A Senate panel approved the Leegin Bill on a voice vote (HT: Main Justice).  The story behind the link suggests that there is some Republican opposition brewing.  I suspect there will be hearings.  The Bill’s findings make the following two observations:

(3) Many economic studies showed that the rule against resale price maintenance led to lower prices and promoted consumer welfare, and;

(4) abandoning the rule against resale price maintenance will likely lead to higher prices paid by consumers and substantially harms the ability of discount retail stores to compete. For 40 years prior to 1975, Federal law permitted States to enact so-called `fair trade’ laws allowing vertical price fixing. Studies conducted by the Department of Justice in the late 1960s indicated that retail prices were between 18 and 27 percent higher in States that allowed vertical price fixing than those that did not. Likewise, a 1983 study by the Bureau of Economics of the Federal Trade Commission found that, in most cases, resale price maintenance increased the prices of products sold.

I believe both of these statements are, at best, misleading, and that Leegin was correctly decided.  From an antitrust perspective, the issue of whether RPM should be afforded per se treatment is whether the practice “always or almost always reduces output.”  Judge Douglas Ginsburg has more eloquently explained the empirical logic behind the per se standard in Polygram, noting that the issue is properly understood as whether there exists “a close family resemblance between the suspect practice and another practice that already stands convicted in the court of consumer welfare.”  The real question is whether we know that resale price maintenance — please don’t call it price-fixing — is whether the practice is so likely to generate competitive harm that it should be condemned without rule of reason inquiry.

As we’ve discussed previously, the empirical evidence on RPM simply does not satisfy this standard.  Quite the opposite, an objective assessment of the empirical evidence suggests that RPM is The findings articulated in the Bill are misleading because (1) they rely on studies from the 1960s which have been superseded by better empirical studies and an improved theoretical lens through which to understand RPM, and (2) by emphasizing the “price” test the findings fail to note that the overwhelming majority of the studies suggest that RPM increases output, a finding at odds with the anticompetitive theories.  Of course, a finding that the most likely effect of the legislation restoring the per se rule is to reduce output and consumer welfare would not, I suspect, attract the same number of votes or public support.

For interested readers,  testimony/ presentation slides at the FTC Workshop on Resale Price Maintenance are available.

The TOTM archives on RPM, including a number of great posts from Thom, are here.

From the AP:

Norway’s Opera said Thursday that downloads of its browser more than doubled after Microsoft Corp. was forced to give European users a choice of Web software to settle European Union antitrust charges.  Microsoft started sending updates to Windows computers in Europe in early March that launches a pop-up screen telling them to pick one or more of 12 free Web browsers to download and install, including Microsoft’s Internet Explorer.  Opera Software ASA said European downloads of its newest desktop browser increased 130 percent between March 12-14, after the updates were sent out. It saw the highest increase in Poland, where downloads went up 328 percent.

Here are some details on what the browser choice screen looks like in practice, or here.

A number of opponents of Obamacare, such as Wall Street Journal columnist William McGurn, have criticized the President and his people for referring to pending proposals as “health insurance reform” rather than “health care reform.” I suppose these critics think the President is engaging in a sleight of hand in an effort to minimize the significance of the reform proposals — as in, “We’re not reforming the whole health care system, just health insurance. No biggie.” But Mr. Obama is right. This proposal is about insurance rather than the provision of health care itself. And that’s the main problem.

At the outset, the President claimed that a central goal of reform was to reduce the cost of health care itself. While Mr. Obama was always concerned with expanding health insurance coverage to the uninsured, he maintained that health care cost reduction is also key (and, in fact, necessary for expanding coverage without breaking the bank). For example, in a June 2009 radio address setting forth his goals for health care reform, the President insisted, “We must attack the root causes of skyrocketing health care costs,” and he reiterated his “belief that any health care reform must be built around fundamental reforms that lower costs, improve quality and coverage, and also protect consumer choice.” Similarly, his Council of Economic Advisers listed a reduction in actual health care costs as one of the two goals (along with insurance coverage expansion) of health care reform:

CEA’s findings on the state of the current system lead to a natural focus on two key components of successful health care reform: (1) a genuine containment of the growth rate of health care costs, and (2) the expansion of insurance coverage.

So I have a question for supporters of Obamacare (either the House bill, the Senate bill, or the President’s own proposal): What provisions of the proposed legislation will reduce the costs of health care itself? This is an honest question. I’m really trying figure out, if a reduction in health care costs is a primary goal of this legislation (and mustn’t it be?), what is the strongest possible case for the pending proposals?

(more…)

I wonder if that is on a per pinch basis?  I refused to believe this is real language, from a real bill.  But Professor Bainbridge says it is — and doesn’t pull any punches in describing its drafter (or at least leading proponent) Assemblyman Ortiz in NY as an “officious pig and an ass.”   But rest assured, Assemblyman Ortiz assures the good citizens of New York that the bill is really about giving consumers more choice, and “more control over the amount of sodium they intake,” and “the option to exercise healthier diets and healthier lifestyles.”

So, here is the salt ban bill in pertinent part.   Really:

No owner or operator of a restaurant in this state shall use salt in any form in the preparation of any food for consumption by customers of such restaurant, including food prepared to be consumed on the premises of such restaurant or off of such premises…

Well, a boom in Hayek sales in the current regulatory climate was fairly predictable, but who knew that travel-friendly salt shakers would be the next big thing?

The WSJ implies that the answer is yes in an interesting article describing the Obama administration’s changing views on behavioral economics and regulation.  The theme of the article is that the Obama administration has eschewed the “soft paternalism” based “nudge” approach endorsed by the behavioral economics crowd and that received so much attention in the blogs — especially as it related to Cass Sunstein’s appointment to OIRA, the Consumer Financial Protection Agency and a few other issues — in favor of harder paternalism and “shoves” including recent proposals for “regulating health-insurance rate increases, separating commercial banking from investing on behalf of their own bottom lines, and prohibiting commercial banks from owning or investing in private-equity firms or hedge funds.”  The article also points to a proposal for new regulations (that I had not heard of prior), that “would require retirement counselors to base their advice on computer models that have been certified as independent” as a precondition that must be satisfied before advisers can push funds with which they are affiliated.

A few observations.

First, is anybody really shocked to see behavioral economics-based proposals give way to harder forms of paternalism?  Though I take Rizzo and Whitman to be focusing on a different slope towards old paternalism, the idea that the behavioral economics nudge approaches reveal policy preferences consistent with hard paternalism is one that has been discussed frequently in this context.  Perhaps the surprising thing is how quickly the shift has occurred?

Second, given the buzz around behavioral economics in antitrust, and especially the misguided notion that the financial crisis has taught us that the baseline assumption for antitrust analysis should that firms are irrational, I was pleased to see Peter Orszag recognizing that “Institutional decision-making is much closer to a rational economics than individual decision-making, no question.”

Third, and cutting to the chase a little bit, its unclear to me that the Administration was ever really interested in behavioral economics as an intellectual guiding force as a “new” approach to regulation.  For example, little attention has been paid to areas where behavioral economics implies less regulation.  Regulators of all sorts want intellectual support for what they are doing.  That is not a criticism.  But was there really ever anything there?  Has anybody seen anything that has come out of OIRA with the signature of behavioral economics?  On this score, TOTM readers may recall that, since early on, I have expressed skepticism about claims that the Obama administration had made any real commitments to behavioral economics:

The second issue is that I’m not convinced that Obama’s policies have much to do with a behavioral economics-based platform. Leonhardt raises Obama’s savings plan (opt-out 401(k)’s), broad based tax cuts for the middle class, and opposition to a health care “mandate” as examples of policies informed by behavioral economics. I understand the the connection between the 401k default policy and behavioral economics. But the second two examples don’t strike me as have much do with with the insights of behavioral economics per se. The link between tax cuts and the lessons of behavioral economics, in this context, is tenuous at best. And as Ezra Klein notes while taking the position that he doesn’t see much behavioral economics in Obama’s positions either, one might suspect that a health care mandate would be more in line with the teachings of behavioral economics rather than Obama’s plan.

Fourth, and finally, I can’t help but note that some agreement on what counts as a behavioral economics-informed policy choice might be helpful in order to make progress.  I’ve been fairly critical of those, especially in the law review literature, who invoke the terms like irrationality and endowment effect willy-nilly, wave their hands around quickly while saying something about market failure (usually this section of the paper also has the term “orthodox neoclassical theory” in it somewhere), and move on to discuss regulatory proposals on the assumption that they will be costless.   But if we are going to be keeping a scorecard here, we should at least agree on what counts as a nudge.  The WSJ shares an example that it says is consistent with what is left of the Administration’s commitment to behavioral economics:

Landlords, for instance, have no incentive to replace a 40-year-old refrigerator if the tenants are paying the utility bills. So the Department of Housing and Urban Development, the Small Business Administration and the Energy Department are looking for ways to give property owners more incentives to save energy, possibly through loan discounts or guarantees offered through mortgage brokers. In October, Mr. Biden unveiled a pilot Property Assessed Clean Energy financing program to try it out.

Wait.  So, the landlord has less than optimal incentives to make investments in refrigerators when the tenant plays the bills because he doesn’t internalize the benefits of the investments.  I hate to be a stickler, but I’m pretty sure standard economics can do this one.   Transacting parties reach agreements to economize on agency costs and incentive conflicts.   The fact that the landlord’s private decision process is different when he owns the refrigerator than when he doesn’t imply irrationality!  Nor is any regulatory shove to get individuals to act closer to the what the regulators think is “optimal” decision-making based on behavioral economics simply by invoking the term.

But if the WSJ is right, maybe this debate about behavioral economics is old news anyway.  Shove is the new nudge and all that.

As predicted, President Obama has called upon Congress to enact his health insurance reform plan using the reconciliation process, which allows the Senate to avoid a filibuster attempt and would permit enactment of the legislation without any Republican support. As I mentioned the other day, the reconciliation process was created to deal with budget-related bills, and one of the key architects of the procedure, Democratic Senator Robert Byrd, has insisted (repeatedly) that it should not be used for sweeping social legislation like the pending health care proposal. Utilizing reconciliation to enact health care reform would represent a massive change in the Senate’s procedures.

Not surprisingly, the President and his people insist that this just isn’t so. They say reconciliation has frequently been used to bypass the Senate’s effective supramajority requirement (i.e., the need for 60 votes to cut off debate and end a filibuster), even when the legislation at issue has been major social legislation. In a speech today, for example, the President, while carefully avoiding the word “reconciliation,” insisted that his health care proposal:

deserves the same kind of up or down vote that was cast on welfare reform, that was cast on the Children’s Health Insurance Program, that was used for COBRA health coverage for the unemployed, and, by the way, for both Bush tax cuts — all of which had to pass Congress with nothing more than a simple majority.

White House Press Secretary Robert Gibbs pointed to the same examples of reconciliation’s use in brushing off questions about the propriety of the process:

[R]econciliation … was the vehicle for welfare reform; it was the vehicle for the Bush tax cut in 2001, at a cost of $1.3 trillion; it was the vehicle for the tax cut in 2003 at a cost of $350 billion; it is how S-CHIP came to be, which is parlance for the Children’s Health Insurance Program; it is how COBRA came to be, which provides the ability for an individual that loses their job to continue their health care coverage when that happens.

The message of the White House is thus consistent and clear: “Move along, folks. Nothing to see here! We’ve done it before with COBRA, Welfare Reform, the S-CHIP, and the Bush tax cuts.”

Except that we haven’t. Congress has never before used the budget reconciliation process to enact broad social legislation (as opposed to focused taxing and spending legislation) that lacked bipartisan support and could not command a sixty-vote majority in the Senate. Never. Not once.

Consider, in historical order, the examples the President and his people cite.

COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1985, was major social legislation in that it mandated an insurance program giving some employees the ability to continue health insurance coverage after leaving employment. But reconciliation absolutely was not needed to enact the statute. The original Senate bill passed on a 93-6 vote. The reconciled bill (the one incorporating compromises with the House bill) then passed by a voice vote, indicating that the outcome was so apparent that no tally was required. If you’re interested, the voting record on COBRA is here.

President Clinton’s welfare reform statute, officially titled the Personal Responsibility and Work Opportunity Act of 1996, was also a relatively sweeping piece of social legislation (though not nearly as sweeping as the Obama health insurance reform proposal, which mandates a reordering of one-sixth of the U.S. economy). Again, though, the statute had significant bipartisan support and did not depend on the reconciliation process for its enactment. On the final vote, there were 78 Yeas and 21 Nays, with one Democrat not voting. Twenty-five Democrats (the minority party) joined 53 Republicans in supporting the bill. The voting record is here.

S-CHIP, the Children’s Health Insurance Program, was created by the Balanced Budget Act of 1997. Again, S-CHIP involves matters beyond mere revenue issues. But, again, reconciliation played no role in ensuring passage of the legislation. The statute at issue was enacted on a vote of 85 Yeas to 15 Nays. Forty-two Democrats (the minority party) joined 42 Republicans in supporting the bill. The voting record is here.

That brings us to the first Bush tax cuts, which were accomplished by the Economic Growth and Tax Relief Reconciliation Act of 2003. This reconciliation bill passed the Senate with 58 Yeas and 33 Nays. Two senators voted “present” and 7 senators didn’t vote. (Voting record here.) Aha! A statute that wouldn’t have passed without reconciliation! Well, I’m not so sure. Two of the seven non-voting senators were Republicans (Senators Domenici of New Mexico and Enzi of Wyoming). Had they voted in favor of the bill, it would have commanded a 60-vote majority. I assume they would have done so had the reconciliation procedure not applied; each voted in favor of the second Bush tax cuts, which were far more controversial. It’s also possible that one or two of the non-voting Democrats would have voted in favor of the bill. After all, twelve Democrats joined the Republican majority in supporting the legislation. This is hardly analogous to the current proposal, where there are zero minority party Senators in favor of the pending legislation and the majority is incapable of passing the bill following the normal (non-reconciliation) procedures.

So what about the second Bush tax cuts? Well, here we have a statute that legitimately could not have been enacted outside the reconciliation process. That statute, officially the Jobs and Growth Tax Relief Reconciliation Act of 2003, passed with 50 Yeas, 50 Nays, and a tie-breaking Yea vote from Vice-President Cheney. Even that bill, though, had some bipartisan support: 2 Democrats joined 48 Republicans in supporting the bill (and 3 Republicans joined 47 Democrats in opposing it — voting record here.) That alone distinguishes the second Bush tax cuts from the pending health care proposal — unless, of course, you ascribe to Speaker Pelosi’s nonsensical view that a “bill can be bipartisan even though the votes might not be bipartisan.” (Come again?)

More significantly, though, the second Bush tax cuts were hardly sweeping social legislation. Press Secretary Gibbs mentions that they were valued at $350 billion, but that’s chump change these days — especially compared to the price tag of the Obama proposal. (If you really believe the plan will reduce the deficit because Congress will severely cut Medicare reimbursement rates, then you either just fell off the turnip truck or are on glue.) To get a sense of the difference in the scope of the bills, compare the 18-page tax cut bill with the 2407-page Senate health insurance reform bill. To be fair, the Senate bill is double-spaced, so I guess we should cut that down to 1200 pages. Still, though, there’s simply no comparison between these two statutes.

President Obama has been very careful not to talk too much about reconciliation — so much so that he didn’t use the word in his speech calling for enactment via the reconciliation process. His reticence is likely due in part to prior statements he’s made about the process. In 2005, for example, the Senate was considering reauthorization of Temporary Assistance for Needy Families using the reconciliation process. Then-Senator Obama was opposed. He explained (at 151 Congressional Record 13527):

I support Senator Carper’s motion to instruct reconciliation conferees to reject the House TANF provisions. Assisting needy families is too important an issue for this Chamber to cede its legislative authority to the House of Representatives. The TANF Program affects millions of American children and families. It deserves a full and fair debate. The reconciliation process does not permit that debate. Reconciliation is not the place for policy changes.

He was right, and he knows it. He also knows that prior uses of reconciliation are nothing like the one Congress is currently contemplating and that using reconciliation to pass the health insurance bill will mark a tremendous change in the Senate’s practice, a change that strikes at the very heart of the institution itself and that will be remarkably difficult to undo the next time a piece of controversial legislation comes along.

I’ve previously posted on the moral bankruptcy of the campaign against Wal-Mart in Chicago. Those fighting to prevent the company from opening outlets in Chicago’s inner-city neighborhood — including Alderman Ed Burke, the busybody who once tried to ban trans fats in the City of Broad Shoulders — continue to flex their illiberal muscles to deny inner-city residents access to the “everday low prices” wealthier suburbanites regularly enjoy. They’re also depriving inner-city residents of job opportunities that plenty of folks find desirable. Indeed, the Wal-Mart that opened a few years back in Evergreen Park, Illinois (just over the Chicago border on the southwest side), received a whopping 25,000 applications for 325 positions — and that was before the economy headed south!

Fortunately, a group of black ministers from churches on Chicago’s southside have decided to speak truth to power and demand that their elected representatives stop denying their congregants access to lower prices and jobs. Godspeed, friends!

(Be sure to watch the video.)

Richard Thaler’s NYT Economic View column features Tom Hazlett (my colleague, and former chief economist as the FCC) proposal for auctioning off TV spectrum.   Thaler points out:

These frequencies are very attractive on technological grounds. People in the industry refer to them as “beachfront property” because these low-frequency radio waves have desirable properties: they travel long distances and permeate walls. We have already allocated parts of this spectrum for mobile wireless, and the F.C.C. recently auctioned other parts for $19 billion. That has left 49 channels for over-the-air television.

Why is the current use of this spectrum so inefficient? First, because of the need to prevent interference among stations, only 17 percent of it is actually allocated by the F.C.C. for full-power television stations. (The so-called white space among stations is used for some limited short-range applications like wireless microphones.)

Second, over-the-air broadcasts are becoming a nearly obsolete technology. Already, 91 percent of American households get their television via cable or satellite. So we are using all of this beachfront property to serve a small and shrinking segment of the population.

Here’s how Professor Hazlett describes the problem in the introduction to his proposal:

The Federal Communications Commission’s digital television (DTV) transition is not nearly complete. The total bandwidth set aside for terrestrial digital video broadcasting — 49 channels allotted some 294 MHz — is worth over $100 billion in license value and at least ten times that amount in Consumer Surplus.2 But it contributes virtually nothing to society in its current configuration, a verdict that will not change if the FCC continues on its present path. The existing policy, which freezes TV stations in their current positions and then attempts to sprinkle in unlicensed devices in the “white spaces” surrounding them, blocks the flow of spectrum inputs to the wireless services consumers most desire to use.

The opportunities squandered are highly valued by consumers: more competition
among mobile voice and data carriers; innovative, spectrum-intensive applications for emerging platforms such as those supporting Blackberries, iPhones, and gPhones; broad expansion of machine-to-machine services as launched by OnStar, Kindle, health telemetrics vendors, and product monitoring devices. While the under-allocation of radio spectrum to mobile networks has been visible for some years,3 the crisis now looming is widely seen. The explosion in bandwidth usage by smart phone subscribers, a salubrious product of competitive rivalry between mobile carriers, is challenging network capacities even now – when high-bandwidth applications, such as audio and video streaming, are just beginning to take-off.

The solution? Thaler discusses Hazlett’s auction proposal:

Suppose we put this spectrum up for sale. (The local stations do not “own” this spectrum. They have licenses granted by the Federal Communications Commission.) Although the details of how to conduct this auction are important, they don’t make compelling reading on a Sunday morning. Interested readers should examine a detailed proposal made to the F.C.C. by Thomas W. Hazlett, a professor at the George Mason University School of Law who was formerly the F.C.C.’s chief economist.

Professor Hazlett estimates that selling off this spectrum could raise at least $100 billion for the government and, more important, create roughly $1 trillion worth of value to users of the resulting services. Those services would include ultrahigh-speed wireless Internet access (including access for schools, of course) much improved cellphone coverage and fewer ugly cell towers. And they would include other new things we can’t imagine any more than we could have imagined an iPhone just 10 years ago.  But some compelling technology that could use these frequencies already exists, like wireless health monitoring — to check diabetics’ blood sugar regularly, for example — and remote robotic surgery that can give a patient in Idaho a treatment like that available in New York or Chicago….

Professor Hazlett estimates that $300 per household should do it: that amounts to $3 billion at most. Compared with the gains from selling off the spectrum, it’s a drop in the bucket. Or, as an interim step, we could reduce the number of channels available in a community from 49 to, say, 5.

Who would oppose this plan? Local broadcasters are likely to contend that they are providing a vital community service in return for free use of the spectrum that was put in their hands decades ago. Whether the local news or other programs are vital services is up for debate, but their value isn’t the issue, because they can be made available via cable, satellite and other technologies, including improved broadband. …

I KNOW that this proposal sounds too good to be true, but I think the opportunity is real. And unlike some gimmicks from state and local governments, like selling off proceeds from the state lottery to a private company, this doesn’t solve current problems simply by borrowing from future generations. Instead, by allowing scarce resources to be devoted to more productive uses, we can create real value for the economy.

Economists are fond of saying that there is no such thing as a free lunch. Here we have an idea that is even better than a free lunch: being paid to eat lunch. More paid-lunch ideas will be coming in future columns.

Check out Thaler’s column, and Hazlett’s proposal.

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.

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.

That’s the punchline of a recent paper by Pierre Desrochers (U Toronto). Pierre has written some interesting papers on a range of topics related to economic development, technological innovation, and the intersection of business and the environment.   He argues that it is governmental (regulatory) failures that distort the environmental consequences of corporate behavior, not market failures. Should be an interesting read.

“The environmental responsibility of business is to increase its profits (by creating value within the bounds of private property rights).” Industrial and Corporate Change, vol. 19, no 1 (February 2010), pp. 161-204.

Abstract:

Proponents of corporate social responsibility (CSR) typically consider “business as usual” unsustainable. Building on historical evidence that long predates the modern environmental movement, the contrary case is made that the interplay of voluntary exchange, private property rights, and self-interest has generally resulted in the so-called “triple bottom line” (economic, social, and environmental) through more efficient use of materials and the continual creation of higher quality resources. However, because market processes continually eliminate less competitive firms and tend to concentrate business activities geographically, political pressure brought to bear by adversely affected vested interests often results in the creation of policies that cause greater environmental harm than would otherwise be evident. Environmental CSR proponents often misinterpret these government failures as market failures, and characteristically advocate policies that further distract firms from their core objective and resulting triple bottom line. The article concludes by arguing that the most promising path toward truly sustainable development lies in the unwavering pursuit of profitability within the bounds of well-defined and enforced private property rights.

The subject of antitrust exemptions has been an oft-discussed topic here at TOTM (see, e.g. here and here).  In the latter of those two links I was somewhat critical of the DOJ for taking a neutral stance on the insurance industry exemption, which has now become rather wrapped up in the health care reform debate. I wrote:

Look, when Harry Reid says that he knows insurance companies are anti-competitive “Because they make more money than any other business in America today,” its pretty hard to refrain from criticizing a political ploy that doesn’t have anything to do with the antitrust merits.  Not to mention that Congress is simultaneously considering passing other antitrust exemptions while its striking down others.  I’m sympathetic.  But just to be clear.  Whatever one thinks about the difficulties of application of the antitrust laws to single firm conduct (I’ve certainly been a critic of much of the modern approach to monopolization), it is worth repeating:  cartels are bad.  They raise price.  They reduce output.  That is not what the economy needs.  There is a substantial economic literature on this.  And I don’t think that any economist who has looked at the literature has or would ever support an industry wide antitrust exemption.  If I’m wrong, I’d love to see some citations.  Maybe there is some evidence out there that I’ve not seen that indicates that exemptions improve consumer welfare in practice.  I doubt it.  But that’s what the comments are for.

As the Antitrust Modernization Committee Report and Recommendation says:

Statutory immunities from the antitrust laws should be disfavored. They should be granted rarely, and only where, and for so long as, a clear case has been made that the conduct in question would subject the actors to antitrust liability and is necessary to satisfy a specific societal goal that trumps the benefit of a free market to consumers and the U.S. economy in general.

And:

to extent that insurance companies engage in anticompetitive collusion, however, then they appropriately would be subject to antitrust liability.

To be absolutely clear, I am NOT saying that I believe that repeal of the federal exemption will do much to lower prices or that I believe there is a high incidence of collusive behavior by the insurance firms.   But that’s not the point.  The point is that we should not be defending the merits of exemptions for prohibitions on cartel activity.  Personally, I believe that state imposed barriers to entry, regulatory constraints and rate regulation are more likely a much bigger problem for consumers than anticompetitive behavior and efforts aimed at increasing competition between the states will have a much bigger bang for the buck for consumers.  But the fact that state regulation is also a problem is not a good argument in favor of an antitrust exemption that allows collusion.

The Competitive Enterprise Institute’s Gregory Conko and Kevin Hiferty offer a defense of the exemption (HT: Washington Times):

There is no evidence that McCarran-Ferguson has resulted in higher premiums or profits, however. So, not only is federal intervention unnecessary for ensuring fair competition, it could actually hurt consumers by eliminating practices that help small insurers compete and drive down costs.  The law gives states the primary role in regulating “the business of insurance,” and exempts insurers from most federal regulation, including antitrust laws, as long as the states have laws governing the same conduct.  But where critics see only dominant market power and higher premiums, a closer look reveals a careful balancing by the states that helps promote competition and keep costs in check. As the Congressional Budget Office concluded in October, repealing the exemption would have little or no effect on insurance premiums because “state laws already bar the activities that would be prohibited under federal law if this bill was enacted.”

It is true that a handful of states have highly concentrated markets. In Hawaii, Rhode Island and Alaska, 95 percent or more of the small-group health insurance market is served by just two insurers. But the McCarran-Ferguson Act only shields activities that are integrally related to providing insurance and unique to the insurance industry, and consolidation isn’t one of them.  Practices that are not inherent to underwriting insurance, such as firm mergers, bundling and tying arrangements, agreements to allocate geographic market shares, and many other allegedly anti-competitive activities are, even under current law, subject to federal antitrust enforcement and actively policed by the Federal Trade Commission. So, additional federal intervention would have no effect on insurance industry consolidation.

What would be newly subject to federal enforcement is a variety of ongoing collaborative practices among health and medical-malpractice insurers that are now permitted by the states because they have pro-competitive effects.  At the state level, insurers actively share loss-experience data and related information through rating bureaus, so that each firm has a large enough pool of information to accurately price risks and set aside reserves. In some states, industry-run rating bureaus aggregate this underwriting data and calculate “target” or “advisory” rates under the supervision of state regulatory authorities. Many states also permit insurers to create joint underwriting associations that help insurers pool difficult-to-manage risks and share in the associated profits or losses.

This kind of collaborative activity tends to lower costs, promote insurance industry solvency, and help small insurers compete with bigger firms. Although the Leahy-Whitehouse bill would permit a limited amount of data sharing, the other practices would be subjected to federal antitrust enforcement. That would, ironically, further strengthen the power of the biggest insurers and disadvantage smaller competitors.  Even aside from these important collaborative practices, federal antitrust law would still be a bad fit for the insurance industry. When faced with a market containing two or three dominant firms, a typical antitrust enforcer’s response is to break up the firms into smaller pieces – think of the dissolution of AT&T’s local service monopoly into seven Baby Bells.

But as Boston University health economist Austin Frakt has noted, limiting the size of insurers would also limit their ability to negotiate down prices with health care providers. On the whole, economics research “supports the notion that recent increased market power of insurers does not lead toward monopolistic pricing, but rather it provides a counterbalance to the power held by hospitals and provider groups.”  There are, however, other ways to promote competition in the health insurance market. One change Congress should consider is to permit individuals and business purchasers of health insurance to buy their policies from any willing provider in any U.S. state.  Under current law, an insurance firm registered in one state may not cover individuals in another without registering in the second state and being subject to all of its taxes and laws. This raises the cost of doing business across state lines and prevents many smaller and midsize companies from entering new markets to compete.

Allowing consumers in Alabama, for example, to escape Blue Cross-Blue Shield’s 83 percent market share in that state by shopping for an insurance policy in neighboring Florida’s highly competitive market would increase competition significantly. And it would do so without jeopardizing important pro-competitive business practices that help keep costs in check.  If congressional Democrats genuinely wanted to help consumers, they would seek ways to reduce burdensome regulations on the insurance industry that raise health premiums. Instead, if their effort to “get tough” on the insurance industry succeeds, they would do more harm to consumers than good.

What do readers think?  The economist cited invokes the countervailing power defense argument raised by Steve Salop.  I’m a strong supporter of the idea of opening sales of insurance across state lines as a measure that could help and would not harm.  But that’s not the issue here.   Is there any evidence that lifting antitrust exemptions helps consumers?  I read this article as largely offering the defense that lifting the exemption just won’t matter much.  Are you convinced?

I’ve tiraded several times about the city of Chicago’s unbridled paternalism. From smoking bans, to proposed restrictions on trans-fats, to censorship of theatrical depictions of smoking, to the confiscation of locally produced meat products, the powers-that-be seem determined to treat residents of the City of Broad Shoulders as though they’re a bunch of helpless infants who can’t take care of themselves. In acting as Protector, the Nanny Brigade thwarts voluntary transactions and associations and thereby destroys real value.

If you want a vivid illustration of this value destruction, read this appalling account of a recent raid on a licensed shared kitchen in Chicago’s West Town neighborhood. Be sure to watch the video. The protective public servant wouldn’t even help dispose of the food he destroyed. Disgusting.

(HT: Lynne Kiesling)

Steve Horwitz writes a short, lay piece on crowding out and job creation.

Brad “smacks down” Steve Horowitz.

Russ Roberts amplifies Horwitz with a nice point about the dangers of aggregation.

David Henderson notes that Brad misses what Horwitz is really saying.

Brad DeLong “smacks down” Steve Horwitz again, not acknowledging any of the criticisms.  Brad writes:

Me: I don’t think so. Take

Government can only spend what it takes from the private sector one way or another, either through taxation, borrowing, or the redistribution effects of inflation. For every dollar that government spends, there is one less dollar being spent somewhere else in the economy…

and replace “government” by “Larry and Sergei’s internet company.” It then reads:

Larry and Sergei’s internet company can only spend what it gets from other businesses and consumers one way or another, either through sales or borrowing. For every dollar that Larry and Sergei’s internet company spends, there is one less dollar being spent somewhere else in the economy…

Brad’s claim is that Horwitz wouldn’t make the second claim and thus, he doesn’t really mean to make the first claim because they are equivalent.  So Horwitz is a partisan hack.

Brad, Brad, Brad, Brad.  This is so revealing.  Brad really believes, I guess, that the government randomly spending money digging ditches or the equivalent (without regard to Russ’s well-highlighted concerns about where money is being spent, among many other things) is as productive as Google spending money inventing, making and improving its products for sale in the market.  Brad really believes, I guess, that when Google engages in voluntary exchange with customers that it is offering value exactly equivalent to the value the government offers in exchange for an equivalent amount of involuntary taxation or inflation.  Apparently Brad believes that the two cases are equivalent, so anyone who disagrees with the second must disagree with the first (and is thus being disingenuous in supporting the first claim).  But anyone who would claim that these two cases should be treated equivalently and who would disregard the obvious and essential differences between government action and private exchange is an ethics-free partisan ass and shouldn’t be taken seriously.