BlawgConomics

Notice...

2012-01-30T15:52:00.000-05:00

Dear Readers:

Thanks for stopping by the site. As always, we appreciate you taking the time to visit. Apologies for the lack of new content and sporadic posting recently; this will be the state of affairs for the next month or so. Although it may be some time before we post new content, please don't hesitate to use our search tool to find old articles that may be of interest in the meantime. In addition, please feel free to send us a message or comment on a post; we will do our best to reply, even if we aren't posting frequently.

Best,
Josh

Resources for Readers: Political Prediction Markets

2012-01-19T07:00:00.063-05:00

As primary season rumbles along unfailingly toward convention season on the way to Election 2012, pundits and wonks are working around the clock to find sources of information to help them determine where the chips might fall. Increasingly, it appears that the trendy tool of choice for those who cover the political scene is also an excellent example of the wisdom of crowds: prediction markets.

While prediction markets, the topic of this post, are being featured more heavily in national newspapers and nightly telecasts, this is not to say that we are going to start mindlessly plugging the trendy tool du jour going forward. For example, if the folks at CNN once again decide that hologram technology will assist viewers in understanding election night better, we can promise you won't see anything about it on this page.

Prediction markets, on the other hand, are right in the BlawgConomics wheelhouse. For those who are unfamiliar with the concept, prediction markets allow people to make bets on the outcomes of events. Online platforms of this sort serve as an intermediary between buyers and sellers for everything from weather events to Supreme Court retirement dates and the most pertinent category for this post, political outcomes.

Essentially the more money people place on an outcome (reflecting a belief that it will occur), the more the price increases. As the price rises, owners can then sell their shares and make a profit, or wait until settlement to gain the maximum potential profit. Alternatively, if one were to bet against an outcome that comes to fruition, they would lose money when the bet settles (more on the basics, as well as other strategies, can be found here). The opposite is true as well, meaning that outcomes are always a zero-sum game for participants. In some ways, it can be seen as the ultimate in putting one's money where their mouth (or in this case, clicker finger) is.

All the while, the prices themselves reflect the odds the market is placing on certain outcomes. For example, at Intrade, the most popular prediction market site, an outcome trading at $5.00 per share has, in the minds of the participants, a 50% chance of occurring. At settlement, an outcome that does happen is assigned a value of $10.00 (100%), while an outcome that doesn't occur is given a value of $0.00, which represents its 0% chance of happening. The winners and losers are paid out accordingly. This pricing cum odds determination mechanism is what is getting the political junkies so excited as those prices (up until settlement) presumably factor in all of the best information individuals have about a potential outcome.

While it is true that certain extraneous factors could impact prices of political outcomes more than some other types of outcomes (for example, especially excitable supporters of a candidate betting them up), prediction market pricing does nonetheless provide a snapshot of the best information about races in real time at least as well as the average poll does.

Some of our more imaginative readers might be wondering what safeguards prediction markets might have in place for someone (or their supporters) trying to reverse-engineer a victory by bidding up shares, causing pundits to talk up the candidate's chances in a self-fulfilling bit of hysteria. However, let's all agree to cross that potentially odd bridge when we come to it.

In the meantime, we can all just enjoy the insights that can be had when political junkies and bad gambling problems meet face to face. You can find Intrade's, political prediction page here. We will also post a link to that page in the sidebar, and will leave it there at least through Election 2012.

Those familiar with the site know that this semi-regular segment typically features an academic journal or a web page with free information that one might have to pay for elsewhere. However, today's post feels a little bit different; while the information gleaned from looking at prices there is of course free, there is always a risk that those visiting the site for the 'free' part will end up being enticed into participating in ventures of a more costly nature. Therefore, we just didn't feel right posting this edition of Resources for Readers without including a minor caveat...

The SOPA Blackout: Did You Feel the Pain Today?

2012-01-18T23:33:00.000-05:00

I was already against SOPA before the internet blackout today, so Wikipedia et al. shutting down didn't necessarily impact my thoughts on the legislation. However, it did make me realize how much I have grown accustomed to using Wikipedia in everyday life. I know it isn't always perfect, but for the quick refresher or primer on most topics, it is an invaluable resource.

It also made me wonder whether any of our readers were impacted by the action. Did you change your mind on SOPA one way or another? If not, did you at least become more aware of the issue? If so, do you think this was an effective protest? Were you just mad that you couldn't easily look up information of questionable provenance? Any thoughts would be appreciated in the comments section.

Is Albert Pujols Worth $254 Million? Part II

2012-01-17T16:00:00.054-05:00

This post is the second in a two-part series on Albert Pujols' record contract. Part I can be found here. There, we discussed the difficulty of asking the question of whether something is 'worth it.' Here, we do so anyway...

Now we can shift to whether the contract was 'worth' it. Certainly many contracts are signed that don't end up being economically efficient for one, or even both, parties. This is true both in the sports world and in the world most of our readers inhabit. However, despite the fact that we have to look ahead a bit, there is some analysis which can be done to determine if the supply and demand equation came out correctly. To do so, we will look at the contract from both Pujols' and and Angel owner Arte Moreno's perspectives.

Let's start first with the player. Wherever the rest of this analysis ends up, I think it is fair to say that $254 million is a lot of money. Pujols, his children, their children and any conceivable relation to Pujols (no pun intended) should be okay. However, we can't just look at dollar figures, as we are trying to determine worth. After all, $1,000 wouldn't be much to spend on a car these days, while it would be quite a bit to spend on an average children's bike.

Therefore, in addition to the pure dollars, we need to take a look at what Pujols' alternatives could have been. First, let's take it outside the realm of baseball and consider career alternatives. I think it is safe to say that Pujols is very unlikely to be able to make that much money doing anything else in life. This isn't necessarily a knock on Pujols, his intelligence, skills or drive. It is simply a recognition that jobs paying $25 million a year are hard to come by. This is especially true in his native Dominican Republic where over 40% of the population lives below the poverty line. While Pujols did move to the US as a 16 year old, we will just repeat as granted the idea that it is tough to make $25 million a year, even in the wealthiest nations on earth.

Shifting to the universe of baseball, the analysis becomes a bit different. People make a lot of money to play baseball, so some people might think that $254 million is not so big of a deal in that such an otherworldly economic environment. However, even in baseball terms, Pujols signed a large contract.

As noted in Part I, Pujols is only the game's second $200 million contract man behind Alex Rodriquez. However, A-Rod plays third base. For direct comparison, we can look at Pujols' positional peers. The top-paid first basemen in 2011 made the following amounts: $23,125,000 (Mark Texiera), $20,275,000 (Todd Helton), $20,000,000 (Ryan Howard and Miggy Cabrera), $15,500,000 (Prince Fielder) and $15,000,000 (Justin Morneau).

For indirect comparisons, we have to note Alex Rodriquez ($32,000,000), Vernon Wells, (outfield, $26,187,500) and CC Sabathia (pitcher, $24,285,714). Now of course, many factors go into these numbers; markets are different in different years, these are not average salaries, but one-offs for 2011, etc. However, it is fair to say that Pujols' $25.4 million average annual salary puts him among the top-paid players in the game in any position.

Solidifying this point, there are a relatively small number of teams in Major League Baseball, and Pujols was unlikely to get that type of contract from any but a few of them. In economic terms, the supply of jobs is constricted in baseball (and other sports), and only a limited number of teams can prudently pony up the funds for mega-contracts. His agent had to take this under consideration, and it was also taken under consideration that the other biggest-spending teams in the league both have first base, spoken for (Mark Texiera with the New York Yankees and Adrian Gonzalez with the Boston Red Sox).

What about further afield? Could Pujols' have taken his talents to other shores? Though there are other baseball leagues in the world, none of the others have the capability of writing a contract like this in a fiscally feasible way. By way of comparison, the highest-paid players in countries like Japan make less than $10 million per year. Moving abroad for bigger paydays is standard practice in some sports, like football (soccer), however, baseball players need to either stay in, or go to, the US for the biggest paydays in baseball.

What about other sports? According to Sports Illustrated, Tiger Woods and Phil Mickelson are the highest-paid athletes when endorsements are factored in, with both topping $60 million per year, with endorsements making up the lion's share of each golfer's income. What about athletes globally? Roger Federer and Manny Pacquiao top that list, followed by racecar driver Fernando Alonso and soccer stars Lionel Messi and Cristiano Ronaldo. All make between $38 and $52 million per year, including endorsements. Once his endorsement deals are factored in for a like-to-like comparison, Pujols is not too far off the pace of some of these global icons either.

Essentially, Pujols and his agent looked at the market for other superstar baseball players and looked at the market for his position. They considered the teams that could, and would pay a big contract to see if they were secure at the position. Maybe they even looked at the broader sports world. In all cases, they determined that the deal from the Angels was the best that he could get. Now, Pujols did reportedly leave an offer on the table from the Florida Marlins that would have included an ownership stake in the team, which could have provided long-term benefits. He did not get such a stake in the Angels. However, in any way of looking at it, it would seem that Pujols (and his agent) did very well.

As we know, there are two parties to a contract. Therefore, after thinking about things from Pujols' perspective, we then need to ask whether the contract was worth it to Angel owner Arte Moreno. When he signed Pujols' new contract, what made him decide that $254 million was an acceptable number? We already noted that, in almost every way of looking at it, that Pujols likely did the best he could. Does this mean that Arte Moreno made a bad business decision?

Most likely he did not given the fact that he might have already made his money back on the deal.

Of course there are no sure things in life, and that holds true in baseball; Moreno of course bears some risk in this deal. If Pujols gets hurt for a full season between now and his 42nd birthday, revenue based on the deal will decline as less jerseys are sold, less tickets are sold, etc. If Pujols has a Bonds/Clemens issue, it would be very easy to imagine fans turning against him, with a similar reduction in jersey sales, etc. A horrible team around him, meaning worse numbers and less wins could be a problem. Heck, if some Mayans are right, just having the year 2012 as one of the ten in the contract could create issues.

There is another monetary risk that Moreno is taking with this contract, the luxury tax. The luxury tax is a mechanism by which teams who go over MLB's soft salary cap have to pay a percentage of the overage into an account which is then split by other teams. This is baseball's way of sharing the wealth and creating some parity in the absence of a hard salary cap. According to ESPN, the Angels could be getting close to the tax threshold, meaning that expenses related to payroll could potentially end up being more than the cost of player salaries. This isn't an insignificant issue. Though most teams don't end up paying a luxury tax, when they do, it can be a huge expense. For example, due to being over the threshold for years under the system's escalating penalty scheme, the Yankees have contributed over $200 million to the pot since the luxury tax began.

However, these risks are far outweighed by potential rewards. Even before Pujols inked his name to his record contract, the Angels had signed a television deal for $3 billion (to add some perspective, this is over 15 times what Moreno paid for the whole team in 2003) over 20 years. While Pujols wasn't an Angel during the negotiation process, the TV rights negotiations with Fox Sports undoubtedly included a high-level briefing on the state of the team. Undoubtedly Fox was apprised of the potential offer to Pujols, a player who has a very good chance to 'purify' some tainted records (and maybe set some TV records) on the way to the Hall of Fame, and factored this in during negotiations with the Angels.

Ticket sales surely played into the equation as well. While the Angels have been near the top of the league in attendance the past decade, numbers have dwindled a bit over the past two seasons. What better way buck that trend and ensure that gate receipts remain constantly high than to have that same potential record-breaker playing at Angel Stadium 81 times a year. This strategy has already paid off; in the two days after the Pujols announcement over 1,000 season ticket packages were sold, and the organization expects an impact on single game tickets as well. Speaking of Angel Stadium, you can imagine that luring Pujols to the team has increased the odds that there could be a revenue upgrade from naming rights sometime soon.

Add in jersey sales and increased concessions and it isn't difficult to see that the worth of the contract to the Angels is many multiples of what they are paying Pujols. Indeed, as noted above, considering the jerseys that have been already sold, guaranteed television revenues that have already been secured, and season tickets which fans have paid deposits on, and that statement could possibly be true even if Pujols never plays a game for the team. Assuming that he does, you can add in good will from the fans based on positive externalities that potential pennant chases and records could create and this might have actually been a bargain for the Angels.

So what is the conclusion? This might be a tough sell for most lunch pail-toting Americans (in particular those who reside in St. Louis), but under our analysis, and though he 'did well' in baseball terms, it may well be that Pujols has been undervalued in economic terms. In other words, Pujols is creating more value for Moreno with his labor than he is being paid for (we wonder what Mr. Marx might have made of this statement; friend of labor though he was, that is a lot of money...). However it is difficult for us to shed a tear for Mr. Pujols. Undoubtedly this is all part of the bargain in the capitalist system, and one that seems to be working out just fine for everyone involved. Well, everyone except Cardinals fans...

Spending on Gadgets to Break $1 Trillion in 2012

2012-01-16T07:00:00.000-05:00

During the holiday season, camcorder sales plummeted 43 percent and sales of GPS units fell 33 percent in the US. Best Buy Co., the largest US-based electronics retailer, recently disclosed that sales at stores open longer than a year fell 1.2 percent in December.

However, analysts predict that sales of electronic gadgets will break the $1 trillion barrier for the first time in 2012. Why? The rise of middle classes in developing nations across the world. The AP has details here.

The List: English Football's Richest Men (And One Woman...Sort of)

2012-01-15T12:11:00.004-05:00

Football, or soccer in the US, is the world's favorite sport. It is also big business, nowhere more so than in England. The magazine Four Four Two recently came out with its annual rich list detailing just who has the biggest wallets in the English game. Not surprisingly, a number of owners (including some Yanks) top the list, but there are some other individuals of note. For example, David Beckham, who came in at #42, is the top-ranked player with an estimated net worth of $206 million. He is also notable for ensuring the inclusion of least one woman, his wife Victoria, onto the list as Four Four Two included earnings from their joint company in his net worth.

And people say that football is sexist...

Detroit Makes a Comeback: Was I Wrong?

2012-01-14T12:05:00.004-05:00

I have been critical of government intervention in markets in the past. Among other things (like saying that bank bailouts were wrong, a call which has since been taken up by everyone from the Tea Party to Occupy Wall St.), I have written that bailouts of the auto industry were inefficient and against the principles of free market capitalism. At the time, I was just one voice in a majority of 67%. However, in a recent Reuters article, it was noted that:

"Executives arriving this week for the Detroit auto show find a U.S. car market that has morphed from meltdown three years ago to a safe haven as concerns grow about the stability of other big economies, from Europe to China...Analysts and executives expect 2012 U.S. auto sales to grow 4 percent to 9 percent, the third consecutive annual gain. The only reason automakers are not more bullish is the risk that the sovereign debt crisis in Europe may trigger a broader slowdown...All three U.S. automakers took market share in the United States for the first time in 23 years..."

And from the Behind the Wheel blog:

"Walk around the Detroit Auto Show and one thing stands out: America's automakers are coming on strong when it comes to cars...Gone are the days when Detroit's cars lagged the sedans you saw from overseas...Bottom line: Detroit has closed the gap (on most levels) with its foreign competitors when it comes to cars."

So was I, and also the majority, wrong about the auto bailouts? An industry, and many jobs, were saved. What was long a point of American prestige was protected and has even been revitalized. Even if the American taxpayer was a big loser on the deal, the bailouts still cost less than the stimulus packages, with an arguably bigger positive impact. By almost all measures, it would appear that the auto bailouts were one of President Obama's best conceived and best executed moves, and they are certain to be noted as 'decisive and pragmatic efforts to save American jobs' when the Team Obama campaign bus makes its way to Michigan and Ohio later this year.

Of course this doesn't answer whether my premise was wrong; bailouts are certainly no more capitalistic today than they were three years ago. And I suppose we can't be entirely sure of what would have happened in an alternative universe, i.e. if there had been inaction on the part of the federal government, if creative destruction were allowed to run its course. Maybe unemployment would have skyrocketed. Maybe losing the auto industry would have been catastrophic. Alternatively, maybe not spending that taxpayer money would have allowed it to be spent even more productively. We just don't know.

What we do know is that the bailout was successful. And, assuming that a thriving manufacturing sector is good for America, that is a positive. I suppose one could say that my analysis of the situation under a free market approach was right, but that I was wrong about whether or not it would have a good impact regardless of whether bailouts are capitalist in nature. I guess in the end analysis, I still stand opposed to bailouts, especially when taxpayers are put on the hook. But practically, this has to be seen as a 'job well done' by the President.

Tebow-nomics

2012-01-13T17:22:00.004-05:00

As the countdown clock for Tebow v. Brady, or Jesus v. The Prophet (or The Denver Broncos v. The New England Patriots as some in the 'mainstream media' have taken to calling it) ticks closer to zero, we thought that it might be a fun Friday activity to look at the business stories surrounding Tim Tebow's rise from third string bench warmer to the leader of the zeitgeist. After all, pundits aren't expecting this game to break ratings records just because of the skill on display.

No, there is more to it than that. Tim Tebow is a phenomenon. Tebow represents different things to different people. Some applaud his faith, some find it offensive. Some think he is the quarterback of the future, others think his team should seek out a replacement this offseason. Broncos and Gators fans love him, Pittsburgh Steelers fans, not so much. He even set a social media record recently after he engineered a one-play-and-done overtime victory over those Steelers, leading to over 9,400 tweets per second with the hashtag #tebow. No word from Twitter on whether he will still hold the record if #tebow falls to #tebowie...

Of course Tebow's economic impact is inextricably linked to his status as a phenomenon. However, as noted above, and in keeping with the goals of our site, we wanted to take a look at Tebow purely as a business, delinking the myth in the making from the dollars he is impacting. The stories below all play into this theme. Special thanks to Darren Rovell's SportsBiz blog, which we link to several times.

- Secret Weapon in the Underwear Wars: Tebow is the new, um, face of Jockey underwear. Not doubt representatives of Hanes and Fruit of the Loom are shaking in their briefs.

- America's Favorite Athlete: While we can knock ESPN for conflating the concept of plurality with the concept of 'favorite' (preferential voting anyone?), it is also impressive that Tebow grabbed so many votes in this favorite athlete poll. If the poll is any indication, Tebow might be adding more endorsement deals to a stable which already includes Jockey and Nike in the near future.

- Best-selling Author: Tebow's autobiography was the best-selling sports book of 2011. Hundreds of thousands of copies of Through My Eyes have either been sold or are currently being printed.

- Writer's Cramp: If penning an autobiography by the age of 23 didn't give Tebow cramps, certainly the desire for his signature will. Bonus here for the supply and demand subplot regarding prices for Mr. Tebow's John Hancock (helmets go for $500)...

- Jersey Sales: Tebow's #15 jersey was one of the NFL's biggest sellers even before he became the #1 starter for the Broncos, especially among women. After the recent magical ride he has been on, he has landed in the #2 spot on the jersey sales list for the entire league. On NFL.com, readers can buy a Tebow 15 replica jersey in three different colors for everyone from a little nephew to a girlfriend for prices ranging from $59.99 to $99.99. For those who have to have what the pros wear, one can spend as much as $149.99. I will let our readers do the math.

- Cost to Broncos Ownership - While Tebow's current five-year contract is a modest (by NFL standards) $9.7 million over its term, his victory over the Steelers earned him an additional $250,000 check. I imagine that this was one check, however, that management was more than happy to have cashed.

While I am not sure whether divine intervention guides him, or other forces are capable of working against him, it is clear that the business stories surrounding Tebow's rise are nearly as interesting as the man himself. And that is saying something. Good luck to Tebow this weekend, let's hope his magical ride can continue.

Is a Plus One on the Horizon?

2012-01-11T07:00:00.001-05:00

Last night, the University of Alabama football team rectified its only loss of the season, beating LSU, and as a result was crowned the national champion of college football. While The Tide are certainly a worthy champion, there were many other one-loss teams in the nation, a few of which could claim that they were, in some way, cheated by the system. For one, Oklahoma State has a legitimate gripe; unlike Alabama, it at least won its conference. Another one-loss team from a less glamorous conference than either 'Bama or OK State is Boise State, a program which can say 'been there, done that' three or four times over when it comes to big game snubs.

While it seems highly unlikely that the top division of college football will move to a full-blown playoff system in the forseeable future (despite the fact that lower division have made it work), it is possible that a plus-one format will soon be adopted. Essentially, the winner of the top two bowl matchups would go head to head to settle the question of who the best team is. Though some teams might still be left on the outside in such a format (five teams had one loss this year), it would, in most years, go some way toward alleviating some of the problems which have arisen under the current format.

While the BCS system is encumbered by contractual obligations, and many structural issues would need to be ironed out, the appetite for change, both among fans and administrators, is at an all-time high. Add to this some recent antitrust attention from the US government, and the time is ripe for a new format to be adopted. While there is no doubt that this will open a new box of troubles, it is also clear that the system as constructed has run its course.

Resources for Readers: The OECD Financial Market Trends Journal

2012-01-10T15:11:00.000-05:00

Yesterday we continued our ongoing effort to highlight free resources that could be of interest to our readers. In what is perhaps a record turnaround time for this semi-regular feature, we return with another tip today.

In this post we would like to highlight a journal which is produced by the Organisation for Economic Co-operation and Development (OECD). Though some might be interested in a paid subscription to an actual paper version, the online versions of articles in the bi-annual Financial Market Trends, including those in the archive, all appear to be free.

Topics ranging sovereign bank debt to financing green growth are presented in a manner that rivals much more expensive (and not just relative to 'free') alternatives. In addition to this post, we have included a permanent link to the homepage of the journal in the 'Other Resources' section of BlawgConomics.

Resources for Readers: Explaining The Fed

2012-01-09T19:45:00.006-05:00

Regular readers will be familiar with our semi-regular efforts at bringing interesting, free resources to our visitors' attention. Today, we would like to highlight a resource which aims to demystify some of the inner workings of the Federal Reserve Banking system.

While the Classroom Economist video series from the Atlanta branch of the Fed might not necessarily allow one to form an opinion on whether or not another round of quantitative easing would have a beneficial or malignant impact on the economy, topics such as monetary policy and inflation are covered.

Visitors should note that this resource is geared toward educators, and the 'Lesson Demonstration' links will probably not hold much value to the general public. However, the general 'Chat with an Economist' videos, cut into digestible bits, should do the job for those who would value quick primers on the subjects highlighted.

An Open Letter to SCOTUSblog

2012-01-09T16:12:00.001-05:00

Dear SCOTUSblog,

For months, I have been unable to access SCOTUSblog on my smart phone. Every time I do, it redirects to the mobile site, which has been down since Fall of 2011.

I assume that you enjoy making your blog difficult to access, but why the half measure? I can still read it from my desktop PC. If you really want to make it inaccessible, remove it from the Internet entirely, and hide all posts inside a steel vault concealed inside Lincoln's head at Mount Rushmore. Include clever clues to the cache's location in an inscription on the underside of the Titanic wreckage. I'll send in the mini-submarine immediately.

Best regards,
Jeremiah Newhall

And to the readers of BlawgConomics: My suggestions are a start, but I'm not sure they're enough. Please add your suggestions in the comments for how to make SCOTUSblog content truly inaccessible to all but the most intrepid readers. Bonus points for commenting via BlawgConomics' mobile site.

Fed Forecasting: Transparency or Risky Monetary Tool

2012-01-05T18:20:00.001-05:00

Any observer of the financial markets around the turn of the century will remember a bewildering assortment of obfuscations by then Federal Reserve Bank Chairman Alan Greenspan. In what amounted to a cat and mouse game between the interest rate-setting body of the world's largest economy and the credit and equity markets dependent on its edicts, Greenspan seemed to delight in delivering a turn of phrase which kept investors on their toes.

When Ben Bernanke took over in 2006, he vowed to diverge from this strategy and promised to usher in a new era of transparency. He has succeeded in this endeavor in increments, first employing clarity in Fed meeting minutes, then mimicking this approach in everything from congressional hearings to informal dinner speeches. In a recent announcement which seemed to be missed by many in the media, he laid the foundation for a continuation of this long-term strategy of transparency when he announced that the Fed will begin publishing its own forecasts of interest rates up to a few calendar years in the future.

While this is certainly in keeping with his trend of pulling back the Fed's traditional veil of mystery, it also begs a number of questions. For example, is the plan intended to increase transparency, or is it n reality intended to serve as a tool to reduce long-term interest rates? Perhaps both? Is the latter merely a corollary of the former? If it is actually intended more as a subtle rate reduction tool, does this mean that the Fed is feeling for the last few bullets in its belt?

If it is indeed a ploy to increase clarity behind Fed strategy and decisions, it could help those involved in credits markets in long-term planning. This, in turn, could have the effect of reducing long-term rates. While these could both potentially be positives, it is also true that it is in the Fed's interest to maintain some level of secrecy as well.

For example, it is a near certainty that markets will price in the information which will be in the published forecasts. This includes long-term debt instruments, which, as anticipated above, will have a reduced risk premium owing to the increased visibility into Fed strategy. However, the Fed will reserve the right to change its forecasts on a dime. If such a change occurs (particularly the first time or so that it does) it could create more volatility in the markets than there would have been if they didn't have the information in the first place. Shame on the market participants one might say; but then it would be even more foolish if they didn't take Fed-provided forecasts under advisement, particularly when their peers are.

It also seems as if this type of strategy could invite currency manipulation by foreign banks and governments. For example, if a nation with a non-floating currency, large treasury holdings and strong trade ties to the US had a very strong indication that interest rates would not move for, say, three years, it would be even easier for it to ensure that it kept its goods flowing solidly in one direction. Whether or not this is ultimately bad is a matter for debate, but it should nonetheless be part of the conversation.

Longer-term implications exist as well. Some Fed officials indicated fears that markets could interpret the forecasts as strategy goals, an issue noted above. What if a future Fed chair shares this concern? Will he or she have the flexibility to revert to a less transparent strategic approach if they feel it is necessary? Or will this precedent leave them helpless to shape policy suited to their styles and the times they are operating in.

Time will tell if Chairman Bernanke's approach is the right one. There are certainly benefits to transparency, and there is no doubt he had all of the above concerns in mind, or at least brought to his attention, before he finalized this dramatic policy change. However, if this was merely a means to reduce long-term rates, it seems as if far too much flexibility was taken off the table for what could be a fleeting benefit fraught with risks.

Supply and Demand Don't ALWAYS Explain Things...

2012-01-05T07:00:00.002-05:00

Regular readers will know that supply and demand forces are leaned on heavily by BlawgConomics as the explanation for many a phenomenon in life. However, supply and demand can't explain everything, and in some situations a normal person with an ounce of common sense can explain the real world better than a pseudo-academic with a pound of Econ 101 knowledge.

So is the case with a recent article from Derek Thompson in The Atlantic. In the article 'Why Do All Movie Tickets Cost the Same?' Thompson takes a look at the fact that movies like Spiderman and Mission Impossible are no more pricey to see than your average flop and suggests some interesting reasons why. This will be an interesting read for anyone who appreciates the Freakonomics approach to economics, particularly passages such as the following:

Cheaper tickets lead to higher policing costs. I'm a cheapskate, so I might buy a ticket to see cheap, cheap Iron Lady and sneak into Sherlock Holmes. This would create a fascinating incentive for art-house studios to release smaller, cheaper films the same weekend as blockbusters, knowing that thousands of canny consumers might buy fake tickets to their show to sneak into the more expensive blockbuster.

Tip of the cap to S.W.

The SCOTUS Year End Report and the Independence of the Judiciary

2012-01-04T18:53:00.000-05:00

The Supreme Court often comes under fire due to the partisan influences many note in its members' voting records. Indeed, it often seems that more time is spent in the media discussing the political affiliations of Justices than actual decisions, a phenomenon that is doubly true during any potential Justice's confirmation process. However, it is not clear that the Justices themselves spend much time worrying about political considerations, and they actually tend to come out 9-0 or 8-1 far more often than they split 5-4. Indeed, if Justice Roberts' year-end address is any indication, the Nine are currently far more concerned with old Marbury v. Madison-esque independence issues than political considerations.

It is no secret that the 2010 healthcare reform legislation is heading to the Supreme Court. What was assumed by many as a number of cases related to Obamacare led to massive circuit splits became a surety as the Court set dates to hear arguments related to the bill for late March.

Many on the right have called for Elena Kagan to recuse herself from the consolidated appeals due to her unclear involvement in the legislation in her role as solicitor general. However, using the Black Sox scandal as a backdrop, Roberts takes advantage of the opportunity afforded him in the Chief Justice's annual address to address recusals (and indirectly defend his benchmate) as part of a broader discussion on judicial ethics. Though he states that he cannot discuss specific cases or circumstances, it is clear what he had in mind with the following statement:

I have complete confidence in the capability of my colleagues to determine when recusal is warranted. They are jurists of exceptional integrity and experience whose character and fitness have been examined through a rigorous appointment and confirmation process. I know that they each give careful consideration to any recusal questions that arise in the course of their judicial duties. We are all deeply committed to the common interest in preserving the Court’s vital role as an impartial tribunal governed by the rule of law.

Of course many other issues of a pragmatic nature may be at play. Many believe that Clarence Thomas has grounds for recusal as well with his wife's involvement in the healthcare industry. Recusal by both Thomas and Kagan would, most likely, lead to one vote being taken from each side in a wash. Or, there may already be a sense among the justices that, particularly in an election year, it would be easier to decide the case on slightly less charged grounds than the ability of the government to mandate coverage. Similarly, or maybe as a corollary, they could duck the issue by declaring that the political process is better able to solve any problems pertaining to reform than the judiciary. Or, perhaps believing he already has a majority with him on this particular issue, maybe Roberts is simply taking the opportunity to reaffirm the independence of the judiciary in a situation where it doesn't lose him any points for his side.

However, while it may be a bit naive, it is nice to think that these types of factors weren't the sole driving force behind Roberts' statement; that he was actually affirming the integrity and independence of his judicial brothers and sisters. If so, this would be a strong signal of intent and should provide a measure of comfort to those who have perhaps become overwhelmed by political sniping and alarmist reporting with regards to The Supreme Court. This is particularly true as the nation embarks upon an election year which is certain to be among the most divisive to date.

Exploring a Potential Solar Rooftop Bubble

2012-01-04T18:27:00.001-05:00

In a recent Freakonomics post, Steve Sexton explores the market for rooftop solar panels and concludes that there may be a bubble in the industry that could soon burst. The basis for his theory is that hidden incentives in the current metering scheme which have been favorable (and, he argues, essential) to the growth of the residential solar industry could potentially be phased out en masse soon, a process which could start in otherwise solar-friendly California if utilities have their way.

The net-metering schemes in question are in place in one form or another in 43 states currently, and have been used to entice owners of residential properties to go solar. Utilities dislike these schemes as they are forced to purchase energy produced by residences at the same rate which they sell electricity, a price which includes infrastructure and other costs. Because of the way the laws work, residential producers are receiving retail prices for what is already subsidized generation. Sexton also notes a perverse incentive by which those who might produce energy storage mechanisms are dissuaded from doing so, an interesting point.

As more and more people take advantage of various tax credits to place solar panels on their homes, this type of scheme is becoming more damaging to utilities' bottom lines (Sexton also notes that it is a case of the poor subsidizing the wealthy, but we will leave this valid point for another day). Because of this, utilities have increased lobbying efforts. At this point, the situation has progressed to the point that regulators in California are considering a scheme whereby solar energy producers would pay the utilities back for some of the difference in production and sale costs via a use charge. Sexton argues that this will cause many to abandon solar panels, thus bursting a bubble he has suggested exists.

While I agree that such a usage fee could alter the dynamics in California, I do see some holes in Sexton's analysis. For one thing, the proposed scheme still includes a subsidy. Additionally, it is not yet even a certainty that such a scheme will be adopted in California, never mind anywhere else. States have shown a predisposition toward stimulating residential solar generation, even if it has to be subsidized. This is particularly true when it isn't the state, but rather other consumers, that are doing the subsidizing.

Further, I believe that he underestimates the power of the solar lobby to counter the weight of the utilities. Finally, I think that many people will continue to buy solar panels (albeit not at the same rate) even without subsidies. Therefore, even in a changing regulatory environment, I think that the industry could be a bit more buoyant than Sexton believes, especially as the technology becomes more efficient.

As an aside, assuming arguendo that a bubble does exist, and further that it is on the verge of bursting, it is not clear who would be hurt. Certainly environmentalists wouldn't be happy, but their displeasure would have more to do with less solar energy being produced than any misfortune for manufacturers. And to the extent that manufacturers are hurt, it is not clear what might happen to what is a very fragmented market. A large amount of panel production has moved offshore, with China one notable hotbed for activity. As far as domestic producers, maybe the bursting of a bubble could act as a Schumpeterian evolutionary moment leaving the best technologies and producers to take control of the market. But I digress...

Despite various differences of opinion with Sexton, I respect his analysis and agree that the situation in California is worth watching as change there could well impact the policies of other jurisdictions. After all, California is often cited as the leader in the area of rooftop solar. Just because that maxim is typically uttered in reference to the state's progressivity doesn't mean that Cali couldn't play the Pied Piper in backtracking as well. More broadly, energy policy in the US is a very difficult beast to analyze, and the competing interests are varied and determined. Nothing at all would surprise me as far as statutory and regulatory schemes go, and a lack of certainty is just about the only sure thing when it comes to this very interesting intersection of law and economics.

Tip of the cap to J.N.

Sports-Related Promotions and the Incentive Effect

2012-01-04T18:00:00.003-05:00

Anyone with even a passing interest in how incentives impact consumer behavior will appreciate this quick read from Darren Rovell's SportsBiz blog. In the post, Rovell discusses a number of sports-related promotions, past and present, and how they have impacted sales for the various auto dealerships, electronics stores and furniture retailers involved. In an example that hit close to home for BlawgConomics, Rovell highlighted Boston furniture superstore Jordan's Furniture. The chain received a mention due to the Red Sox and Bruins championship-linked promotions that have helped the company boost its numbers.

Meanwhile, Rovell missed a golden opportunity to explore how running ads featuring

aging founders in full uniform might impact sales...

The Best of 2011: Crowdsourcing, PBR and Chasing the American Dream

2011-12-31T11:21:00.001-05:00

This fan favorite, featured on June 26th, wraps up our Best of 2011 series. With beer the subject on tap, it seems to be a particularly apropos way to end the year. Be sure to stop by soon for new content, as we are certain that law, economics, politics and culture will continue to intersect in 2012. Happy New Year!

Ownership, whether of a car, a home or a business, is thought by many to be one of the key ingredients in that tough-to-define and oft-evolving concept known as The American Dream. However, earlier this month an innovative plan utilizing social media that would have given Americans a chance to own their own little piece of a well-known national brand was nixed by the Securities Exchange Commission (SEC). Why? The SEC determined that a social network-driven initiative to buy brewer Pabst failed to meet the statutory standards for a public offering. According to The Wall St. Journal's legal blog:

"Two advertising executives on (June 8) reached a settlement with securities regulators over a Web site that purported to raise $300 million via ”crowdsourcing” on Facebook and Twitter to buy Pabst Brewing Co., the maker of Pabst Blue Ribbon, Lone Star, Colt 45 and other beers.

The Securities and Exchange Commission said Michael Migliozzi II and Brian William Flatow agreed to a cease-and-desist order after they allegedly failed to register their offering before seeking to sell shares to the public. They did so without admitting or denying wrongdoing."

For those unfamiliar with the details of the Pabst sale, crowdsourcing or the role of the SEC, allow us to elaborate. Migliozzi and Flatow noted that the brewer, Pabst, had been put on sale by the private charitable trust which currently owns it. The two ad execs saw an opportunity to buy a well-known brand (or conduct a social media experiment, or both depending on who is describing the facts) and created a website which advertised their intent to buy PBR. They also used social media, including Twitter and Facebook, to attract co-travelers, who they called 'pledgees' and 'investors' to their potential venture.

Speaks for itself...

The site, 'Thebuyabeercompany.com,' explained the execs' plan to potential pledgors; the first stage would be the gathering of pledges. After a sum of $300 million was pledged, the next step would be collecting and making a bid for the brewer.

What would pledgors receive for their efforts? According to the website (which has been restricted for obvious reasons, but whose main contents can be found in SEC documents), in the event that the threshold amount was reached, each investor would receive a 'crowdsourced certificate of ownership' and beer of an equal value to the amount invested. At least at that point, it would appear that a pledge of, say, $20 would get a potential investor a certificate and a few six-packs, but not necessarily an ownership stake in the brewer, in the event of a successful purchase.

Let us turn briefly aside from our timeline to say a few words about crowdsourcing, like so many other inventions of the internet-age, a rather recent phenomenon. According to a June, 2006 Wired article by Jeff Howe, The Rise of Crowdsourcing, it started as a way for companies to outsource projects to crowds, often anonymously, as a means to tap into alternative resources. Since that time, the term has grown to broadly define more web-based interactions.

At this point, the term could be defined as anything from the e-outsourcing activities that it originally described to the broader utilization of social media to bring together disparate individuals for any common cause. In the case at point, that cause was buying a brewer. From the start, and like so many creations of the web world, crowdsourcing was often more about collaboration than payment; the pleasure of problem solving placed squarely above pecuniary interests.

In this vein, and getting back to the main story, our ad-execs hoped to tap into this desire to be a part of a collaborative group. With their website, which was promoted by various social media, they proved successful at doing so. Perhaps even more successful than they had originally supposed. From November 2009, when the website was formed, to February 22, 2010, the two managed to obtain over $200 million in pledges.

This caused them to pursue their options a bit more seriously, and they went as far as exploring the formation of a takeover vehicle. Forming such a corporate structure created the potential outcome that, rather than receiving a fancy certificate and a few six packs, pledgors would receive actual shares. It was probably also the point where the Rubicon was crossed as far as the SEC was concerned. From SEC documents (also linked to above; citations omitted):

- Securities Act Section 5(c) makes it unlawful for any person, directly or indirectly, to make use of any means or instrument of transportation or communication in interstate commerce to offer to sell any security unless a registration statement has been filed with the Commission. Scienter is not an element of a Section 5 violation.

- Section 2(a)(3) of the Securities Act defines "offer to sell," "offer for sale," and "offer" to include, "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value."

- The Respondents made use of the jurisdictional means to effect an offering of securities. (Ed. note: in this case, this statement refers to their use of the internet as a tool of interstate commerce)

- The Respondents failed to register the offering with the Commission and there was no applicable exemption from registration.

- Since the offer of the securities was not registered with the Commission, nor exempt from registration, Migliozzi and Flatow violated Section 5(c) of the Securities Act.

In sum, using the internet (which crosses state boundaries, thus triggering the rules for national securities laws in addition to local requirements) to offer securities was in violation of statutory securities laws.

So, the execs put together a plan, potentially as a social experiment initially, which quickly grew into something more and violated securities laws. Aside from pure statutory issues, was this such a bad thing? Obviously there are varying opinions. The SEC, for one, believes it was. The SEC has a clear mandate to regulate offerings, and it is pretty clear that the situation here became a potential offering when the ad men considered issuing shares, if not sooner. There are compelling interests in ensuring that the investing public is not subjected to unregulated offerings.

However, there was clearly no nefarious intent about the would-be beer barons. Additionally, the cool-factor of the plan is unmistakable. One beer industry insider we spoke to summed up this side of the coin perfectly (while giving a nod to the idea that the potential offerors didn't handle the situation perfectly):

"It was an interesting idea to stretch the uses of social media this way. With a brand like Pabst - and its grassroots resurgence of late - it seems like using social media means was the perfect avenue to take the company over. They just forgot a few phone calls and filings."

As it is difficult to completely match up the spirit of the law with the actual facts in this case, perhaps focusing on the actual results rather than the right or wrong of the situation is the more productive exercise.

In the end, it is probably for the best that the SEC stepped in when it did. Takeovers occurring via the medium of social media are takeovers nonetheless, and it is important to the functioning of the broader financial system that its participants believe that all transactions are on the up and up (a growing body of evidence from insider trading cases notwithstanding). Nonetheless, we would like to tip our caps to Messrs. Flatow and Migliozzi for coming up with one of the best intersections of social media and finance we have personally seen; that they also unfortunately intersected with the law shouldn't take innovation points away from the duo.

We also think that the SEC deserves a nod for its rational treatment of the two perpetrators. Though it has a mandate to diligently protect the public against unauthorized offerings, by letting Migliozzi and Flatow off by signing a cease and desist order with no assignation of blame the SEC engineered an entirely reasonable outcome. As such, what was likely a set of honest mistakes made while trying to do something innovative and interesting is not being punished disproportionately while the public remains safe from the foamy perils of brewer ownership.

Meanwhile, if a recent trip to a bar with a disproportionate number of men in very skinny jeans and ironic graphic tee's is any indication, Pabst seems to be chugging along just fine as well. In the end, not a bad day at the office for all involved it would seem...

The Best of 2011: NYC Bag Ban and the Shifting Rationale for Trademark Law

2011-12-30T13:09:00.002-05:00

This popular post, the second by contributor Jeremiah Newhall to appear on our Best of 2011 list, originally featured on May 24th. I can't be sure this is for its legal analysis or rather due to people looking for cheap merchandise, but I can say that it was a favorite of mine in either case.

By contributor Jeremiah Newhall

The recent BlawgConomics post on NYC’s proposed bag ban prompted me to wonder: what, or whose, interest is the ban protecting? Trademark law should prevent unfair competition and consumer confusion, but this law punishes consumers, not competitors. What’s going on here?

New York City's biggest law enforcement problem?

The ban is aimed at the putative world capital of designer knock-offs, the Canal Street area. The previous post focused upon the efficiency (or, as Josh concluded, lack thereof) of enacting and enforcing such a measure, but I’m drawn to other questions. The proposal represents a seismic shift in the way we think about trademark law.

As a preliminary matter, I’d like to dispense with two basic points: first, the bags in question are protected by trademark, not copyright. For reasons best explained elsewhere, designer bags are not, in most cases, copyrightable. As a result, designers from Donna Karan to Calvin Klein have relied instead upon trademark protection to prevent others from creating copy-cat designs.

Second, NYC has the power to enact such a law. The general police power of the states is plenary, and extends to the limits of the Constitution. So long as the state provides at least a rational basis for its laws, it may punish citizens for owning knock-off bags, or dynamite, or even celery. Nor is NYC’s bag ban preempted by any federal legislation. Congress could preempt such a ban, by regulating ownership of false trademarks under its commerce clause power, but it has chosen not to do so.

Moving past those preliminary points, whether or not NYC should enact its bag ban raises fascinating questions about why we have trademark law at all. From a legal perspective, trademark law has traditionally been a consumer-protection measure. But from an economic perspective, trademark law creates an asset on the value sheet. With these notions in mind, it is possible to view the NYC bag ban as an overdue legal response to the economic reality of trademark ownership.

The rationale of trademark law is summed up most succinctly in the title of the introductory course in trademarks at my alma mater (GWU): Trademark Law and Unfair Competition. Trademark ownership is protected because it identifies the source of goods; consumers can reliably determine that one shirt from Armani will be of roughly the same quality as the last. If the quality is high, the consumer can buy another; if the consumer judges the quality deficient, then the trademark tells them which designer to avoid.

When sellers of any goods begin copying one another’s trademarks, they can cause consumer confusion. Marks that are too similar create, in the parlance of trademark law, a “substantial likelihood of consumer confusion.” In other words, the legal threshold is crossed if there is a threat that someone might buy a knockoff when they instead meant to purchase the original. By way of example, the greeting-card trademark “Hallmark” (not coincidentally synonymous with the term “trademark” itself) might be confused with a mark such as “Hullmark.” Therefore Hallmark has the right to prevent such a competitor from using that mark for greeting cards (or tear-jerking cable-TV productions). All competitors must compete fairly, by trading on the value and prestige of their own names, and not someone else’s.

The bag ban is different because there is no consumer confusion. Instead, the ban punishes consumers for intentionally purchasing goods with similar marks. This is a stark departure. Hitherto, governments punished unfair competition by penalizing the competitors; NYC’s law would be the first to punish the consumers. If the rationale were adopted broadly, GWU might retitle its course Trademark Law and Unfair Consumption.

Why is if unfair for consumers to buy knockoff goods? Because of the social value associated with a trademark. The consumer wishes to benefit not from consumer confusion, but social confusion, as her friends mistake her DKMY bag for a DKNY bag. This ancillary value to trademarks, the social prestige they bestow upon the consumer, is unanticipated by the traditional focus of trademark law; the identification of the source of goods.

To date, the social value of designer goods has relied upon snide gossip from fashion snobs for protection, but perhaps the recession has made even this ever-vigilant source of protection insufficient. The NYC bag ban would be the first trademark law in the United States to protect (really, to create) the right of a designer to be compensated for bestowing social value on the consumer. If adopted, a whole host of goods might begin to clamor for protection, raising some interesting questions.

For example, what about consumers who begin their shopping day with a small purchase from Coach, which the clerk then places in a shopping bag bearing the Coach logo. Should consumers be banned from placing their wares from Big Lots or JCPenney inside the Coach bag, thus trading (deceptively) on Coach’s social value? Should shoppers be required to disclose if we buy designer clothes on sale, or own a used car? In answer, and in case my opinion of NYC’s proposed bag ban is unclear, may I suggest a scarlet “P” to identify consumers who are poorer than they appear.

Jeremiah Newhall is a graduate of The George Washington University Law School and will serve as a law clerk in Chicago. He can be reached via the miracle of email.

The Best of 2011: The NBA: Where an Overpaid Middle Class Happens

2011-12-29T15:57:00.009-05:00

This post by Mike Azmera, which originally featured on November 10th, kicked off a number of NBA-related posts on our site during and directly after the league's labor dispute. While basketball has returned this week, it was still far from certain that there would be a season when we first dove into the topic.

By Michael Azmera

I would like to quickly thank my friend Josh for letting me talk to you about one of my favorite things, basketball, and about one of my least favorite things, the current NBA lockout.

The last time that we saw an NBA game, we watched Dirk Nowitzki join the ranks of the great players who have won an NBA championship. He joined Jordan, Kobe, Magic, Bird, Duncan, Garnett, Olajuwon, Moses Malone, Isiah Thomas, and Shaq, all players who are either in the Basketball Hall of Fame or well on their way there. All of these players were—and some still are—among the very best players in the NBA during their careers.

Excluding the 2004 Detroit Pistons as the lone exception, every NBA champion since the 1980 Lakers had at least one of these players on its roster. All of them have been able to boast at least one of the 10 best players in that season’s NBA. The rule is pretty simple: Teams with elite players can contend for NBA championships. Teams without these players just fill out the rest of the league. Micky Arison, owner of the Miami Heat, looked back on 31 years of recent NBA history, noted this rule, and built a team around a pair of superstars. The Heat narrowly lost in the 2011 NBA Finals, essentially proving this rule along their way.

However they did not win it in the end; the Dallas Mavericks did. And in comparing the champion Mavericks with the runner-up Heat, the difference is obvious. The Mavericks surrounded their superstar with a good team of complimentary players; the Heat splurged on superstars and filled out their roster with an affordable group of supporting players.

Now give me a moment to explain why this is relevant to the current labor dispute. As fans, we like to think of winning championships as the ultimate goal of team owners. But owners also want to turn a profit. As such, they need to generate enough team revenue to exceed team expenses. NBA teams generate revenue, among other things, through ticket sales, through TV contracts, and through merchandise sales. Put simply, NBA teams generate revenue when people watch games. So one goal is to win the games; another is to get people to watch the games.

People watch two types of teams: Teams with title hopes and teams with exciting players of the Blake Griffin variety. Thus, NBA teams need superstars if they want to bring in revenue without winning. And title contenders have superstars on the roster, so it follows that in either case, NBA teams need superstars to bring in revenue, period. Even though role players are integral to building winning teams, they don’t generate revenue. And so it doesn’t make sense to pay them what they’re currently paid.

If there is one flaw with the current NBA business model, it is that the NBA labor market incentivizes owners to overpay mediocre players and allows these players to underperform on their contracts without real consequences. Of course, ownership wants to change this, and that is why the biggest demands made by the owners in the current labor dispute will primarily affect these mid-level type players, not the top tier or the bottom tier. Of course, players want it to stay as it is. Both sides have obviously rational stances, and that’s where the conflict stands. I will try to put this in context by explaining a few of the biggest issues:

Basketball Related Income (BRI): The big one. Obviously, this feels like something that will impact all players equally. But that is not the case. At the end of the lockout, the maximum salary is likely to stay the same. The best players will continue to be paid the maximum salary. There will be the same number of roster spots, and the same players will continue to fill the last spots on rosters. And then the players who barely make it onto rosters will continue to get the minimum salary. Since the highest-paid players and the lowest-paid players will continue to be paid the same as they are now, it is clear that any decrease in the players’ BRI share will come from the mid-level guys.
Maximum Contract length: Owners want to shorten the maximum contract lengths; players want to keep them where they are. Shortened contracts are not an issue for players who perform to the level of their contracts. (Of course, some players will be injured during the term of their contracts and see their market value fall. But unfortunate injuries would damage some careers under any system.) The only healthy players who would be hurt by shorter contracts are the ones who don’t earn their pay. The others will keep signing shorter contracts, one after the other.
Salary Cap Exceptions/Sign-and-Trade Rights: Without going too in-depth, current exceptions allow teams to exceed the cap to spend more money on players. Sign-and-trades allow free agent players to change teams without taking pay cuts, and they allow teams that lose free agents to recover some assets for their losses. These are examples of issues that relate more universally to players across all levels, and owners are trying to exert more control over them.

Of course, the union has a duty to protect the interests of its middle class and it is right to do so. Many players are fighting for their friends, for their colleagues, and possibly for their own futures. However many players are just fighting for their right to remain overpaid. As an NBA fan, I hope that this dispute is resolved in the coming days and that the lockout ends soon. I also hope that the players can keep a lot of their freedom and their security, beating the owners on some of the more onerous issues. But in this situation, I won’t be that torn up if the average employee in the middle of the pack is forced to take a pay cut, because in this rare case, the average employee is actually the overpaid one.

Michael Azmera is a recent law school graduate. This is his BlawgConomics debut.

The Best of 2011: The Centers for Disease Control vs. The Zombies

2011-12-28T13:44:00.003-05:00

This post, the first of two by contributor Jeremiah Newhall to appear on our Best of 2011 list, allowed us to have a little fun with the CDC, well, having fun. It originally appeared on December 4th.

By contributor Jeremiah Newhall

The Centers for Disease Control (CDC) recently posted an excellent article on what to do in case of zombie attack on its Public Health Matters blog. Of course, CDC is not really worried about zombies, but it is worried about emergency preparedness, and the “zombie attack” premise is a cheeky attention grabber which addresses this concern. Kudos to CDC (in particular to the author of the piece, Rear Admiral Khan) for tricking us into reading something educational, and perhaps even making us all better prepared for real life emergencies.

But while reading the post, I was struck by CDC's assertion that it would be in charge of fighting the zombie apocalypse:

If zombies did start roaming the streets, CDC would conduct an investigation much like any other disease outbreak. CDC would provide technical assistance to cities, states, or international partners dealing with a zombie infestation.

...Not only would scientists be working to identify the cause and cure of the zombie outbreak, but CDC and other federal agencies would send medical teams and first responders to help those in affected areas (I will be volunteering the young nameless disease detectives for the field work).

The CDC is getting ready. The only question is whether the zombies or the red tape will beat them first.

This got me to thinking: in case of a zombie apocalypse, who would be in charge? It’s a cop-out to say the President, or whomever the President delegates. After all, the President may be a zombie himself before the government can react. A zombie President (and Vice President) would not be technically dead (they’re undead), so succession would be hazy. Who would be the natural cabinet official, based on their responsibilities, to step up?

Especially in a pre-election year, there is another way to look at the question: if the President runs for reelection and needs to blame someone for his failure to stop the zombie apocalypse (can’t you just hear the partisan rhetoric?), which cabinet official is the natural to take the fall?

CDC would be a good-sense option to step up and lead the response; it’s an agency filled with brilliant doctors who love doing research on pandemics and epidemics and how to stop them. But when we have brain-craving zombies roving around, I think the Department of Defense might leap to the minds of most Americans: priority one, protect us from zombies. Priority two, cure zombies. I think doctors lose this one.

The question is thorny because all cabinet officers are equal; they report directly to the President, not to one another (here’s a nice overview). But a decent proxy for rank is order of succession, set by 3 U.S.C. § 19 (and in a more digestible form on The White House website). Of course, this isn’t absolute: no one expects Tim Geithner to be telling Leon Panetta whether to have the Marines target the zombies’ heads or hearts. (Always go for the head shot!) So we’ll look first for agencies that should have expertise in controlling zombie plagues, then use succession as a kind of tie-breaker.

At first blush, controlling a zombie uprising/plague seems like it should fall squarely in the bailiwick of the newly formed Department of Homeland Security. DHS does not include CDC; that falls under the purview of the Secretary for Health and Human Services (see the HHS org chart here). But DHS does include the Federal Emergency Management Agency (FEMA), the folks who step in after hurricanes, floods, and earthquakes (see the DHS org chart here).

On the other hand, Janet Napolitano of DHS is actually last in line for the Presidency. Of course, HHS Secretary Kathleen Sebelius doesn’t fare that much better; she’s seventh in line of the Cabinet officials (ninth overall, after the Vice President and Speaker of the House). Still, between FEMA and CDC, it makes more sense to hold CDC responsible for controlling a zombie epidemic. FEMA does best at picking up the pieces; quarantine laws are more likely to be enforced by the military and National Guard at the direction of the President on the advice of CDC (See, e.g., 42 U.S.C. § 264 and 42 C.F.R. § 70.6).

So in all likelihood, CDC would be in charge of guiding the President’s response to a zombie apocalypse. And thank goodness Rear Admiral Khan is already planning ahead, just in case.

Now, about the legal repercussions of shooting all those citizen zombies without due process ...

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email.

The Best of 2011: The War on Drugs, In the Style of Satire

2011-12-27T15:00:00.010-05:00

This post originally featured on November 30th, and is notable for generating some very interesting reader feedback. We followed up this post with a few others focused on the e-satire of Morris on December 5th and December 12th.

One of the great pleasures of running BlawgConomics is the ability it affords me to showcase thought-provoking and interesting content by some colleagues and friends of various political and ideological persuasions. I often find myself wishing that there were more fora for thought and discussion on the internet and elsewhere that provided similar opportunities; media where discussion on topics of the day didn't degenerate instantaneously into name-calling and partisan sniping. Until then, there is BlawgConomics.

Today we are carrying on our proud tradition of featuring the best and the brightest by introducing our readers to Mr. Robert Morris, a recent law school graduate who also goes under the tag of MoFreedomFoundation. Mr. Morris' MoFreedomFoundation avatar is an attempt to explore the facts behind The War on Drugs.

Students of both legal and economic theory will be familiar with various arguments for and against The War on Drugs. Though generalities are tough to make on a topic which is so socially, ideologically, and politically charged, it can nonetheless be argued that economists (and proponents of a law and economics approach) are more likely to be against The War on Drugs than those coming from a straight legal tradition. The former camp looks at the numbers behind what has, in their view, been a disastrous effort while the latter is more likely to cite notions of retribution and deterrence in support of drug regulation.
Mr. Morris falls unabashedly in the group which would consider the drug war to be a spectacular failure from what I suspect he would agree is a fairly standard libertarian viewpoint. That he manages to do so with a bit of dark humor is all the better from our perspective. Part 1 of MoFreedomFoundation's expected three-part series on The War on Drugs can be found below. Meanwhile, Mr. Morris' highly- (albeit lightly-) rated authorial debut can be found on Amazon here.

Best of 2011: Wolfer on Loan Forgiveness = Analytical Fail

2011-12-26T14:49:00.004-05:00

This article was originally posted on September 19th in response to a post by Professor Justin Wolfers' on the Freakonomics blog. While we happen to think that it is one of the better posts we have written this year, it stands out even more for two other reasons. First off, Wolfers showed off an impressive sense of fairness when he posted a link to the article on his Twitter page. Even more rewarding for us was the genuine and passionate commentary by readers that it inspired.

Let us start off this post by saying that Justin Wolfers is a very intelligent person. Not that it is 100% dispositive, but the professor has his own page on the Wharton website chock full of fancy titles and publications. And if being a professor at Penn wasn't enough, those perusing his vitals will also note associations with institutions like Stanford, Princeton, Brookings and the Federal Reserve. In short, he is not the sort of individual that we have any business going toe to toe with on economic analysis. However, there is something in his recent Freakonomics post 'Forgive Student Loan? Worst Idea Ever.' that just isn't sitting right from our perspective.

The issue of student loan forgiveness is a touchy one with passionate advocates on either side. Unlike other debts, student loans cannot be discharged in bankruptcy. Sometimes even death doesn't erase the burden. The individuals signing the papers for debts which can exceed six figures are often young, uninformed and naive/overly optimistic about post-graduation employment possibilities. And those who take the debts on are often forced to start paying them back when they are just starting out in entry-level positions and are therefore most financially insecure. There is also a significant percentage of the population which ascribes to the idea that forgiveness is morally acceptable because the loans were made by predatory corporations in the first place.

On the other hand, college is statistically a good gamble over the long-term as lifetime earning potential will largely overshadow the downside of loan repayment. And those taking the loans, while young, are no younger than those we ask to die for our country. Loanees have the tools at their disposal to understand the burdens they are taking on. Finally, countering the 'corporations are just out to get us' argument would be the contrasting moral obligation line of reasoning; essentially that paying back debts is a responsibility, and shirking that responsibility is not fair to society.

Most of the arguments above can be fitted loosely into two different political philosophies. To erase any ambiguity most of those who advocate for loan forgiveness tend to support Democrats while those with Republican leanings tend to be against the idea. Of course, this is not hard and fast. Many people I know with liberal leanings of course feel responsible for their debts. And, some I know who consider themselves to be conservatives would probably be happy to have their debts erased. However, it tends to be organizations like Moveon.org and legislators with a D after their names who typically support forgiveness plans with Republican legislators poo-pooing such notions.
While I cannot claim to know Wolfers' political leanings, he is overwhelmingly sides with what we are describing as the 'Republican' viewpoint on this issue. To be clear, and despite having an obscene amount of debt as a result of a recent three-year break from the workforce, I am as well, almost entirely due to the moral responsibility argument (though I can't lie...there is some appeal in knowing that these burdens could be wiped out Fight Club style). I knew that I would have a big bill to pay after graduation; my cost/benefit analysis nonetheless tilted in favor of taking it on.

In other words, Wolfers and I agree philosophically that those who take on debt burdens should be responsible for them. In his words:

This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.

However, while I can agree with his political/philosophical analysis, Wolfers' economic analysis leaves something to be desired. Again, in his words:

This is the worst macro policy I’ve ever heard of. If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars.

Wolfers has to be underestimating the multiplier effect that extra dollars for graduates could have. Perhaps this is because he seems to be conflating two groups; those who have student debts with those who have an education. While the Venn diagram for those two groups obviously has a very fat middle, there are many more college graduates than individuals with loan debts. For example, some graduates had help from parents, or scholarships, or have simply paid their loans back already. Those individuals are most likely to be in the positive financial situation that Wolfers describes above; he seems to be talking about older, well-established college grads. His description does not match those who have most recently graduated (and thus have the debt to forgive in the first place).

This latter group is more statistically likely to be in their 20's and just 'starting out.' Many of them do live hand to mouth with savings rates approaching zero. Particularly in the current economy, they are not necessarily able to get credit, or even jobs. To the extent that they can find work, they are typically making purchases on furniture, work clothing and cars. They are likely to be spending any discretionary money on entertainment, such as bar trips, restaurants and vacations. While these items are all more or less defensible from a financial responsibility standpoint, they all undoubtedly contribute to, and have a multiplier effect on, the economy.

To me, a cleaner macro argument would center on the idea that the economic system could possibly come closer to collapsing if student debts were written off than it ever did due to bad housing loans. Or that the federal government backing up trillions of dollars if forgiven debts would make the economy so bad that those whose debts were forgiven would be jobless anyway, leading to a downward spiral worse than the country finds itself in now. Both are economically supportable hypotheses due to the absolute dollars figures that are thrown around in the forgiveness scenario.

Despite his exceptional economic chops, it is clear that Mr. Wolfers would have a stronger argument by avoiding the dismal science in this situation. His moral argument that debts are a responsibility as well as others that suggest that forgiveness creates moral hazard and is just bad educational policy ring much stronger than his macro arguments. Perhaps his time at Wharton has put him out of touch with the realities of average college grads, perhaps his obvious academic acumen enabled him to avoid the bitter taste of student debt. Maybe he is just looking for an economic argument to boost his political one. However, in the end it is clear that his economic analysis undermines his argument more than underpins it.

Best of 2011: Should Ponzi Schemes Be Legal?

2011-12-25T18:00:00.005-05:00

This story originally ran on January 12th, and was one of the most Googled topics we wrote about all year. We are unsure of what this says about our readership and the greater American public, but we are pretty sure that this is a bad sign for suckers nationwide...

I recently heard someone, when asked to define 'Ponzi scheme,' offer an answer that though technically correct also sounded considerably more benign than such a definition would be expected to sound in a post Bernie Madoff world. After all, everyone knows that Ponzi schemes are awful pyramids which cheat people out of money. However, 'An illegal plan where early investors put money into a pot which the organizer takes money from. The early investors are then paid back by the contributions of later investors.' sounds an awful lot like a pension plan, at least once you get past the 'an illegal' part. Indeed, it doesn't really take a lot of verbal olympics to get that statement to read something like 'A fund workers pay into which a manager takes a fee to run. The workers then get paid by the contributions of workers with a later retirement date.'

Parallels can also be drawn to the stock market. IPO investors are more likely to get their money, plus a nice bonus, for their troubles than the later investors whose buying pushes up the price. To people who see little difference between Ponzi schemes and the equity markets anyway, perhaps this similarity is not that striking. Indeed, extreme proponents of such theories might suggest that, like illegal pyramid schemes, stock markets should be shut down. We are certainly not suggesting that however. Indeed, on the contrary, what if we took the other side altogether. What if to be provocative, we suggested that Ponzi schemes, like pension plans and stock markets, should be legal?

Page 14 of the prospectus might look something like this...

Most people on gut reaction would answer no to such a proposition. So let's go further. In the contra examples to Ponzi schemes provided above it is notable that both pension schemes and equity markets are regulated and that participants presumably know at least some of the risks. So what if Ponzi schemes came complete with prospectuses outlining the risks of participation? If the answer with these amendments is still no, maybe it would be helpful to remind readers that lotteries are essentially Ponzi schemes, though even arguably more extreme as there are fewer 'winners.' Maybe the reader is opposed to investing and/or lotteries altogether. However, for everyone else, it might at this point be tough to come up with reasons why something defined as a completely voluntary fund with complete transparency which promises nothing more than your money back with the possibility of a return 'if you get out early enough' (i.e. win) shouldn't exist.

Of course tricking people out of their money is bad; certainly Bernie Madoff was a bad guy and we by no means wish to make light of the actions which have, and continue to, ruin lives. However, the idea of transparent and legalized pyramids is intriguing once you think about parallels to other situations which, if arguably moral, are certainly legal. It is also probably worth noting that as a practical matter legalized Ponzi schemes are highly unlikely to ever be an investment choice for readers, if for no other reason than the fact that governments rather like their monopolies on lotteries.

However, issues of morality and practicality aside, it was nonetheless thought-provoking when I initially heard the correct but rather light definition of Ponzi scheme noted above. The striking immediate thought was that sometimes perspective is everything. Ponzi schemes are bad, but often things that are viewed as inherently 'bad' by society don't need too much work before they look a little better or even mirror others which are at the very least legal. The exercise above is a good show of this. This can make the line between shades of morality blurry sometimes.

Therefore the ultimate lesson might be not related to whether we should legalize Ponzi schemes at all, but instead should be taken from the gut reaction I had of their definition; though instincts are often important in life, it is sometimes careful consideration from different viewpoints which produces the types of analysis that good decisions can soundly be based on. All that said, here's hoping that careful consideration doesn't lead you into a Ponzi scheme, especially the illegal kind...

(Sort of) Live from Bretton Woods: The Best of 2011

2011-12-25T12:00:00.014-05:00

In their wisdom, the organizers of the World Economic Forum chose, once again, to not extend an invitation to Blawgconomics for their annual event in January. However, fear not dear friends! This week I am getting over the sadness precipitated by this snub by visiting the site of what might have been the first world economic forum in substance, if not name; Bretton Woods, New Hampshire.

In 1944, delegates from the 44 Allied nations of World War II convened on this small mountain community in the shadow of Mt. Washington to determine the fate of the global economic system. Why would some of the most powerful men in the world gather at such an off-the-beaten path location? Well, some of the delegates, including John Maynard Keynes, couldn't stand the heat of the summer in New York or Washington, DC and air conditioning was not yet widely in use. The mountain air of a resort in New Hampshire was a worthy alternative in which to peg exchange rates and create the IMF, and the rest, as they say, is history.

While I enjoy a few days of skiing, zip lining and cocoa, faithful readers will still have some content to look forward to as we will be reposting some of the most popular articles of 2011. Among the scheduled reposts are an article about zombies, a video explaining why we should end the drug war and a piece on why it might make sense to legalize Ponzi schemes. If that doesn't get everyone in the holiday spirit, I am just not sure what will...

Is Albert Pujols Worth $254 Million? Part I

2011-12-23T14:33:00.001-05:00

We return to the sports world today to talk about the economic concept of value. Albert Pujols was one of the greatest baseball players of the 2000's (if not the best), is currently on track to break a number of records which are sacred in the eyes of baseball fans, and, barring any Bonds-ian or Clemens-esque controversies, is a lock for the Hall of Fame. Heading into the most recent off-season, he was also a free agent, and, at the age of 31, was very clearly was on track for one last big payday.

So what was he worth? This was the question being asked by the management of the only team he had, to that point, suited up for, The St. Louis Cardinals, as well as other baseball executives and fans. He seemed almost certain to be baseball's second $200 million dollar man (after Alex Rodriguez who has twice signed contracts giving him that distinction). But how much more than $200 million?

At least according to one team, the Los Angeles Angels, the final answer was $254 million over the next 10 years. This left many pundits, happy fans in California, stunned fans in St. Louis and dozens of baseball executives wondering whether the deal was 'worth it'. In other words, was this the correct value to put on Pujols?

Of course value is a term with many different meanings to different people. Many people will subjectively look at the contract and think that there is no way someone should be paid that much money to play a game. Of course $254 million is a lot of money. Of course America is in a recession. Of course Mr. Pujols is getting paid to play a child's game. Of course numbers like this don't seem to make a lot of sense to people who are digging ditches every day or fighting for our country on the front lines.

However, subjective analysis is, well, subjective, and it isn't the best way to analyze this (or really any) contract. After all, many executives make more money that Pujols will under his contract just for the honor of destroying shareholder value (though that might be a post for another day).

One way to get baseball discussions to shift a little closer to the realm of objectivity is to use statistics. For those who don't follow the sport, or might only be passingly familiar with statistics like RBIs and home runs, there are baseball-specific ways to measure value called sabermetrics. These are most often measures of how much a player's specific statistics more generally benefit a team. Jamesian terms like win-share and wins over replacement, once the realm of uber-stat geeks, have become more familiar to common baseball fans.

In addition to being fan favorites, these types of measurements are helpful for executives as they allow for direct comparisons between players. They also help to set the market for free agents as a player statistically worth a relatively high number of wins can usually expect a nicer payday in comparison to lesser players. Many teams have gone so far as to base their scouting programs on such advanced metrics. Even non-fans might be familiar with this approach, or at least its name, as the 'moneyball' concept recently featured in a Hollywood movie of the same name.

While a subjective statement that someone is paid 'too much' and the use of sabermetrics are certainly ways to explain value, they also don't get right to the heart of the concept we are talking about today. Why is this? Well, the parties to the contract were thinking in economic terms when they signed it. And, in economic terms, the subjective concept of value we noted above is really inconsequential. Addtionally, the baseball measures of value explain how someone impacts a game, but not how they impact the bottom line at company they work for. Yes, that is correct, not the team they play for, but the company they work for. Let's not forget that it is the owners, and not the fans, who sign the checks.

Some owners care more about on-field results than others, but hardly any take too kindly to losing money. Therefore, in the analysis of 'is he worth it,' the owners really adhere to the economic definition of value. Of course most owners care what the fans think to some extent (subjective value), and of course, all things equal, most owners would prefer to win (sabermetrics analysis). However what they care about more is creating profits, and economic analysis is uniquely suited to determine whether they will be successful in that endeavor.

Players, of course care about economics as well. Quite simply, the equation is usually the more money the better.

However, what type of economic analysis is appropriate in this situation is something we struggled with a bit. Regular readers might be a bit surprised to hear that we first turned to Karl Marx for the answer, as we mulled over the idea that the labor theory of value is the best way to analyze whether Pujols is 'worth' his contract. At some point, however, this didn't hold up as we couldn't figure out any way to fit what Pujols 'produces' nicely into labor theory. In other words, since Pujols 'makes' hits, not, say, balls, bats or gloves, there is nothing to base his worth on in traditional Marxian analysis (of course to the extent that there are any neo-Marxists who are also baseball fans out there who think they can refute this there is always the comment section).

We also took a look at some other theories of value, but long story short, (and like we often do on the site) we finally settled on a simple supply and demand type of analysis. At the base of this analysis is the idea that Pujols is 'worth' the price someone assigns to his services that he accepts. As Pujols was offered $254 million, and he signed the contract, $254 is what he (or rather his services) are 'worth' (On a side note, while services can of course be valued under Marxian analysis, we still couldn't get around to understanding what is 'produced' by Pujols' labor...so supply and demand it is!)

We couldn't merely end the analysis there, however. Supply and demand should be thought of as an ethereal concept rather than a static one, so it is helpful to look ahead a bit as well. Therefore, we took the analysis a step further. However, our readers will have to wait for Part II for that...

Team Obama's Latest Stop on the E-Campaign Trail

2011-12-23T13:08:00.001-05:00

It is increasingly common for political rhetoric and partisan bickering to overshadow actual attempts to find solutions to the problems facing America. This pervasive problem reared its ugly head again recently in the form of the payroll tax issue. However, while it was covered ad nauseum in the press, we believe that many in the media missed an interesting angle on the story with implications that could reach far beyond a few weeks of tax cuts.

Interspersed with all of the political wrangling, spliced among all of the media rantings, mixed-up in all of the admonishment of politicians by the citizenry was one of the best political uses of social media yet, the #40dollars campaign. For the less-social media savvy among our readers, this campaign was an effort by The White House to encourage people to Tweet about what an extra $40 means to them. The White House believed that this would help to drive its message and spur action by House Republicans. In addition, and showing a solid understanding of not just the medium, but its capabilities, the White House re-Tweeted some of the more compelling 140 character stories proponents of extending benefits shared.

The strategy wasn't entirely successful as Republicans hijacked the hashtag at times to make their own points (albeit somewhat clumsily...see Speaker Boehner's feed for examples). However despite taking a risk that it couldn't control its message entirely, this seemed to be an overwhelmingly successful campaign by The White House as many people chimed in showing support for its position.

The e-campaign trail doesn't result in as many awkward photos as the real campaign trail. Luckily for us, e-campaigning didn't factor as heavily during the two previous election cycles...

We have written extensively about e-campaigning in the past. Though the use of social media has seemingly derailed as many political careers as it has jump-started (see Weiner, Anthony and Larsen-Gate) sometimes pols are successful when employing e-strategies. While the #40dollars campaign was an end in and of itself, it also strikes us that it was an important step in the campaign development strategy for Team Obama. If this is true, Republican candidates should make sure they have excellent teams of social media experts at the ready. It is becoming clearer that social media will be as crucial a stop on the campaign trail as Iowa or New Hampshire as Campaign 2012 picks up steam.

Payments to Doctors: Problems and a Solution

2011-12-22T17:30:00.007-05:00

Let's play a quick game of what if. If you had an injury that required surgery to replace, say, a knee, wouldn't you want the best replacement knee possible to be used? If you had the option, wouldn't you want the actual doctor who created that knee to do the procedure? Even assuming that you answered yes to those questions, you might wonder if there was a hook. Would you mind if that doctor was paid over a million dollars a year in royalties because he helped create the knee? Would it matter if that doctor was working at a teaching hospital linked to a state university system? Or that some other options, including non-surgical options, might be available?

These are just some of the conflicting interests inherent in the way the medical system is currently structured in the US. Two quotes from a recent Wisconsin State Journal article on the issue sum up the main points of the two sides succinctly and accurately:

"Since doctors write the prescriptions, it's crucial for drug companies to win their hearts and minds — to bribe them, seduce them, flatter them, whatever it takes," Dr. Marcia Angell, former editor of the New England Journal of Medicine, said at a forum last month in New York. "The companies wouldn't do this unless it worked."

"We have an obligation to leverage the resources of the people of Wisconsin in partnership with industry, as long as it's done in a transparent and ethical way," said Dr. Robert Golden, dean of the UW School of Medicine and Public Health.

We typically strive for some basic level of objectivity here at Blawgconomics, and will tag issues where we feel we are being a bit more subjective as Op-eds. Therefore, it is common for us to present both sides of a story. However, objectivity aside, this issue is striking in that both sides have equally valid and strong arguments. Of course having doctors who work with products consult on their creation is beneficial to recipients. Of course we should allow people who create innovative devices to be financially rewarded. And of course these two facts lead to potential conflicts of interest.

While some point to disclosure as the cure for such conflicts, it is also true that the average consumer of medical services and products, to the extent that they even read disclosures, is unlikely to understand such conflicts. However, the solution to this isn't to eliminate the practices (and thus conflicts) in question. It is to give consumers more, and importantly better, options for understanding the conflicts that could impact their care.

One of the most innovative solutions we have heard of is a program where patients have the option to receive independent counseling on procedures and products which are being contemplated for their treatment. In such a program, a trained professional (though not necessarily a doctor) works with the patient to explore everything from conflicts of interest to alternative treatment strategies, removing many of the concerns that exist when doctors who work closely with device makers and pharmaceutical companies act as the only consultant. Some hospitals have such systems in place currently, and we would anticipate that it is a trend that will continue to move in a positive direction as these relationships face increased scrutiny.

Internet Freedom Update

2011-12-22T07:00:00.004-05:00

The internet has been a hot topic in the news recently, often in the context of how the freedoms enjoyed via this growing medium are being threatened by governmental actions. In addition to recent posts on this very page, a few other stories in this vein, with both national and global implications, have been making the rounds recently:

- While it is unlikely that any of our readers sympathize with the Somali militant/terrorist group Shabab, there are at least some among you who might be concerned with government efforts to shut down the group's Twitter account. Apparently the US military complex hasn't taken too kindly to Shabab's mocking of the Kenyan military via Tweets and is seeking out legal avenues to shut down its means of communication. Twitter representatives declined to comment on the story.

- In what is merely the latest attempt at legislation to 'enhance cyber security', the House Homeland Security Committee recently introduced a bill which would establish an entity to oversee information-sharing. The mostly-Republican supported bill would require private firms to share information on cyber threats. The legislation has some similarities to other recent proposals, but it is unclear what actual enforcement mechanisms it might create to accompany the mandate to share information.

- And, in a slight change of direction from stories we normally discuss in this realm, someone in the government is warning that greater regulation of the internet could be a threat to freedom. Of course, this one is a little different because it deals with the UN, and not the US government, creating the regulatory system, so maybe the reticence around the idea can be chalked up more to concerns about sovereignty than internet freedom. However, in either case there is quite a bit of material for domestic internet freedom advocates sprinkled throughout FCC Commissioner Robert McDowell's comments to The Washington Times recently.

Those interested in additional stories related to this topic can visit our November post Freedom v. Security, Tech-Style here.

Page Lebanon

2011-12-21T18:16:00.003-05:00

One of our main self-criticisms at Blawgconomics is that we lack the requisite local knowledge needed to fully and carefully explore many of the topics we post about. Though that apparently doesn't stop us from recklessly forming and sharing opinions and conclusions about situations, we are nonetheless self-aware that it typically takes boots on the ground to understand the nuances of regional social, political and economic issues.

Someone with less of a problem in that area (at least when it comes to the Middle East), is friend of the site Anthony Elghossain. Though Anthony resides in the US most of the time, he has lived and traveled extensively in the Middle East and is therefore able to bring a unique perspective on the region to his blog. From Page Lebanon:

Page Lebanon, as the name implies, is a blog on all things Lebanon. The blog generally deals with politics, but also touches on cultural, economic, and social developments in that small country on the shores of the Eastern Mediterranean. Of course, events elsewhere – particularly in the broader Levant - have a funny way of affecting things in Lebanon so Page Lebanon focuses on those issues too.

Anthony has been writing a bit more actively recently after posting sporadically for a while, and his new material is excellent. For anyone interested in a witty insider's perspective on the goings on in the Middle East, the following three posts are worth a read. All descriptions have been provided by the author:

An Oasis of Steel and Glass: a first impression of Abu Dhabi and the UAE from a Levantine perspective
The Big Cat's Out of Bag: a (slightly) polemical look at the Assad regime's duplicitous essence
The Botox Revolution: a tongue-in-cheek piece about socialites in Lebanon's reform movements

Anthony also provides maps and documents as well as an extensive reading list at the site, making it a truly outstanding resource for those with an interest in the region.

Op-ed: Persuasion v. Coercion in Goverment Actions

2011-12-17T11:48:00.004-05:00

We recently posted an article describing Senator Joe Lieberman's attempt, as head of the Committee on Homeland Security and Governmental Affairs, to get Blogger to stop allowing what he calls terrorist speech on the blogs it hosts. Blogger (the platform we use for the site) is owned by Google. Google also owns YouTube, and previous attempts by the Committee to have terrorist content removed from that medium have proven successful. Presumably, Lieberman would have Blogger monitor its blogs and/or respond to requests and remove the offenders whenever content therein could be deemed 'terrorist' in nature.

While I noted some first amendment constitutional concerns in the post itself, a friend of the site wisely pointed out in the comments that Lieberman, or anyone else in the government, has as much of a right to express free speech as anyone else, so long as they are not, in fact, violating the rights of others. While this is undoubtedly true, it did lead me to consider a broader concern: When does the power of persuasion become the power of coercion? When does government speech attempting to convince a company like Google to stifle speech slide over into the government forcing Google to stifle speech?

For purposes of this post, I am not so concerned with the jurisprudence on the matter; particularly in the realm of e-issues, this is somewhat ethereal. Even if I did not so casually eschew the opinions of our nation's jurists, there is a very practical problem which exists in the realm of internet cases. That is that the Supreme Court has itself chosen to leave some of the more important questions concerning with the internet tangled in a complicated maze of Circuit splits. This makes it difficult to determine just what legal precedent might be in this situation.

Therefore I will instead think about the reasoning behind the matter, taking a more 'natural rights' viewpoint. In other words, as the baseline for this discussion, I am hoping that our readers can take some time to think about what it means to have freedom of speech as a right. Then I want them to think about what it means to have restrictions on it.

Without getting too far into the concept of natural law, it is safe to say that most would agree that, in the absence of governments, freedom of speech would exist inherently. The only way to suppress it would be through force. Therefore, when governments guarantee rights to free speech, what they are really saying is that they will stop individuals and entities from stopping the speech of other individuals. This includes the government itself. While some restrictions on this freedom exist, it is so universal that states must have a very compelling interest when they put restrictions in place. However, many readers of this blog might be able to agree that state interests don't always align perfectly with the interests of the people. Politicians have power, they like it, and they don't like to give it up. Therefore, politicians often put self-interests above the interests of their constituents. It is human nature.

Of late, many in government have decided that putting restrictions on the internet is important. Whether it is important for their own interests of the interests of the nation is up for our readers to decide. In any case, one of the main topics of discussion as part of this system of restrictions is freedom of speech. While speech on the internet is protected speech just like speech from a soapbox, it is potentially easier for the government to restrict it. While stopping someone on a soapbox might require brute force, it is possible to think of many ways speech could be restricted on the internet. It could be by shutting it down entirely, denying service, viruses, or by stifling the platforms where speech occurs.

In this last case, restricting speech via the platforms where it occurs, is there a gray area where, short of issuing a cease and desist order to do something, that the government can be so 'convincing' as to stifle free speech in violation of constitutional rights? I would argue that there is. And again, I will dispense with the use of jurisprudence here (something readers might perhaps correctly criticize), but I would argue that if a speech by the government carries the threat of future pain if its 'suggestion' is not met with action by the platform, that this is akin to a violation of speech rights of those who post there.

In the situation at hand, Lieberman only asked Blogger to shut down terrorist blogs. However, at least in the letter, neither he nor the government he represents have ordered the site to shut down blogs. This is the distinction that our aforementioned reader touched on, and it is a critical one. That said, it would not be difficult to imagine some discussion accompanied the letter Senator Lieberman sent to Google/Blogger. What if Lieberman threatened increased monitoring of the platform? Would this make users less likely to utilize it? What if more devious threats accompanied the request?

We already know that one such request by the government to suppress content on YouTube was successful. That suggests that the government's argument was very persuasive. Maybe in that case, Google was persuaded, wanted to be a 'responsible corporate partner', and thought that it really was in the best interest of society to suppress certain video content. However, considering its recent moves in China, where it has, at different points, catered to government demands in consideration for a more favorable operating environment, it seems at least possible that it put simple bottom line concerns ahead of speech concerns. While that is completely fine for a company to do as a general matter in my opinion (and in the opinion of the law), having to make that decision due to the strong encouragement of the government just doesn't pass the smell test.

Let's shift gears and address another potential problem with this situation, one of potential overreach. In other words, who is to say what terrorist speech even is? While it might be simple in this day and age to point to an example of a jihadist bent on destroying America as Lieberman does, what else is terrorist speech? Is someone speaking out against government policies a terrorist? What if they speak out against a government's internet policies? Is a writer who doesn't like blacks, or whites, or Catholics, or maybe Muslims and writes about it terrorising them? So far, under current law, these types of speech would not be forbidden, odious as the latter example is. So let's go a little further.

What if it is a group of individuals on Twitter discussing the idea that their system of government is broken and needs to be replaced? It is this very type of activity which was so applauded by so many that contributed to the overthrows of several dictators throughout the Middle East earlier this year. Do Americans not think that it is incongruous to applaud this type of activity at a personal and even governmental level, but suppress it at home? For those who think this is merely alarmist, The Department of Homeland Security recently said in no uncertain terms that it would be stepping up efforts to monitor such speech.

The internet is one of the last bastions of freedom for many in the world. While it may be sad to some that freedom can only be found virtually and often anonymously, it is a blessing for many, as we have seen in numerous examples throughout the world this year. Governments are, and should be, nervous about the potential of the internet to stimulate political discussion. However, this is no bad thing. To paraphrase (and slightly twist) Thomas Jefferson, when governments stop being afraid of the people, liberty is lost.

Americans should be concerned by federal overreach into internet freedoms, in the form of monitoring, suppression of speech, in legislation such as SOPA. It has been seen throughout history that freedoms, once given up, are nearly impossible to get back. People should strongly consider government actions to restrict the internet, even if they are merely persuasive. If they don't it is not inconceivable that, at some point, posts like this will be much more difficult to come by.

Article Review: Derivatives: A Twenty-First Century Understanding

2011-12-14T09:24:00.004-05:00

Derivatives are an oft-maligned and dangerous yet misunderstood and critical part of the modern financial system. While many Americans rightfully place some of the blame for the housing bubble on a system which could enable and even facilitate the creation of highly-rated credit default swaps on blocks of almost worthless debt, it is also true that derivatives allow companies and investors to manage risk and protect value. Like so many things from the financial markets to everyday life, derivatives can be very useful when properly utilized and exceptionally destructive when they aren't.

Unfortunately most of the policy-makers who have oversight over these instruments have little idea how they work, leading to disruptive under-regulation. Or at least that is the theory of one individual, Professor Timothy E. Lynch. In a recent article which appears in the latest Loyola University Law Journal, Lynch outlines some of the problems with derivatives and explains what he describes as a modern framework for derivatives. Under this framework, derivatives, which Lynch argues are defined both over- and under-inclusively currently, would be more appropriately redefined. In Lynch's estimation, this would ensure that policy can properly match the challenges presented by the myriad structures which exist. From the abstract:

"Derivatives are commonly defined as some variation of the following: a financial instrument whose value is derived from the performance of a secondary source such as an underlying bond, commodity or index. But this definition is both over-inclusive and under-inclusive. Thus, not surprisingly, derivatives are largely misunderstood, including by many policy makers, regulators and legal analysts. It is important for interested parties such as policy makers to understand derivatives, because the types and uses of derivatives have exploded in the last few decades, and because these financial instruments can provide both social benefits and cause social harms. This Article presents a framework for understanding modern derivatives by identifying the characteristics all derivatives share.

All derivatives are contracts between two counterparties in which the payoffs to and from each counterparty depend on the outcome of one or more extrinsic, future, uncertain event or metric and in which each counterparty expects such outcome to be opposite to that expected by the other counterparty. The framework presented in this Article will facilitate the development of more rational and comprehensive derivatives regulations, including (i) those required under the recently enacted Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) and (ii) those addressing the particular risks associated with “purely speculative derivatives,” (those in which neither party is hedging a pre-existing risk)." (emph. added).

Throughout the article, Lynch describes different types of derivatives and tries to speak to an 'everyman' audience with analogies centered mostly around fairly common Super Bowl bets. The article is quite readable and doesn't present any incorrect information. In short, Lynch has written a very good primer on derivatives for anyone with a cursory understanding of these admittedly complicated products.

However, in suggesting that he has created a new framework for understanding derivatives, Lynch has reached too far. Nothing that he discusses in the article will be new or surprising for anyone with a better-than-average knowledge of financial market transactions. Market observers have been discussing the rise of interesting and unique instruments, including derivatives based on everything from box office receipts to weather events, for years. Political junkies have known for some time now that they can put cash down on elections. None of this is novel.

Where Lynch does discuss some more interesting, if not necessarily novel ideas, including his suggestion that derivative regulation should borrow from/contrast with both insurance products and gambling, the analysis is light and obvious avenues to contemplate further go unexplored as 'beyond the scope of the paper.' It is also not clear how he thinks, as a practical political matter, that responsibility for insurance contracts and gambling could be shifted to the realm of the commodities world, but perhaps I quibble.

It almost seems as if in identifying derivatives as a problem for America, Lynch has created a straw man to attack in the form of a lack of knowledge. Most market observers would agree that it isn't a lack of knowledge among politicians, but instead the political process itself which has led to the current state of regulatory affairs. Even taking a neutral stance on the question of whether or not more regulation is necessary, it is clear that it is the lobbying efforts of the financial industry and special interests which have led to the current regulatory regime, not an inability of regulators and congressional leaders to understand derivatives.

In short, to the extent that financial reform is necessary in America, and to the extent that derivatives should be some part of this reform, it surely isn't a lack of understanding and classification of financial products which has led to this necessity. Perhaps the best proof of this is information on some of the recent rule makings which have been handed down in connection with the very legislation Lynch claims requires clarification. It seems as if the respective agencies have a fairly good grasp of what derivatives are all about after all.

With respect to lawmakers, I agree that there may be some individuals in the Halls of Congress who don't sufficiently understand supply and demand, never mind derivatives. However, they aren't typically on financial committees and subcommittees. Nor are they involved with enforcement. And, even if one grants that a lack of knowledge has contributed to gaps in financial system regulation and enforcement, a paper which advocates for including a wider array of financial products in the commonly-used definition of derivatives doesn't seem to be the solution. It rather seems almost naive to think that gaps in the understanding of financial instruments could be filled by morphing definitions in an attempt to help usher in a new era of regulation and enforcement; surely the American financial system is in even greater danger than many already fear if that is the case.

Now, as noted, it seems as if the intended audience for this piece might be the average American. If this is the case, Lynch has come closer to identifying a group with a knowledge gap. But to the extent that he feels that grassroots understanding of financial markets will lead to substantive change, he is certainly contemplating a long-term and difficult battle.

To be fair, this paper has a companion piece referenced in the footnotes in which Lynch discusses purely speculative derivatives contracts further. As per several footnotes, he makes some policy arguments suggesting that such contracts without 'social benefit' should, to a large extent, be eliminated. Therefore, though we did not have an opportunity to review that paper, it is possible that the 'framework' described in Derivatives: A Twenty-First Century Understanding is fleshed out a bit elsewhere. He does make some note of this in the present paper. From the conclusion:

Appreciating this framework will also readily allow us to better differentiate between socially beneficial derivatives and those that are more problematic. Such problematic derivatives contracts include those in which both counterparties to the contract are mere speculators. These purely speculative derivatives contracts do not offer the risk-hedging value for which derivatives are rightly touted and are not used to facilitate any commercial transaction in the real economy. They are mere bets. And, as I argue elsewhere, the social benefits of PSD contracts rarely outweigh their costs. Therefore, except for limited circumstances, PSD contracts should be void for public policy reasons.

And here, finally in the conclusion of the paper, we may be getting to what Lynch seems to want to say all along; he is presenting this paper not as a way to better define derivatives as a mean to educate lawmakers and regulators, but as a way to capture certain activities which he finds objectionable and regulate them out of the market. If he is trying to say that speculative transactions should be regulated out of the market, that is fine, and its certainly a supportable assertion.

However, it is not what this paper set out to do, and it points to a lack of organization/structure between this paper and its companion piece. If Lynch's intent was for this paper to serve as an introduction to the companion, I believe that he could have dispensed with his conclusions far more perfunctorily and posted the work together. At the least he could have made the link between the two papers more explicit, including noting the relationship in the introduction rather than in a maze of footnotes. If indeed his purpose was to 'change' the definition of derivatives in an attempt to make a policy argument that many derivatives should be legislated away, again, this point should have been clearer, and not saved for the conclusion. That, as I have noted, is a supportable assertion, and there is no reason to obfuscate it in a re-working of definitions.

In any case, and whatever Lynch's intentions may have been, the title described herein does not live up to the lofty goals which the author set out for it. As a standalone, it is an entertaining read and could potentially serve as an introductory chapter in a resource for law students or novices desirous of an introduction to derivatives. As noted, it might also have served in a scaled-down form as the introduction to its companion piece, which again, I have not had the opportunity to review. Lynch also makes very good arguments about the system itself, noting that the 'multiplicity' of statutory and regulatory regimes make enforcement difficult. However, in its current form, it is not a new blueprint for understanding derivatives, and it is decidedly not the solution to financial system woes.

Editor's Note: This review was undertaken at the invitation of the editors of the Loyola University Law Journal, the journal which is publishing Professor Lynch's article. They provided a link to an early version of the article here, which will help them to track interest in the article. However, anyone more interested in reading a copy that is relatively free of distracting errors and less interested in having their page views tracked can read the article here.

Schmidt on SOPA

2011-12-13T07:00:00.004-05:00

Google Chairman Eric Schmidt made some interesting comments on the Stop Online Piracy Act (SOPA) during and after a recent visit to the Economic Club of Washington. In discussing SOPA, Schmidt had the following to say, as relayed by Gautham Nagesh at TheHill.com:

An online piracy bill in the House would "criminalize linking and the fundamental structure of the Internet itself," according to Google Executive Chairman Eric Schmidt. Schmidt said the controversial Stop Online Piracy Act (SOPA) would punish Web firms, including search engines, that link to foreign websites dedicated to online piracy. He said implementing the bill as written would effectively break the Internet.

"By criminalizing links, what these bills do is they force you to take content off the Internet," Schmidt said, calling it a form of censorship. "If Congress writes a bad law, we all suffer," Schmidt said. He compared the proposal to the Web censorship practiced by repressive foreign governments like China.

"It's not a good thing. I understand the goal of what SOPA and PIPA are trying to do," Schmidt said of the Senate counterpart bill, the Protect IP Act. "Their goal is reasonable, their mechanism is terrible. They should not criminalize the intermediaries. They should go after the people that are violating the law."

Schmidt also criticized SOPA for targeting the Domain Name System, which experts have warned could undermine the security of the Web. "What they're essentially doing is whacking away at the DNS system and that's a mistake. It's a bad way to go about solving the problem," Schmidt said.

While it is plain that Schmidt has a vested interest in ensuring that SOPA doesn't pass as currently written, his comments summarize the perspectives of many internet freedom activists as well. To them, SOPA is seen as a potential encroachment on the freedom of internet users that, once lost, will never be regained.

There are some legitimate concerns about protecting intellectual property on the internet, particularly because of its global nature. However, there are solutions that don't create such a great potential for infringing on the rights of web users. In other words, follow the money. Don't penalize those who link to or seek information, penalize those who host pirated content. Otherwise, the internet as we know it could soon be a thing of the past.

Dreaming of a White Christmas?

2011-12-12T18:00:00.002-05:00

The idea of a white Christmas is as much a part of the mythological fabric of the holiday season as reindeer and decorated trees. However, the reality is that most Americans are only slightly more likely to see snow than the former, and are far less likely to see snow than the latter.

Nonetheless, the possibility of snow on Christmas has enough implications for travel, vacation-planning and even sales numbers (though which way the correlation works is not necessarily clear...) that we thought it might be of interest to our readers. The below probability map comes courtesy of The Weather Channel.

Nobel Prize Lectures

2011-12-12T10:31:00.002-05:00

A few weeks back we told you why Messrs. Sargent and Sims won the latest Nobel Prize for economics (and also explained why 'Nobel Prize' is a slight misnomer). Today, we bring you their Prize Lectures:

Challenging Mainstream Economics

2011-12-12T09:28:00.004-05:00

I found the video below posted on Harvard Professor Greg Mankiw's blog. The lecture captured in the video is a teach-in, and is an extension of the "Occupy Harvard" protest which started a few weeks back.

For purposes of this post, the most notable facet of that ongoing protest was the walk-out of the aforementioned Professor Mankiw's Principles of Economics class. The walk-out was staged to protest the class's mainstream economics curriculum, which some say verges on fundamentalist. In reaction to this concern, Steve Marglin was brought in to challenge the orthodox approach taken by Mankiw as well as many others around the world.

While I can agree that mainstream economics and economists leave something to be desired, I would argue that the best way to debunk or counter orthodoxies is to understand them (a point Mankiw makes as well). Therefore, I believe that the walk-out was a bit pointless and inefficient, but I am sure its participants would disagree with my definitions and/or use of both adjectives.

In any case, the lecture below is reminiscent of some I have attended in the past, and I can say that, though none of them have influenced me too heavily, they did provide an opportunity for me to look at things from different perspectives. And that is never a bad thing in my book.

The Drug War is Awesome, Part III

2011-12-12T08:55:00.002-05:00

It has been our great pleasure to work with e-satirist Rob Morris to provide a second home for his video series on the War on Drugs. His videos have been provocative (in the best sense of the word), and have clearly brought out the best in our commentariat. Today, we are happy to be able to post the final video in the War on The War on Drugs Trilogy, and I think this one just might be the most compelling of the three. That said, it would probably be best to let it speak for itself...

Remembering Pearl Harbor

2011-12-07T13:55:00.000-05:00

Some very nice words from President Obama commemorating the attack on Pearl Harbor:

Seventy years ago today, a bright Sunday morning was darkened by the unprovoked attack on Pearl Harbor. Today, Michelle and I join the American people in honoring the memory of the more than 2,400 American patriots—military and civilian, men, women and children—who gave their lives in our first battle of the Second World War. Our thoughts and prayers are with the families for whom this day is deeply personal—the spouses, brothers and sisters, and sons and daughters who have known seven decades without a loved one but who have kept their legacy alive for future generations.

We salute the veterans and survivors of Pearl Harbor who inspire us still. Despite overwhelming odds, they fought back heroically, inspiring our nation and putting us on the path to victory. They are members of that Greatest Generation who overcame the Depression, crossed oceans and stormed the beaches to defeat fascism, and turned adversaries into our closest allies. When the guns fell silent, they came home, went to school on the G.I. Bill, and built the largest middle class in history and the strongest economy in the world. They remind us that no challenge is too great when Americans stand as one. All of us owe these men and women a profound debt of gratitude for the freedoms and standard of living we enjoy today.

On this National Pearl Harbor Remembrance Day, we also reaffirm our commitment to carrying on their work—to keeping the country we love strong, free and prosperous. And as today’s wars in Iraq and Afghanistan come to an end and we welcome home our 9/11 Generation, we resolve to always take care of our troops, veterans and military families as well as they’ve taken care of us. On this solemn anniversary, there can be no higher tribute to the Americans who served and sacrificed seventy years ago today.

From the Desk of the Commissioner

2011-12-06T21:40:00.001-05:00

We received an email blast from 'the desk' of NBA Commissioner David Stern earlier this evening. We thought that posting it might be a nice way to bring some closure to our coverage of the league's labor dispute. It follows in its entirety:

Dear Fans,

On behalf of the entire NBA family, I want to thank you for your patience and support over the past several months. The new collective bargaining agreement is designed to provide more competitive balance for our league, reward strong performances by our players, and strengthen our game by improving its economics. We believe this agreement will benefit our teams, players, and most importantly, fans by making the NBA stronger.

In the days and weeks ahead, all of us hope you will enjoy the run-up to the start of the season: free agency, training camp, and preseason games. Each NBA team will be hosting special events for fans, so be sure to check your favorite team's website, Facebook page, or Twitter feed for details. This season we look forward to bringing you more of everything you love about NBA basketball: incredible competition, tremendous excitement, and unending hard work and dedication by the world's best athletes.

Thank you for being an NBA fan. I hope you enjoy the season, which promises to be a most exciting one.

Does America Imprison Too Many People?

2011-12-05T18:30:00.003-05:00

Considering the amount of time we have been spending discussing the causes and effects of the War on Drugs recently, not mentioning Judge Richard Posner's recent post on the incarceration rate in America would be almost negligent. From the article:

Another troubled American system is that of criminal justice, with particular emphasis on the astrounding (sic) growth and level of imprisonment. Some statistics: the incarceration rate had been 118 per 100,000 in 1950, and actually fell in 1972 to 93 per 100,00. By 2000 it had reached 469 and only since the advent of the economic crisis has it begun to decline as states try to reduce expenditures. Between 1950 and 2000 the white imprisonment rate increased by 184 percent and the black imprisonment rate by 355 percent; today 40 percent of prison and jail inmates are black, although blacks are only 13 percent of the overall population. Even though the U.S. crime rate fell by a third in the 1990s (and by two-thirds in many large cities)— the murder rate by more than 40 percent—the inmate population continued growing during this period, an increase that cannot be explained by population growth, since the population grew by much less than a third in the 1990s.

For more on these alarming statistics, check out the complete post here. Fans of Judge Posner will know that he has addressed the War on Drugs in the past, and his views on marijuana in particular are not entirely dissimilar from those of recent contributor Rob Morris. Meanwhile, Judge Posner's partner-in-blogging Gary Becker has also posted on the topic. From his piece:

Imprisonment is the right policy for anyone committing heinous crimes like rape, assaults, robbery at gunpoint, and many other crimes where victims are badly harmed both physically and mentally. Imprisonment is the wrong punishment for crimes without victims, or where other punishments are more effective. The sale of drugs is the prime example of a “victimless” crime for understanding the data on imprisonment. Buyers of drugs for the most part enter into voluntary transactions with sellers. Yet almost one quarter of all persons in US prisons are there on drug-related charges. In addition, studies indicate that many others are there because they committed crimes to finance their expensive drug habits since drug prices are kept artificially high by US drug policy.

Interestingly, both articles contain discussions on deterrence, a concept that factored heavily in our readers' comments on the original War on Drugs article we posted.

What Makes a Trader Go Rogue?

2011-12-05T18:15:00.003-05:00

Rogue trading, or the act of independently making, and often obfuscating, reckless losses in a firm's accounts, has become so common that the uncovering of these situations has lost the shock factor it had in the days of Leeson. This is despite the fact that the dollar figures involved in such scandals have become increasingly mind-blowing.

However, despite the rising frequency with which rogue traders make the headlines in the financial press, the fundamental question of why they have done what they have done often goes asked and unanswered. This is no simple question of greed; traders would usually have very little chance of personal financial gain even if their trades were to go right. And, even if the potential for a big bonus is the lure, it is clear that the downside of jail time and public humiliation far outweighs the upside of pecuniary gains in the minds of most rational observers.

Over the weekend, John Gapper of The Financial Times outlined an interesting theory that might do a better job of explaining rogue behavior than simple financial incentives; biology. In his article What makes a rogue trader, Gapper identifies research suggesting that many species will take bigger chances when they are already in a hole (whether the deficit is made up of seeds or dollars) than they would otherwise. And, since this risky type of behavior often leads to survival in the case of, say, food shortages or droughts, risk genes are more likely to be passed down through the generations. In other words, we might be genetically predisposed to go double or nothing.

Who knew that sparrows and bumblebees could provide such insights into market behavior? If what Gapper suggests it true, it would seem that we are less Homo economicus and more Bombus pennsylvanicus, not necessarily a happy thought for all the neoclassical microecononomics holdouts in the audience...

The War on The War on Drugs

2011-12-05T18:00:00.004-05:00

If the comments on our recent posting of Rob Morris' YouTube video are any indication, the War on Drugs is a divisive topic among our viewers. This is not surprising as it is a political, economic, social and racial issue that is complicated and has few clear alternatives that a majority of Americans would agree on, even if they agree that it isn't working (which itself doesn't appear to be a consensus). Given the power of the status quo, particularly with regards to government initiatives, this lack of clear alternatives suggests that the War on Drugs is here to stay, regardless of the government's nomenclature du jour.

However, despite that fact that changing the nation's policy on drugs is an uphill battle, people have not stopped trying to do so. With that thought in mind, we are happy to be able to bring part II of Rob's video series The Drug War Is Awesome! to our readers below. In addition, for anyone who is interested, Rob is now on Twitter, and can provocatively be found at TheFederalGovt.

The Centers for Disease Control vs. the Zombies

2011-12-04T13:57:00.009-05:00

By contributor Jeremiah Newhall

The Centers for Disease Control (CDC) recently posted an excellent article on what to do in case of zombie attack on its Public Health Matters blog. Of course, CDC is not really worried about zombies, but it is worried about emergency preparedness, and the “zombie attack” premise is a cheeky attention grabber which addresses this concern. Kudos to CDC (in particular to the author of the piece, Rear Admiral Khan) for tricking us into reading something educational, and perhaps even making us all better prepared for real life emergencies.

But while reading the post, I was struck by CDC's assertion that it would be in charge of fighting the zombie apocalypse:

...Not only would scientists be working to identify the cause and cure of the zombie outbreak, but CDC and other federal agencies would send medical teams and first responders to help those in affected areas (I will be volunteering the young nameless disease detectives for the field work).

If zombies did start roaming the streets, CDC would conduct an investigation much like any other disease outbreak. CDC would provide technical assistance to cities, states, or international partners dealing with a zombie infestation.

The CDC is getting ready. The only question is whether the zombies or the red tape will beat them first.

This got me to thinking: in case of a zombie apocalypse, who would be in charge? It’s a cop-out to say the President, or whomever the President delegates. After all, the President may be a zombie himself before the government can react. A zombie President (and Vice President) would not be technically dead (they’re undead), so succession would be hazy. Who would be the natural cabinet official, based on their responsibilities, to step up?

Especially in a pre-election year, there is another way to look at the question: if the President runs for reelection and needs to blame someone for his failure to stop the zombie apocalypse (can’t you just hear the partisan rhetoric?), which cabinet official is the natural to take the fall?

CDC would be a good-sense option to step up and lead the response; it’s an agency filled with brilliant doctors who love doing research on pandemics and epidemics and how to stop them. But when we have brain-craving zombies roving around, I think the Department of Defense might leap to the minds of most Americans: priority one, protect us from zombies. Priority two, cure zombies. I think doctors lose this one.

The question is thorny because all cabinet officers are equal; they report directly to the President, not to one another (here’s a nice overview). But a decent proxy for rank is order of succession, set by 3 U.S.C. § 19 (and in a more digestible form on The White House website). Of course, this isn’t absolute: no one expects Tim Geithner to be telling Leon Panetta whether to have the Marines target the zombies’ heads or hearts. (Always go for the head shot!) So we’ll look first for agencies that should have expertise in controlling zombie plagues, then use succession as a kind of tie-breaker.

At first blush, controlling a zombie uprising/plague seems like it should fall squarely in the bailiwick of the newly formed Department of Homeland Security. DHS does not include CDC; that falls under the purview of the Secretary for Health and Human Services (see the HHS org chart here). But DHS does include the Federal Emergency Management Agency (FEMA), the folks who step in after hurricanes, floods, and earthquakes (see the DHS org chart here).

On the other hand, Janet Napolitano of DHS is actually last in line for the Presidency. Of course, HHS Secretary Kathleen Sebelius doesn’t fare that much better; she’s seventh in line of the Cabinet officials (ninth overall, after the Vice President and Speaker of the House). Still, between FEMA and CDC, it makes more sense to hold CDC responsible for controlling a zombie epidemic. FEMA does best at picking up the pieces; quarantine laws are more likely to be enforced by the military and National Guard at the direction of the President on the advice of CDC (See, e.g., 42 U.S.C. § 264 and 42 C.F.R. § 70.6).

So in all likelihood, CDC would be in charge of guiding the President’s response to a zombie apocalypse. And thank goodness Rear Admiral Khan is already planning ahead, just in case.

Now, about the legal repercussions of shooting all those citizen zombies without due process ...

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email.

Following up on the NBA Labor Dispute

2011-12-02T18:00:00.003-05:00

Before the resolution of the NBA labor dispute, we dedicated quite a few column inches to insight and analysis on the situation. Now that it is done, many fans will be content to go back to a BRI-free world, completely satisfied in the knowledge that they will get to see Kobe Bryant smiling down on them from their new Black Friday-enabled big screen during Christmas dinner after all.

However, some people are probably still interested in the business aspects of the deal. For those fans, the best analysis I have seen so far graced the pages of Grantland recently. The curious can find Vishnu Parasuraman's article here, while everyone else can enjoy most of the big guns in action in between wrapping paper fights.

The Race to the Moon: Two Approaches Light Years Apart

2011-12-02T17:33:00.003-05:00

The Isle of Man and China almost couldn't be more different. According the CIA World Factbook, one is a parliamentary democracy in Europe measuring 572 km sq whose biggest business is low tax-driven offshore banking and gambling. The other is a nearly 10 million km sq rising superpower with a market-oriented communist government and seemingly whatever business it wants.

However, despite these stark contrasts, these two nations have something in common; they are both considered to be front runners in the race to space. They can also be considered to be the contrasting sides in a referendum on funding space exploration, with approaches differing almost as much as their CIA profiles.

The Isle of Man has stimulated its space program by providing an accommodating business environment where innovators have been able to headquarter and work on development. Despite a lack of government spending, the favorable tax regime has allowed private companies to flourish. Meanwhile, the Chinese program is backed by the wealth of the state, and is seen by the government as a prestige piece in the nation's development plans, not unlike the NASA program was for the US during the Cold War.

Ah, the US. Some may be wondering where this pioneering nation of space travel fits into the picture. Well, the US has been making moves as well. In the absence of a solid plan to the return to the moon, NASA is rather in the process of developing rules for moon tourism that it will have no legal or practical ability to enforce. And people say America is a superpower in decline...

Friday Funday...

2011-12-02T15:53:00.000-05:00

BCS Proven to be as Skewed as We All Knew it Was

2011-12-02T15:32:00.002-05:00

After our earlier post on what 'percent' correlates to certain income levels, we found another story on the Real Time Economics blog that might be of interest to our readers. The conclusion is that the BCS is every bit as skewed and open to manipulation as college football fans have intuitively known it to be since its inception. To find out how the authors of the study highlighted in the post came to that conclusion, click here.

What Percent are You?

2011-12-02T15:17:00.001-05:00

With all of the ongoing talk about 'The 99%' 'The 1%' and who is representing who, it might be helpful for readers to know just what category they fall into. Although it doesn't account for things like regional costs of living or the fact that not every tax filing unit is the same (not an insignificant problem in my opinion), this calculator at the Wall St. Journal's Real Time Economics blog does nonetheless does provide some food for thought.

If nothing else, Friday afternoon time sucks on economics blogs somehow feel less wrong than playing solitaire or Farmville...at least in this humble blogger's opinion.

Tip of the cap to J.N.

Terrorists =/= Bloggers?

2011-11-30T22:53:00.001-05:00

A CBS affiliate in Connecticut reported yesterday that Joe Lieberman, Senator and Chairman of the Committee on Homeland Security and Governmental Affairs, has asked Google to ban terrorist's writings on its Blogger platform. For those who are not necessarily blog-savvy, that is the platform you are reading this post on. It's ease of use and simplicity has brought blogging to the computer illiterate masses, including home chefs, armchair philosophers, amateur economists, and, well, homegrown terrorists. According to Lieberman, doing so would put Google's Blogger policies more in-line with those of other its other platforms, such as YouTube, on which it has banned terror-related content.

There are at least two major concerns that many have with Lieberman's approach. The first is obviously the potential impingement on First Amendment rights. While these rights are of course not without limitations, they are nonetheless some of the most carefully protected freedoms in America. Potential violations of freedom of speech, religious freedom, freedom of the press, freedom to protest, all of which fall under the protective umbrella of the First Amendment, are implicated in Lieberman's approach

There is another concern that is less obvious, but also important; banning terrorist's blogs would create the unintended consequence of taking away a proven tool in locating notoriously difficult to find homegrown terrorists (Lieberman's letter ironically notes that a recent terror suspect was tracked down in part due to his blog).

Americans strongly backed the War on Terror in the wake of 9/11. Support has been eroded by the PATRIOT Act, the TSA and other intrusive government initiatives. Governmental mandates to private actors to ban words are not only unconstitutional, but as a practical matter they erode both the tools to fight terrorism and public support for important and valid anti-terror initiatives. This is a bad combination in a world where terrorism is still a clear and present danger.

The War on Drugs, In the Style of Satire

2011-11-30T22:03:00.003-05:00

One of the great pleasures of running BlawgConomics is the ability it affords me to showcase thought-provoking and interesting content by some colleagues and friends of various political and ideological persuasions. I often find myself wishing that there were more fora for thought and discussion on the internet and elsewhere that provided similar opportunities; media where discussion on topics of the day didn't degenerate instantaneously into name-calling and partisan sniping. Until then, there is BlawgConomics.

Today we are carrying on our proud tradition of featuring the best and the brightest by introducing our readers to Mr. Robert Morris, a recent law school graduate who also goes under the tag of MoFreedomFoundation. Mr. Morris' MoFreedomFoundation avatar is an attempt to explore the facts behind The War on Drugs.

Students of both legal and economic theory will be familiar with various arguments for and against The War on Drugs. Though generalities are tough to make on a topic which is so socially, ideologically, and politically charged, it can nonetheless be argued that economists (and proponents of a law and economics approach) are more likely to be against The War on Drugs than those coming from a straight legal tradition. The former camp looks at the numbers behind what has, in their view, been a disastrous effort while the latter is more likely to cite notions of retribution and deterrence in support of drug regulation.

Mr. Morris falls unabashedly in the group which would consider the drug war to be a spectacular failure from what I suspect he would agree is a fairly standard libertarian viewpoint. That he manages to do so with a bit of dark humor is all the better from our perspective. Part 1 of MoFreedomFoundation's expected three-part series on The War on Drugs can be found below. Meanwhile, Mr. Morris' highly- (albeit lightly-) rated authorial debut can be found on Amazon here.

Economic Ignorance Knows No Idealogical Bounds

2011-11-28T23:35:00.000-05:00

The other day Ilya Solmin at The Volokh Conspiracy had an interesting article discussing a recent set of studies on political affiliation and economic savvy. In short the authors of the studies, Zeljka Buturovic and Dan Klein, looked at how people who identified with the major US political parties scored on basic economic tests. I can save you the trouble of reading through the article; it doesn't matter if one is a Republican or a Democrat, both groups are biased and economically illiterate. Although, considering the recent track records of those who would undoubtedly do substantially better on such tests, perhaps economic illiteracy isn't the worst thing in the world...

Can F1 Make it in North America?

2011-11-28T23:17:00.002-05:00

In this post we turn to the world of auto-racing, continuing a recent series of sports-related pieces. Among these included an article on the decline of boxing, Mike Azmera's excellent debut discussing the economics behind the NBA lockout and another article discussing fan indifference with respect to that very same labor dispute. Though this is a lot of sports in a little time, it is hardly a stretch for our site; it is often the case (as both sides in the NBA dispute made quite clear) that professional sports are at least as much about economics as they are about actual games.

Uncommonly for a blog based in the US, our auto-racing discussion will focus on Formula 1. This is no throwaway statement; NASCAR is the self-proclaimed 'fastest growing sport in America' and to the extent that print and tv space are spent on auto-racing in the US, they are spent on NASCAR. It has made its way onto ESPN telecasts and the stars of the sport are as bankable as any of the big names from the MLB or NFL.

However, despite this clear ability of motor sports to capture the hearts and wallets of Americans, there is a decided lack of interest in Formula 1. Therefore we would like to take a look at the slightly incongruous question of whether or not this global mega-brand can succeed in one of the World's biggest markets.

I was personally in attendance at a Formula 1 race held in North America. It was the 2008 edition of the Canadian Grand Prix, the last race held before F1 took a one-year hiatus from the continent. Though Formula 1 has returned to Montreal since, with races being held in 2010 and 2011, the circuit has not featured in the US since 2007 when it visited Indianapolis.

This is scheduled to change with races set for Texas and the New York metro area over the next few years. But will Americans care? From personal experience, and with the benefit of having attending sporting events around the globe, an F1 race has an incomparable energy that Americans should love. Race weekend is a huge event, the stars are recognizable, the names of the makers involved come straight from many boys' wall posters.

However something is apparently missing from the offering. Maybe it is a lack of connection with drivers who are only in the States once every few years. Maybe the sheer size of the US means that even an annual visit to, say, Indianapolis, isn't enough to get fans from the major east and west coast markets interested. Maybe there are already too many sporting events on the television, and most Americans wouldn't trade football time for F1 time. I do not personally know what the reason is, much less the solution. What I do know is that F1 is missing a huge growth opportunity in the US, and two races over the next few years is probably not the salve, no matter how excited your humble author might personally be...

The Public Welfare Investment Authority and Solar Development

2011-11-28T22:50:00.003-05:00

With all of the recent discussion about the Solyndra fiasco, many of our naturally curious readers have undoubtedly spent some time considering exactly how the government is involved in the developing solar industry. Among the more attention-grabbing ways it is involved would of course be the now infamous loan guarantee system. There are also various tax credit and grant schemes at the federal level as well as locally. However, there are other means by which the federal government has encouraged investment in the solar industry which carry less direct risk.

One of the tools in this multi-pronged approach is the use of regulatory schemes to encourage private investment in solar projects. In other words, in addition to the enticements of tax breaks, the government can also stimulate behaviors by creating loopholes in rules and allowing certain activities which would otherwise be forbidden. One notable example of this approach is provided by the Office of the Comptroller of the Currency (OCC)'s public welfare investment authority.

First a little backdrop. Under the National Banking Act, banks are restricted from making certain types of investments. Typically this would foreclose large investments in developing industries which could be seen as speculative. Solar projects would certainly fall into this category at this time. However, one clause of the Act allows for higher thresholds for investments which encourage the public welfare. Specifically, banks are allowed to:

"...make investments directly or indirectly, each of which is designed primarily to promote the public welfare, including the welfare of low- and moderate-income communities or families (such as by providing housing, services or jobs)."

Under certain circumstances, (specifically with OCC approval), such investments could equal a sum of up to 15% of capital stock paid-in and unimpaired and 15% of the association's unimpaired surplus fund. While this might sound a little complicated, suffice to say that there is potentially a lot of money which could be invested under the parameters of this clause, particularly under an accommodating OCC.

In short, under OCC oversight banks can make significant investments in solar if they can prove that the investments help the community. Though such a claim could undoubtedly be debatable given the specifics of a project and the way the investment authority is interpreted, it is unsurprisingly not a very heavy lift under the current administration (whatever one thinks of the strategy, it is a good example of how ruling parties can impact policy without changing laws if nothing else).

To highlight some success stories, the OCC released a newsletter in July discussing solar investing under the public welfare investment authority. While focused on a banking audience (i.e. the article on getting green projects to qualify for CRA credit), the newsletter also includes some interesting resources and articles that anyone interested in this newsworthy topic might enjoy. The full newsletter can be in .pdf here while individual articles from the document can be found here.

The NBA: Where Fan Indifference Happens

2011-11-12T18:35:00.004-05:00

The other day, we posted an article which described some of the business aspects behind the current NBA work stoppage. However, one thing that wasn't discussed in Mike Azmera's otherwise excellent piece on the NBA lockout was the potential fallout which would occur if games are not played very soon. I think that one of the reasons that Mike did not contemplate such a scenario is that he hopes that games will start soon.

And they will start at some point. At some point, players will miss checks (and maybe even the competition), owners will play ball, and a deal will be done.

However, the lockout has damaged public opinion of both sides. Even if games are played this season (an uncertain proposition), there has already been significant time off and momentum has been lost from a strong playoffs this past spring. The question has to be asked: when the NBA comes back, whether this season or the next, will anyone be watching?

Over a year and a half ago, we posted what now seems to be a rather prescient piece on one reason why the NBA should avoid a lockout. Among other things we wrote:

...over the next few years, both the NBA and the NFL face major labor issues. Strikes and lockouts are not unfamiliar to fans of America's major sports. Some of the biggest, including the baseball labor stoppage in baseball in the 90's and the lost year in the NHL a few years back, arguably caused at least medium-term pain to the leagues. Baseball's labor stoppage hurt ticket sales for a few years until a certain steroid-fuelled home run craze brought casual fans back. Arguably, the NHL has yet to return to its peak pre-strike popularity, though the recent Olympics is sure to help. Despite inevitable rebounds, however, even short- to medium-term dents to profits and popularity would be damaging to the NFL and NBA.

There could be no better study in contrasts than the NBA and the NFL with regards to how labor problems have been handled this year. The issues might not have been as contentious in pro football as they are in basketball, but there were some serious differences between the sides going into the current season. However no one involved wanted to see time missed, mainly because of what we noted above; some people get fed up with leagues after strikes, some people simply find other things to do.

Considering the fact that the NFL is far more popular than the NBA currently, and could have weathered a post-strike storm perhaps the most easily of all the major US sports, the fact that those associated with pro football heeded this warning should have been instructive for those involved with the NBA. Clearly it wasn't, and both the players and the owners have, probably in their respective minds justifiably, dug in. While there is still hope for a season, it will at best be shortened. At worst, in a scenario which doesn't seem that unlikely based on recent player comments, the '11-'12 season will be lost.

Changing gears a bit, we continued in the conclusion of that post:

...no one could make a logical argument that soccer is anywhere close to supplanting basketball as a major sport in the US. Pro football is even stronger. However, soccer has a foot in the door, and it may only be a matter of time before it steps all the way in. The surest way for the major sports in the US to ensure that soccer is one day counted among their number is to engage in damaging labor stoppages. In addition to the obvious factors, this is another reason why ownership and players representatives should try their best to avoid stoppages while there is still time.

This was a fairly strong statement, and it is not clear that it has held true; in all likelihood, NBA fans aren't turning en masse to the MLS playoffs or the English Premier League to satisfy their hoops cravings. However it is nonetheless true that people have been finding things to do in the absence of the NBA. And the longer the league isn't in session, the more things casual fans can and will do to fill the gaps. Whether it is indeed watching soccer, other pro sports in America, college hoops or Australian Rules Football or even reading this blog that people do is really inconsequential to the broader point; the longer the NBA is away, the less people will miss it.

Or, in other words, if the NBA 'happens' and no one is there to see it, will it still make a profit? Lets just say that there is a very good chance that a 50/50 split of revenue isn't going to mean what the parties involved think it means by the time the numbers are calculated...

The NBA: Where an Overpaid Middle Class Happens

2011-11-10T18:43:00.004-05:00

By Michael Azmera

I would like to quickly thank my friend Josh for letting me talk to you about one of my favorite things, basketball, and about one of my least favorite things, the current NBA lockout.

The last time that we saw an NBA game, we watched Dirk Nowitzki join the ranks of the great players who have won an NBA championship. He joined Jordan, Kobe, Magic, Bird, Duncan, Garnett, Olajuwon, Moses Malone, Isiah Thomas, and Shaq, all players who are either in the Basketball Hall of Fame or well on their way there. All of these players were—and some still are—among the very best players in the NBA during their careers.

Excluding the 2004 Detroit Pistons as the lone exception, every NBA champion since the 1980 Lakers had at least one of these players on its roster. All of them have been able to boast at least one of the 10 best players in that season’s NBA. The rule is pretty simple: Teams with elite players can contend for NBA championships. Teams without these players just fill out the rest of the league. Micky Arison, owner of the Miami Heat, looked back on 31 years of recent NBA history, noted this rule, and built a team around a pair of superstars. The Heat narrowly lost in the 2011 NBA Finals, essentially proving this rule along their way.

However they did not win it in the end; the Dallas Mavericks did. And in comparing the champion Mavericks with the runner-up Heat, the difference is obvious. The Mavericks surrounded their superstar with a good team of complimentary players; the Heat splurged on superstars and filled out their roster with an affordable group of supporting players.

Now give me a moment to explain why this is relevant to the current labor dispute. As fans, we like to think of winning championships as the ultimate goal of team owners. But owners also want to turn a profit. As such, they need to generate enough team revenue to exceed team expenses. NBA teams generate revenue, among other things, through ticket sales, through TV contracts, and through merchandise sales. Put simply, NBA teams generate revenue when people watch games. So one goal is to win the games; another is to get people to watch the games.

People watch two types of teams: Teams with title hopes and teams with exciting players of the Blake Griffin variety. Thus, NBA teams need superstars if they want to bring in revenue without winning. And title contenders have superstars on the roster, so it follows that in either case, NBA teams need superstars to bring in revenue, period. Even though role players are integral to building winning teams, they don’t generate revenue. And so it doesn’t make sense to pay them what they’re currently paid.

If there is one flaw with the current NBA business model, it is that the NBA labor market incentivizes owners to overpay mediocre players and allows these players to underperform on their contracts without real consequences. Of course, ownership wants to change this, and that is why the biggest demands made by the owners in the current labor dispute will primarily affect these mid-level type players, not the top tier or the bottom tier. Of course, players want it to stay as it is. Both sides have obviously rational stances, and that’s where the conflict stands. I will try to put this in context by explaining a few of the biggest issues:

Basketball Related Income (BRI): The big one. Obviously, this feels like something that will impact all players equally. But that is not the case. At the end of the lockout, the maximum salary is likely to stay the same. The best players will continue to be paid the maximum salary. There will be the same number of roster spots, and the same players will continue to fill the last spots on rosters. And then the players who barely make it onto rosters will continue to get the minimum salary. Since the highest-paid players and the lowest-paid players will continue to be paid the same as they are now, it is clear that any decrease in the players’ BRI share will come from the mid-level guys.

Maximum Contract length: Owners want to shorten the maximum contract lengths; players want to keep them where they are. Shortened contracts are not an issue for players who perform to the level of their contracts. (Of course, some players will be injured during the term of their contracts and see their market value fall. But unfortunate injuries would damage some careers under any system.) The only healthy players who would be hurt by shorter contracts are the ones who don’t earn their pay. The others will keep signing shorter contracts, one after the other.

Salary Cap Exceptions/Sign-and-Trade Rights: Without going too in-depth, current exceptions allow teams to exceed the cap to spend more money on players. Sign-and-trades allow free agent players to change teams without taking pay cuts, and they allow teams that lose free agents to recover some assets for their losses. These are examples of issues that relate more universally to players across all levels, and owners are trying to exert more control over them.

Time's 25 Best Financial Blogs

2011-11-08T21:22:00.002-05:00

Readers can click here for a list of what Time magazine has determined are the top 25 financial blogs. Eagle-eyed readers will note, in what must be a first for the site, that this is the second reference we have made to Time in one day.

Some might wonder why we keep posting other news site's 'best' lists when we aren't included on any of them. First off, it makes for an easy post. Secondly, it is well-established to be good SEO practice. But most of all, we are still holding out hope for inclusion on the ABA Blawg 100. We figure that if the posting of such lists is de rigueur for the site, it won't seem louche if we make the list and immediately re-post it.

After all, whether one is making decisions based on a specific law or regulation, making investments in the financial markets or simply sitting down for a read of their favorite blog, it is often beneficial to have to have proper expectations for what one might find.

Smokin' Joe and Boxing's Decline

2011-11-08T20:44:00.002-05:00

Smokin' Joe Frazier's death at a relatively young age drew an outpouring of emotion from those who covered him from the press box and faced him in the ring (even Ali, which undoubtedly brings a wry smile to the face of anyone familiar with their history). Family members, friends and fans alike have all expressed sincere sadness at his passing. And while many of the emotions expressed regarding the passing of this American sporting icon were undoubtedly brought on by a real affection for the man himself, there must have also been a sense among many that his death was another nail in the coffin for the sport he shed blood, sweat and tears for.

While we don't typically write about individuals on this site (with Steve Jobs being a notable and recent exception) the decline in boxing which is emblemized by the declining health and increasingly frequent passings of the greatest stars of the sport's not-so-distant past is also an economic story. Of course there are some fighters who still garner media and fan attention, and thus create wealth. Global stars like Manny Pacquiao are big pay-per-view draws and Vegas still buzzes like the old days when the latest lamb is led to the ring with him. However there aren't many Mannys left in the sport and very few names in the boxing world generate enough interest to merit high ticket prices. Only 'true' boxing fans tune in to most bouts.

While this state of affairs has been enough to keep the sport on life support for some time, the numbers of 'real' fans are dwindling, and there is hardly such thing as a casual fan in the sport anymore. Most Americans probably couldn't name the heavyweight champ (not even one of them) at any given time. Likely even fewer have watched a fight any time in the past year. Some might say that this is a sign of the times, that such violence doesn't have a place in America any more. The rise of mixed martial arts of course renders such sentiments invalid.

It is probably rather a grab bag of issues which has led to boxing's decline. A lack of star power, an unwieldy number of governing bodies, corruption, high prices for tickets and televised events, a lack of accessibility, the rise since boxing's hey day of other sports such as football; all these factors and more have likely contributed to the decline of the sport.

However, this wasn't always the case. To have a decline, something must have an apex, and boxing's apex was as high as the Rockies. While the sport's decline has been precipitous, within the lifetimes of most of our readers Mike Tyson appeared in Pepsi commercials. And within the lifetime of some of the older readers of the blog, it was arguably the biggest sport in the country. Big title matches used to be bigger than the Super Bowl. Stars of the sport were social ambassadors. Champs graced the covers of magazines like Time and the front pages of the biggest newspapers in the land.

All of which leads to the punchline. Though of course the business and the essence of boxing are both different from many of the other popular sports in the US right now, it is also true that those involved with the sport over the past 25 or so years have presided over its downfall, taking it from a top sport and a very lucrative business to an almost unsalvageable mess. It might behoove those involved in a certain labor dispute to remember just how big boxing used to be, and just how fast the sport has fallen as they plot out the path of their sport. Otherwise, there is a great risk that someday people will wake up and just not care.

Easterbrook on Groupon

2011-11-08T19:33:00.002-05:00

We just loved the following comment from Gregg Easterbrook's Tuesday Morning Quarterback column today (I hope Mr. Easterbrook doesn't mind the reprint):

Groupon Issues Coupons for Its Own IPO: Groupon just had a successful IPO, raising $805 million. Eleven months ago, the same company turned down a $6 billion purchase by Google. Had Groupon accepted the Google proposal, its early investors and founding management would have $6 billion; instead, following the IPO they are holding a much smaller sum. True, they also still hold equity, and could wind up ahead in the long run. Or they may end up way behind: Your columnist noted 11 months ago that Groupon someday may wish it had accepted the Google offer. At any rate, rather than getting $6 billion in 2011, Groupon insiders got $805 million. Groupon issued discount coupons for itself, offering 87 percent off!

Mr. Easterbrook is correct to point out that there is a chance that those involved will more than make up for not accepting Google's billions at some point. However considering typical early investor expectations for exit, the time value of money, and signals to the contrary being provided by the supply/demand for shares, it seems about as likely as law school hire rates being uninflated.

Americans Voting with Their Feet

2011-11-06T07:45:00.004-05:00

It is yet to be seen whether the 'bank transfer day' which took place yesterday and was supported by the Occupy Movement will have any noticeable impact on the bottom line at big banks. The idea behind the day was that transferring funds en masse from the largest financial institutions to local banks and credit unions would serve as a protest to fees. The idea has also obtained a punitive air about it, with some advocates suggesting that it could hurt the people who were responsible for the financial crisis.

In reality, it is of course more likely to be front-line workers, themselves struggling to get by, rather than the masters of the universe who will be harmed if profits decline at the nation's largest financial institutions. However, it would only be right to commend the protestors for doing/advocating for something that is potentially of substance after all of the criticism with regards to their lack of direction we have noted in the past.

However, even if the bank transfer day 'works', it isn't clear that it should necessarily be a notch in the Occupy Movement's belt. Indeed, it was the alliterative Kristen Christian, a small-business owner in Los Angeles who had the idea originally. Occupy only picked up on the Facebook-driven concept once it was fully formed.

Additionally, according to the Financial Times, many Americans have already had their own personal bank transfer days; the paper reported this weekend that over 650,000 Americans have joined credit unions in the past month, compared with about 600,000 in the entire previous year. This influx of members has led to an estimated $4.5 billion dollars shifting hands from big banks to local institutions. Even in a world of $700 billion dollar bailouts, that is nothing to sneer at and is perhaps the main reason behind some banks scrapping previously announced fee increases.

If the current trend which has seen money flowing from the national banks to local institutions continues, Occupy will no doubt claim a victory. Whether or not it is rightly claimed will remain to be seen. Until then, however, we would like to think that this trend is emblematic of something simpler and more 'by the book' than a social networking or protest movement, that it is just a good old fashioned case of Americans voting with their feet. It is somehow comforting to know that good old micro-econ still matters in these topsy-turvy times of ours...

Remember remember...

2011-11-05T22:59:00.006-04:00

...the fifth of November

Gunpowder, treason and plot

I see no reason why gunpowder, treason

Should ever be forgot

- Traditional English Nursery Rhyme

Though Blawgconomics did not suppose that the Guy Fawkes mask would ever attain more popularity in the United States than it did after the release of the movie 'V' for Vendetta, the rise of hacktivists Anonymous and the adoption of the symbol by some in the Occupy movement have proven us wrong. For anyone who is unfamiliar with why, exactly, the mask has become so popular, there is no more appropriate day than today for an explanation. From the website http://www.rhymes.org.uk/:

Words of "Remember Remember" refer to Guy Fawkes with origins in 17th century English history. On the 5th November 1605 Guy Fawkes was caught in the cellars of the Houses of Parliament with several dozen barrels of gunpowder. Guy Fawkes was subsequently tried as a traitor with his co-conspirators for plotting against the government. He was tried by Judge Popham who came to London specifically for the trial from his country manor Littlecote House in Hungerford, Gloucestershire. Fawkes was sentenced to death and the form of the execution was one of the most horrendous ever practised (hung ,drawn and quartered) which reflected the serious nature of the crime of treason.

The 'V' stands for victory, right?

It is clear that the protestors have adopted the Fawkes persona as a means to represent their anti-government leanings; nothing subtle there. However it is unclear if they are at all aware of the outcome of Fawkes' actions. For one, he failed in his mission. For another, as a result of his failed actions he endured one of the most 'horrendous ever' executions. Somehow I find it difficult to believe a mic check of the 99% would lead to either outcome being approved if put to a vote...

This Sums it Up...

2011-11-05T22:27:00.002-04:00

It will be no surprise to frequent readers that I am a fan of both Paul Krugman and Greg Mankiw. We link to both of their blogs and have referenced the work of both in posts and on the Twitter feed. Both are incredibly intelligent and both typically provide interesting contributions to the hot debates of the day. However, despite appreciating the logic and style of both, I often find myself agreeing with the latter more often than the former.

The cult of the 99% which has arisen out of the Occupy Movement has led to a virtual debate between the two which summarizes very well why I more often than not end up in Camp Mankiw. Mr. Krugman's analysis, suggesting, if I may be blunt, that education no longer matters in our society of 'oligarchs,' can be found here and here. Meanwhile, Mr. Mankiw's admittedly slightly aspirational (though factually-based) assertion that education, while no guarantee, is still one factor in ultimate success can be found here.

Call me a sucker for the system, but it must be true that education is still a factor in career success. On one hand, it is true that education does not immediately guarantee higher wages (Krugman). However, it is also true that many individuals would not even be able to get off the ground floor in our current society without a degree or two (Mankiw). Though the cost of education has soared in recent years, and though I do believe that more individuals in our society should be encouraged into trade schools and other more suitable alternatives to the typical undergraduate path, gaining an education is still a valuable proposition for the average American worker in a service economy.

Alternately, it could be that the lump of student debt I have accumulated leads me to hope Mankiw is right in a case of self-serving blindness. I suppose I will have to get back to you in about 20 years for confirmation.

Who is Responsible for Europe's Financial Crisis?

2011-11-05T22:10:00.001-04:00

Is Greece responsible for the current European financial crisis? Is it continuing fallout from the American housing bubble which has brought Europe to the edge? Perhaps the failed Lehman Brothers is the culprit?

George Soros seems to think that the answer to the query in the title is not any of the usual suspects, but rather Angela Merkel. That is the same Angela Merkel who currently serves as the leader of what by most accounts is actually the most fiscally responsible nation in Europe. For anyone who is curious about Mr. Soros' logic, video is available below:

Resources for Readers: The Oyez Project

2011-11-05T21:49:00.002-04:00

BlawgConomics has often noted its keen interest in free resources for students, professionals and average citizens in a world of expensive websites and subscription services. As we think it can only benefit our readers to know about and have access to such resources, we try to use the platform afforded by the site to help spread the word whenever we come across anything of note. In this post, we would like to highlight Chicago-Kent's aptly named Oyez Project, a multi-year systematic program dedicated to providing an accessible resource for everything SCOTUS. From the Project's 'About' tab:

The Oyez Project at Chicago-Kent is a multimedia archive devoted to the Supreme Court of the United States and its work. It aims to be a complete and authoritative source for all audio recorded in the Court since the installation of a recording system in October 1955. The Project also provides authoritative information on all justices and offers a virtual reality Tour of portions of the Supreme Court building, including the chambers of some of the justices.

The Oyez Project now offers access to more than 7,000 hours of Supreme Court audio. The aim of this latest effort is to create a public, searchable archive of all public sessions recorded in the Court since 1955. With this version of Oyez, our audio collection covers all audio from the 1968 Term through the current 2010 Term. Before 1968, the audio collection is selective.

We report voting details in every case back to 1953, thanks to data compiled by Harold Spaeth, the creator of several NSF-funded databases currently hosted Center for Empirical Research in the Law (CERL) at Washington University School of Law. We display votes using headshots of the justices. Active images signal voting with the majority, opaque images signal voting with the minority, and missing images signal no participation. The author of a majority opinion will be framed in purple, and the author of a judgment of the Court will be framed in green. More details about a justice's vote can be displayed by moving the mouse over his or her picture. For example, this is how the votes appear in Hamdan v. Rumsfeld:

You can sort the votes by voting coalitions, by seniority, or by ideology. Seniority arrays the justices left to right, with the Chief Justice in the left-hand position followed in order of service by the other justices. Ideology arrays the justices left to right from most liberal to most conservative.

This is a truly powerful tool as well as a valuable resource for anyone interested in how the US justice system functions. For anyone interested in specific resources, audio is available here and information on particular courts can be found here. Meanwhile the Project's main page can be accessed here. We have also included a link to the Oyez Project in our Other Resources section where readers can find the best in global news as well free legal and economic tools.

Freedom v. Security, Tech-Style

2011-11-05T19:06:00.006-04:00

Since 9/11, America has been embroiled in a debate about whether privacy and other related freedoms should be sacrificed at the expense of national security. From the PATRIOT Act to the sometimes heavy-handed approach of the TSA, reasonable voices have differed on just what the correct balance between these important interests is. That the relative worths of security and privacy are weighed in a constant struggle is unquestionable, only whether or not one feels that the scales are tipped in an appropriate direction on any particular topic is still up for debate.

Nowhere is this dichotomy more evident or contemporary than in the technology world. Though it was coincidental that e-banking, e-commerce and e-communication came into their own around the same time as the tragedies of 9/11, the freedom/safety debate has been inextricably linked to the tech world ever since. Some recent stories have ensured that this ongoing issue has remained firmly in the public consciousness:

The Department of Homeland Security has declared its intent to more closely monitor social networking sites for signs of civil unrest in the wake of the events in the Middle East earlier this year. According to Department Undersecretary Caryn Wagner "We're still trying to figure out how you use things like Twitter as a source. How do you establish trends and how do you then capture that in an intelligence product?"

While not necessarily related to the internet, a story out of Florida merits inclusion here due to its strong link to the privacy/public security debate in the technological context. In a case that has made its way to the Supreme Court, Florida police have made a habit of installing GPS transmitters without first obtaining warrants. While this has assisted in crime fighting efforts, detractors have noted a 'Minority Report' feeling surrounding some actions. According to Pembroke Pines Police Captain Sean Hemingway, "GPS is one of the technologies that are helping to move us forward. You can use it to take someone down in an area they don't belong, like say a gated community. Or you can watch where they go and build a case for loitering and prowling, to prevent a burglary."

In a related story, most of our readers will by now be familiar with social networking technology that allows friends to track each other via smartphones. While this has not been utilized by agents of the state to the best of our knowledge, it would seem that such a use of technology by police officials would ultimately fall under the same rules, at least as long as users intend data to remain private. However, it wouldn't be shocking to see that very debate make it to the SCOTUS on its own at a future date.

While using technology to impair military defenses in other countries might not directly impact the general US populace, many observers are watching the military hierarchy wearily for signs of what direction policy might turn with respect to cyber warfare. Among concerns include the idea that the same technologies that could be used against foreign powers could be used against the US by enemies, or even against citizens by their own government, in the future. There are also related, broader concerns related to the ongoing conversation regarding who should control the internet.

While readers might think that the idea that the military using cyber warfare against the US population is alarmist, we would remind them that kill-switch legislation is never far from debate in the halls of congress. Like other stories in this post, reasonable minds can and do differ over the relative merits of the government being able to shut down parts of the internet under certain circumstances. However, whatever side one comes out on it is undoubtable that some in the government seek and have sought this very power.

Finally, the internet has made it easier for music and video users to obtain content without paying. While most people would agree (even if grudgingly) with courts that this is an abuse of copyright law, and there could be security issues with regards to foreign piracy, privacy and internet freedom advocates are nonetheless speaking out against potential legislation that could curtail piracy activities if doing so would come at the expense of legal uses.

All of these stories have something in common; they are situations where the use of technology has created concerns in the balance between various freedoms and security. However, there are differences as well. Subjects as varied as local police work, warfare and copyright law are implicated. Therefore, like so many other areas of law impacted by the incessant progress of technology, it is not likely that the debates described herein is likely to be settled any time soon. However, it is undeniable that despite the low probability of closure in the near future, much remains at stake.

Music as a Metaphor for Social Welfare Systems (Reprint)

2011-11-05T18:02:00.002-04:00

On occasion, we reprint a story from the past when/if we believe circumstances dictate that it would be of interest to readers a second time around. After the music/e-conomy story earlier today, we though we had just such a situation on our hands. Following is a reprint of a story from late last year explaining the economics of music industries in places that aren't the US and the UK, where government subsidies, rather than music executives, are the main driving force behind nascent musical groups' development. Apologies to those who may have seen this one the first time it was posted. All I can say is that it is good to be both editor-in-chief and chief contributor...

While it is true that American tax dollars are spent on music programs in schools, and there might be performing arts centers or city orchestras which receive a slight funding boost from their respective local coffers, the federal government does not typically set aside funds for 20-somethings to globetrot in an attempt to increase fandom, and as a result, album sales and downloads.

Indeed there would likely be enough public uproar to establish a congressional sub-committee if it were someday discovered that Jack and Meg White, for example, were able to leave Detroit behind for international stardom on the back of government subsidies (that such a hearing would almost inevitably cost the taxpayer more than the initial handout is another topic for another day). Most politicians spend most of their time attempting to get re-elected, and while doing so would rather discuss local pork barrel projects with voters than explain why tax dollars were spent on kids with tattoos in tight jeans. So, of course, they build bridges instead.

Additionally, and more practically, there is already a well-established market for musical talent whereby bands with potential can contract with labels who obtain studio time, organize tours, and assist with procuring everything from equipment to, well, just about anything so long as the band makes them money. The system is similar in the UK, where for all of the empire-losing they seem to do, they still manage to produce some fine musicians. Though sometimes a band or musician might fall through the cracks, the members of the general public seem satisfied with this arrangement, especially in a world where iTunes and MySpace have made it easier than ever for them to discover new talent.

Because of the prevalence of this model in the States, some Americans might be surprised to hear that this system is not necessarily emblematic of the global approach. In many places, in addition to the record label system, the government does provide assistance to up and coming talent. For example in Sweden, bands are annually able to apply for a piece of a pie worth a few million USD. This can be utilized for various items, such as studio time and touring expenses, with the ultimate goal being the export, both culturally and economically, of Swedish music. And Sweden is far from alone; other countries which actively encourage, and financially support, rising popular musicians include Australia, Canada, Scotland, New Zealand and Sweden's Nordic neighbor Denmark among others. A non-exhaustive list of successful bands from the past few years that have benefited from such arrangements includes The Hives, Arcade Fire and Wolfmother among many other Pitchfork darlings

There are many motivations for these governments to support such cultural spending. One is a sort of new-age Panda Diplomacy, the creation of good relations via the medium of cultural awareness. Another, as mentioned above, is economic. With the ability of consumers to go home immediately after a concert and download the songs they just heard, it has never been easier to increase sales, and therefore profits, for bands in foreign lands. There is also the protection of local culture. Any American who has spent time abroad, particularly in parts of Europe, will know that local radio stations can sometimes fool you into thinking you have never even left the States. Many politicians in places that aren't America feel a need to develop the type of cultural identity that can be formed most easily around music. Other explanations include national pride in a global brand and a more liberal attitude toward spending tax revenues for cultural purposes in more liberal countries.

So, what does all of this matter? Perhaps it doesn't unless you are a Scandinavian musician or of the age/mentality where you are attending music festivals on a regular basis and therefore benefiting from these modern day trailblazers. Even if you aren't, however, the contrast is systems can nonetheless serve as a case study in different approaches to social welfare.

Under the American system, it is clear that the market does the work. Deep-pocketed record executives find the poor talent, the talent makes music the public buys, the execs and bands get rich, and everyone goes home happy. Meanwhile, under the alternate approach, the government, at least in part, funds musicians from taxpayer dollars. This makes more sense where income tax rates are higher as folks have less disposable income to spend on things like albums and, therefore, rather than become upset by government expenditure, might even expect the national government to provide funding for such things. This is more likely to be applicable in places like Scandinavia where tax rates can be as high as 50%. Such a set up would just not be prudent in America, where, for all of the bluster, tax rates remain relatively low.

Without, for purposes of this particular article, passing judgment on either system, the above paragraph does seem to encapsulate different levels of, or perhaps approaches to, social welfare perfectly; tax more and provide more, including niceties like cultural experiences, or tax less and provide less, allowing individuals to choose what their money goes to. Though some tea-partiers might disagree, many of the countries noted above for their subsidization and high tax rates also boast some of the happiest populations on earth. Perhaps then the best way to wrap this up then is to merely say chacun ses goûts...

The E-Conomy and the Music Industry

2011-11-05T17:52:00.002-04:00

Our readers would be wise to ignore the faux prophetic warnings of music executives bemoaning the pending death knell of their domain. While consumers no longer have to haul around a 10 pound CD wallet to listen to more than one album on a foray outside their homes, and while it has undoubtedly been a few years since any of our readers stepped foot inside a Tower Records, music is still very, very big business. It is simply that the nature of the business has changed. And transitioning from the Walkman to the iPod is not the only example of this. From streaming radio stations to satellite radio to YouTube, the way music is consumed, paid for and creates wealth is not so much in a state of evolution as it is embroiled in a foaming sea of change.

Rolling Stone contributor Steve Knopper has helpfully explained exactly how in a recent article The New Economics of the Music Industry. In the article, through words and graphics, Knopper explains how what music consumers pay for everything from downloads to streaming content is shared between executives, artists, songwriters and hosts. The observant will note at least one in-article correction explaining that various models exist as well as some differing opinions on actual payment schemes in the comments section. However, the broader point is that the recording industry is doing just fine, and your favorite artist is not at all likely to be facing penury any time soon, at least not any more than s/he would have been under the old system...

Though changing economics might not result in big artists losing revenue, one legend in the industry believes that the new model is leading to poorer development of new artists. Pete Townshend, perhaps taking advantage of the metaphorization opportunity afforded by both Halloween week and the buzz around the latest installation of the Twilight saga, went so far as to liken Apple to a 'digital vampire' earlier this week. At the BBC-hosted lecture he was speaking at, Townshend argued that, of the traditional functions of the record executive: editorial guidance, financial support, creative nurturing, manufacturing, publishing, marketing, distribution and payment of royalties, the iTunes system really only provides the latter two.

Of course the flip side to this is that distribution has become increasingly global. This has led to a correlated rise in opportunities, and therefore royalty payments, for some artists which exceeds any opportunities they might have had under the old system. In addition, it could be argued that the digital marketplace provides many of the other functions Townshend is bemoaning the disappearance of, such as instant user feedback to replace editorial guidance. Meanwhile, publishing and manufacturing have arguably lost their importance under the new model. In other words, things are undoubtedly changing, but it is hard to say for certain that they are changing for the worse.

Mr. Townshend may or may not be correct in the point he was trying to make. However, in either case his thoughts do provide evidence of the broader theme of today's post; the industry and its economics are changing. Those who embrace it, taking advantage of new distribution opportunities and global marketing (assuming they can hold a tune, or at least passably wail over a populace-pleasing synthesized beat as the case might be) will succeed. Some artists, including Townshend, will benefit in spite of themselves as digital services provide new sales opportunities for well-established acts. And some artists, including those who might have benefited from a helping hand under the old system, might never make it to our readers' iPods. Unfortunate for both them and our readers (in some cases) I suppose, but then success was never guaranteed under the old system either.

Variable Healthcare Premiums: Why Law and Econ Can't Tell the Whole Story

2011-11-01T19:35:00.002-04:00

Smokers and obese people use more healthcare resources over their lifetimes than people who aren't overweight or smoke. This indisputable fact has put a spotlight in recent years on the strain that those who live what can be blanket-labelled unhealthy lifestyles are putting on company-sponsored health plans. This has become ever more true in an environment with mandated coverage and ever-rising costs. As a result, many companies have recently made the decision to charge smokers and overweight employees higher premiums for insurance coverage. While this is potentially more fair to 'healthy' employees who would otherwise have to bear a disproportionate burden, it has also created far more questions than answers with respect to privacy and personal choice.

For example, should companies have the right to inquire whether employees are smokers? After all, despite it being a freedom which has been massively curtailed over the past decade, smoking is still legal. While it would be possible to avoid judgment calls by using physician-approved weight tables, should a company have the right to ask an employee their weight? What if the employee's weight gain (or inability to lose weight) is not self-induced but physiological? What about overweight smokers who nonetheless live well into old age and never place an added burden on the healthcare system? Why should they have to pay extra? After all, the very idea of insurance presupposes the averaging of lifespans and lifelong costs among a broad pool of people. Perhaps the choices of individuals in that pool shouldn't matter.

With such fundamental privacy issues involved and the overwhelming amount of healthcare legislation existing in the US, some among this post's readers will be wondering what the law is on variable pricing. According to the Reuters piece linked to above,

The programs have until now met little resistance in the courts. The 1996 Health Insurance Portability and Accountability Act (HIPAA) prevents workers from being discriminated against on the basis of health if they're in a group health insurance plan. But HIPAA also allows employers to offer wellness programs and to offer incentives of up to 20 percent of the cost for participation.

President Barack Obama's big health care reform, the 2010 Patient Protection and Affordable Care Act, will enable employers beginning in 2014 to bump that difference in premiums to 30 percent and potentially up to 50 percent.

In other words, despite the privacy issues involved, any potentially valid legal challenge available to those who are being impacted by these plans now is rapidly evaporating as America approaches implementation of provisions in what has been dubbed by some as ObamaCare. Assuming that sections of the legislation, or even the whole bill, are not struck down by the Supreme Court sometime over the next few terms, this could leave some with premiums up to 50% higher than co-workers.

Though there are issues in the realm of privacy, variable pricing arguably makes a lot of sense from an economic standpoint. In a law and economics type of analysis, it could be argued that the incentives and disincentives that variable pricing create reward cost-reducing behavior while still allowing people personal choice. In other words, added costs could provide an incentive for those who lead unhealthy lifestyles to change their ways. In another way of thinking about it, it would also provide a disincentive to begin smoking or gain weight in the first place. Particularly in a world where health insurance coverage is compulsory and health is valued, these ends are presumably desirable.

In addition to a favorable economic analysis of variable pricing, personal privacy issues can in some ways be addressed. Companies themselves do not have to be involved in the decision process at all. Life insurance contracts often require a medical professional to administer a check-up. Company health plans could do the same through independent third parties.

At this point, we have presented the notions that the law and economics analysis of variable pricing suggests that it is a positive, while privacy advocates would suggest that the negatives of such plans outweigh these benefits. Though we often advocate for the primacy of personal privacy on the site, we also think that the economics as discussed above would lead to a state of fairness. In other words, as outlined above, it is very possible to find merit in the arguments of both proponents and opponents of variable pricing plans. However, there is a third approach to analyzing such plans that tilts the scales a little more in a negative direction from our perspective; the likely reality of variable pricing.

We noted above that costs could rise by up to 50% for the 'unhealthy' plan participants. While this is undoubtedly true, practical experience would indicate that it is unlikely that such increases in costs will lead to commensurate reductions in costs for non-smokers. This is a political/corporate reality that the student of basic law and economics might unfortunately miss. In addition, despite it being conceivable that companies could have medical professionals determine who should be charged more, it is also true that, as a practical/administrative matter, companies will nonetheless be aware of who is paying more.

Therefore, in at least one very plausible (perhaps even the most likely) scenario, it would seem that individuals will face intense scrutiny into their personal lives without so much as an economic benefit as a result. When uncertain but likely unfavorable economics are coupled with a decidedly unfavorable personal privacy environment, no one wins (except perhaps insurers). Our fondness for the approach of law and economics aside, this is the main reason why BlawgConomics has to say that variable pricing is destined to be far more trouble than it is worth.

40 under 40

2011-10-26T19:15:00.003-04:00

While some inexplicable oversight led to a lack of our inclusion, CNN Money nonetheless recently went to press with a list of 'the hottest young stars in business across the globe.' 'Across the globe' might be a bit ambitious considering the US roots and/or domicile of most of the individuals listed. In addition, some might question the decided lack of members of the fairer sex on the list. And, of course, there is the snub of BlawgConomics. Quibbles aside, however, it is nonetheless a very impressive collection. Ladies and gentlemen, the 40 under 40.

Solving Congestion Problems: The Off-Peak Rush Hour

2011-10-26T19:00:00.004-04:00

Human settlements have always had congestion problems. From the very first time an individual had to look beyond a communal cave or fortified walls to find sufficient space for the activities of daily living, the areas people inhabit have been overcrowded in one way or another. If the animal kingdom is any indication, it is likely that even prior to the evolution of homo sapiens that human precursors faced overcrowding. Indeed, the search for land with sufficient resources is undoubtedly one of the factors which led to the diaspora of the human race.

The 21st century would be in many ways unrecognizable to the Neanderthals and early human cave-dwellers, but the problem of human overcrowding remains a very pertinent one. Even as populations grow in absolute terms the worst of the Malthusian predictions have been avoided. However, while the global population, unfortunate examples notwithstanding, produces sufficient food resources, is it also true that urban areas in particular have not been able to avoid problems caused by pure space limitations. These problems manifest themselves in living and working space to some extent, but they are all the more prevalent with regard to access of living and working space. In other words, the daily commute.

The very roads which governments created to get people out of cities and into suburbs are now used to get back into cities for the workday. This has led to epic congestion in many of the cities of the world. Urban planners have tried many solutions to this type of problem. Some play around with taxes as a solution, with congestion charging schemes popping up around the world. Such schemes can be based on time of day or by geographic area. Some roads have tolls. Some jurisdictions charge high excise rates on vehicles to discourage purchases. Parking restrictions are initiated and enforced. As a practical matter, some of these are above all revenue generation schemes, but each nonetheless should have a result of getting cars off the road.

Economic literature and common sense both tell us that when options are deemed to be unattractive, people look for substitutes. In the case of commuting, this means that where stimuli make car travel unattractive, people switch to public transportation. However, at some point the scales tip, public transportation becomes overused and creates brand new frustrations for customers. Any of our readers who have faced long daily commutes with a mouth full of elbow and daily dose of chronically trampled feet will need no help imagining what these frustrations might be.

So what to do? Assuming that for any number of reasons, public transportation is preferable to mass auto use, one solution would be to create more public transportation infrastructure. However, this is costly and often difficult from a zoning/planning perspective. Another solution would be to get people to use public transportation more efficiently. It is safe to assume that people spend no more time on public transportation than is necessary, so this efficiency will not come from actual use. However, it could come from what time transportation is used.

Many of our readers may not be intimately familiar with the concept, but a vast number of salaried workers still work a 9-5 shift. This is why the roads and rails of the world are so busy during the roughly two hours before and two hours after this stretch (rush hour, it is clear to commuters, is a term of convenience only). What if the traditional 9-5 were not the norm, however? What if employees arrived and left work during alternative times?

Though some urban areas have systems in place to stimulate such behavior, (off-peak pricing and congestion charges come to mind) it is still on the employer with a typical 9-5 approach to allow its employees to arrive and/or leave on an alternative schedule. Otherwise, the types of approaches which cities use now often prove fruitless. Therefore one clear solution to congestion issues would be to provide tax credits or other incentives to employers who introduce alternative hour work days.

Such a scheme wouldn't, of course, be a panacea. For one thing, global population growth has exploded over the past few generations and looks certain to continue on a positive path, meaning that more comprehensive approaches will be required in many areas. There may also be issues that would need to be worked out on the enforcement front. Some might argue that stretching out rush hour further might put even more stress on the system. On a more individual level, some people will want to continue with a 9-5 schedule for childcare reasons, ease of scheduling or the simple reason that 'that's how I have always done it'.

However, there are surely those late risers who would value an 11-7 shift, or the early birds who would value a 7:30 to 3:30. In fact, in our global economy, there may be some companies that would have compelling reasons to re-align and set a workday more in-line with that of foreign colleagues. And, as many commuters would no doubt attest, there is a 'window' for them to leave their doors which allows them to avoid the worst of the traffic, both on road and on rail, on most days. This window often happens to be open a little earlier than would otherwise be convenient. Why not make it more attractive to leave during that window? What if that window could be opened wider for everyone?

Commuting in the future necessarily has to include better infrastructure. This concept doesn't solve that problem, and it has its kinks. However, if put into place in a thoughtful way, it could be a novel, cheap and effective contributing factor in reducing congestion in many cities around the world. If any of our readers have heard of such schemes, either proposed or in practice, or have any other novel approaches to reducing congestion, we would be happy to hear them in the comments section below.

The Future of Law and Economics

2011-10-26T08:57:00.002-04:00

At BlawgConomics, we have always considered ourselves to be students of law AND economics rather than Law and Economics. In other words, we are more interested in discussing stories and ideas with economic and legal angles than analyzing everything purely through the lens of that discipline most notably championed by Judge Richard A. Posner. The distinction might be subtle, but it isn't insignificant, if for no other reason that it allows us a little more flexibility with the stories we bring to our readers.

However, just because all of our analysis doesn't fall rigidly within a Law and Economics framework doesn't mean that we don't keep tabs on the discipline's proponents. As those with an interest in the field will know, many of these individuals inhabit the University of Chicago. Some of them, including the aforementioned Posner, recently wrote about the future of their field in essays available on the University of Chicago Law's Alumni website here. For those with a surplus of curiosity but a deficit of time, blogger Josh Wright has more digestible summaries here.

The Legality of the Declaration of Independence

2011-10-23T18:04:00.001-04:00

In spite of the fact that it matters not a bit at this point, British and American lawyers met in Philadelphia recently to discuss the legality of the Declaration of Independence. According to the BBC, the arguments presented at the debate can be summarized as follow:

It was legal:

The Declaration is unquestionably "legal". Under basic principles of "Natural Law", government can only be by the consent of the people and there comes a point when allegiance is no longer required in face of tyranny.

The legality of the Declaration and its validity is proven by subsequent independence movements which have been enforced by world opinion as right and just, based on the fundamental principles of equality and self-determination now reflected in the UN Charter.

It was illegal:

The Declaration of Independence was not only illegal, but actually treasonable. There is no legal principle then or now to allow a group of citizens to establish their own laws because they want to. What if Texas decided today it wanted to secede from the Union?

Lincoln made the case against secession and he was right. The Declaration of Independence itself, in the absence of any recognised legal basis, had to appeal to "natural law", an undefined concept, and to "self-evident truths", that is to say truths for which no evidence could be provided.

The grievances listed in the Declaration were too trivial to justify secession. The main one - no taxation without representation - was no more than a wish on the part of the colonists, to avoid paying for the expense of protecting them against the French during seven years of arduous war and conflict.

Again, recognizing that it doesn't much matter at this point, I would nonetheless tend to side with the British viewpoint. The Texas hypothetical is a very persuasive one in my humble opinion, and I think that it was very clever to bring the venerated Lincoln into the debate the way they did. I also think that there is something to the idea that the grievances of colonists fell short of justifying secession. Though as an American I am happy that things worked out the way they did, it is clear that case for independence was anything but self-evident.

Income Figures Present a Warning Sign for the Incumbent

2011-10-21T16:24:00.000-04:00

If we hosted a poll asking readers to guess which metropolitan area had the highest average income last year, Silicon Valley might rate highly. However, though its well-educated residents work in potentially very lucrative ventures, the area around San Jose only came in second. Perhaps with all of the anger being directed toward Wall St. these days, it is the land of bankers which would top the list. That would be another good guess, but the New York City metro area wasn't in the lead last year either.

According to Census Bureau figures, even though nearly 11% of the area's residents qualify as 'very poor,' the bragging rights actually go to the Washington, DC area. According to Bloomberg, "Federal employees whose compensation averages more than $126,000 and the nation’s greatest concentration of lawyers helped Washington edge out San Jose (ie Silicon Valley)." Overall, the average household in DC makes nearly $85,000. Meanwhile, the national average was just over $50,000.

Sara Kline, a Moody's analyst interviewed for the Bloomberg piece, suggested that it was government spending which has enabled the area around the capital to weather the recession more easily than the rest of the nation. There is, of course, a plausible economic argument that as this government spending has helped the employment rate in DC, it has therefore boosted the national economy. Spending created well-paid jobs for federal employees, and the management of the political process created additional trickle-down jobs in the form of the lobbyists and lawyers. An economist might label this a sort of bureaucratic multiplier effect.

However, economics could also be used to point out that this was done at the expense of increasing the national debt. In addition, as a purely practical matter, it is unlikely that an angry and underemployed public would view the proliferation of highly-compensated federal jobs on the public dime to be a benefit to the economy, regardless of whether statistics could be found to support the notion. On the contrary, such jobs are more likely to be decried as excessive and another example of how government has gotten 'too big.'

It is clear that Wall Street has drawn the bulk of the ire of the American public recently. Indeed, the perception of the nation's banking establishment likely hasn't been this poor since trust busting was in vogue. However even if 'Big Government' has found a reprieve in the Occupy Movement, anger at government spending is never far from the surface. If I were one of President Obama's advisers, I would be trying to figure out a way to deflect criticism over Washington's political class. Indeed, it wouldn't be too much of a stretch to think that populist politics in 2012 could dictate the President disassociating himself from the very spending he has for so long championed.

The Personal Job Index

2011-10-21T10:32:00.004-04:00

A while back, BlawgConomics took at a look at the legal job search from the perspective of those in the know. At the end of that piece, we were able to boil down the thoughts of both erstwhile and current job seekers into a few bullets. We would note that #4 has yielded some positive results for a few friends of the site recently:

1. If you don't have a Biglaw job, offer or summer position currently, it is highly unlikely that you will be getting one. It's probably best to get over it and move on to number 2.
2. Tap into networks. Most people have been helped at some point during their lives; some of them are kind enough to pay it forward.
3. Scan the map. Things might not be much better abroad, and it is often difficult for US-trained lawyers to work abroad. However, this doesn't mean that you can't look outside your current target markets including secondary markets in the US.
4. Consider temp or contract work to get your foot in the door.
5. Above all, stay positive. This final bit of advice is not as purely practical as the others, and runs the risk of seeming almost trite when considering the realities of the current market. However it is hard to overstate how important it can be to send out that one last email or make that one last phone call.

We invited readers to add any thoughts in the comments section. While we could do the same, that would seem to be a waste of the resources that the BlawgConomics platform provides, hence this post. In other words, here is another idea for job seekers.

In this day and age, technology is an almost indispensible tool for the job seeker. Most recent seekers will be familiar with electronic job boards, email alerts, job blasts and all the other seemingly ubiquitous e-tools of their ilk. While there is an obvious potential benefit to applying directly to jobs from these sources and it is something that seekers often feel has to be a tool in their belt, it was also noted by many of the individuals highlighted in the jobs piece we did that direct writes and online applications have a less-than-stellar success rate.

Therefore, why not put the ubiquitous emails and alerts to another good, perhaps even better, use? Use them to make up a personal job index. In other words, use them to take the temperature of what particular industries and practice groups are hiring. Doing so could also help pinpoint particular geographic job markets that are on the upswing. To take a recent example, many people we talk to have been discussing the impact that recent legislation is having on the IP legal market. This anecdotal evidence is reflected in many of today's job boards and email blasts as well. In another example, our 'personal job index' also indicates that real estate firms in NYC are hiring.

Of course once you have this information, you need to do something productive with it. First off, it would be prudent to tailor your resume a bit to highlight any experience with a touchpoint to what we are calling the hot market. Then, as always, networking comes into the equation. Maybe you have a friend in a hot industry, maybe there was a lawyer you spoke to in the past whose firm wasn't hiring at that point, but could be now. Maybe it is just a better way to focus cold calls and direct writes or get your foot in the door with a temp position.

All of these tips might seem to be obvious upon reading them, but some of our readers will also have to admit that they haven't tried this particular type of approach. It might also not help readers out there who will only accept patent law jobs in downtown DC or are convinced they can still get a transactional job in midtown Manhattan. However, in this market, it would be prudent for seekers to try anything and everything that could help them to land a job.

To be completely clear, it is a tough market and 'indexing' job emails is certainly no panacea. However, our approach on BlawgConomics has been to try and help readers think outside the box rather than take the 'woe is me' approach. We hope this is helpful. As always, we invite our readers to add thoughts and additional tips in the comments section.

Another Perspective

2011-10-18T21:36:00.002-04:00

Anne Applebaum of the Washington Post had some interesting thoughts on the 'Occupy' movement in an article published yesterday. Her piece, titled 'What the Occupy protests tell us about the limits of democracy' explores the current situation and what it could mean for the political process if it is to continue without finding 'the point.' Her conclusion:

The emergence of an international protest movement without a coherent program is therefore not an accident: It reflects a deeper crisis, one without an obvious solution. Democracy is based on the rule of law. Democracy works only within distinct borders and among people who feel themselves to be part of the same nation. A “global community” cannot be a national democracy. And a national democracy cannot command the allegiance of a billion-dollar global hedge fund, with its headquarters in a tax haven and its employees scattered around the world.

Unlike the Egyptians in Tahrir Square, to whom the London and New York protesters openly (and ridiculously) compare themselves, we have democratic institutions in the Western world. They are designed to reflect, at least crudely, the desire for political change within a given nation. But they cannot cope with the desire for global political change, nor can they control things that happen outside their borders. Although I still believe in globalization’s economic and spiritual benefits — along with open borders, freedom of movement and free trade — globalization has clearly begun to undermine the legitimacy of Western democracies.

“Global” activists, if they are not careful, will accelerate that decline. Protesters in London shout,“We need to have a process!” Well, they already have a process: It’s called the British political system. And if they don’t figure out how to use it, they’ll simply weaken it further.

While I disagree that the Occupy movement will ever have the momentum or strength to topple Western democracies (Applebaum cannot think this either though she implicitly suggests it; otherwise she wouldn't mock the link to the Arab Spring so forcefully) I do believe that the Occupiers would need to tap into the mainstream political process to accomplish anything of note. As we noted in our Live from Occupy Boston piece, the prevailing ideology in the Occupy camps seem to be a confused amalgamation of socialist and anarchical thought. They seem to be run under a very loose (at best) leadership structure. In other words, it doesn't seem like such formal political outreach is in the cards.

The most likely outcome then would be that the Occupy movement will attract some more celebrities and maybe a shout out or two from a national politician. A continued proliferation of Occupied city centers could keep the movement in the news. However, that type of momentum does not seem to be sustainable and things might unfortunately have to take a violent turn for the protesters to keep themselves in the spotlight. This would surely signal the end of any political hope for the movement; people might support the protesters in polls, but when push comes to shove, Americans don't tolerate violence on their turf.

So what then? Maybe, just maybe the movement will merit a brief mention in the history books when the Obama presidency is discussed or the Great Recession is covered, sort of like a Shay's Rebellion for the Millenial generation. Maybe it will go down as one of a number of protests of the era, linked unintentionally with the Tea Party. However, without real political initiative, real political change appears to be out of reach for the movement for the time being.

An Age of Austerity or More Smoke and Mirrors?

2011-10-17T15:12:00.001-04:00

Many liberals point to budget cuts wrangled for by Republicans as the reason that the economy has not been able to recover from recession territory. Austerity, they claim, is harming growth. Meanwhile, many conservatives, particularly Tea Party-backed Republicans who were elected last year, claim that those same budget cuts have hearkened a new era of financial responsibility and smaller government which will lead the nation back to prosperity. Though it is plain to see that the ends of the political spectrum heartily disagree on what budget cuts mean for Americans, there at least seems to be some agreement that America is in cutting mode.

However maybe even this underlying assumption isn't correct. And, if it isn't, then many of either side's popular talking points would seem to be invalidated. According to Treasury Department data noted by investors.com, it appears that both federal and state spending are actually higher year over year. This, of course, doesn't account for the fact that potential cuts have yet to kick in. However, it does provide a basis to both discount liberal economists' claims that austerity is undercutting growth and ignore conservative politicians' claims that they have accomplished anything of note since the 'Tea Party Revolution.'

Presumably, if the agreements which have been put into place are honored, cuts are coming. They might harm the economy, they might save our government from itself. Maybe history will show that they were a crowning accomplishment for conservatives, maybe they will be viewed in retrospect as a great failure. Depending on one's economic models of choice and political viewpoints guesses can be made either way. However it is impossible to know for sure what will happen until it happens.

In the meantime, it would be nice if everyone involved could at least get on the same page about what cuts are and when they are going to happen. Until then, this confusion and obfuscation can only continue to reduce the level of educated and reasoned political dialog in the US.

Live from Occupy Boston

2011-10-14T00:11:00.002-04:00

In the shadows of The Federal Reserve building in the morning and the The Fiduciary Trust building in the afternoon lies the home base of Occupy Boston. Much like the Tea Party movement last year, the Occupy movement has sparked dialog in the country, something that I too often find lacking. Though I don't personally agree with the ideals of many of the protesters, I am thrilled to see Americans taking advantage of their right to be heard. I joined the Occupiers for about an hour last night to get a sense of the mood and speak to some of the participants.

There were people of all ages, many of them clearly veterans of various protest campaigns through their respective years. There were students, union members, clergy members, teachers and Iraq veterans all supporting the cause. The sounds were all there, from the beeps of and shouts of commuters and delivery drivers on Atlantic Ave. to the now world famous phenomenon of the 'mic check.' And of course it wouldn't be a proper protest without some acoustic guitars accompanied by kitchen utensil percussion sections.

The expected sights were there too. Tents dotted Dewey Square Park representing every color of the rainbow. Unmatched canvas tarps steeled the Occupiers' temporary homes against that night's forecasted rain storms. Guy Fawkes masks ironically outed members of Anonymous. There was even a blue VW van whose driver double parked so he could drop off some fuel for the participants. There were also the obligatory signs and flyers, dozens, maybe even hundreds of them littering the landscape. Some notables included:

- 'If you can't afford to miss work to be here, you belong here'
- 'Smash Corporate America and Capitalism'
- 'Too many problems to fit on one sign'
- 'War, economic crimes and the fight for socialism'

The protesters weren't the only characters in the story. Police officers, despite the issues and arrests from the night before, seemed far more interested in punching a clock than doing the same to any of the assembled throng. The five o'clock hour's arrival meant nearly fifty Bostonians passed by on their way to the suburbs by way of South Station every time the walk sign flashed on Summer Street. Curious passerby took a few moments to read a sign and ask a question or two, and representatives of various news outlets took turns looking the most awkward.

I wasn't merely there to observe, however. I wanted to get a feel for the voices of the movement. As a writer, however amateur, about legal topics, economic topics and the general zeitgeist, what better place to be, I imagined, than one of the outposts of a movement that has caught the attention of the world. However what I found at Occupy Boston was slightly disappointing.

True, I heard people speak with real passion about their plights. People told me how down and out they were, how much debt they had, and how angry they were with corporate America. I don't want to discount the real pain and passion I saw in some people's eyes. However despite giving participants every opportunity to articulate a strategy or desired outcome, the most I got from many of them were answers like 'restore democracy' and 'stop corporations from ruining our lives.' To the extent that some of the people I spoke to were able to provide more than these types of catch phrases, they spent their time extolling the virtues of strategies such as nationalising banks and implementing socialism. Apparently those who hate the banks also missed what happens to socialism in the hands of those in power.

Like the Tea Party, the Occupy movement is a good thing for our nation. Both of these political/ philosophical movements have gotten the nation talking, and have brought the dialog of common citizens to a level that brings patriotic pride to this humble writer's heart. And, like the Tea Party before it, the Occupy movement has clearly captured the feelings of a great many Americans. However, unlike the Tea Party protesters, the Occupiers don't seem to have any core, attainable goals in mind. As long as the Occupiers remains driven by feelings and an unrealistic desire for failed historical relics of political systems, I am afraid that the recent headline from The Times of London will continue to sum up the movement best: 'Passionate but Pointless.'

Revisiting the Double Irish

2011-10-13T18:53:00.002-04:00

As of the moment we posted this, Bloomberg's most popular story of the day was titled Google Tax Probe to Focus on Offshore Units. Ladies and gentlemen, there would appear to be no better time than the present to reprint a very popular post from a year ago which explained the Double Irish tax scheme. For those unfamiliar with the Double Irish, it is an asset transfer pricing plan which allows Google and others to book profits offshore until repatriating the cash at a later date. As this allows the companies to avoid US taxes for the time being, such plans are not particularly popular among some circles, especially when the country is desperately in search of new sources of revenue. Without further ado, what follows is an unadulterated copy of last year's posting:

Over the past few weeks the media has been buzzing over a few exotic tax schemes with even more exotic names, the Double Irish and the Dutch Sandwich. Though such strategies have been utilized since the late 90's when a liberalization of tax laws in Ireland facilitated the ability to put them in place, the special attention given to them recently is a result of an article Bloomberg published in which the author threw around some truly eyecatching numbers.

For example, Google, which was used as the centerpiece of the article, has annual global tax savings in the billions of dollars and an effective foreign tax rate of under 3%. To put this in context, one analyst quoted in the Bloomberg piece estimated that keeping its tax rate so low has added as much as $100 to Google's approximate $625 share price. In other words, if true, this would mean that tax strategies alone are responsible for at least 16% of the tech giant's market value.

So, how exactly is Google able to concurrently avoid the IRS and delight shareholders? The actual details are quite complicated and explaining the parts of the tax code that the structure rely on would be neither easy to write nor rewarding to read. However behind the creative names and the seemingly labyrinthine corporate structures are some fairly easy to grasp concepts. Essentially an American company with some form of intellectual property rights (usually tech or pharma based) licenses an offshore entity to co-produce the product. That company is registered in Ireland, but typically located in a slightly sunnier locale. That company then licenses yet another subsidiary, which is both registered and located on the Emerald Isle, to sell the product in overseas markets.

A slightly more traditional Double Irish...

For this, the selling subsidiary pays the producing subsidiary royalties. Due to the liberal offshore tax treatment of royalties as well as lower corporate taxes in Ireland, corporations can manage to take incredible percentages off tax bills on sales abroad. In toto, the transactions which take place during this process can also be referred to as asset transfer pricing.

The Double Irish name comes from the fact that two Irish subs are used, while a potential short-term transfer to The Netherlands reduces the tax bill even further and provides the name Dutch Sandwich (for a meaty Dutch transaction between two slices of soda bread). If any of our readers prefer very simple, interactive and easy to understand diagrams to verbosity, the Bloomberg article provided just such a visual which can be found here.

While most of the press Google has received for the structure has been, to put it diplomatically, unfavorable, blaming companies for reducing their taxes is akin to disliking your neighbor for taking deductions on April 15th. It is perfectly legal, and companies even negotiate with the IRS to come to terms before they establish the subsidiaries. Companies exist to serve shareholders, not pay taxes. It is also worth noting that companies are not avoiding taxes indefinitely. Indeed the Double Irish is really a tax deferral scheme rather than a tax avoidance scheme, and if the company ever wished to repatriate assets, ie return funds to domestic soil, it would owe a fairly hefty tax bill at that point. However, during a time of budget cuts and revenue problems and in the wake of an angry public, it would not be surprising to see asset transfer pricing become a more visible item on The President's agenda going forward.

Common Sense v. Civil Rights

2011-10-12T22:30:00.002-04:00

A recent story out of the Boston area has caused quite a bit of a stir in the Bay State this week. It seems that in Beverly, MA this past weekend, police officers scoured neighborhoods looking for unlocked cars with valuables inside. When they found them, they left behind notes for the owners with tips on how to safeguard their property and locked the doors. About 100 notes were left by officers during the initiative, some found by people on their way to work Monday morning whose keys had been locked in their cars.

We have heard many people sounding off on this topic, and opinions seem divided fairly evenly into two camps:

Pro

1) The police were doing something positive for the community and helping people. The did this with the best of intentions.
2) It was a harmless activity; there was no contraband found or seized. Therefore the activity wasn't unreasonable.
3) Even more resources would be spent on finding criminals if the goods ended up stolen.
4) It is just plain common sense to lock your door in this day and age, having someone point it out is helpful.

Con

1) The whole initiative was a gross violation of the fourth amendment and the police powers.
2) It was a waste of resources to have officers going around pulling door handles.
3) If any normal citizen were caught opening car doors by those same officers, they would undoubtedly have a lot of explaining to do, maybe even in court the following Monday.
4) People should be able to leave their car doors unlocked if they so choose; the state should stay out of their business.

So what do our readers think? Were the police acting as helpful civil servants in this situation? Or were they instead violating citizens' rights? We would love to hear from you in the comments section below.

Quip of the Day

2011-10-12T21:48:00.000-04:00

Technology has made all of our lives twice as easy. However life becomes twice again as hard when you have become dependent on technology and the power goes out.

Today's Quip of the Day was brought to you by Research In Motion.

What Does ATL Tell Us About the Use of Technology in the Legal Profession?

2011-10-12T21:39:00.001-04:00

Something bothers me about the fact that Above the Law is consistently the top-rated blawg on the web. Don't get me wrong, ATL is fun. I personally visit the site a few times a week, and I have even formed ideas for posts from their headlines and stories. However, and the site itself is very clear about this fact, ATL is a legal tabloid. True, topics of substance are covered, but typically as a foundation for the respective author to make pithy quips about them. For those who haven't visited the site, or think that I am brushing off its serious chops too easily, they run a legal blind dating service; this is not exactly Holmesian material.

Yet it is by far the top-rated legal blog in existence. I can't help but think that there is a lesson in that fact. Maybe first years don't have enough work to do, and spend all their time trolling each other and browbeating the site's authors. Maybe more 'highbrow' legal blogs are not written particularly well, or are too niche for large readerships. Maybe it is just a broader reflection of a society that is more interested in US Weekly than the New York Times. Maybe I am just making too big a deal of people trying to have a little fun at the expense of others. All of these factors are likely true to some extent, but it is probably also true that most lawyers don't see blawgs as a valid source of legal information.

To be clear, this applies to the blogosphere only, not technology in general. It is not technology lawyers are afraid of. Westlaw and Lexis are proof of this. Client management, document review, docketing; almost all the tools of the trade are linked to servers, the web, or the cloud at this point. Based on anecdotal evidence even the older generation has adopted ever-changing technologies with aplomb. It is just the information on blogs which seems to be underutilized.

Which brings us back to the earlier point. It is apparent that lawyers don't trust their fellow lawyers to provide useful, timely and correct information on the web. What could change this? Maybe things would change if more top schools hosted web-based journals in a blog format. Maybe more publishing of quality articles directly to the internet would have an impact. Maybe it will be a Supreme Court justice who takes the initiative and starts a running dialog with the legal community that will signal that blogs are a valid resource. Such uses of technology would undoubtedly benefit the entire legal community. Until then, I guess I will be seeing you in the ATL comments section.

Recent Developments Fail to Bring Closure to Immigration Debate

2011-10-11T23:00:00.001-04:00

As a matter of neutral analysis, illegal immigration is a tremendous problem facing America. However, the topic of illegal immigration in the US is so fraught with emotion that it is difficult to get the respective sides of the debate to even agree on what the 'problem' is. Is it a problem with the rule of law? Is it a labor supply and demand problem? Is it a pure and simple compassion problem? Some people don't even believe that the problem, whatever it might be, requires addressing. However the fact of the matter is that wherever one stands on illegal immigration, the current state of affairs is unsustainable in the long run.

Every potential solution on the continuum from mass deportation to immediate amnesty has costs and benefits associated with it. Illegals utilize resources and some percentage of illegals, however small, are responsible for crimes and social problems. One the other hand, they are also critical to the functioning of the economy as we know it. By definition they are lawbreakers. They are also human beings often fleeing from horrific situations and circumstances. These are not statements of judgment, they are statements of fact. And they are the facts of life Americans deal with daily under the current, uncertain regime of federal immigration enforcement.

Perhaps the supercharged nature of the public debate on immigration is the reason why some national politicians seem to avoid the topic like the plague. Others may pay lip service to changes, but in all cases, things never seem to progress much further than that. On the other hand, though the federal legislature clearly doesn't have such a result in mind when it avoids illegal immigration, it is clear that its inaction has led to local governments giving various strategies a chance. Many of these strategies are in themselves controversial. However, they also reflect the experiences and desires of the states where they have been passed.

On one end of the spectrum would be tough stances on illegal immigration, probably most notoriously exhibited by Arizona. The border state, finally tired of being used as a highway for drug smugglers, decided to tighten the borders with or, as it turned out, without, the help of the federal government. Though Arizona lawmakers received serious pushback from both the federal government and immigration advocates around the country, their anti-illegal immigration legislation was well-received by locals. It is also worth noting that the language of the legislation itself did not make anything illegal that wasn't already illegal under US federal law. However, under immense political pressure the law was nonetheless defanged by way of a court injunction.

On the other end of the spectrum would legislation such as so-called Dream Acts. Though the meat of each bill under this broad umbrella is predictably different state by state, Dream Acts typically provide a path to citizenship for those who immigrated as minors with some combination of time, education and sometimes military service qualifying individuals for citizenship. Under the recently passed California version, it affords in-state tuition benefits to illegal immigrants. Though all of these bills, including several failed federal-level versions, are controversial, the most oft-cited issues with them seem to be that they take opportunities away from legal residents, that they drain resources and that they encourage future immigrants to flout existing laws.

There are other proposals flowing through the national conversation as well, some more or less pro- or anti-illegal immigration. However nothing about these conversations, nothing local politicians and legislatures do will solve the problem. It will take federal action, and not just blocking laws or implicitly blessing them that will end the debate. A complete immigration policy reform overhaul at a national level is the only thing that will put the issue to rest. Such an overhaul will take earnest discussion and frank dialog with both sides acknowledging that compromises will be required. Assuming that is true, it would unfortunately seem that the illlegal immigration problem remains far from being solved.

Quip of the Day

2011-10-11T18:13:00.000-04:00

Contracting may be time consuming, labor intensive and inefficient. However, it is hardly ever more time consuming, labor intensive or inefficient than litigation...

Why Did Sargent and Sims Win the Nobel?

2011-10-10T17:12:00.003-04:00

Before we get to the meat of the post today, we felt like there would be no better time than the present to echo the words of one of our more fastidious (and slightly curmudgeonly) past professors by saying that there is no Nobel Prize in economics. There is rather a Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel which was established by Sweden's central bank in the late sixties. This differs from the Nobel Prizes in chemistry and physics which were established and funded by Alfred Nobel in his will in the late 1800's. Nonetheless, as the honor is awarded by the same body, is typically referred to as the Nobel Prize in Economics by everyone from your grandmother to the awarding committee, has the name 'Nobel' in the official name and is, like the others, incredibly prestigious, public confusion can be forgiven.

For those who haven't been following news today, the stimulus for that short anecdote is that the winners of the 'not' Nobel (in the words of the aforementioned professor) were announced today. Thomas J. Sargent of NYU and Christopher A. Sims of Princeton were the recipients of the honor this year for their work on how shocks and more systematic changes impact macroeconomic variables in both the short and the long run. For those who would like more than this one-liner, we have taken the liberty of taking some select passages from today's public press release to help our readers understand the basics on Sargent and Sims' research:

The economy is constantly affected by unanticipated events. The price of oil rises unexpectedly, the central bank sets an interest rate unforeseen by borrowers and lenders, or household consumption suddenly declines. Such unexpected occurrences are usually called shocks. The economy is also affected by more long-run changes, such as a shift in monetary policy towards stricter disinflationary measures or fiscal policy with more stringent budget rules. One of the main tasks of macroeconomic research is to comprehend how both shocks and systematic policy shifts affect macroeconomic variables in the short and long run. Sargent’s and Sims’s awarded research contributions have been indispensable to this work. Sargent has primarily helped us understand the effects of systematic policy shifts, while Sims has focused on how shocks spread throughout the economy.

One difficulty in attempting to understand how the economy works is that the relationships are often reciprocal. Is it policy that influences economic development or is there a reverse causal relationship? One reason for this ambiguity is that both private and public agents actively look ahead. The expectations of the private sector regarding future policy affect today’s decisions about wages, prices and investments, while economic-policy decisions are guided by expectations about developments in the private sector.

A clear-cut example of a two-way relationship is the economic development in the early 1980s, when many countries shifted their policy in order to combat inflation. This change was primarily a reaction to economic events during the 1970s, when the inflation rate increased due to higher oil prices and lower productivity growth. Consequently, it is difficult to determine whether the subsequent changes in the economy depended on the policy shift or on underlying factors beyond the control of monetary and fiscal policy which, in turn, gave rise to a different policy. One way of studying the effects of economic policy would be to carry out controlled experiments. In practice, however, varying policies cannot be randomly assigned to different countries. Macroeconomic research is therefore obliged to use historical data. The laureates’ foremost contribution has been to show that causal macroeconomic relationships can indeed be analyzed using historical data, even in cases with two-way relationships.

Some of Sargent’s contributions were solely methodological, although he has also applied the new methods in highly influential empirical research. For instance, he has analyzed historical episodes of hyperinflation in different European countries. He has also examined the above-mentioned course of events in the 1970s when many economies initially adopted a high-inflation policy and then reverted to a lower rate of inflation. Sargent showed that the way expectations are formed by the general public as well as central banks’ understanding of the inflation process were based on gradual learning. This could explain why the decline in inflation took such a long time.

The difference between forecast and outcome – the forecasting error – for a specific variable may be regarded as a type of shock, but Sims showed that such forecasting errors do not have an unambiguous economic interpretation. For instance, either an unexpected change in the interest rate could be a reaction to other simultaneous shocks to, say, unemployment or inflation, or the interest-rate change might have taken place independently of other shocks. This kind of independent change is called a fundamental shock.

The empirical strategies proposed by Sargent and Sims are intercomparable. In order to study the impact of systematic policy changes on the economy, Sargent’s method requires specific assumptions about thestructure of the economy – assumptions that may be questionable. The assumptions underlying a VAR model, on the other hand, are more general and hold across a wide class of economic models. Researchers have a choice of method depending on the application. With detailed knowledge about the structure of the economy, Sargent’s method may be preferable, in particular since it allows a counterfactual analysis of systematic changes in economic policy. When knowledge of the field is less exact, Sims’s method may be safer.

Thoughts on the Ongoing Occupation, Etc.

2011-10-09T13:38:00.003-04:00

In the middle of last week I spent a little time thinking and writing about the Occupy Wall St. movement (meant there and here to refer to regional offshoots as well) and how a lack of focus within the movement would likely spell its demise. Since then, it has gained far more momentum and press attention, and has even led to responses from the nation's leaders. I highly doubt that anyone among the protesters read my humble suggestion, but the media has since regularly decided to sum up the wishes of the throng in the simple phrase 'end corporate greed.' Though it was likely unwittingly, it seems that the protesters have had their focus sharpened for them.

In any case, it is interesting to note just how dynamic this situation is. From a few bedraggled twenty-somethings to the current network of protests nationwide, the movement has grown exponentially. Whether or not one agrees with the message or the methods, one has to recognize that Occupy Wall St. is not going away. Indeed, though I personally discounted this association as a bit presumptuous considering what the individuals who participated in the Arab Spring were up against and ultimately accomplished, it does have a bit of that type of feel to it. I am sure many of the participants of the current movement believe that there are more similarities than the dynamism of the two movements; like the folks in the Middle East were battling against tyrannical rulers, that they are battling against the tyranny of corporate America.

I personally don't feel that the banks of the US are single-handedly liable for the current economic malaise, or that corporations are entirely to blame for every ill of the American society. As a matter of personal philosophy I place the blame for the current financial situation in the US on all of us, from those who took on mortgages inappropriately to anyone who has charged something even once that they couldn't afford, yours truly included. Nonetheless it is also certainly true that the blind drive for short-term profits is a part, even a big part, of this puzzle. It is also true that the current political backdrop enables this to happen. As it seems that politicians will be unable to effect change to this system without a little push, maybe some help from the citizenry will get them moving in the right direction.

However, the big question that I have is 'what is that help from the citizenry.' What is that 'right direction.' What is the 'blind drive for short-term profits'? In other words, what does 'ending corporate greed' mean exactly? There is no doubt in my mind that many of the participants in the Occupy Wall St. movement think that banks should be broken up, that profits should be foregone or redistributed, that politicians should have no association with them. These more or less socialist (not intended to be pejorative here, merely descriptive) or liberal ideals are spelled out clearly enough in various social media tools members of the movement have utilized. Though I applaud their enthusiasm, I cannot agree with the protesters on these fundamental points. So what, then, would I consider to be ending corporate greed?

Greed, defined by dictionary.com, is an 'excessive or rapacious desire, especially for wealth or possessions.' I would argue then that the statement 'ending corporate greed' is an oxymoron with the last two words representing a tautology. It is the aim of corporate entities to make profits for their owners. By nature, the more 'greedy' corporations are, the better they are fulfilling their function. If you 'ended' this greed, you would essentially be ending the corporate form as we know it. Of course, some in the Occupy Wall St. movement would applaud this boiled-down notion, but I for one certainly could not.

For all of their ills, corporations employ tens of millions of Americans. Their activities produce goods efficiently so that most Americans have a standard of living unparalleled in much of the world. Their profits drive the growth in retirement accounts of hardworking citizens. Their research and development produces drugs that cure cancer, materials which can go from the bottom of the oceans to the reaches of space and the food staples that feed the world. They drive charitable giving in the country and form part of the fabric of modern America. In short, they are here to stay, and I believe that is a good thing.

However, I believe that greed can be described in another way. In this other case, the greed isn't the greed of selling the most products possible, it is the greed of taking on imprudent risks. After all, selling more soap or tires or jackets hardly ever leads executives to cheat; rather it is the other 'stuff', the risk-taking without fear of failure. Maybe this is prop trading, maybe it is a new product line, maybe it is merely continuing as a going concern, it all depends on the industry.

There are a few reasons for this, or maybe a few factors which lead to it. Corporations have become more cozy with the politicians who supposedly oversee them than is prudent. I believe that banks and companies in certain industries have it on good authority that, if push comes to shove, that government will help them through rocky times. And I believe that these two factors combine to form an environment with little accountability and high moral hazard. Companies take on risks because the government allow them to, putting workers, shareholders and 'the sytem' at risk. This is not the invisible hand, it is borderline cronyism.

I would propose an end to bailouts among other things to end this moral hazard. Companies might fall in the short-term, which would of course hurt people. However over the long-term, this would provide a much healthier environment to do business in. Maybe we wouldn't have an auto industry, but maybe we shouldn't. Maybe a few investment banks wouldn't be around, but maybe they weren't functioning in a sustainable way. Maybe a lot of things would be different, but our society is close to being broken, and a change is clearly needed.*

I don't agree with the fundamentals of Occupy Wall St. I don't even wish the protesters success in many of their goals. However, I hope that the Occupiers keep at it. I think that they are provoking thought in people, and that does not happen often enough. If they can manage to become part of the national conversation, this can only be a good thing. If it leads us on the road to a healthier economy, and my vision of a free market society (even if that is not the movement's goal) that is great too. In any case, it is nice to see that Americans, whether they line up on one side of the aisle or the other, care again. The situation is in flux, the outcomes are uncertain. However, there is no doubt in my mind that Americans thinking deeply about the society they live in is a good thing.

* On a side note, ending corporate greed in this way would mean ending corporate reliance on the government. It is at least possible, though admittedly not likely, that government wouldn't have to be as large in such a scenario. In this hypothetical of means ends and results, some Occupiers and some Tea Partiers would have more in common than they would admit or like to believe. This makes it just one more example of a phenomenon we have noted in the past; political beliefs are more circular than continuous. The goals and policies of Republicans and Democrats are continuously blurred; notions of what is 'right' and 'wrong' for society are fleeting at best; the lines between capitalism, socialism and cronyism are never so solid as they seem. But I digress.

Thoughts on Jobs

2011-10-05T23:40:00.003-04:00

I didn't have the pleasure of knowing Steve Jobs. Therefore I don't have any anecdotes or personalized thoughts to share in the wake of his untimely passing. However, I believe that there might be no more fitting tribute to Apple's co-founder than to simply reflect on how much he has helped to change the world we live in over the past decade or so.

From the iPod to the iPhone to the iPad or MacBook you might be reading this posting on right now, the Apple way has shaped how we listen to music, keep in touch and obtain information. I don't think it would be overstating it to say that Apple's recent innovations under Jobs' direction have changed the very way that many Americans live their lives.

So often we get caught up in share prices and financials of companies rather than how they impact the world around them. Jobs certainly delivered on the financial fronts...in style no less. However the fact that he was able to do so while making people's lives a little better made the meteoric rise of Apple all the more noteworthy...and Jobs' life all the more memorable.

2011: The Birth of a Libertarian Utopia?

2011-10-04T09:46:00.003-04:00

It is highly unlikely in any scenario that this writer could envision that the 'unemployed angry white men' of the Tea Party movement would align themselves with the 'angry, dirty kids' of the Occupy Wall St. movement. Indeed, so different are their participants, it seems more likely that you could get a Republican politician to admit something was in his book than get the two movements to combine forces. However, it is interesting to note that they could, by working individually toward their respective goals, inadvertently create something of a libertarian utopia.

We already wrote earlier today that Occupy Wall St. lacks focus. However assume arguendo that the movement's core goal is ending favorable treatment of banks and corporations. At the core of the Tea Party was/is an aversion to Big Government. Boiled down to their cores, if both group's goals are met, their collective impact would be a small-government, bailout-free country. Just a thought, but that sounds like something approaching a libertarian-friendly sink-or-swim version of capitalism to me...

'Focus on One Thing,' or: Why Occupy Wall St. is Likely to Crash and Burn

2011-10-04T09:35:00.002-04:00

I recently posted a brief query on the Twitter feed about the ongoing Occupy Wall St. movement, questioning the lack of press it had been receiving. In the meantime, the assorted members of the social media-driven protest have pressed the issue, increased their ranks, and have made it much more difficult for the media to ignore them. The movement has also caught geographic momentum, with this writer personally witnessing a few demonstrations in Boston over the past few days. Other branches have sprung up across the nation. So where is this protest movement headed? Will the protesters have any impact on business as usual in the US?

I am a huge fan of peaceful protests. Whether or not I agree with the particular cause du jour, protest movements are a good way (maybe even the best way) for citizens to participate in the representative political process. The power of protest cannot be overstated; this year's events in the Middle East are great proof of this. Closer to home, some of the greatest social changes in US history were stimulated by protests.

Recently, the financial crisis has led to the rise of the financial system as a subject of interest to various protest movements. Our readers will no doubt be familiar with crisis-related riots in Greece (though these did take an unfortunate violent turn at times). Last fall, I witnessed a few protests in Munich, Germany that had a sign or two referencing bailouts. Similar movements have sprung up all over Europe at times since. In the US, protest movements against Wall St. seem have taken longer to materialize for some reason. Maybe the collective youth of the US is just too busy playing video games. Maybe it is hopelessness over the odds of success that has kept angry citizens at home.

The former barrier is only slightly tongue-in-cheek, while the latter is a more relevant concern. The truth of the matter is that since perhaps the Vietnam era protests in the US have been overwhemingly underwhelming in the results they produce. Even during Vietnam, it took years or protests before US troops left Southeast Asia, and I am sure that any military historians in the crowd today would debate the impact that the various marches on Washington actually had on the policy decisions of that town's occupants.

So what is the problem? Notwithstanding the example given by the Tea Party movement, to the extent that protest movements do gain momentum they typically end up devolving into a hodgepodge of various liberal talking points. For example, the recent Occupy Wall St. protests included, littered among statements concerning the malignant impact bankers and financiers have on 'the other 99%,' demands concerning everything from censorship to poverty to ending war to ending the death penalty. Such things give general detractors and anyone who disagrees with the side issues an excuse to not care.

This is perhaps the reason that the more conservative Tea Party movement was able to gain steam; unalterable focus on one thing. Somewhat ironically (and probably missed by many involved in the cause) the main success they have had in this goal was replacing old politicians with new ones. However, that was about as much success as a protest movement could reasonably be expected to have; if Occupy Wall St. similarly leads to any real political change, it would have to be considered a huge victory for participants. Without that kind of lazer focus, no matter how much energy organizers bring to their cause (which is not inconsiderate in the case of the almost month-old Occupy Wall St. movement), it is far more difficult for them to force their way into serious conversations.

This message was echoed by a recent visitor to Zuccotti Park, Susan Sarandon. Ms. Sarandon, in recently stopping by to chat with Occupiers, mentioned that her one main piece of advice to them would be to focus on one thing. The more protestors follow this advice, the more likely it is that their voices will be heard in the political process. Of course this leads to a rather glaring conundrum; the more voices that get added to the crowd, the more amplified their shouts become. However, the more voices that get added to the crowed, the greater the disparity in the issues they shout about (frankly, someone should tell them that it is difficult to take grown-ups holding balloons seriously as well, but I digress).

If the Occupiers focus on one thing; say, stopping corporate bailouts and corruption, they will increase their odds of gaining more mainstream followers, mainstream news coverage and political traction. Maybe they can even help some of their candidates of choice get elected (for example if Elizabeth Warren ultimately decides to run for something in 2012, her longstanding anti-Wall St. stance would allow her to slot in very nicely as an Occupier-supported candidate). However, until it finds focus, the movement will remain newsworthy only when its participants become arrested with little to show for it beside police records.

UPDATE: Things seem to be going well in NYC for the protesters. The message seems to have been refocused entirely on banks instead of the more scattershot approach which was being taken earlier, and union support will certainly help to swell the ranks. However, public opinion could potentially turn against the movement if much more violence occurs or it the hacktivist group Anonymous makes good on a promise to do something dramatic to the NYSE on Oct. 10. Remember...many Americans are angry with banks, but just as many have 401k plans and get very nervous when bad things happen to their retirement accounts...

Sharing a Favorite Thought from the Weekend

2011-09-26T11:31:00.001-04:00

The Lex Column in this past weekend's Financial Times had a thought that put a smile on my face. Since the salmon daily has become much better at (gasp) protecting its content lately, we will reprint the snippet courtesy of theStreet.com:

So Albert Einstein was the class dunce after all, and there really is something that is faster than light. Scientists at CERN, the European nuclear research centre, have been firing neutrinos across the Alps from France to Italy for three years. Now they tell us that these electrically neutral subatomic particles have moved "at a velocity 20 parts per million above the speed of light."

Here's hoping that the boffins are right. Einstein argued, as part of his theory of relativity, that travelling at greater than the speed of light would mean that time is going backwards. So investors will be able to return to the status quo ante: before Lehman Brothers. UBS will not have suffered that $2.3bn loss. The eurozone will not even exist. And it will have turned out that God, all along, has been playing dice with the universe.

Maybe it is the outrageously see-sawing markets (with much more see than saw...or is it the other way around?), the new threats of a government shutdown or the lack of the ability of the Fed to calm markets. Maybe it is just Monday (I only saw it this morning). In any case there is something to be said for a little bit of dark humor done well when things don't seem to be generally going in the right direction.

Loan Forgiveness = Dem Victory in 2012?

2011-09-23T17:15:00.004-04:00

If the volume of traffic that made its way to our recent posting on loan forgiveness is any indication, it is clearly a very hot topic right now. Based on the comments and feedback we received, it is also one that evokes very strong opinions in people. Most notably, some of our readers shared stories about how they have taken decades to dig out from under heavy loan burdens. Some of these readers indicated their belief that the government should step in and do something about these burdens, with outright forgiveness, debt ceilings and maximum payback periods all being mooted as possibilities.

Though loan forgiveness is not something that I would typically advocate for, some of our commenters provided numbers suggesting potential forgiveness programs could be cheaper in real dollar terms than the stimulus plans were (or indeed potential future stimulus plans would likely be). The current state of affairs which sees the federal government owning much of the outstanding student debt also ensures that write-offs wouldn't directly hurt lenders, many of whose balance sheets are just recovering from the financial crisis.

Even many detractors would have to agree that there would be undoubted economic benefits from forgiveness, at least at the individual level. Our original reason for posting about this topic was Professor Wolfers' assertion that any multiplier effect from loan forgiveness would be negligible, a statement we heartily disagreed with (while agreeing with his larger premise that forgiveness wouldn't be a good idea no less!). Many of our readers agreed through personal anecdotes that the multiplier would be much higher than Wolfers believes. Paraphrasing one reader, there is a lot that many of us could do with an extra $800 every month, and I am not referring to putting it in a savings account with a 1% APY.

Though some (including yours truly) believe that loan forgiveness is wrong on moral responsibility grounds the potential economic benefits that could be realized by some substantial percentage of the population simply being able to spend more are compelling. And, to be honest, this moral high ground feels a lot less steady after it was unceremoniously eroded by the actions that the US government has already taken in bailing out banks and corporate interests.

After all, if American citizens, albeit through their elected officials, are collectively willing to bail out bankers who took unnecessary risks, why not lend a hand to those who have tried to better themselves through higher education only to find life getting in the way of their ability to pay the price. At least that is the logic of some in the pro-forgiveness crowd.

Of course, there is a downside. In broader terms, it would increase an American debt burden which has already led to a credit rating cut. This is unlikely to appeal to a very vocal group of Americans who are against government spending in any form. Though the burgeoning debt is an incredibly sensitive and highly debated topic on both the political and economic fronts, it is almost impossible to know what adding a few hundred billion to the national debt would do. Some people believe that it would be bad. It also seems likely that it would set an unwelcome precedent for future loan takers in the inevitable event of another recession down the line. This moral hazard argument was noted by Mr. Wolfers as well, and we feel that it is more compelling than his multiplier-underpinned macro analysis.

However, while loan forgiveness is debatable as sound economic strategy, it is almost undeniable that for one group, it could be a good political strategy come 2012. As noted in the original forgiveness post, most advocates for loan forgiveness tend to be connected to the Democratic party. With President Obama's flagging approval ratings and claims that he has abandoned his liberal ideals running roughshod over reelection hopes, there are worse things that he could do than advocate for loan forgiveness.

While it would hardly be a slam-dunk to get such a plan through Congress, loan forgiveness in some form might be more palatable to Republicans than another straight stimulus plan, especially with Tea Partiers breathing down their necks. A plan developed with Republicans might be a little more heavy on total debt caps or maximum payback periods than straight forgiveness, but this would nonetheless have an immediate and measurable impact on the monthly take-home of many Americans, and that can't do anything but help Mr. Obama's reelection bid.

Whether or not loan forgiveness is sound economic strategy, moral or even possible is almost irrelevant. If President Obama's team believes that proposing a forgiveness plan will energize the base, and perhaps even the economy itself, heading into next fall you can expect it to be an increasingly hot topic of conversation whether you like it or not.

Understanding 'Operation Twist'

2011-09-22T13:38:00.003-04:00

Yesterday's 'Operation Twist' announcement by the Fed left markets disappointed. It also left a lot of people on Main St. shaking their heads and wondering what the latest Fed announcement actually means.

At its core, Operation Twist is an attempt to further reduce already historically low lending rates by exchanging shorter-termed securities for those with longer-terms. The Fed hopes that the demand it creates for longer-termed securities will drive down lending rates for things like cars and mortgages and therefore stimulate demand. However, detractors have been quick to point out that with rates as low as they are, there is not much room for the market to move. For more in-depth analysis, readers can click on presentation below which was posted to YouTube by OptionAlpha. It explains what, exactly, the strategy entails and includes charts showing what the Fed hopes to accomplish.

Potential paper jam jokes aside, here's hoping the Fed gets this right; many are predicting that this is the 'strategy of last resort' on the way to another round of quantitative easing.