I’ve been grading Contracts exams for the last week or so. This is where I earn my pay. It’s an awful job. The students take only one exam for the entire semester, so I really have to be careful to make sure I’m evaluating everyone fairly. Painstakingly reading and effectively ranking 75 three-hour essay exams is tedious beyond belief.

Adding to the tedium is the severe frustration I feel when students make the same basic mistake over and over. The one that really drives me nuts — especially because we went over the rule ad nauseum and I repeatedly warned the class not to make this mistake — is when a student says that a particular transaction is governed by the Uniform Commercial Code (UCC) because the parties to the deal are merchants. Even worse is when they tell me the UCC doesn’t govern because one or both of the parties is not a merchant.

Ugh! I honestly don’t know how I could make it any clearer that Article 2 of the UCC (the part we study in the basic Contracts course) governs all contracts for the sale of goods, even non-merchant sales. Every year, I increase the number of times I make this point in class. I’m now approaching 500 or so repetitions. (OK…That’s an exaggeration. But I really do emphasize this rule!)

I suppose students make this mistake with such frequency because one of the UCC’s most notorious provisions — Section 2-207 — makes merchant status relevant for one matter (the question of whether additional terms in a written acceptance or confirmation become part of a contract). We spend quite a bit of time on 2-207’s intricacies, so this must be the genesis of the confusion. In any event, it’s maddening! (Though not as maddening as losing your students’ exams on an international flight….)

Do other Contracts teachers have the same problem? And how about other common mistakes in other subjects? Let’s commiserate!

Danny Sokol posted his blog’s list of top antitrust publications for the year.  The big winners were Einer Elhauge, Bundled Discounts, and the Death of the Single Monopoly Profit Theory, 123 Harvard Law Review 397 (2009), and Nathan Miller, Strategic Leniency and Cartel Enforcement, American Economic Review.  In the holiday rush,  I forget to send in my votes.  Sorry about that Danny.  With the normal caveats that I’m sure I’m leaving off some articles I’m just forgetting about at the moment, that the list is entirely subjective, and that the methodological sophistication of the list is essentially equivalent to trying to remember articles and find links while counting with my fingers, here are my top 10 for 2009:

1. William Kovacic, The Federal Trade Commission at 100: Into Our Second Century (Jan 2009)
2. Nathan Miller, Strategic Leniency and Cartel Enforcement, American Economic Review, Vol 99, No. 3 (2009), 750-568
3. Benjamin Klein, Competitive Resale Price Maintenance in the Absence of Free-Riding (forthcoming, Antitrust Law Journal)
4. Paul Seabright, The Undead? A Comment on Professor Elhauge’s Paper,  5 (2) Competition Policy International 277 (2009)
5. Bruce Kobayashi and Joshua D. Wright, Federalism, Substantive Preemption, and the Limits of Antitrust: An Application to Patent Holdup, 5 Journal of Competition Law and Economics 469 (2009).
6. Dennis Carlton, Why We Need To Measure the Effect of Merger Policy and How to Do It, 5(1) Competition Policy International 77 (2009)
7. Thomas Lambert, Dr. Miles is Dead. Now What?: Structuring a Rule of Reason for Minimum Resale Price Maintenance, 50 WILLIAM AND MARY LAW REVIEW 1937 (2009).
8. Daniel A. Crane, Chicago, Post-Chicago and Neo-Chicago, 76 University of Chicago Law Review (2009)
9. William Page and Seldon J. Childers, Measuring Compliance with Compulsory Licensing Remedies in the American Microsoft Case, 76 ANTITRUST L.J. 239 (2009)
10. Alan Devlin, The Stochastic Relationship between Patents and Antitrust, 5(1) Journal of Competition Law and Economics 75 (2009).

Chairman Kovacic’s FTC at 100 Report (all 200 or so pages) is not traditional academic scholarship as such, but is a must read material for anybody who does serious thinking about antitrust institutions and enforcement a legal or economic perspective and so I wanted to call some attention to it here.

What have I left off?

And if I don’t hear from you before then, Happy New Year!

I’m delighted to report that the Liberty Fund has produced a three-volume collection of my dad’s oeuvre.  Fred McChesney edits, Jon Macey writes a new biography and Henry Butler, Steve Bainbridge and Jon Macey write introductions.  The collection can be ordered here.

Here’s the description:

As the founder of the Center for Law and Economics at George Mason University and dean emeritus of the George Mason School of Law, Henry G. Manne is one of the founding scholars of law and economics as a discipline. This three-volume collection includes articles, reviews, and books from more than four decades, featuring Wall Street in Transition, which redefined the commonly held view of the corporate firm.

Volume 1, The Economics of Corporations and Corporate Law, includes Manne’s seminal writings on corporate law and his landmark blend of economics and law that is today accepted as a standard discipline, showing how Manne developed a comprehensive theory of the modern corporation that has provided a framework for legal, economic, and financial analysis of the corporate firm.

Volume 2, Insider Trading, uses Manne’s ground-breaking Insider Trading and the Stock Market as a framework for many of Manne’s innovative contributions to the field, as well as a fresh context for understanding the complex world of corporate law and securities regulation.

Volume 3, Liberty and Freedom in the Economic Ordering of Society, includes selections exploring Manne’s thoughts on corporate social responsibility, on the regulation of capital markets and securities offerings, especially as examined in Wall Street in Transition, on the role of the modern university, and on the relationship among law, regulation, and the free market.

Manne’s most auspicious work in corporate law began with the two pieces from the Columbia Law Review that appear in volume 1, says general editor Fred S. McChesney. Editor Henry Butler adds: “Henry Manne was an innovator challenging the very foundations of the current learning.” “The ‘Higher Criticism’ of the Modern Corporation” was Manne’s first attempt at refuting the all too common notion that corporations were merely devices that allowed managers to plunder shareholders. Manne saw that such a view of corporations was inconsistent with the basic economic assumption that individuals either understand or soon will understand the costs and benefits of their own situations and that they respond according to rational self-interest.

My dad tells me the sample copies have arrived at his house, and I expect my review copy any day now.  But I can already tell you that the content is excellent.  Now-under-cited-but-essential-nonetheless corporate law classics like Some Theoretical Aspects of Share Voting and Our Two Corporation Systems: Law and Economics (two of his best, IMHO) should get some new life.  Among his non-corporations works, the classic and fun Parable of the Parking Lots (showing a humorous side of Henry that unfortunately rarely comes through in the innumerable joke emails he passes along to those of us lucky enough to be on “the list”) and the truly-excellent The Political Economy of Modern Universities (an updating of which forms a large part of a long-unfinished manuscript by my dad and me) are standouts.  And the content in the third volume from Wall Street in Transition has particular relevance today, and we would all do well to re-learn the lessons of those important contributions.

The full table of contents is below the fold.  Get it while it’s hot! (more…)

A TOTM reader sends me the following interesting development on an emerging dispute over shelf space competition in Israeli supermarkets:

Israel’s Super-Sol to Aggressively Pursue Stocking Fees and Perhaps its Private Label Positioning
Tel Aviv…Stocking shelves in an Israeli supermarket will henceforth cost manufacturers and distributors money, it was announced by the mega Super-Sol chain, according to Globes, Israel’s leading business publication. In fact, Supersol’s announcement said that while it plans to take back its power from suppliers—or impose it on them unfairly, depending on how you look at it—by stocking products in its stores itself, it will permit food wholesalers to continue to arrange the shelves using their own workers for six months, as long as they pay Super-Sol for the privilege during the transition period. About six weeks ago Super-Sol sent its suppliers a letter stating that beginning at the end of December the chain will begin to gradually introduce its own stockers. The Manufacturers Association of Israel said it would go to the Antitrust Authority and demand that Super-Sol be declared a monopoly.

The chain has promised to hire a significant number of the stockers now working for its suppliers, who otherwise stand to lose their jobs. Super-Sol has promised to hire 1,275 stockers, some of them from among those who are working for suppliers as well as new employees it will train. Beyond the stocking fees, what is at stake here is a critical component of retail marketing, especially in the food sector: control of product placement, from the height at which items are shelved to the amount of shelf space they take up horizontally, to the battle for the all-important “end caps” at the end of an aisle. Suppliers fear that if Super-Sol takes over shelf stocking it will give priority to its own house brand and they will lose market share.

This is an interesting development.  Israel, in 2004-05, developed a code of ethics governing vertical relationships between grocery product manufacturers and supermarkets which was quite restrictive in terms of slotting contracts, category management, and partial exclusivity requirements.   The concerns were largely to do with supplier market power.  Apparently, the move by Super-Sol has reopened discussion of the code.  It should be interesting to watch.

Leading antitrust critic and abolitionist, Dominick Armentano, has a letter to the editor in the WSJ.  The point of the letter to the editor is rather specific: that FTC’s attack on Intel is no outlier in the historical context of antitrust enforcement, contrary to the WSJ’s description.  To the contrary, Armentano argues that Intel is just another in a long line of misguided enforcement actions.   Here’s the letter:

Your editorial is correct to condemn the Federal Trade Commission’s attack on Intel (”The 100 Years Chip War,” Dec. 18), but it is dead wrong to conclude that the government’s antitrust intervention is “unprecedented” or that antitrust laws really “exist to promote business and price competition.”

Have we forgotten the FTC’s eight-year (1958-1966) campaign against the Borden Co. to stamp out lower prices for evaporated milk? Or its 10-year (1957-1967) legal assault to end the Procter & Gample-Clorox merger in which the FTC’s primary argument against the consolidation was that the probable “economies and efficiencies” of the merger could be passed along to consumers?  Or how about the Justice Department’s 15-year (1953-1968) war against United Shoe Machinery in which United was ultimately ordered to create a competitor with divested shoe machinery assets, license out all of its own patents to the competitor, and then refrain from active competition with the new-born company for five years?

And have we already forgotten that the Microsoft antitrust debacle started with a two-year investigation by the FTC back in 1990 or that the Justice Department pursued the company for another 10 years because Microsoft bundled its Web browser, Explorer, with its Windows operating system, much to the delight of willing buyers. Recall that in the 1999 trial verdict, lower court Judge Thomas Penfield Jackson even ordered the company divested until the D.C. Circuit Court of Appeals unceremoniously discarded that absurdity in 2001. In short, the FTC’s assault on Intel is hardly unprecedented.

What these cases (and hundreds of others) establish beyond any reasonable doubt is that antitrust does not exist to promote business and price competition. Never has, never will. The theoretical and case evidence, some of which I’ve cited, is all the other way.

The real mystery surrounding antitrust is why knowledgeable observers of the free-market process persist in believing this fairy tale.

I’m already on the record as publicly criticizing the FTC’s Intel complaint.  And to the extent the letter makes the general point that the past and present of monopolization enforcement is riddled with false positives and rent-seeking that dissipate any theoretically plausible efficiency gains, I’m on board.  But more generally, I was reminded by the letter of the antitrust abolition argument raised by Armentano and others (generally from Austrian or public choice traditions).  While I’m generally sympathetic to Armentano’s views  in so far as they express skepticism about the welfare benefits of antitrust enforcement, I do not favor the abolition of antitrust and never have.  I should note that I am especially sympathetic to the skeptical view with respect to Section 2 enforcement.  As an antitrust economist who has been highly critical of government intervention in his scholarship — particularly with respect to monopolization rather than cartel and merger enforcement — and who has been described as a “Chicago School apologist” by a sitting Federal Trade Commissioner, I’ve certainly been criticized by those favoring a “reinvigorated” antitrust regime for supporting a reduction in the scope of antitrust laws and a humble and cautious approach to their enforcement.  On the other side, I’ve also frequentlybeen asked why, if I take such a critical view, don’t I support the abolitionist position of Armentano and others who share his views (and criticized by them, see, e.g. the comments to this post)?  Indeed, I might even self-indulgently describe myself as one of the “knowledgeable observers of the free-market process” to whom Armentano ascribes a mysterious and persistent belief in fairy tales.

So why don’t I believe in abolishing antitrust in toto?  The last time the issue came up on the blog was in response to a similar question raised by my George Mason colleague Bryan Caplan (in regard to the new proposed law in Hong Kong).  In that post Bryan asserted:

Even if you’re a mainstream economist who thinks my general critique of antitrust is overblown, you should still grant that for Hong Kong, I’m right. And doesn’t the fact that Hong Kong’s made it this far without antitrust give you a moment’s pause about the domestic benefits of these laws?

My position then is my position now:

Bryan has overestimated the case in favor of abolition, or at least should take a more nuanced stance. In evaluating the social benefits and costs of antitrust enforcement (including rent-seeking, error and administrative costs) I think one really has to distinguish between cartel enforcement, mergers, and monopolization. The evidence that antitrust can generate net benefits in the first category is much stronger than that it is for either mergers or monopolization. Reasonable minds can differ about the state of evidence in those latter categories, as well as whether “real” antitrust enforcement in those categories results in social costs that swamp potential benefits.

Lets just take cartels as an example.  It would be tough to argue, based on the evidence, that there is enough there to support abolition of cartel prosecution.  And cartel prosecution is a substantial part of the modern competition policy landscape.  Nor do I believe that the fact that Hong Kong is a small open economy or that it has gone a long time without antitrust means that cartel prevention is ineffective in the U.S. or cannot be in Hong Kong.  This is not an optimistic or utopian view of antitrust.  I don’t think I’ve ever been accused of that.  I’m written quite skeptically about enforcement in the single firm conduct area and how little we know in these areas should inform our policy.  One can argue that in practice, cartel enforcement really amounts to consumer welfare decreasing activity by overzealous regulators. But thats an empirical question. And I think the evidence pretty strongly suggests that cartel enforcement is good for consumers. The evidence with respect to mergers is a mixed bag and there is no general consensus. The picture is much more bleak with respect to single firm conduct, where not much is known and there is very little empirical evidence to suggest that antitrust enforcement is producing the types of outcomes that would justify the social costs of enforcing and administering those laws.

Bottom line: the position for abolishing antitrust, if we are are basing this on the current state of theory and evidence, is weakest against cartels, uncertain with respect to mergers, and much stronger for single firm conduct.

The interventionists argument that is in theory, since monopolization can result in the same effects as cartels, it doesn’t make sense to prohibit one instead of the other.  Similarly, since a horizontal merger can be a substitute for a cartel agreement, it probably doesn’t make sense to have a cartel prohibition without merger law.  All this is true in theory.  But it does not necessarily follow that these theoretical connections justify adopting the entire antitrust machinery if the welfare losses from merger and monopolization policy exceed the gains from cartel enforcement (including administrative and error costs).  One can argue about the relative magnitudes of those values in theory.  And please note that nothing in such a hypothetical position would require one to believe that anticompetitive conduct doesn’t exist.  But my position is an evidence-based one.   Cartel enforcement, in my view, has largely proven its social value.  But I’m quite skeptical that the technology available to distinguish “single firm” conduct from its anti-competitive counterpart renders Section 2 a consumer-welfare increasing proposition.   In the meantime, in my opinion, the abolitionists’ refusal to confront the qualitative and quantitative evidence supporting the effects of cartel enforcement undermines their case generally, and shifts attention away from the much stronger case against monopolization enforcement.

Here’s hoping all our readers have a Merry Christmas. (If you don’t celebrate Christmas, I hope your new year is filled with joy and good fortune.)

Since I can’t deliver a Christmas present via the Internet, my “gift” to you is a movie recommendation. My father in law (the one with a high beta taste in movies) and I watched Sanjuro last night. It is a triumph. See it.

In its latest rulemaking, the Securities and Exchange Commission has included a provision amending its rules to require the Nominating Committee of a company Board of Directors to disclose whether and how diversity is used as a factor in nominating director candidates to the Board of Directors.  The new rule also includes a provision seeking comment on whether it should amend its proxy disclosure rules to require companies to disclose additional information about the Board’s consideration of diversity in nominations.  The new rules do not themselves define diversity, but leave that up to Boards in their disclosures. 

I wonder how this new disclosure requirement fits within the SEC’s mission, found in the Securities Act of 1933, to protect investors and encourage capital formation.  I realize that there is a vigorous debate about affirmative action in other policy areas, but I simply do not see how that objective fits within the SEC’s mandate to protect the capital formation process.  If there was some link between Board diversity and firm performance, we would see some differential in trading values.  We do not.

I fundamentally do not accept that the SEC has a role to play in engineering social policy.  Its statutory mandate does not permit it, and the SEC is not equipped to do it well.  I think everyone can agree that securities lawyers and financial accountants do not have the right skill set for that purpose.  Even if the justification for this new rule is one based in social policy, the arguments we see about affirmative action in other policy areas also do not carry over well into Board selection.  The pool of qualified Board candidates must have sufficient commercial experience such that their net worths are likely to rank within the upper echelons of the social ladder.  I also fail to see how cultural, religious, or gender based perspectives differ on, for instance, how to structure a debt offering or divest an operating subsidiary.

At least the new regulations don’t mandate selecting folks based on pre-established criteria like the post-Sarbox listings standards did.  And let’s hope they don’t ever go as far as suggestions from Profesor Emma Jordan, who in a recent Center for American Progress paper advised that firms accepting TARP money be required to nominate ex-bureaucrats and social organizers to seats on corporate Boards to improve diversity of experience in the boardroom.  I recall that White House Chief of Staff Rahm Emmanuel was a member of the Board of Directors at Freddie Mac when many of the loans that took Freddie down were originated, but I suppose we should give Professor Jordan a mulligan on that one.

At the end of the day, it would seem that boilerplate disclosure, such as “The nominating committee of the Board takes into account the diversity of experience of Board candidates, and determines how that experience will improve the function of the Board,” would be sufficient to sidestep the burdens of this new regulatory overreaching.  Hopefully this is not the opening sally for direct Board diversity mandates from the SEC.

 Here is my testimony before the House Oversight Committee hearing last week regarding implications of the government as a shareholder in TARP recipients, particularly Citigroup, AIG and GM.  It gave me a unique opportunity to continue discussing my Treasury Incorporated paper.  I certainly hope the members took notes, although I doubt it.  Nothing has been done since the last time I testified before House Oversight with the AIG trustees and CEO about problems in the AIG trust that was set up by the Federal Reserve to manage the taxpayer’s investment in AIG.  Sparring with Ralph Nader, Congressman Tierney, and Chairman Kucinich about the evils of government shareholder activism was fun though.

My brilliant and beloved colleague Brian Leiter refers to Republican voters as “sociopaths, villains, religious zealots, and crazies.” There is much to this – the 50 percent or so of the voting population that traditionally vote for the GOP includes its fair share of misinformed nuts. But is there any reason to believe that Republicans have a monopoly on “crazies”? I highly doubt it; I suspect Democrats have some voters and politicians that they would rather not roll out as poster children for the cause. No political party is perfect or even particularly appealing, and pretending that one’s favored side has cornered the market on high mindedness, truth, or justice is just posturing. We must judge voters, politicians, and parties not by their composition, their intentions, or their ideals but by the outcomes they produce.

The problem with politics today isn’t that Republicans are idiots or Democrats are socialists; the problem may be democracy. H.L. Mencken, a wise fellow if there ever was one, described the problem thus:

Politics, under democracy resolves itself into impossible alternatives. Whatever the label on the parties, or the war cries issuing from the demagogues who lead them, the practical choice is between the plutocracy on the one side and a rabble of preposterous impossibilists on the other.

Mencken went on to argue that what we need beyond anything is “a party of liberty.” Hear, hear! I will gladly leave behind the crazies and villains in both parties for a party that believes in freedom and liberty. Let the mantra be that of Reason magazine: free minds & free markets, with a dose of limited government, lower taxes, less regulation, and personal responsibility. When such a party starts, I’ll be a member. Until then, I’ll continue to be one of Leiter’s crazies.

President Barack Obama, June 1, 2009:

What we are not doing, what I have no interest in doing, is running GM. GM will be run by a private board of directors and management team with a track record in American manufacturing that reflects a commitment to innovation and quality. They, and not the government, will call the shots and make the decisions about how to turn this company around. The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions. When a difficult decision has to be made on matters like where to open a new plant or what type of new car to make, the new GM, not the United States government, will make that decision.

Wall Street Journal News Headline, December 22, 2009: In Risky Move, GM to Run Plants Around Clock. Obama Auto Team Urged the Change; Experts Say Maintenance, Restocking Could Cut Into Efficiency.

(Parts I and II of our Rhetoric Versus Reality series are available here and here.)

In light of economic worries in Vietnam, the WSJ reports that the country is soon likely to impose a widespread set of price controls and restrictions on political activity after an encouraging move toward freer markets:

Carlyle Thayer, a veteran Vietnam watcher and professor at the Australian Defense Academy in Canberra, says conservative factions in the ruling Politburo are tightening their grip on the country as Vietnam’s economic worries—especially inflation and fallout from currency devaluations—grow. He says he expects more crackdowns and arrests to come in the run-up to the country’s 2011 Party Congress, a major political event that will aim to map out Vietnam’s political and economic direction for the following five years.  In turn, the crackdowns threaten to curtail investment and economic growth in the country…..

Now, the price-control unit of Vietnam’s Finance Ministry is drafting proposals that, if implemented by the government, would compel private and foreign-owned companies to report pricing structures, according to documents viewed by The Wall Street Journal and corroborated by Vietnamese officials.  In some cases, the proposed rules would allow the government to set prices on a wide range of privately made or imported goods, including petroleum products, fertilizers and milk to help contain inflation as Vietnam continues pumping money into its volatile economy. Typically, the government applies this kind of aggressive measure only to state-owned businesses, and it is unclear whether Vietnam will write the wider rules into law.

Somewhat relatedly, here is one of my favorite papers about the economics of contractual relationships and enforcement institutions in Vietnam (McMillan & Woodruff).

Judge Saris’s district court opinion denying the motion to exclude one of the plaintiff’s economic experts in  Natchitoches Parish Hospital v. Tyco International recently came across my desk.  It is an interesting case involving allegations that Covidien, a leading supplier of “sharps containers” used for the disposal of various needle-involving medical products (syringes, IVs, etc.) violated the antitrust laws with various market share discounting arrangements with buyers and exclusive dealing contracts with GPOs.   I’ve not been following this litigation very closely, which has now apparently survived summary judgment.  What caught my eye was a passage from the Daubert opinion to exclude Professor Einer Elhauge’s expert economic testimony on behalf of the plaintiff.  As an interesting side note, we’ve had occasion to opine ourselves on some of Professor Elhauge’s views on the related topic of loyalty discounts here.  If you’d like to get caught fully up to speed, read the briefs.  I’ll start you off with the motion to exclude , the opposition, and a declaration submitted by John Bates Clark Medal / Nobel Prize winner Daniel McFadden in support of the motion to exclude.

The basis for the motion to exclude is that, in effect, Professor Elhauge is untrained as an economist and / or as an econometrician.  The brief uses stronger language.  But the basic point is that Professor Elhauge has, according to the brief, taken a few introductory undergraduate economics courses and a law school law and economics course and, again according to the brief, submitted an expert report with various errors (primarily of a statistical and econometric nature, as I read the brief and the McFadden declaration).  Holding aside the substantive issues concerning the alleged methodological errors, on the issue of expertise and qualifications, the opposition brief argues that:

Tyco’s claim that Prof. Elhauge is not qualified to offer an opinion in this case is groundless, and ignores: a) Prof. Elhauge’s particular expertise in antitrust economics, b) his extensive economic qualifications, and c) his peer-reviewed economic articles, textbooks and service on law and economic advisory boards. Moreover, numerous courts (and the U.S. Congress) have qualified Prof. Elhauge to testify on the very same issues as those involved in this case.

On point (a) in particular, the brief elaborates:

It is in fact, exactly what Prof. Elhauge identifies as his area of expertise: antitrust economics, which he defines as “the application of economic principles and methods to antitrust issues.” Elhauge Dep. at 8, see also Elhauge Declaration at 99.5. He testified at his deposition that he considers this discipline to be distinct from economics in general. Dep. at 8. He also qualified his statement that he is not an econometrician by defining that person as someone who “specializes in developing methodologies for [statistical] analysis of economic problems,” and stating that he applies econometric methods to various issues, but he is not a “scholar who develops methodology in econometrics.” Dep. at 9. The specific expertise required for this case is the practical application of economic principles to antitrust theory – not the scholarly development of econometric models or expounding on economic theories in general or performing economic tasks for their own sake.

The brief goes on to argue that the defendants have ignored Professor Elhauge’s qualifications in the distinct area of “antitrust economics,” including:

a peer-reviewed economics article on loyalty discounts published in the Journal of Competition Law & Economics; several other published antitrust economics articles; peer-reviewed textbooks on antitrust law and economics; being selected as the editor of the Research Handbook on the Economics of Antitrust Law; co-authoring a volume of the Areeda antitrust treatise that covered both law and economics of tying; and serving on a number of law and economic advisory boards.

Here’s how the court frames and then resolves the economic qualifications debate:

As a threshold matter, defendants have challenged Professor Elhauge’s credentials because he holds no academic degrees in economics. He currently teaches antitrust, contracts, and corporations at Harvard Law School but has never taught a class in economics or statistical modeling. undergraduate courses on economics, he majored in science. took only one graduate level course on the economic analysis of legal issues.  Based on this background, defendants contend he is not qualified to perform regressions and other technical statistical analyses. …

Defendants’ argument is unpersuasive.  While he is not qualified as an expert in economics generally speaking or econometrics, Professor Elhauge is qualified in the narrower field of antitrust economics.  Professor Ashenfelter, who is an expert in econometrics, pinpointed no methodological flaws or technical errors in the econometric analysis that Professor Elhauge presented. (Report at 1, 25). In the comments on the report, defendants do not refute this conclusion. As the validity of the econometric methodology is not an issue in the case, the lack of econometric/economic credentials affects the weight, not the admissibility, of Professor Elhauge’s testimony.

It would take a much larger investment on my part than I am willing or able to make at the moment to evaluate the underlying econometric battle on the merits (but do see the exchange between McFadden and Elhauge), but on the point of witness qualifications, the opinion seems quite problematic.  As an absolute matter, it is certainly true that possession of a Ph.D. in economics is neither a sufficient condition to testify in all issues arising in antitrust litigation nor a necessary condition to testify as an expert witness.  But it also seems to be a fairly sensible default presumption to assume that a potential expert witness without formal training in the economic methods providing the basis for his expert opinions is not qualified to offer those opinions pending compelling evidence to the contrary.  So, I guess that takes us right into the nitty gritty, doesn’t it?

While Professor Elhauge is as highly qualified an antitrust legal scholar as they come, and one that I greatly respect, I just don’t see it.  The only qualification on the list that seems relevant to the existence of the underlying skills required to offer the theoretical and statistical expert evidence in the case is the peer-reviewed journal publication in the Journal of Competition Law & Economics.  While the JCLE is a very nice journal, and one that I’ve published in once and have a second article forthcoming in for 2010, I just don’t see how this publication alone provides the basis for econometric testimony without the underlying training (with or without a Ph.D.).   The Antitrust Law Journal is also peer reviewed and publishes work by economists, law professors and practitioners.  Is every antitrust lawyer who has published in either the JCLE or Antitrust Law Journal qualified under the court’s standard?   What would it take for a lawyer with a publication in one of these journals not to satisfy the court’s Daubert standard?

I’m completely unpersuaded as to the relevance of authoring law school textbooks and treatise chapters that discuss the underlying economics as a qualification to offer expert testimony grounded in economic training — much less statistical work.  Again, the court’s overall approach seems to imply that “antitrust economics” is something anyone can do–it’s not real economics; it’s just law with a little bit of talk about demand curves and prices.  Maybe this is a predictable consequence of the empirical bubble in legal scholarship?  Perhaps lawyers, and judges, believe that the economics / econometrics is largely control over some jargon and knowing how to hit the right buttons on a statistical software package.  Nothing that a smart and talented lawyer couldn’t teach themselves over Spring Break.

The court’s analysis seems particularly troublesome in this regard.  As I read the passage above, Judge Saris (adopting the plaintiff’s argument) identifies “antitrust economics” as a sub-field of “economics” in which the expertise required to satisfy Daubert can be established in the absence of any expertise in economics generally or statistical methods.  Now, one can see this argument running in the other direction.  For example, I might consider myself to have some expertise in economics generally because I have a Ph.D. in economics, but would not consider myself an expert in macroeconomics, labor economics, or international trade.   Similarly, even within the field of industrial organization, and further within the sub-field of antitrust economics, there are specialized areas where I would not consider myself to have the relevant expertise to offer expert testimony.  Generalized economic training does not always translate to specifically tailored expertise in the narrow issue of interest.  However, the argument here is that the lack of general economic training is no obstacle to producing narrowly tailored testimony within the sub-field of “antitrust economics.”   That doesn’t make any sense to me, and again, equates antitrust law and antitrust economics in a manner that strikes me as at tension with the purposes of Daubert.

I’ve got some more thoughts on this issue, particularly as it relates to the court’s use of an independent court appointed expert (I believe in this case settled upon by both parties) to arbitrate the Daubert dispute, and to some of my own research agenda involving the burdens placed on generalist judges to understand complex economic evidence.  More on those issues later.  For now, just some questions.  I’ve been critical of the district court’s approach here.  Do others find it a sensible approach?  Perhaps I’m just protecting the guild.  If Daubert is not the answer here, and it certainly comes with its costs, what other solutions are there?  Are court appointed experts a reasonable partial solution to help resolve Daubert-related disputes?

The Nanny Brigade has once again descended on the Windy City. It previously sought to protect us from unhealthy trans fats, smoking in private establishments that we voluntarily patronize, and those oh-so-offensive theatrical depictions of smoking. The Nannies are now working to protect Chicago’s well-heeled from risks associated with the locally produced, artisanal sausages sold in some of the city’s finest restaurants. Whatever would we do without these folks (other than enjoy our lives more)?

At the end of November, the Chicago Reader published an article on small, local sausage makers whose products are beloved by foodies but who are not licensed by the government. The charcuteries’ sophisticated patrons realize they’re dealing with unlicensed meat-preparing facilities, but they know the sausage makers, are aware of the high-quality products they use and the care they take in making their products, and are willing to purchase the products despite the absence of a commercial license. Many of the charcuteries would have to shut down if forced to comply with applicable regulations, which were written to govern (and to protect) large-scale industrial operations. As one of the meat-preparers explained:

The regulations are written for industrial food operations. And if you apply them to small-scale local producers, no one’s gonna do it. It’s legislating local food out of the market. Unfortunately, the health departments don’t appreciate that. But that food is actually safer. It’s easier for someone on that small scale to move things more quickly and be more careful. Local markets are self-regulating. If there’s anything wrong with your products and someone gets sick from it, then you’re out of business.

Not surprisingly, the food regulators disagree with this assessment. Last week, regulators from the Illinois Department of Agriculture raided one of the Chicago restaurants that was mentioned in the Reader story (along with its sister restaurant). While the story never said those restaurants bought any of the offending meat products, it did observe that some of the underground meat-preparers obtained their meats from the same processors as the raided restaurants. The state’s compliance officer said that the raid, which unearthed 80 pounds of illicit bacon and some headcheese, was prompted by the Reader story. She warned that the other restaurant mentioned in the story might also be raided.

We’re not talking about dives here. The raided restaurants were celebrity chef Rick Bayless’s Frontera Grill and Topolobampo. Accolades for those restaurants include an International Herald Tribune ranking of Frontera as “the world’s third best casual restaurant,” a Conde Naste Traveler review proclaiming Frontera’s fare “the best Mexican food I’ve had outside Mexico,” and a New York Times declaration that Topolobampo is “the most elegant and serious Mexican restaurant in the country.” The to-be-raided restaurant is North Pond, which landed spots on Travel & Leisure’s list of the top forty restaurants in America and Epicurious’s list of the “top ten farm-to-table restaurants.”

Part of the appeal of Frontera, Topolobampo, and North Pond — all favorites of mine — is that they strive to use small-batch, locally produced ingredients. Such ingredients tend to be produced with a bit more tender loving care, they’re generally fresher, they give diners a connection to their own geographic region (a connection that many people really value), they help ensure the persistence of a local agricultural community (which lots of folks like), and their production is at least perceived to be less resource intensive (e.g., it involves lower transportation costs). But the diminutive scale of many small-batch food preparers precludes them from being able to comply with the various food safety regulations that were drafted for large-scale food processors (and tend to insulate those processors from competition).

Now the public health crowd is sure to jump down my throat for suggesting that we permit the risk of food borne illnesses in order to allow diners to enjoy, and local artisans to craft, small-batch meat products. Doesn’t the government have a responsibility to ensure the safety of our food supply? I actually don’t think it does, but I won’t argue that fairly extreme point here. Instead, I’ll make the narrower argument that the government is pursuing its objective in the wrong way.

Imagine if Frontera or Topolobampo served artisanal sausage that made patrons ill. Rick Bayless’s empire would come crashing down in an instant. The local meat-preparer that made the sausage would be immediately out of business. Tort liability would ensue. In short, market pressures and the tort system create extremely strong incentives to avoid significant risks — far stronger than the incentives created by the costly and cumbersome food regulatory machine. (Frontera’s recent raid resulted in the seizure of some bacon; no fines were issued. Big deal.) Moreover, the regulatory machine tends to be both over- and underinclusive in its reach: It sanctions conduct that poses little risk (like home sausage-making by yuppies on Chicago’s North Shore) while giving a pass to real risks that haven’t yet been identified by the centralized regulators (who are somewhat far from the action) and incorporated into a formal rule. Market pressures, on the other hand, nimbly regulate all risks perceived by those closest to the action, while ignoring non-risks.

In light of the strong and focused incentives created by the market and the tort system, how about something shy of an outright ban on meat products that haven’t received the government’s stamp of approval? There are lots of alternatives here. The best, I believe, would be pure laissez faire. In such a world, producers would seek to make their products more attractive to consumers by earning the seal of approval of private certifiers. Competition among those certifiers (i.e., competition to be “most trusted”) would lead them to focus on just the right factors for evaluating food safety — to structure their rules so that they catch all real risks but ignore non-risks. The Jewish community relies on this sort of private certification system for Kosher foods, and it works quite well.

While I’d opt for laissez faire, I realize it’s a political non-starter. So how about a scheme in which the government (e.g., USDA) acts as a safety certifier but doesn’t ban non-certified products? We could structure this as either an opt-in system or an opt-out system. Under the former approach, food sellers who complied with all USDA requirements would have the right to advertise their products as USDA inspected — that is, they could opt into the system. Consumers who want the governmental seal of approval could then seek out only USDA-approved foods. An opt-out system would be a little more paternalistic. Under that approach, producers could sell foods that hadn’t met USDA’s requirements, but only if they opted out of the regime by labeling the products as “Not USDA-Approved.”

The point is, there’s a spectrum of regulatory alternatives here. From least to most restrictive, it proceeds from laissez faire (let markets, aided by private certifiers, do the work), to an opt-in public certification system (let USDA certify for those who care about its approval), to an opt-out public certification system (let those who want to avoid USDA’s requirements do so if they warn consumers), to an outright ban (the status quo). The option our government has selected — the most restrictive, and the most likely to protect an industry group from consumer-friendly competition — threatens to drive local, small-scale food producers out of the market. For example, the charcuterie that was the primary focus of the Chicago Reader article, E&P Meats, voluntarily shut down in response to the regulators’ raid of Frontera Grill. That’s “protection” I, as a locavore and handmade sausage afficionado, can do without.

Occasionally I read Mr. Krugman’s column for entertainment purposes — sort of like watching Project Runway or Animals Gone Wild. This morning was one of those occasions. The man is a partisan hack of the worst sort. Why does anyone take his political observations seriously?

Some thoughts about this morning’s column.

1. Krugman starts by calling the pending health care legislation “an awesome achievement,” “a huge step forward,” “seriously flawed,” and something “we’ll spend years if not decades fixing it,” all in the same sentence. Huh? This just doesn’t make any sense. If this is the best we can do at the height of Democrat power and popularity (no one thinks the Democrats will consolidate power in the next election), how exactly is it a step forward? Isn’t it more likely or just as likely that the flaws in the bill will only get worse over time? What evidence is there in our history that bad laws get better, new bureaucracies shrink, or policy failures magically correct themselves over time?

Interestingly, the Republican attempts to kill the bill by opposing care rationing (so-called death panels) and a strong individual mandate may end up making the bill worse if it becomes law. If we have nationalized health care, I want both death panels and high penalties for those who don’t buy insurance. Of course, I prefer no bill at all, or something more narrowly targeted on the worst cases, like kids who get cancer and can’t get insurance or people who lose everything after contracting a horrible disease. But, the compromise we seem to be getting is the worst of all worlds, it seems.

2. Krugman would say that this is exactly his point. He notes that the “Democrats won big last year [and] [i]n any other advanced democracy this would have given them the mandate and the ability to make major changes.” A couple of responses. First, look around the world, Mr. Krugman, and point me to advanced democracies with less dysfunctional legislative processes. And, since I’m a stickler, use some objective metric to measure outcomes. Legislatures are messy places, and the genius of our constitutional system is that change is difficult. Societies only survive if they evolve slowly over time; we can all flourish better if we have stability and certainty in our laws and policies. Radical change does not work.

Second, why is the public’s rejection of health care reform a sign of a dysfunctional Senate instead of rational updating? I concede that the president and Democrats won based on promises of reform, but these were vague promises that are unenforceable in both directions. Policy is not made at the ballot, and the people may sensibly change their mind based on details. People are rejecting the specific reforms proposed by the president and Congress, not the idea of reform.  This is not necessarily a sign of dysfunction but sophistication.

3. Krugman then laments that there is much to be done — e.g., climate change, financial reform — and that the dysfunctional Senate means some or none of it will be done. Of course, he blames the 40 Republican senators for this. Funny that, since it only takes 60 to get any law passed in the Senate. If there is blame to be given for failure to get out of the way of a radical reordering of our economy in favor of government control, the blame lies with Democrat senators and the leadership in Congress and from the White House. Republicans oppose a government takeover of health insurance and a huge tax increase on the economy to reduce some future risk of rising seas. Whether these are the optimal policies is debatable, but why should the Democrat senators who agree with them lay down their principles in favor of Mr. Krugman’s world view?

4. Krugman points to a recent study showing filibusters are getting more common. So what? It is impossible to know in the abstract whether this is a good or bad thing. What is the optimal number of filibusters? I have no idea, and neither does Krugman. Perhaps legislation is getting more radical over time, or perhaps the stakes are higher in modern bills, or perhaps the size of our government has grown so much that each additional spending bill and extension of government is that much more dangerous. I don’t know how to even evaluate the issues, and I’m sure I’m not alone. Throwing some numbers around doesn’t prove anything interesting.

5. Then Krugman claims that Republicans are worse than Democrats. News flash, Mr. Krugman, all politicians are the same, and neither party has a monopoly on idealism, wisdom, or fair play.When we point the finger at the other political party without recognizing the failings of our own, we are resting on the wobbiliest of arguments.

6. In a nod to his readers with BDS (Bush Derangement Syndrome), which is probably all of them, he dismisses Bush’s ability to get his way with Congress by claiming he was a “buy-now-pay-later president.” The evidence for this is that he “rushed” us to war and never asked us to pay for it, and that the prescription drug benefit was unfunded. One is wrong, the other is true but irrelevant to his point. Whether the wars in Iraq and Afghanistan were the right call is debatable, but it isn’t debatable that both were authorized by Congress and paid for by Congress. As for the drug benefit, it may or may not be unfunded, but Krugman is making this comparison to President Obama. The same president Obama that has run up the largest budget deficits in US history and supported massive spending bills that our great grandchildren will be paying for. Again, these may or may not be the right calls, but they are clearly pay-later programs. Health care is the prime example. The program is based entirely on (phantom) future cuts to make it solvent.

7. I could go on and on, but I’ll stop by noting how clearly one-sided this is. Imagine a world in which radical Republicans led by the extreme of their party have 60 votes in the Senate and are trying to ram through prayer in public schools, a ban on all abortions, wars against Venezuela and Iran, and other policies that Mr. Krugman would find deeply wrong and offensive. Would Paul Krugman write the same column lamenting the power of the 40 Democrats standing in their way? No chance. He would be lionizing them and the genius of our Founders. So let’s call a spade a spade: Krugman doesn’t like the results today so he wants to change the system. It is sloppy analysis, the worst kind of partisanship, and definitely in the category of be careful what you wish for.

Next time, I think I’ll watch Project Runway instead.