Usha Rodrigues and Mike Stegemoller have penned an interesting article, “Placebo Ethics,” assessing the effect of one of SOX’s disclosure provisions: The required immediate disclosure of waivers from a company’s code of ethics, found in Section 406 of the law.  The article is concrete, informative, empirical and well-written.

The article’s abstract summarizes the heart of the paper:

Out of 200 randomly selected firms, we found only one waiver over 4 years disclosed pursuant to Section 406. However, by exploiting an overlap in disclosure regulations [between SOX 406 and Item 404 of Regulation S-K requiring disclosure of related-party transactions in year-end proxy statements], we were able to cross check our sample companies’ waiver disclosure. We find 30 instances where companies appear to be violating the law, and another 74 where companies evade illegality by watering down their codes to an arguably impermissible degree – their codes of ethics do not forbid the same Enron-style conflicts of interest that led to the adoption of Section 406 in the first place. Finally we study all waivers filed by all public companies with the SEC in the four years following SOX’s passage – and find only 36 total. Event studies reveal that the market generally does not react to these transactions, suggesting that companies only use waivers to disclose innocuous, immaterial information.

There’s a lot of interesting stuff here, including the conclusions that 15% of the sample firms are apparently violating the law and that the waivers that are disclosed are viewed by the market as irrelevant.  It is also interesting that 37% of the sample “evade illegality by watering down their codes to an arguably impermissible degree.”  It is this latter claim on which I want to focus.

I talked a bit about this issue in my Hydraulic Theory of Disclosure article.  In the article I said this about the waiver disclosure requirement:

The implicit assumption is that disclosure to shareholders will deter inappropriate waivers, inducing better compliance with the underlying code of ethics.  But that assumption must be animated by a further assumption that some conduct will be relatively static—that codes of ethics will not themselves be re-written and relaxed in response to the rule. In fact, however, the more likely outcome is that codes of ethics will be (and have been) re-written in order to minimize the need for waivers, in the event actually stemming rather than improving the flow of information . . . .  In other words, disclosed waivers are (privately) costly, and it may be less (privately) costly to amend codes of ethics than to seek and publicize waivers. Underlying behavior of the sort requiring waivers may not change, or it may even deteriorate. And either way less of it will be disclosed.

Rodrigues’ and Stegemoller’s (R&S’s) concluision seems to be 1) that immediate disclosure of related-party transactions would be a good thing, 2) that SOX 406 intended this but was poorly-executed to achieve the result, and 3) that companies’ failure to disclose waivers of their codes of ethics for related-party transactions is a violation of SOX 406, even where the code does not explicitly prohibit such transactions.

While the abstract quoted above is somewhat circumspect about the illegality of these “in spirit” violations of SOX 406, the article itself is a bit more hard-nosed:

It may be that, by omitting related-party transactions from their codes of ethics, companies are in violation of Section 406(c)(1), because prohibiting related-party transactions is “reasonably necessary” to promote “ethical handling of actual or apparent conflicts of interest between personal and professional relationships.” At the very least, these codes violate the intention, or “spirit” of Section 406’s disclosure requirements. As discussed in Part III, Section 406’s waiver provision was specifically enacted to address Enron’s related-party transactions with its CFO, Andy Fastow. Yet the majority of our sample companies do not forbid related-party transactions in their codes.

Instead, companies tend to have generic “conflicts of interest” provisions. And even when the provisions address related-party transactions, they use “weasel wording” that makes it hard to find an actual violation.

As R&S note, most ethics codes do not prohibit related-party transactions outright, so neither waivers of these codes, nor, therefore, disclosure of waivers, is required.  While seemingly proving my prediction that the effect of SOX 406 would be watered-down codes of ethics and, thus, less disclosure of information (assuming the watering down came in response to SOX 406), R&S focus instead on the illegality point, with which I have some trouble.

Basically, R&S argue that ethics codes that do not prohibit related party transactions are, in fact, impermissible under SOX, but I find their reasoning to be a stretch, and certainly there is no case law or SEC ruling (that I know of or that they cite) supporting the claim.  The R&S argument goes, in essence: a) a firm has an ethics code, waivers of which must be disclosed immediately; b) the code “should” prohibit related-party transactions but it does not on its face; c) there is a related-party transaction; d) there is no disclosure of a waiver; e) 406 is violated because the code of ethics “should” have prohibited this transaction, thus it “should” have required a waiver, and thus the absence of disclosure of a waiver is a violation of 406.  This seems like a pretty big stretch to me.  It might be that firms are interpreting 406 liberally, but it’s a long way from that to saying they are breaking the law.  Rather, I would say that failure to disclose waivers in this case is not an example of a firm flouting its obligation under SOX, it is instead an example of the predictable (and predicted) hydraulic effect of imperfect regulation.

This would still count as a failure of SOX 406, in my book (whether that’s a bad thing or not is another matter), but not because of non-enforcement, as R&S suggest, but rather because of the perverse incentive created by SOX 406 that induces firms to enact less-restrictive ethics codes.

In the end, I see the article as a vindication of my prediction.  My point was to suggest that SOX 406 would have the opposite effect of the one it intended–less internal prohibition (or policing) by firms of “unethical” conduct and less disclosure of such conduct.  I hasten to note that this study doesn’t say anything about whether SOX had anything to do with the watered-down ethics codes; for all I know they were already watered down (and thus the accuracy of my prediction is unconfirmed by the article).  But that would have been the thing to look at, it seems to me:  The role of SOX in inducing firms to engage in disfavored conduct to avoid new disclosure obligations that they would not otherwise have engaged in.

Despite this critique, I think the article is the best sort of empirical legal scholarship.  My conclusion might diverge from R&S’s (I would not suggest, as they do, a rule simply requiring disclosure of all related-party transactions over a certain size), but the evidence they uncover is important and their presentation of it is straightforward, well-written and informative.

Well, it looks like Congress is going to attempt to enact the Senate’s health care bill using the reconciliation process. President Obama certainly suggested as much in Thursday’s Health Care Summit, downplaying the significance of such a move and suggesting it may be necessary in order to “move forward.”

First, he said to Senator McCain:

You know, this issue of reconciliation has been brought up. Again, I think the American people aren’t always all that interested in procedures inside the Senate. I do think that they want a vote on how we’re going to move this forward. And, you know, I think most Americans think that a majority vote makes sense, but I also think that this is an issue that could be bridged if we can arrive at some agreement on ways to move forward.

I interpret that as, “Agree with us, or we’ll pursue this using reconciliation. Americans won’t mind.” That also was the thrust of the President’s closing remarks, where he said:

[T]he question that I’m going to ask myself and I ask of all of you is, is there enough serious effort that in a month’s time or a few weeks’ time or six weeks’ time we could actually resolve something? And if we can’t, then I think we’ve got to go ahead and make some decisions, and then that’s what elections are for. We have honest disagreements about — about the vision for the country and we’ll go ahead and test those out over the next several months till November. All right?

This is most unfortunate. Reconciliation — the process by which budget-related bills can be approved without threat of a filibuster (and thus without winning the support of at least 60 Senators) — moves the Senate away from its constitutional role as a moderating, consensus-building check on the other two entities that must approve legislation, the House of Representatives and the President. While the House and the President are designed to respond to majority impulses, the Senate is explicitly designed not to work that way; otherwise, California, with its 38 million people, wouldn’t have the same voting power as Wyoming, with its population of 540,000. If the Senate transforms itself into what is effectively a second House of Representatives for this piece of non-budget legislation (which, somewhat ironically, is actually opposed by a majority of Americans) then what’s to stop it from doing so on any future bill? The Senate will no longer be the Senate.

But don’t just take my word for it. Democratic Senator Robert Byrd, who defined the narrow contours of the reconciliation process in the so-called “Byrd Rule,” adamantly insists that the process is inappropriate for sweeping social legislation like the pending health care reform bill. On April 2, 2009, he wrote the following to his Senate colleagues:

I oppose using the budget reconciliation process to pass health care reform and climate change legislation. Such a proposal would violate the intent and spirit of the budget process, and do serious injury to the Constitutional role of the Senate.

As one of the authors of the reconciliation process, I can tell you that the ironclad parliamentary procedures it authorizes were never intended for this purpose. Reconciliation was intended to adjust revenue and spending levels in order to reduce deficits. It was not designed to cut taxes. It was not designed to create a new climate and energy regime, and certainly not to restructure the entire health care system.

Just last week, Senator Byrd reiterated his position in another “Dear Colleague” letter. In that letter, he insisted that any attempt to use reconciliation to enact health care reform would be “grossly misguided.”

Senator Byrd isn’t the only Democrat who recognizes the importance of maintaining the Senate’s supramajority rule for important social legislation. Friday afternoon, I spent several hours reading through the Congressional Record from May 10, 2005 to May 25, 2005, a period during which the then-Republican majority leadership in the Senate was threatening to eliminate the supramajority requirement for approving judicial nominees. A number of Democratic senators — including Senators Bayh, Biden, Clinton, Dodd, Durbin, Feingold, Feinstein, Harkin, Kohl, Lautenberg, Leahy, Murray, Nelson, Reid, and Schumer — spoke eloquently and passionately about the Senate’s crucial and constitutionally prescribed role as a non-majoritarian body. Their characterization of the Senate’s special role was spot on.

Here’s some of what they had to say (emphasis added, of course):

SENATOR CHUCK SCHUMER, May 10, 2005:

It is the Senate where the Founding Fathers established a repository of checks and balances. It is not like the House of Representatives where the majority leader or the Speaker can snap his fingers and get what he wants. Here we work many times by unanimous consent where you need all 100 Senators to go along. In some instances, we work where 67 votes are needed, in some with 60, and in most with 51. But the reason we don’t always work by majority rule is very simple. On important issues, the Founding Fathers wanted — and they were correct in my judgment — that the slimmest majority should not always govern. When it comes to vital issues, that is what they wanted.

The Senate is not a majoritarian body. My good friend from Utah spoke. He represents about two million people in Utah. I represent 19 million in New York State. We have the same vote. You could have 51 votes for a judge on this floor that represents 21 percent of the American people. So the bottom line is very simple. This has not always been a 50.1 to 49.9 body. It has been a body that has had to work by its rules and by the Founding Fathers’ intent. Even when you are in the majority, you have to reach out and meet not all, not most, but some of the concerns of the minority.

***

SENATOR HARRY REID, May 18, 2005:

For further analysis, let’s look at Robert Caro. He is a noted historian and Pulitzer Prize winner, and he said this at a meeting I attended. He spoke about the history of the filibuster. He made a point about its legacy that was important. He noted that when legislation is supported by the majority of Americans, it eventually overcomes a filibuster’s delay, as a public protest far outweighs any Senator’s appetite to filibuster.

But when legislation only has the support of the minority, the filibuster slows the legislation-prevents a Senator from ramming it through, and gives the American people enough time to join the opposition. Mr. President, the right to extended debate is never more important than when one party controls Congress and the White House. In these cases, the filibuster serves as a check on power and preserves our limited government. …

For 200 years, we have had the right to extended debate. It is not some ” procedural gimmick.” It is within the vision of the Founding Fathers of this country. They did it; we didn’t do it. They established a government so that no one person and no single party could have total control.

Some in this Chamber want to throw out 214 years of Senate history in the quest for absolute power. They want to do away with Mr. Smith, as depicted in that great movie, being able to come to Washington. They want to do away with the filibuster. They think they are wiser than our Founding Fathers. I doubt that is true.

***

SENATOR CHRIS DODD, May 20, 2005:

One of the reasons the extended debate rule is so important is because it forces us to sit down and negotiate with one another, not because we want to but because we have to. I have helped pass many pieces of legislation in my 24 years here, both as a majority and minority Member of this institution. I have never helped pass a single bill worth talking about that didn’t have a Republican as a lead cosponsor. I don’t know of a single piece of legislation here that didn’t have a Republican and a Democrat in the lead. We need to sit down and work with each other. The rules of this institution have required that. That is why we exist. Why have a bicameral legislative body, two Chambers? What were the Framers thinking about 218 years ago? They understood the possibility of a tyranny of the majority. And yet, they fully endorsed the idea that in a democratic process, there ought to be a legislative body where the majority would rule.

So the House of Representatives was created to guarantee the rights of the majority would prevail. But they also understood there were dangers inherent in that, and that there ought to be as part of that legislative process another institution that would serve as a cooling environment for the passions of the day. So the Framers … sat down and said: There is a danger if we don’t adopt a separate institution as part of the legislative branch where the rights of the minority will also prevail, where you must listen to the other side in a democracy, pay attention to the other side.

***

SENATOR JOE BIDEN, May 23, 2005:

At its core, the filibuster is not about stopping a nominee or a bill, it is about compromise and moderation. That is why the Founders put unlimited debate in. When you have to-and I have never conducted a filibuster-but if I did, the purpose would be that you have to deal with me as one Senator. It does not mean I get my way. It means you may have to compromise. You may have to see my side of the argument. That is what it is about, engendering compromise and moderation.

Ladies and gentlemen, the nuclear option extinguishes the power of Independents and moderates in this Senate. That is it. They are done. Moderates are important only if you need to get 60 votes to satisfy cloture. They are much less important if you need only 50 votes. I understand the frustration of our Republican colleagues. I have been here 32 years, most of the time in the majority. Whenever you are in the majority, it is frustrating to see the other side block a bill or a nominee you support. I have walked in your shoes, and I get it. …

I say to my friends on the Republican side: You may own the field right now, but you won’t own it forever. I pray God when the Democrats take back control, we don’t make the kind of naked power grab you are doing. But I am afraid you will teach my new colleagues the wrong lessons.

***

Much, much, much more below the fold. Please read it — it’s important and, well, a little fun! (more…)

The EU has launched its preliminary investigation of Google’s search engine and search advertising businesses.  From the Financial Times:

According to Google, one of the three complaints was from rival Microsoft. That protest, from an online service called Ciao that was recently bought by the software company, echoes a complaint that had already been lodged with regulators in Germany.

The Commission added that it had asked Google to comment on the complaints and that it was co-operating closely with national competition authorities. This procedure is standard practice when complaints are received in Brussels, and it can take some time – often months – before a decision is made either to begin a formal probe or to drop the matter.

Here is Google’s Blog Response, pretty squarely laying blame for the preliminary investigation at the feet of Microsoft:

The European Commission has notified us that it has received complaints from three companies: a UK price comparison site, Foundem, a French legal search engine called ejustice.fr, and Microsoft’s Ciao! from Bing. While we will be providing feedback and additional information on these complaints, we are confident that our business operates in the interests of users and partners, as well as in line with European competition law.

Given that these complaints will generate interest in the media, we wanted to provide some background to them. First, search. Foundem – a member of an organisation called ICOMP which is funded partly by Microsoft – argues that our algorithms demote their site in our results because they are a vertical search engine and so a direct competitor to Google. ejustice.fr’s complaint seems to echo these concerns….

Regarding Ciao!, they were a long-time AdSense partner of Google’s, with whom we always had a good relationship. However, after Microsoft acquired Ciao! in 2008 (renaming it Ciao! from Bing) we started receiving complaints about our standard terms and conditions. They initially took their case to the German competition authority, but it now has been transferred to Brussels.

Though each case raises slightly different issues, the question they ultimately pose is whether Google is doing anything to choke off competition or hurt our users and partners. This is not the case. We always try to listen carefully if someone has a real concern and we work hard to put our users’ interests first and to compete fair and square in the market. We believe our business practices reflect those commitments.

As it so happens, Geoff and I are just getting ready to send out a law review piece analyzing a potential monopolization/ abuse of dominance cases against Google through the lens of an error-cost, evidence-based antitrust framework.   So the timing is perfect!  We’ll blog about that piece in the very near future (and get it posted to SSRN).

My wife makes me subscribe to the New York Times, and occasionally it is worth it. Take this recent essay by Roger Cohen. It is difficult to get past the faux-intellectual babble — “As it is, everyone’s shrieking their lonesome anger, burrowing deeper into stress, gazing at their own images” — but if you can resist laughing or immolating yourself to escape Cohen’s drivel, you’ll get to a tremendous claim. Cohen writes:

Americans don’t want a European nanny state — fine! But, as a lawyer friend, Manuel Wally, put it to me, “When it comes to health it makes sense to involve government, which is accountable to the people, rather than corporations, which are accountable to shareholders.

Some thoughts about Mr. Cohen’s claim about corporations:

1. Health care is indeed essential to our wellbeing, but so is food, water, entertainment, productive work, transportation, and on and on. I assume Mr. Cohen eats food from supermarkets, dines at restaurants, drinks bottled water, flies across the ocean, and drives a car. But these are goods and services provided by corporations! Unaccountable corporations! It is a short leap from his absurd claim to nationalization of the means of production, and it is an inevitable step from there to totalitarianism, murder, starvation, and chaos.

2. Shareholders are people. Who exactly does Mr. Cohen think owns our corporations? We do. The “people” who allegedly can hold our government to account are exactly the same people who can hold our corporations to account. If corporations are not accountable to us, the fault dear Brutus lies not in the stars but in ourselves.

3. Neither the govenrment nor corporations are perfectly accountable or aligned with the people’s interests. The question is which is more capable and accountable under specific circumstances. Markets for labor, capital, and products and services provide discipline for firms; elections provide dicipline for government. Sometimes we can rely on the former — no one believes we would have a better Internet search engine, grocery store, or computer if it were provided by Uncle Sam instead of Google, Whole Foods, or Apple. Sometimes we can rely on the latter — no one believes we could reduce acid rain without government involvement, in one way or another. There is a reasonable debate to be had about how well functioning the market for delivering health care is and how we may be able to improve it, but that debate is not advanced at all by absurd claims like Mr. Cohen’s. We law professors tinker at the edges to try to make governments and corporations more accountable, but to flatly assert one always dominates the other is just sophistry.

4. Does Mr. Cohen really think the government is always accountable to the people? Let me guess that Mr. Cohen was opposed to the invasion of Iraq. Who exactly does he think did this? Hint: it wasn’t a corporation.

5. If Mr. Cohen’s problem with shareholders is the profit motive, he might want to do some research on the provision of health care by non-profit hospitals, clinics, and insurance companies. In many states, the big, terrible insurance companies are non-profit corporations. Are these unaccountable too? If so, why? Just because the individuals behind them chose to be a “corporation”? If that is the reason, perhaps Mr. Cohen would be surprised to know Chicago is also a corporation.

6. Although I could go on and on and on about Mr. Cohen’s simplisitc and downright silly analysis, I’ll just point out that Mr. Cohen himself works for an unaccountable, greedy, terrible, world-destroying corporation, called the New York Times. Perhaps we should be afraid.

Dick Langlois’ post on Carl Kaysen’s role in the United Machinery antitrust case reminded me of a question I’ve been meaning to blog about.  Langlois writes:

Obituaries praise Kaysen for his role as a policy intellectual of great scope, especially in the area of nuclear non-proliferation. But they either fail to mention, or mention with considerable approval, Kaysen’s pivotal role in the famous 1954 United Shoe Machinery case. Kaysen’s view of the case, and of the role of economic analysis in antitrust, is a key example of what Williamson calls the “inhospitality tradition” — that any kind of contract we don’t understand must therefore be anticompetitive. In the eyes of many present-day economists, Kaysen is implicated in having destroyed the American shoe machinery industry and with it the American shoe industry. (The post-mortem is by Masten and Snyder.) Not exactly McNamara in Vietnam, but worth mentioning amid the hagiography of Kaysen, not to mention the reawakened culture of elitist decision-making in Washington.

Kaysen was retained by Judge Wyzanski in United Machinery.  Kaysen sat in court with the judge, examined the evidence, and briefed the court — though the brief was apparently not available to either side.  In another famous example, economist Alfred Kahn was appointed in New York v. Kraft General Foods pursuant to Federal Rule of Evidence 706.  Judge Posner has long urged that district courts make greater use of court-appointed experts.  We recently discussed Judge Sarin’s reliance on economist Orley Ashenfelter to help resolve a Daubert dispute.  Michael Baye and I discuss judicial training in basic economics as one method of mitigating problems arising out of economic complexity in antitrust cases, and provide some empirical evidence suggesting positive returns to this approach in less complex cases.

The reason the Kaysen and Kahn cases are so frequently discussed, of course, is because the examples in antitrust are few and far between.  As I understand it, judicial use of court-appointed “neutral” experts or special masters is very rare in antitrust.  Casual empiricism and a little bit of digging suggest that it is much more common procedure in, for example, appointment of experts with specialized knowledge in science in patent cases involving claim construction.  Turns out, the lack of court appointed experts appears to be a real phenomenon, and one that doesn’t get much attention in part because it happens so infrequently. But the problem is at least perceived to be a big one in antitrust.  24 percent of economists in the ABA Task Force survey opined that judges don’t understand the general economic issues in modern antitrust litigation.

So, why is it that federal judges don’t use court appointed economists more often?  Is it that judges are more comfortable relying on experts in hard sciences but there is some stigma in admitting one needs “help” to understand economic testimony?  Are the outcomes in areas where courts do use court appointed experts more frequently positive?  Do they reduce appeal and reversal rates for district court judges?  If the stylized fact that court appointed experts are used much more frequently in some areas of the law than others, this seems like a neat puzzle to try to both document and explain.  Any thoughts?

Judge Jed Rakoff just approved a settlement between the SEC and Bank of America in a dispute about the disclosures made to shareholders during Bank of America’s acquisition of Merrill Lynch. This is significant becasue Rakoff causes a minor kerfuffle last year when he rejected a similar deal (although for only $33 million in fines compared with the $150 million agreed to today). In approving the settlement, Rakoff called it “half-baked justice,” among other things. For my take on the earlier decision to reject the settlement, see this essay published in the excellent periodical, Wall Street Lawyer. (It is reprinted at the link with their permission.)

As Todd mentioned, the Obama Administration has released its latest plan for regulating (and mandating) health insurance. The new plan includes a novel element: the creation of a seven-member Health Insurance Rate Authority that would issue an annual schedule of “reasonable” rate increases. Increases deemed unjustified could be blocked, and insurers that imposed unjustified rate increases would have to provide rebates to overcharged consumers.

This is, of course, an old-fashioned price control. The sort the Nixon and Ford Administrations imposed, with a spectacular lack of success, on gasoline markets in the 1970s. The sort that either has no effect (if the rate regulators set the maximum price at or above the market-clearing rate) or causes shortages and/or service cuts (if the rate regulators set the maximum price below the market-clearing rate). The sort that wins short-term political points because it sounds good to lots of well-meaning folks who are too busy living their lives to worry about the unintended consequences their elected representatives are supposed to be considering.

The Obama Administration included this added feature in its new health insurance proposal because some health insurers — most prominently, Wellpoint’s Anthem Blue Cross — have recently raised premiums on individually purchased policies. Ironically, other features of the Obama proposal would encourage all insurers to follow Anthem’s lead.

Anthem raised premiums on individually purchased policies because the current economic downturn has motivated many of its customers who ascribe a relatively low value to insurance coverage — in general, its healthiest policy holders — to drop their insurance coverage. As these healthier customers have dropped out of the pool of insureds, Anthem’s average policyholder has become less healthy and more likely to make claims. To deal with that change in its risk pool, Anthem has had to raise premiums.

This “drive out the healthy folks” dynamic will occur in spades if the Obama plan becomes law. That’s because the plan’s elimination of pre-existing condition prohibitions, coupled with its lax penalties for not carrying health insurance, will incentivize a huge percentage of healthy people who buy their own insurance to drop it until it’s needed.

Suppose you’re a 27 year-old man living in Columbia, Missouri (65203 ZIP Code) earning $40,000 a year. To buy a health insurance policy with a $1,000 deductible (which is susbtantially higher than the average deductible for employer-provided insurance), you’d have to pay $187.84 per month, or $2,254.08 per year. (Price data are from this website.) Now, if the law prohibits insurers from denying you or charging you extra for a pre-existing condition, you could hold off buying that insurance policy until you get sick and need it. Under the Obama plan, you’d have to pay a maximum penalty of $1,000 (2.5% of your income) if you forego coverage.

So what are you going to do? Pay an extra $1,254 to ensure that you’re covered for any expense greater than $1,000, or pocket that money and take the risk that you might have to pay out-of-pocket for some expenses you incur before you have a chance to buy insurance from a company that can’t penalize you for a pre-existing condition?

Lots of folks will take the latter option. And guess who those folks will be? Young, healthy people.

Once those people drop their insurance, the cost of covering the people remaining in the risk pool will rise. And as those costs rise, premiums will follow. As premiums rise, the amount one can save by dropping one’s coverage — i.e., one’s “payment” for taking the risk of some uninsured loss — will grow. This will lead even more healthy people to drop their insurance and will drive costs and premiums higher still.

Of course, the government could use force to stop premium hikes, and the new Obama proposal seems to authorize such coercion. But even brute force has its limits. If the Health Insurance Rate Authority refuses to allow the premium increases necessary to cover an ever unhealthier risk pool, it will eventually drive private insurers out of business, leaving only the government as insurer of last resort.

But perhaps that was the goal all along.

In the comments to my last post on Mr. Obama’s health proposals (which have gotten worse — price controls!?), “Chris” and I have been having a back-and-forth about what he characterizes as a uniquely Republican disease — obstructionism. He calls Republicans “the Party of No.”

I’m not a political scientist, but this seems like a partisan statement to me. My guess, as expressed in my comments, is that the Republican conduct today in opposing the health reforms is driven by a mix of ideological point of view, desire to be reelected, desire to please contributors, susceptibility to arguments of particular lobbyists, and so on. No matter which of these (or others) is the major driver, it seems silly to me to describe their conduct as new in American politics or a Republican-only phenomenon.

My guess is supported by an interesting paper by Rick Pildes, which he is presenting at a workshop at Chicago today. It is entitled “Ungovernable America: The Causes and Consequences of Polarized Democracy.” Pildes writes about Democrat obstructionism of the Bush Administration:

Moreover, while still in opposition, [Pelosi] argued . . . that the Democrats should not assist in trying to improve Republican legislation, but should be oppositional throughout, in an effort to draw sharp contrasts with the aim of taking over the chamber in later elections. She discouraged Democrats from co-sponsoring bills with Republicans, to avoid enabling Republicans to look bipartisan and discouraged ranking Democrats from negotiating with Republicans on their committees. For example, during the debates over privatizing Social Security, she, along with Senator Reid, decided the Democrats would not only oppose Bush’s efforts, but would not offer any alternative, nor negotiate with Bush, until he gave up priviazation.Whether in opposition or in the majority, Pelosi is in many ways a mirror image of Newt Gingrich when it comes to using rules and institutional structures to realize a vision of unified and polarized partisan combat. (Footnotes omitted).

There are interesting questions raised by the fact of polarization Pildes describes. Is this a good or bad thing from a social welfare perspective? Big government types might think it is bad, because it may lead to less big government, but on the other hand, the government is ever growing, and making change more difficult locks in entitlement programs and allows the bureaucracy to creep, if not run. Small government types might think it is bad for this last reason, but might also think it is good because it prevents even more radical change. George Will’s highly entertaining talk at CPAC makes this argument.One might also ask how we can try to fix the polarization problem, if there is one. Pildes offers some interesting suggestions, including mandating open primaries, because these generally put forth more moderate candidates.

But one thing that is not an interesting question, because it is patently false, is that Republicans are uniquely obstructionist and bad. It is true that a tenet of conservatism is to be against change — what William Buckley called the urge to “stand athwart history, yelling Stop” — but this is not necessarily informative about the willingness to govern. After all, we start today with a modern welfare state of unprecedented proportions in this country, and therefore the need to legislate to reduce the size of government is as strong as the need for the other side to legislate to increase it.

If there are problems with politics today, there are problems with politics today, not with this party or with that party. Let’s have the debate about the role of government in our lives and how much government we are willing to pay for. Calling each other names — Party of No!, Socialists! — doesn’t seem very helpful to that debate. This is something we all learned on the playground, but seem to have forgotten.

The president revealed his last-ditch plan to reform our healthcare system today. (Funny the plan is revealed before the “bipartisan” meeting about health care being trumpeted for political reasons.) One thing I was hoping to see in the proposal is missing — an increase in the eligibility age for Medicare (and, while we are at it, Social Security). Although I would prefer to see us do away with these entitlement programs, if we have them, why not make them solvent and sensible? When these programs were passed, people lived a lot shorter lives than they do today, and a simple indexing to life expectancy would go a long way toward reducing our national fiscal crisis. Not only would this reduce our government-funded health care expenses, it would encourage 65 year olds to stay in the work force. Take my Dad. He retired to a life of reading history books when he hit that magic number, even though he was still energetic, capable, and earning a good living at the time. Our perverse entitlement programs encouraged him to do this, to accept government handouts even though he doesn’t need them, and mandated that he go onto a government-run insurance program, even though he could easily afford his own health care bills or insurance. This makes absolutely no sense. Any system that takes people like this out of the work force and bestows upon them welfare without regard to need is not just stupid, it is immoral.

Faced with a similar set of existing incentives in the 1990s, President Clinton and a Republican Congress ended welfare as we knew it. No longer would we pay people not to work, but instead we would make government handouts instrumental toward a productive life. President Clinton had the cache and credibility with the opponents of welfare reform to get this obviously beneficial change enacted, just as President Nixon did with foreign policy hawks when he went to China. Since Democrats largely stand in the way of entitlement reform, the same must be true of President Obama. President Bush wasn’t able to reform Social Security in part because his proposal to let people invest their own money for retirement sounded to some like a plan to make Bush’s banker friends rich at the expense of Joe the Plumber. But Obama could do this. If he proposed to raise the eligibility age for Medicare (and the other entitlement programs) gradually but dramatically, perhaps in return for some Republican concessions on insurance reform and subsidies for the poor to buy insurance, there might be a deal. The Republicans might even be able to get some tort reform as part of the deal — again, who better than a Democrat lawyer to stand up to the trial lawyers?

In his best moments, the president has seemed to play against type and stand up for good ideas that are not favored by his core special-interests constituency. There have been, for instance, some nods for school choice and performance pay that have irritated the teachers’ unions. He has also continued our assault on Muslim terrorists. We need more of this from the president. (And, he needs more of it if he hopes to be reelected. Just ask President Clinton.) In short, the best hope for reform is compromise, and compromise in ways in which Mr. Obama has a comparative advantage. Anyone could ram through a one-sided agenda; it takes real leadership to go to China. Book your ticket, Mr. Obama. I hear the Great Wall shouldn’t be missed.

Over at the International Center for Law and Economics website we’ve posted a link to a pdf e-book version of the collected content (including both posts and comments) from our recent “Interchange Fees and the Law and Economics of Credit Cards” symposium.  Head on over and download a copy if you’re interested in a dead tree version of the symposium.

I love our national parks as much as the next guy (probably more, having visited every major one and dozens of smaller ones, and loving every minute of nearly every visit), but can someone tell me why the federal government owns so much of our country? Some maps tell the story. See here and here. Now comes news from the Obama administration that there are plans to make more land off limits to economic uses. See here. I understand the temptation to think of nature as benign, aesthetically valuable, and like a piece of antiquity to be preserved, but I think we go too far when we sacrifice economic progress for desert plants, tall trees, fish, and other nonhuman things. Fundamentally the claims of favoring these things for some abstract goals of perservation are antihuman. They are also often ways for politicians to serve their own interests and those of favored constituents over the general welfare.

The examples of hypocrisy from politicians on this subject are innumerable. The Obama administration favors more solar power, but Senator Feinstein wants to make sure it doesn’t happen in “her” desert. See here. The Kennedy family favors non-fossil fuels for energy, but not if it spoils their view. See here. Everyone is in favor of less reliance on foreign oil, but we don’t drill off the coast of California, so Jennifer Aniston can avoid seeing oil platforms from her Malibu mansion, and in Alaska, so caribou are not offended by our presence and the tundra is “preserved.”

Would our world really be worse off if the federal government sold all federal lands, except a limited number of areas for national parks and essential military facilities? Is it really true that the government does a better job of balancing the tradeoff between economic returns from land and preservation of land? It is time to get the government out of the business of issuing mining permits, oil drilling permits, logging permits, and on and on. There used to be a time when corporate charters were passed out by the state in this way, and the result was a disaster of exploitation, bribery of public officials, and reduced economic efficiency. One of the most important legal innovations of the past century was getting the government out of the business of telling people what business organizations they could form.

In that spirit, we should sell nearly all of the 60% of this country owned by the federal government, and use the vast sums such sales would generate to pay down some of our massive debt. Private property is not a recipe for spoliation but our best hope to get everything we can from our resources, including recreation, preserving natural beauty, minerals, and everything else the Earth has to offer. It is time to put people, all people, not just the rich ones who can afford to visit the wild places, first.

I just love the Olympics. Exhibit A for me was the face of American skier Lindsey Vonn in the starting gate last night before her gold-medal-winning race. Vonn was the overwhelming favorite, having proved herself the greatest skier in the world for the past few years. She was, however, plagued by a nasty shin injury and was only able to ski because the weather gods delayed her race by several days. She was also preceded by several near-tragic crashes of her competitors. The look on Vonn’s face was pure intensity. She embodied the human spirit of accomplish and excellence in that moment.

Exhibit B was Shaun White’s second run in the halfpipe competition. White had already won the gold before his last run, and instead of taking it easy, he pushed the envelope of human capabilities. He proceeded to perform the greatest halfpipe run of all time, doing a trick that have never been done, and, if I’d seen it on YouTube, would have been convinced it was a trick of editing.

But the Olympics got me thinking about the odd role that political history plays on the competition. Take my favorite sport of ice hockey. What would the competition look like if the Cold War was still going on? Imagine the Czechs and the Slovaks, who had an epic battle against each other last night, playing for the same team? Or how about reuniting all the Soviet republics? Or giving Finland back to Sweden (sorry to my Finish colleague Anu Bradford for even suggesting this)?How about a combined American-Canadian team, say based on an American victory in the war of 1812? We can imagine a few mighty teams had history been not that much different, but would the competition be better? Is a tournament better with a few great teams or a larger number of nearly great ones?

Compare the US and Europe. These regions have a similar number of people, similar GDP, and similar living standards. And yet the fact that we 50 are 1, and their 27 are 27, means that they send more athletes and win many more medals than we do. In fact, one European state, Germany, will likely win as many medals as the US will. We could imagine instead an Olympics with US states competing individually, say as the territories of the United Kingdom do (e.g., England, Scotland, Wales, Northern Ireland, etc.). Minnesota, California, and New York, which send most of our winter Olympians would do well, but would they do better if they competed as states? In other words, would American medal totals be higher with our states competing individually, as in Europe, or as a union?

We might expect state-based teams to produce more athletes but lose a bit of enthusiasm — who wants to hear the state anthem of Illinois (do we have one?) on the podium? We might expect more innovation in techniques, styles, coaching, and technology, but perhaps a centralized body like the USOC does a good job of learning and implementing the best of the world. It is unlikely we will ever know how many medals Americans would win on state teams, but someday we may have a competition between America and Europe on equal geographic terms. Until then, I’ll enjoy watching how incredible we humans are, no matter how trivial the goals we pursue. I’ll also continue cheering for strangers just because they live nearer to me than those they compete against, and I’ll keep getting choked up watching the Stars & Stripes fly high over the medal stand.

Writing in the Weekly Standard, Jeffrey Anderson offers an alternative to Obamacare (or should we call it Pelosireidcare?). The seven provisions in the “Small Bill” seem sensible to this nonexpert. Allowing insurance to be sold interstate is likely to bring down costs and improve service — wouldn’t some competition from Geico Health Insurance be a good thing? I can already imagine the commercials. Another proposal is to cap noneconomic damages in medical malpractice suits. Again, this seems like a no-brainer.

But I was most interested in proposal #3:

Cut costs by allowing lower premiums for healthier lifestyles.  Federal regulations ban companies from offering more than a 20 percent discount to those who eat and drink in moderation, exercise, or don’t smoke.  Such regulations handcuff private cost-cutting efforts and should be eliminated.  (No increase in government spending.*)

I’ve written about this in an article forthcoming in the University of Chicago Law Review. You can find a version of the paper here. Based on my review of corporate nannyism, I fully endorse proposal #3 of the Small Bill.

A few years back, my colleague Royce Barondes and I wrote an essay entitled Should Antitrust Education Be Mandatory (for Law School Administrators)? The essay, whose title was intended to be tongue-in-cheek, argued that the members of the Association of American Law Schools were engaged in an illegal conspiracy to limit competition for professor talent. The focus of our criticism was an AALS “good practice” under which the law schools agree not to extend offers of employment to professors at competing law schools after March 1.

Law school administrators maintain that their agreement not to compete is justifiable because unbridled competition for professor talent causes them inconvenience (e.g., having to reschedule the fall semester courses of a professor who gets hired away during the spring or summer). But law schools could always rely on non-collusive, unilateral means of avoiding these difficulties. They could, for example, execute employment contracts that preclude professors from departing after some particular date and specify some amount of liquidated damages as a remedy for breach. In any event, the Supreme Court has made clear that the law schools’ argument — “Competition for professor talent is just too hard!” — amounts to a frontal assault on the Sherman Act and is entitled to no weight. (See Professional Engineers.)

Perhaps Royce and I should have included law firm recruiters and law school placement directors in our proposed antitrust education program. A few weeks back, a prominent group of those folks — acting through the National Association for Law Placement, or “NALP” — proposed a similarly collusive agreement not to compete for legal talent. The centerpiece of the proposed scheme is a pact among law firms, which currently interview law students whenever they want and make offers on a rolling basis, to refuse to extend offers of summer employment to second-year law students before a set date in January. The law schools, then, agree to punish gun-jumping firms (which the NALP proposal revealingly terms “cheaters”) by barring them from on-campus recruiting. NALP attempts to justify this law school-policed collusion among employers on grounds that it (1) allows firms to make staffing decisions when they have a better idea of their employment needs (i.e., after their year-end accounting); (2) enables firms to utilize better, but more time-consuming, interview methods (tests, simulations, “McKinsey-style group projects,” etc.); and (3) prevents firms from having to interview law students in the late summer and early fall, when lawyers like to vacation. (I’m serious. Read the proposal linked above.)

This agreement among law firms to limit competition in entry-level hiring is a bad idea for a number of reasons. For example, do the firms really want to extend the wining and dining period until January? Do they really want to replace the current system of rolling offers, in which the timing of an offer doesn’t reveal much information, with a system that signals to second-round offerees that they were not first choice? Relative to the current rolling offer system, won’t a scheme that encourages firms to make all or most of their offers at once (lest they lose attractive candidates to other firms) exacerbate, rather than alleviate, the difficulty of managing yield?

Most importantly, though, this agreement is a bad idea because it constitutes an illegal restraint of trade among competitors. A group of competitors has effectively said: “We don’t like having to make quick hiring decisions to catch the best talent, so we’re going to agree to limit competition amongst ourselves, and we’re going to enlist the law schools, who desperately want us to hire their grads, to act as our policemen.” That, my friends, is a naked restraint of trade. It seeks to level the playing field by removing an advantage from those well-managed law firms that are good at identifying and wooing talent and that can confidently predict their future business prospects, and it doesn’t create notable efficiencies (e.g., transaction cost reductions) or enable the creation of a new product or service.

Moreover, its purported justifications fail. The agreement isn’t necessary to achieve the first two putative benefits — enabling firms to make hiring decisions when they have a better idea of future labor needs and permitting them to utilize more time-consuming interview methods. Under the current system, firms are free to delay making offers until they get year-end accounting data, and they can take as long as they want to evaluate job candidates. While they might find that they lose candidates to employers who are more confident about future needs and who are speedier evaluators, no one’s stopping them from taking their sweet time if they want to. As for the third purported benefit — less need to interrupt attorneys’ late summer vacations, etc. — courts have not looked favorably on the “But competition makes us work too hard!” defense.

Fortunately, one prominent law firm — Jones Day — has objected to the NALP recommendations on grounds similar to those set forth above. Perhaps we should put that firm’s excellent antitrust lawyers in charge of our mandatory antitrust education program for law school administrators and law firm recruiters.