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Today's tweet

@securitiesattny says "in past 5 yrs only 10% of venture backed companies exited w/ IPO" Here's why:ssrn.com/abstract=16963…

— Stephen Bainbridge (@ProfBainbridge) May 1, 2013

LIBOR case tossed (mostly)

Kevin LaCroix reports that:

On March 29, 2013, in a ruling that she acknowledged some might find to be “unexpected” in light of the substantial regulatory fines and penalties that some of the defendants have paid, Southern District of New York [Judge] Naomi Reice Buchwald granted the defendants’ motions to dismiss the antitrust and RICO claims in the consolidated Libor-based antitrust litigation. Judge Buchwald also dismissed the plaintiffs’ state law claims and some of the plaintiffs’ commodities manipulation claims. However, she denied the defendants’ motions to dismiss at least a portion of the plaintiffs’ commodities manipulation claims. A copy of Judge Buchwald’s massive 161-page opinion can be found here.

As detailed here, the consolidated litigation arises out of allegations that the banks involved with setting the Libor benchmark interest rate conspired to manipulate the benchmark. The plaintiffs – several municipalities, commodities traders and investors, bondholders and the Schwab financial firm, among many others – variously allege that suppression of the Libor benchmark reduced the amount of interest income they earned on various financial instruments. The various cases were consolidated before Judge Buchwald. The defendants moved to dismiss.

In her March 29 Opinion, Judge Buchwald granted the defendants’ motions to dismiss as to all of plaintiffs’ claims, except for a portion of the plaintiffs’ commodities manipulations claims. All of the dismissals were with prejudice, except for her dismissal of plaintiffs’ state law claims, over which she declined to exercise supplemental jurisdiction and therefore she dismissed the state law claims without prejudice.

As LaCroix explains, this probably will not end the litigation over the LIBOR scandal. Going forward, however, the more important question is whether the reforms that are being undertaken will give us confidence in LIBOR in the future. On that issue, see my article Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013). NYU Journal of Law & Business, Vol. 9, No. 2, 2013. Available at SSRN: http://ssrn.com/abstract=2209970

 

 

Pope Francis and the Economy

As a Catholic professor of corporate law, I have a deep and abiding interest in what Catholic Social Thought has to say about the economy and economic regulation. I know almost nothing about the new Pope's views on these issues, so I was interested to see this report:

According to National Catholic Reporter’s John Allen, the new pope steered clear of liberation theology — a branch of Catholic social thought which emphasizes the importance of reforming capitalist structures that disadvantage the poor — even as many of his peers in Latin America were embracing it. 

Thank God. There are few sources of more muddled thinking about the economy than liberation theology. (See Michael Novak's takedown of the nonsense).

Back to the report:

Francis also seems to be an opponent of austerity, most notably during his time as spiritual leader of Argentina when the country defaulted on its debt in 2002.

A paper by Thomas Trebat, “Argentina, the Church, and Debt,” details the church’s role in the crisis’s resolution. Argentine bishops, including Francis, had long criticized the laissez-faire policies of Carlos Menem, who was president from 1989 to 1999. “The bishops were critical of the economic model as a generator of poverty and unemployment, notwithstanding the stability it had brought to the country,” Trebat wrote.

Oh dear. Sounds like he might be one of those third way folks. The problem, of course, is that there is no third way.

And when the debt crisis hit in 2002, the church called in strong terms for a debt restructuring to take place which privileged social programs above debt repayment. They argued that the true problems in the Argentinian economy were, in their words, “social exclusion, a growing gap between rich and poor, insecurity, corruption, social and family violence, serious deficiencies in the educational system and in public health, the negative consequences of globalization and the tyranny of the markets.”

Trebat thinks this influenced the eventual outcome of the crisis, wherein the country’s creditors accepted a less devastating austerity package than many expected. “Civil society, of which the Church is a part, has a clear role to play in demanding that debt service not take precedence over human development once reasonable efforts have been expended to pay the debt,” he concludes.

Interesting. Sounds like his views here are in line with those who argue for repudiation and/or reformation of odious debt and probably also those who call for a sovereign debt jubilee. Of course, these folks rarely ponder the question of why creditors who were forced to write off sovereign debts would put good money after bad by extending new loans to debtor nations.

Trebat studied the whole church’s response, rather than just Francis’s, but comments by the new pope suggest he held similar views. Allen quotes a later speech in which then-Cardinal Bergoglio declared, “We live, apparently, in the most unequal part of the world, which has grown the most yet reduced misery the least. The unjust distribution of goods persists, creating a situation of social sin that cries out to Heaven and limits the possibilities of a fuller life for so many of our brothers.”

Wealth inequality is a major social ill. The trouble is that Catholic social thought on how to deal with it often aligns itself with left-liberal, statist redistribution policies that destroy wealth without fixing the structural problems that create inequalities.

In any event, the Church's sex and financial scandals ought to keep Francis sufficiently busy that he can leave the economy to the laity.

Corporate Law and Governance: UK: FSA responds to to Treasury Committee report on LIBOR

Last August the Treasury Select Committee published its report Fixing LIBOR: some preliminary findings: see here. The response of the Financial Services Authority was published today: see here (pdf). This contains some interesting points about the FSA's powers in respect of approved persons, and the approved persons regime, which were also recently discussed before the Parliamentary Commission on Banking Standards: see here.

via corporatelawandgovernance.blogspot.com

For my take on reforming LIBOR, see Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013). NYU Journal of Law & Business, Vol. 9, No. 2, 2013; UCLA School of Law, Law-Econ Research Paper No. 13-02. Available at SSRN: http://ssrn.com/abstract=2209970

News on "Reforming LIBOR: Wheatley versus the Alternatives"

From SSRN:

Dear Stephen Mark Bainbridge:

Your paper, "REFORMING LIBOR: WHEATLEY VERSUS THE ALTERNATIVES", was recently listed on SSRN's Top Ten download list for: Corporate Governance & Law eJournal. ...

Corporate Governance & Law eJournal Top Ten.

Click the following link(s) to view all the papers in:

Corporate Governance & Law eJournal All Papers.

Also, I have posted a revised version of the paper to SSRN that you can download here.

Abstract:  The London Interbank Offered Rate (LIBOR) is the trimmed average interest rate for interbank loans by a panel of leading London banks. LIBOR is the most widely used benchmark rate. An estimated $350 trillion in financial products are based on the LIBOR rate.

In late June 2012, a major scandal broke when Barclays PLC — one of the panel banks whose rates went into calculating LIBOR — agreed to pay $453 million in fines to UK and US regulators to settle allegations that Barclays had attempted to manipulate the LIBOR rate. The probe by multiple national regulators around the world quickly spread to include several other global banks.

In response, the United Kingdom’s Chancellor of the Exchequer charged a commission led by Martin Wheatley with conducting an independent review of the setting and usage of LIBOR. In September 2012, Wheatley released a report proposing a comprehensive 10-point reform plan. In October, the UK Government announced that it accepted “the recommendations of Martin Wheatley’s independent review of LIBOR in full.”

Even though Wheatley’s recommendations likely will have been implemented by the time this article appears in print, they are still deserving of analysis. First, changes and amendments may be necessary to further improve the process, perhaps including some of those suggested in this Article. Second, while LIBOR is one of the most important benchmark rates, it is not the only such rate. Some of these other benchmarks are already under scrutiny. Assessing the merits of various LIBOR reforms therefore may be helpful as regulators evaluate whether these other benchmark rates require similar reform.

In light of LIBOR’s systemic importance as a global interest rate benchmark and the compelling evidence of rate manipulation by panel banks, reforming LIBOR was both a political and economic incentive.

This Article explores a number of alternatives that were available to the UK government. The Article concludes that leaving the problem to market forces had failed and, moreover, was politically unfeasible. Switching to a government-supplied alternative benchmark was both impractical and unwise as a policy matter, as was installing a government agency as a replacement for BBA as the LIBOR administrator. Although vesting the LIBOR administrator with sufficiently strong intellectual property rights to ensure an adequate stream of licensing fees to provide adequate incentives for the administrator and panel banks is an important part of a reform package, but — contrary to what some commentators have suggested — is not viable as a stand-alone reform.

In contrast to the alternatives, the Wheatley Review provides a comprehensive reform package that has proven politically attractive and seems likely to significantly enhance LIBOR’s credibility and attractiveness as a interest rate benchmark. To be sure, the Wheatley regime is not perfect. To the contrary, this Article suggests a number of ways in which it can be expanded and improved. Over all, however, the analysis of the Wheatley Review herein strongly suggests that it will prove a viable starting point as a blueprint for reforming LIBOR and other interest rate benchmarks.

Keywords: London Interbank Offering Rate, LIBOR, benchmark, intellectual property, property rights, banks, financial reform

Bainbridge, Stephen M., Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013). NYU Journal of Law & Business, Vol. 9, No. 2, 2013; UCLA School of Law, Law-Econ Research Paper No. 13-02. Available at SSRN: http://ssrn.com/abstract=2209970.

It'll be the lead article in the next issue of the NYU Journal of Law & Business.

 

In which I disagree with Alison Frankel on the import of the UBS LIBOR settlement

Let me preface what follows by emphasizing that I have tremendous respect for Alison Frankel. She's one of the best journalists covering law/business matters around. But I (respectfully, of course) dissent from her recent column on the meaning of the UBS LIBOR settlement.

Frankel tees up her argument with a quick rundown of the admittedly appalling facts:

UBS disclosed its cooperation with antitrust authorities more than a year ago, so it’s no surprise that the bank was penalized, though the size of the penalty – a total of $1.5 billion to United States, UK and Swiss regulators – was certainly notable, particularly because UBS had been granted leniency for some parts of the Libor probe. But what’s most striking about the FSA’s filing on UBS, just like its previous notice on Barclays, is the brazenness of the misconduct the report chronicles. According to the FSA, 17 different people at UBS, including four managers, were involved in almost 2,000 requests to manipulate the reporting of interbank borrowing rates for Japanese yen. More than 1,000 of those requests were made to brokers in an attempt to manipulate the rates reported by other banks on the Libor panel. (Libor rates, which are reported for a variety of currencies, average the borrowing rates reported by global banks; 13 banks are on the yen panel.)

The corruption was breathtakingly widespread. According to the FSA, UBS took good care of the brokers who helped the bank in its rate-rigging campaign: Two UBS traders whose positions depended on Libor rates, for instance, engaged in wash trades to gin up “corrupt brokerage payments … as reward for (brokers’) efforts to manipulate the submissions.” In one notorious 2008 phone conversation recounted in the FSA filing, a UBS trader told a brokerage pal, “If you keep (the six-month Libor rate) unchanged today … I will fucking do one humongous deal with you…. Like a 50,000 buck deal, whatever. I need you to keep it as low as possible … if you do that … I’ll pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I’m a man of my word.”

So what does Frankel makes of this?

Everyone who has ever claimed that the financial industry is overregulated should be forced to read the final notice on UBS’s manipulation of the London interbank offered rate issued Wednesday by the United Kingdom’s Financial Services Authority. ...

If we’ve learned nothing else in the last four years, we should at least acknowledge that some people within financial institutions, if left to their own devices, will behave dishonorably and even illegally. The drive for profits in people like the UBS traders and their brokerage conspirators, as described in the FSA filing, is obviously more powerful than any qualms about morality or fear of being found out.

That’s why moaning about Dodd-Frank whistle-blowers or duplicative actions against the banks rings hollow. Insiders will abuse the power of asymmetry: They know about their own secret conduct and we don’t. We’re playing by their house rules, and regulators armed with subpoenas are the only hope we’ve got.

First, LIBOR differs from the other cases she describes in that the LIBOR process was essentially unregulated. The British Bankers’ Association (BBA) is a trade association for the UK banking and financial services industries, representing over 200 member banks.  It created LIBOR in 1986 to serve as the benchmark interest rate for commercial bank lending on the London interbank money market.

The method by which LIBOR was calculated gave banks considerable room for strategic behavior. First, because banks self-reported, there was no system for verifying their answers. Indeed, because LIBOR was based on the panel banks’ estimates rather than actual transaction data, there was nothing to verify.  Second, the key term “reasonable market size” was “intentionally left broadly defined,”  which again created opportunities for banks to make strategic tweaks in their estimates by varying what they regarded as a reasonable loan size. Third, because the panel size was relatively small, misreporting by even a few participating banks could shift the LIBOR benchmark.  Fourth, because each panel bank’s submission was made public almost immediately, it easy for banks colluding to move the benchmark in a particular direction to ensure that their partners had complied with the agreement.  Even in the absence of outright collusion, real-time publication made it possible for a single bank to make good estimates of where their submission needed to be set in order to influence the outcome of the benchmarking process.

In April 2008, the Wall Street Journal reported suspicions that some of the LIBOR panel banks were taking advantage of these opportunities for strategic misbehavior.  During the financial crisis of 2007-2008, some banks allegedly did not want to report the high interest rates they were being charged for interbank loans because they did not want to alert regulators and markets of the full extent of the economic difficulties in which those banks found themselves.  Prompted by the Journal’s reporting and regulatory pressure, the BBA undertook an expedited review to determine whether banks had been filing false reports.

In response to the concerns flagged by the Journal, the BBA in June 2008 made several changes to the way in which LIBOR was calculated. First, the number of panel members was increased.  Second, the BBA announced plans to police the accuracy of the reported estimates more carefully.  Broader changes, including changes to the definition of LIBOR, however, were rejected.  Indeed, the BBA’s critics dismissed the changes as minor tweaks unlikely to change the fundamental problems with how LIBOR was set.

In sum, the admitted fact that LIBOR was underregulated, doesn’t mean that other sectors of the financial market are not overregulated.

Second, Frankel’s trust in “regulators armed with subpoenas” is particularly misplaced in this context. During the financial crisis, both government and private sector actors viewed a high LIBOR submission as a sign of financial weakness on the part of the submitting bank. Barclays admitted to having reduced the rates it submitted so that its submission fell within the mid-range of the panel banks. Internal Barclays documents showed that top Barclays managers had expressed concern throughout the financial crisis that Barclay’s relatively high LIBOR submissions were attracting negative media attention and raising questions about the bank’s creditworthiness. This led to a directive being issued by a senior bank manager to Barclay’s LIBOR submitters that the bank “should not stick its head above the parapet.” Jun Anthony Garcia, “Fixing the Benchmark”—Wheatley Considers LIBOR Overhaul at 2, available at http://ssrn.com/abstract=2143137.

Troublingly, Barclays “released evidence that can be interpreted as an implicit nod from the Bank of England (and Whitehall mandarins)” approving of the bank’s fudging its LIBOR submissions. During the crisis, the U.K. government—like many others—was desperate “to bolster confidence in banks and keep credit flowing. The suspicion is that at least some banks were submitting low LIBOR quotes with tacit permission from their regulators.” How Britain’s Rate-Fixing Scandal Might Spread—And What to do About it, The Econ. (July 7, 2012), available at http://www.economist.com/node/21558260.

The same may have been true of other key global regulators. In the US, for example, the New York Federal Reserve Bank—then run by Timothy Geithner, who subsequently served as Treasury Secretary in the first Obama administration—reportedly was aware as early as August 2007 of possible LIBOR manipulation but failed to aggressively respond. Rachelle Younglai & Pedro da Costa, Geithner Says Did All he Could to Address LIBOR Problem, Chi. Trib. (July 26, 2012), available at http://articles.chicagotribune.com/2012-07-26/news/sns-rt-us-usa-geithnerbre86o0vc-20120725_1_libor-responsibility-for-market-manipulation-british-bankers-association.

Frankel’s regulators with subpoenas knew what was going on (or at least should have known) and did absolutely nothing. So how exactly will empowering them help? (Well, I’m working on an article to address the issue.)

Please note that in the case of LIBOR I am not reflexively opposing new regulation of the LIBOR process. To the contrary, I am currently working on an article on LIBOR reform that embraces reasonable new regulatory constraints.

But I would also remind Frankel that the chief lesson of financial bubbles is that they tend to lead to bad laws. See generally Larry E. Ribstein, Bubble Laws, 40 Hou. L. Rev. 77, 79 (2003); Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 Yale L.J. 1521, 1590 (2005).

I detail the problem at length in my book Corporate Governance after the Financial Crisis.

The history of securities regulation in both the United Kingdom and the United States teaches that new regulation is an inevitable political response to financial crises and scandals. In a bubble period, such as the one that preceded the financial crisis of 2007-2008, major regulatory initiatives are relatively rare, because interest groups like shareholders and consumers are lulled into inaction by the seemingly ever-rising value of their portfolios.  At the same time, however, the stage is being set for a post-bubble burst of regulation. In the euphoria associated with a bubble, regulators and private gatekeepers tend to let their guard down, potential fraudsters see an explosion of opportunities, and investors become both more greedy and trusting.  The net effect is a boom in fraud during bubbles, especially towards the end, when everybody is trying to keep the music going. When the bubble inevitably bursts, investigators reviewing the rubble begin to turn up evidence of speculative excess and even outright rampant fraud.  Investors burnt by losses from the breaking of the bubble and outraged by evidence of misconduct by corporate insiders and financial bigwigs create populist pressure for new regulation.

It is in the post-bubble environment, “when scandals and economic reversals occur” and grab the attention of the public, that regulators and legislators act.  This is hardly surprising, because such periods typically involve an upswing in populist anger and accompanying intense public pressure for action.  This pattern is a reoccurring phenomenon in American law, going back even before the New Deal.  Indeed, the same pattern of boom, bust, and regulation can be seen in both American and British legal history far back into the Nineteenth Century.

The trouble is that new financial regulations adopted in a post-crisis environment often “impose regulation that penalizes or outlaws potentially useful devices and practices and more generally discourages risk-taking by punishing negative results and reducing the rewards for success.”  Ribstein supra, at 83.

As I will detail in my forthcoming article, I think there is a good chance of avoiding this phenomenon in the case of LIBOR. But I don’t see why that makes the LIBOR case anything more than the exception that proves the rule.

Free Choice to Work

Apropos the debate (and growing specter of violent protest by unions and their liberal allies) in Michigan over right to work legislation, let me direct your attention to Free Choice for Workers: A History of the Right to Work Movement, by George Leef, which may be the single best thing I've read on the subject.

As Harry Hutchison explains in his review, Compulsory Unionism as a Fraternal Conceit?, 

With the publication of Free Choice for Workers: a History of the Right-to-work Movement, George Leef offers a prudential basis tied to experience, coupled with informal logic, implicating ultimate values in order to reexamine compulsory labor unions and to contest the justification offered in support of labor laws. Leef’s perspective delegitimizes compulsory unionism on ethical and empirical grounds. … Demonstrating that statutory compulsion fails to direct society down the pathway to progress, the book reveals that the road to serfdom can often be paved by bureaucratic regulation. Carefully examining history and contemporary events, this book contributes to the richly textured debate about the normative role of unions in a putatively free society. … Leef’s book provides a historical appraisal that assists society in learning from the past. The book explicates the capacity of principled ideals, embedded in fearless individuals, to trump historical tendencies favoring privileged and entrenched autocracies. Aptly appreciated, George Leef’s reassessment offers an essentially contractarian and liberal model of labor relations that rests on a vision of individual rights which have a clearly defined, independent existence predating society. From this perspective, Leef specifies liberty as a desirable good in and of itself which is placed in harm’s way by progressive ideals and constructs. In the essay that follows, … I contend that Leef supplies a strongly theoretical (if incomplete) as well as a highly pragmatic argument against the tendency to see government as the solution to the “labor problem.”

Should we repeal anti-gouging laws?

Greg Mankiw:

A great topic for class debate.  Some readings:

1. John Carney says yes. (Also, look here.)
2. Mark Thoma says no. (Also, look here.)
3. Carney replies to Thoma.

Fama on balancing the budget

Economist Eugene Fama in a selection from a fascinating interview opines that:

I heard a very prominent person say in private that we could balance the budget by going back to the level of government expenditures in 2007. The economy is currently about the size it was then. If you just rolled expenditures back to that point, I think it would come close to balancing the budget. 

Worth a try.

Fama on the causes of the financial crisis

Economist Eugene Fama in a selection from a fascinating interview opines that:

I think the global crisis was first a prob- lem of political pressure to encourage the financ- ing of subprime mortgages. Then, a huge recession came along and the house of cards came tumbling down. It’s hard to believe that without a pretty sig- nificant recession, the financial system would have come crashing down like it did. Subprime was basically a U.S. phenomenon, yet the crisis spread around the world. 

 

More on the USA's post-election creditworthiness

A reader sent along a very interesting email, which I thought I'd share with all of you:

Dear Prof. Bainbridge,

Here are a couple of other data points.

Closing CDS (credit default swap) prices on German debt = 32.67 basis points; on US debt sovereign debt = 34.74. Forget about agency ratings; the CDS market gives a much more accurate and timely view of credit quality. So right now the markets view German sovereign debt as slightly less risky than US debt despite the pending collapse of the Euro.

A number of corporates now have CDS prices lower than US treasuries. As you note, this is unprecedented. Here is what I've found:

CDSs on Samsung Electric (a Korean corporation) debt closed at about 32, the same as Germany.

Burlington Northern (Warrent Buffet's RR), CDS pricing @ 16.77. Burlington Northern is the new risk-free security. It's nice to be the chief crony in a crony capitalist society.

I noticed last week that Chevron was also viewed as safer than US treasuries but I don't remember the pricing.

A month or so ago Norfolk Southern CDSs traded at 33.70 and CDSs on US treasuries at 42.85. Subsequently, US sovereign CDS prices dropped quite a bit when it looked like Romney had a chance. I don't know what happened to Norfolk Southern.

In any event, CDS prices on US treasuries have gone up (meaning credit quality has gone down) by over 5 basis points (about 19%) since the election.

Note, however, that CDS pricing does not scale in any obvious way. Compared to the prices for German and US CDSs, the current prices for CDSs on MBIA are around 3,000 basis points per year (that means if MBIA doesn't default, you'll pay 150% of the face amount of the insured debt in premiums over the five year life of the CDS); and for Argentina, about 1,825 basis points per year. I can't find Greek sovereign CDS pricing.

Last point: in my view, default is not a likely option for the US. It's just not necessary. It is far more likely that we will pay our debts through inflation in the manner of other overly indebted countries throughout history. That risk will eventually be reflected in treasury yield but not in CDS prices, which are pure measures of default risk.

Posted with Blogsy

Obama wins, stock market swoons, but the bond market matters more

As I write this at 9:49 am of the morning after Obama's reelection victory, all of the major stock market indices are down. The Dow Jones is down 2.18% and NASDAQ is down 2.40%. It's easy to score political points with those numbers. The market is clearly spooked by (1) the prospect that continued divided government will make resolving the impasse over the fiscal cliff harder and (2) the likelihood of continued heavy-handed regulatory and enforcement practices by the Obama administration.

But there's something more important going on under the rader screen. US Treasury securities historically have been used as a proxy in finance for the so-called "risk free rate"; i.e., the theoretical rate of return of an investment with no risk of financial loss. Hence, as Matthew Philips observed after S&P downgraded the US' credit rating:

U.S. T-bonds and bills have been a proxy for the risk-free rate for decades. Without a risk-free rate, modern finance essentially falls apart, since it is the building block of most financial models. People use it for determining everything from the value of a company, to the price of an option or a bond.

Of course, the very concept of a risk-free rate has always been relative. It assumes a zero chance of default. If you want to get technical, there isn’t a zero chance of anything really. But ... U.S. treasuries are still the least risky place to put your money in the whole world. 

Not anymore, according to today's WSJ:

Treasurys have a new rival for safe-haven status: U.S. companies.

Bonds of Exxon Mobil XOM -3.42% and Johnson & Johnson JNJ -1.10% are trading with yields below those of comparable Treasurys, a sign that investors perceive them as a safer bet. It is a rare phenomenon that some market observers said could be the beginning of a new era for debt markets. It could ultimately mean some companies will borrow at lower rates than the U.S. government.

For now, just a handful of relatively short-term bonds yield less than comparable Treasury bonds. But some market observers said some fundamental changes in the financial health of U.S. companies relative to the government, including the fact that some corporations are more highly rated than Uncle Sam, suggest it could become a longer-lasting trend.

This is what four years Obamanomics has brought us: An historic reversal of the assumption that US treasury securities were so safe as to be essentially risk free. And the astonishing fact that the markets perceive some corporations to be less risky than the United States government.

One wonders what four more years will bring?

"The Redistribution Recession"

Tyler Cowen offers a qualified endorsement of a book I'm reading and enjoying very much, Casey Mulligan's The Redistribution Recession: How Labor Market Distortions Contracted the Economy:

The contributions of this book include:

1. Using data from seasonal cycles and seasonal changes to better understand supply-demand relationships during the Great Recession.  These sections are excellent and highly original.

2. Showing that the normal laws of supply and demand still held and that we were not living in anything resembling wrong-ways sloping AD curves.

3. Calculation of various implicit marginal tax rates during the Great Recession and showing their relevance for labor supply decisions.

By no means am I fully on board.  I believe he specifies the aggregate demand view incorrectly and significantly under-measures the impact of aggregate demand.  I don’t think the AD view has to imply sticky prices or completely inelastic labor demand, for instance, although one version of that view does (p.208).  I see Mulligan as underestimating labor supply composition effects and overestimating productivity growth during the period under consideration.  There are other points one can complain about and overall he ends up overstating the size of the effects he is measuring.

Still, there are only a few readable books which integrate actual empirical research with a look at the Great Recession.  This is by no means the whole story, but this is a book which anyone seriously interested in the topic should read.  People still will be consulting it after the invective against it has long since died away.

The WSJ's review opines that:

Mr. Mulligan's thesis is that, in addition to thwarting recovery with unprecedented levels of spending, the Obama administration and Congress have made unemployment much higher than it might otherwise be. To take an obvious example, Congress increased the cost of labor—and thus decreased the number of jobs—by raising the minimum wage. (In fact, it has done so three times since 2007.) On a grander scale, Mr. Obama and his policy advisers have added to government benefits in various ways—in essence paying would-be workers for staying out of the workforce. Mr. Mulligan, an economist at the University of Chicago, estimates that about half the precipitous 2007-11 decline in the labor-force-participation rate, as well as in hours worked, can be put down to such misguided generosity. ...

In short, businesses drove up productivity by shedding workers. Why? "Businesses perceive labor to be more expensive than it was before the recession began," Mr. Mulligan writes. The reason for the added cost was that easier requirements for benefits—even as the government was pumping "stimulus" money into the economy—unwittingly reduced the supply of workers. As output began to rise, firms hired fewer workers. National unemployment has stayed so high for so long because of the government's policies, not in spite of them.

By the way, Mr. Mulligan doesn't challenge the claim that a surge in unemployment benefits, food stamps and other subsidies may have been desirable to prevent hunger or severe poverty for out-of-luck families or unemployable people traumatized by the recession. He simply and inconveniently notes that, though increasing subsidies may be compassionate in the short term, it comes with costs in the long term that eventually cause more hardship rather than less.

Outsourcing FEMA

Predictably, liberal commentators are bashing Mitt Romney for having once suggested that disaster relief should be left to states and private organizations. For example:

The Huffington Post has an absolutely essential piece  noting that Mitt Romney opposes FEMA and believes disaster relief should be either left to the states or to private organizations.  There is, in his world, apparently no role for the national government.  We're not all in this together, apparently. 

Romnery probably will backtrack in the fact of such criticism, but I'd live to see him take ownership of it. After all, in the wake of Katrina, I argued that we ought to outsource disaster relief:

This proposal will shock those who intuitively regard disaster relief as a core government function, but consider how many functions traditionally regarded as public sector responsibilities are already being outsourced to the private sector. Charter schools educate many of our children. Many more of our children are educated in public schools operated by for profit educational management companies. Many prisons are operated by for profit corporations. Even as basic a government function as war making has been partially outsourced, as illustrated by the military's extensive use of private contractors in Iraq and Afghanistan.

If we can outsource war, why not disasters?

Do me a favor: Before leaving some comment about how heartless I am, at least go read the whole post. Okay?

I'll never understand the French

With the Euro-zone crisis still running hot, we might expect the French government to be doing everything it can to make its economy more efficient. Instead, here's what President François Hollande is worried about these days:

Hollande has said he will end homework as part of a series of reforms to overhaul the country’s education system. ...

He doesn’t think it is fair that some kids get help from their parents at home while children who come from disadvantaged families don’t.

The tyrrany of the lowest common denominator. The very definition of the Left.