When was my beloved City of Chicago – a refuge for such liberty lovers as Milton Friedman, Richard Epstein, and F.A. Hayek – overtaken by the Lifestyle Gestapo? First it was the smoking ban. Then, the ban on foie-gras. Now, the city’s most powerful alderman has proposed that the city ban the sale of foods containing trans-fats (e.g., Kentucky Fried Chicken).

I must give credit to Prof. Bainbridge, who predicted this sort of thing. (Money quote: “Back when the professional do-gooders started turning government into society’s nanny with smoking bans, some of us warned that they would go after alcohol next and then food. We were mocked as Cassandras preoccupied with visions of slippery slopes. Who’s laughing now?”)

Advocates of a trans-fat ban argue that their position is justified because there is no safe level of trans-fat consumption. But this argument proves too much: There is no safe level of many, many activities, yet we do not ban them. For example, there’s no safe level of whitewater rafting, or snowskiing, or automobile driving, or sex (heart attacks!), or football playing, or…well, you get the idea. Every instance of participation in these (and practically all) activities involves some risk. Yet, most of us would oppose significant restrictions (much less bans) on these activities, because each of them produces benefit as well as risk.

Well guess what — so does trans-fat consumption. And so does smoking. I eat KFC’s original recipe because it tastes better than non-trans-fat-containing alternatives. I have thus decided that I’m willing to accept a cost (some measure of risk) in order to obtain an even greater benefit. Similarly, lots of folks smoke, despite the well-known risks, because they perceive the benefits they receive to outweigh the risks they incur.

Now, I think those smokers are crazy. It seems to me that only a fool would subject himself to the significant health risks smoking creates (not to mention the yellow teeth, bad breath, and unsightly lip lines). But I’m not privy to the benefit side of the balance. Since I have no idea how much pleasure an individual smoker gets out of lighting up, I cannot say that there would be more happiness in the world if smoking were banned. Similarly, since Alderman Burke has no idea how much I like KFC, he cannot know if he’s making the world a better place by banning trans-fats. Lacking such assurance, he should butt out.

There may, though, be a silver lining to Alderman Burke’s campaign to ban trans-fats: It may force the non-smoking, non-foie gras-eating, trans-fat consuming majority of Chicagoans to finally stand up to all this government meddling.

As my former college roommate, Randy Heinig, told me:

First they came for the smokers, and I didn’t speak up, for I am not a smoker. Then they came for the foie gras eaters, and I didn’t speak up, for I don’t eat foie gras. Now they’ve come for my french fries and, well, there are lots of annoyed people to speak up…hopefully.

Indeed.

This National Review editorial defends George Mason’s Law and Economics Center from what it describes as “junk ethics” charges.  My colleague Ilya Somin has picked up the story at Volokh.  In the comments to Ilya’s post, GMU Foundation Professor and Associate Dean Frank Buckley, Director of the LEC, responds to some of the charges that have been directed at the LEC (i.e. corporate donations are buying judges votes, anonymous donors allow corporations to do so freely, the lectures are part of a right-wing conspiracy, etc.):

At this point corporate support is less than 10% of total support for the Mason judges program. That’s not surprising when you consider that the last program was on Samuel Johnson and the next one is on Mathew Arnold and High Culture. Or is all corporate support bad? In which case, you’ll have a problem with the Lyric Opera, not to mention every American university. 

As for keeping the identity of donors confidential, and keeping them wholly away from the judges, can anyone seriously suggest that this is troubling? You want them to schmooze with the judges, the way lobbyists do with Congressmen? That’s supposed to be the ethical thing to do? It’s a good deal harder to show appreciation for a donor if you don’t know his name. 

Does it matter that the Mason lecturers are the leading scholars anywhere, that its readings are posted on its web site, that no one has or could have a problem with them, that people like Larry Kramer, Gordon Wood, John Searle, David Bromwich, Jasper Griffin, Joe Ellis, Cass Sunstein and Marcia Angell lecture for it, that without Mason lecturers the NYRB would have trouble publishing, that lecturers are asked to stay away from hot button topics, that global warming, environmental issues, asbestosis, abortion, tobacco, etc. are simply not mentioned in Mason programs, that no judge has ever complained of the content of the programs or lectures? Does it matter that the programs are academically intensive, that there are no entertainment or hospitality events? Does it matter that judges such as Ruth Bader Ginsburg have praised our programs? And does it matter that Mason programs this year are on subjects as varied as Renaissance Humanism, David Hume, Abraham Lincoln, and the principles of microeconomics? Because if none of that matters, the complaints can be made only by bitter ideologues blinded by an ignorance of or animus against the life of the mind.

*In the interests of full disclosure, I have received summer research support from the LEC.

The following is contained at the end of a June 28, 2006 Wachtell, Lipton, Rosen & Katz memo addressing the recent Court of Appeals decision to vacate SEC hedge fund registration requirements:

In this era of hedge fund activism, the future of hedge fund regulation may impact the balance of power between public companies and activist shareholders. In contests for corporate control, unregistered hedge funds typically enjoy greater advantages of stealth and flexibility. The transparency and restraint created by the Hedge Fund Rule make for a fairer fight when hedge funds attack. At this time, public companies can only hope that some form of hedge fund regulation persists.

This is not surprising considering the firm, according to its website, “originated the so-called ‘poison pill.’” It is also consistent with earlier Wachtell memos concerning hedge funds (see here and here). I would, however, like Wachtell to elaborate on their “fairer fight” point. How does hedge fund regulation make a takeover fight fairer? If anything, doesn’t management currently have an unfair advantage in a takeover fight? In fact, maybe instead of hedge fund regulation, Congress should consider rolling back the Williams Act to increase the disciplinary effect of the market for corporate control.

After scoffing for months at the suggestion that satellite radio firms Sirius and XM should merge, Sirius CEO Mel Karmazin admitted this week that it’s something he’d like to see happen but expressed doubts about the antitrust authorities permitting the deal to go through. See stories here and here.

Karmazin is right that the proposed Sirius/XM merger presents some antitrust issues. But he may be wrong in thinking that the issues are insurmountable.

Take the issue of product market definition. Karmazin appears ready to concede that the relevant product market is satellite radio and that Sirius and XM are duopolists who by merging would become a monopoly. But why concede that? Satellite radio competes with regular radio for listeners. And many cars are now equipped with television and dvd players, which passengers (though not drivers) can watch. iPods can be hooked up to car speakers. And it is only a matter of time before Internet content (including audio streaming) will be widely available via portable wireless devices that are usable in cars. Satellite is just one medium among many through which it is possible to transmit content. And the market for audio content is quite thick, with Sirius and XM holding only a small combined share.

Even assuming that the agencies will define the product market narrowly to include only satellite does not end the inquiry. Neither XM nor Sirius nor a combined Sirius/XM can stop anyone else from supplying content via the satellite medium. There isn’t a discernible barrier to entry here. So if Sirius/XM raises prices unduly, one would have reason to expect entry into the satellite medium by other firms.

Another point to emphasize is the efficiencies associated with the merger, which would create an entirely new product for which there is clearly some demand. There are doubtless many Sirius subscribers who would like to hear some XM content and vice versa. Now the only way to do that is to buy two sets of hardware and subscribe to both. For these consumers at least, things would be better if they could buy all the content they want from a single provider. And in this sense at least, the merger would be unambiguously pro-consumer.

One final point: even short of a merger, it may still be possible for the two firms to facilitate “one stop shopping” for content by means of cross-licensing agreements permitting each firm to sell the other firm’s content to its own subscribers. But if this is permitted, then wouldn’t it be pointless to block a full blown merger?

A letter to the editor in today’s W$J (see here) asserts the following regarding option backdating:

[B]y backdating options at the lowest price of the past period, say, three months, a company is not providing any more incentives to CEOs to work harder on behalf of shareholders. If anything, since the options are already in the money on the grant day, CEOs are getting money right now, even though they have not done a thing to benefit shareholders. It defeats the very purpose of granting stock options, namely to align future efforts of CEOs to the best interest of shareholders in the future.

This is a criticism appearing in various forms in various articles I’ve read regarding option backdating, and it makes little sense to me. The incentive provided by stock options comes not from the strike price but from the fact that the option increases in value essentially dollar for dollar as the company’s stock price rises. If setting a strike price below market price is in and of itself problematic in terms of incentives, people should have been in an uproar when Microsoft and other companies changed from stock options to restricted stock. The grant of restricted stock is essentially the same as granting an option with an exercise price of zero. I do not recall any uproar, nor should there have been one.

Further, CEOs do not “get money right now” from backdated options. They do have an immediate paper gain, but the gain is typically subject to vesting, and locking in the gain is greatly complicated by Section 16 of the Exchange Act. If the stock tanks before the option can be exercised or the gain locked, the CEO never gets the money. Hence, options, even if backdated, certainly provide CEOs with incentives to increase share value.

I’ve posted a couple of times about Wal-Mart’s foray into the organic food sector (see here and here). I’m wondering on which side this puts Wal-Mart in Store Wars. Is the chain now on the side of Cuke Skywalker, Tofu D2, and the exiled Princess Lettuce? Or is it still aligned with the evil Darth Tader?

I’m pretty sure what these folks would say.

(Hat tip to Ellen Brooke.)

Hanno Kaiser at the Antitrust Review reports (courtesy of the ABA listserv) that SCOTUS has granted cert in Weyerhauser (predatory buying) and Twombly (pleading standards), but not Schering-Plough (reverse payments).

Speaking of Weyerhauser, the FTC/ DOJ single firm conduct hearings started off with an examination of predatory pricing issues.  The materials from the hearings are here and include presentations and submissions on both predatory selling and buying that are worth checking out.

Economist Michael Salinger, Director of the Federal Trade Commission’s Bureau of Economics for the past year, comments on the recent FTC Report and price gouging in Sunday’s WSJ (HT: Greg Mankiw). I have blogged a bit about the FTC Report previously: once about its findings (that “market manipulation” did not explain post-Katrina price increases), once about media reactions to the Report, and again criticizing the ill-advised proposed federal price gouging legislation.

Salinger agrees that federal price gouging legislation is ill-advised (pay particular attention to the last line):

If the public were to ask my advice on the wisdom of price gouging legislation, however, I would counsel against it. When disasters like Katrina and Rita occur, prices must go up.

The difficulty is that without knowing the details of a disaster, it is impossible to specify in advance how much prices need to rise. As result, price-gouging legislation — particularly if penalties are severe and enforcement is aggressive — will pose two distinct risks. One is that prices will not rise to market-clearing levels and gas stations will run out of gasoline. As unpleasant as high-priced gasoline is, running out will be even worse.

The other is that gas stations will shut down rather than risk an allegation of price gouging. In the wake of major market disruptions, it is always going to be possible in hindsight to identify companies that raised the price the most and to label them as “gougers.” But gasoline stations do not set prices in hindsight. A vague definition of price gouging will make it difficult for gas station owners to know what price they can charge and stay within the law. Indeed, the FTC investigation uncovered examples of gas stations that shut down rather than risk a suit under a state price-gouging statute.

Salinger is also on to something when he suggests that economics professors at both colleges and high schools should teach portions of the FTC Report to students because it provides a real world example of how markets respond to shocks:

Students will benefit from discussing whether the evidence is more consistent with the chapters on perfect competition, monopoly or oligopoly. They will also benefit from discussing the wisdom of government intervention in the marketplace. (I even have a recommended exam question. “Oil industry critics argue that lower inventory holdings have left the industry more susceptible to supply disruptions. How would ‘price gouging’ legislation affect the incentive to hold additional inventories to sell during shortages?”)

It appears that despite the fact that economists just about universally agree that such legislation is a bad idea, some form of it will eventually pass. While a consensus among professional economists may not win the day in the politically and emotionally charged policy debate over price gouging, perhaps increasing knowledge of basic economic principles at the high school level and beyond may ultimately prove the best available means of slowing this urge to “do something” about gas prices without giving serious thought to the inevitable consequences.

The Glide Foundation is once again auctioning on ebay a lunch with Warren Buffett. The current bid for the lunch is at $455,100 (click here for the ebay listing). The lunch will be held at Smith & Wollensky in New York, and the winner can bring up to seven people along. Buffett has been doing since 2000. The winning bids for the last three years are as follows: $250,100 in 2003, $202,100 in 2004, and $351,100 in 2005.

The press release is here. The petition alleges that the ABA violated at least six provisions of the 1996 antitrust consent decree, which was otherwise scheduled to expire on June 25th, and was filed along with a stipulation and proposed order in which the ABA acknowledges these violations and agrees to pay $185,000 in fees and costs.

The ABA conspiracy has been the subject of posts from each of the TOTM bloggers. Here are previous entries on the topic by me (and David Zaring), Geoff, Keith, and Thom. My colleague David Bernstein also recently reported on the U.S. Commission on Civil Rights Hearing on ABA Standard 211, which would require law schools to adopt racial preferences in their admission decisions or risk accreditation, and the possibility that the ABA’s accreditation privilege might be held up by the Department of Education over concerns regarding Standard 211. In light of the ABA’s recent troubles, one has to wonder whether the consent decree will expire as previously scheduled.

As I mentioned earlier, I’m having my research assistant pull together bi-weekly top ten lists of SSRN downloads of papers announced during the last 60 days for corporate law, corporate governance law, and securities law.  See below the fold for the lists.

(more…)

As Josh noted, Henry Manne recently published a WSJ op-ed arguing for liberalization of insider trading on efficiency grounds — chiefly, because such trading “aids capital allocation decisions and informs business executives through market-price feedback of the best predictions about the value of new plans.” (For a more complete statement of Henry’s argument, see here.)

Today’s WSJ includes several letters in response, including one by Kenneth Kehl, who accuses Henry of “emphasiz[ing] efficiency at the expense of fair play.” I hear versions of this “I Don’t Care If It’s Efficient, It’s Just Not Fair” argument all the time. They’re generally unpersuasive, for if insider trading were legal, any investor who bought stock of a company that had not privately (i.e., contractually) banned such trading would know what she was getting herself into and would be compensated (via a price adjustment) for the risk associated with such trading.

Kehl’s argument, though, is not actually a fairness argument; he’s really concerned with efficiency. (more…)

Yesterday, the U.S. Supreme Court issued a fractured decision in consolidated appeals raising the issue of which wetlands come within the ambit of the federal Clean Water Act (“CWA�). The wetlands at issue were next to drainage ditches that, when full of water, would eventually flow into navigable waters. The record did not establish whether the connections between the wetlands and the drainage ditches were continuous or intermittent, or whether the ditches contained continuous or merely occasional flows of water.

Deeming those missing facts irrelevant, the Army Corps of Engineers (the agency the CWA charges with granting “dredge and fill permits� for wetlands) determined that the wetlands were within the scope of the CWA. A five-justice majority found that determination to be hasty and voted to remand the cases for further consideration of whether the wetlands at issue were within the CWA’s reach. The five justices disagreed, though, on the proper standard to apply. Justice Scalia, joined by Chief Justice Roberts and Justices Thomas and Alito, articulated one test; Justice Kennedy set forth a less stringent test (which the lower court will presumably apply on remand).

The New York Times is unhappy with the Court’s judgment but insists that “it could have been much worse� if Justice Scalia had garnered a fifth vote in favor of his “very restricted view of the Clean Water Act.� The Times insists that Justice Scalia’s test for what constitutes a covered wetland is “largely invented�; that the views of the Scalia-led plurality amount to “judicial activism�; and that Justice Kennedy’s alternative test, presented in a “careful opinion,� is laudably “moderate.�

The Times is wrong on all these points. (more…)

An article in yesterday’s NYT describes the genesis of option backdating at Micrel Inc., a silicon valley semiconductor company:

Throughout the 1990’s, Silicon Valley companies were locked in an intense battle to recruit employees, and stock options were their primary tool.

* * *
So when new hires began complaining that the [Micrel's] volatile share price meant that colleagues who had arrived just days earlier were receiving stock options worth thousands of dollars more, Micrel executives moved to satisfy the troops. They raised with their auditor, Deloitte & Touche, the idea of adopting a new options pricing strategy similar to one that other tech companies, including Microsoft, used at the time.

Instead of granting options at the market price on a new employee’s hire date, Micrel proposed setting the price at the lowest point in the 30 days from when the grant was approved.

It seemed like an ideal solution. The 30-day window could help Micrel attract and reward new hires on a more equal footing, while helping to retain existing employees. And if it were extended up the corporate ladder, the prospect of built-in gains and tax breaks, worth millions of dollars, could enrich senior executives.

Deloitte allegedly approved the strategy but five years later reversed course. By then, however, the practice had become the norm in Silicon Valley and perhaps ultimately led to the option backdating scandal we’re now in the midst of.