ProfessorBainbridge.com

Fannie Mae is Corporate Turkey of the Year

Citizens Against Government Waste (CAGW) today named Fannie Mae its 2004 Corporate Turkey of the Year in recognition of how it has cooked the books in its growing accounting and corporate governance scandal.  Fannie Mae is a government-sponsored enterprise (GSE), mashed together by Congress and endowed with tens of billions of dollars worth of special privileges and exemptions.  Fannie Mae has been under scrutiny over the last several years because its securities enjoy the implied backing of the taxpayer, yet Fannie Mae (like its corporate cousin Freddie Mac) is exempt from many of the regulatory and accountability rules other major financial companies must comply with.

“Fannie Mae has used its special taxpayer-backed privileges and exemptions to leverage itself into a massive mortgage empire with virtually no outside supervision or accountability,” CAGW President Tom Schatz said.  “Now, it appears the company is showing the feathers we associate with Enron and Worldcom, putting taxpayers at enormous risk in order to receive huge executive bonuses and artificially inflate its stock price.  It is unconscionable that Congress has stood by and allowed Fannie’s corporate executives to game the system for personal gain, especially in one of the most vital and sensitive sectors of our economy, housing.” ...

In September, Fannie Mae’s regulator at the Department of Housing and Urban Development stated that Fannie Mae had engaged in “cookie jar” accounting in order to present gravy earnings to its investors, improperly accounted for its hedging transactions, and manipulated its accounting rules in order to trigger compensation bonuses for its top executives.  Fannie Mae may now have to carve down its earnings by $9 billion.  Fannie Mae, which had been operating under a voluntary disclosure agreement with the Securities and Exchange Commission, missed its deadline for filing its third-quarter earnings report because its accounting firm, KPMG, refused to certify the statement. (Link) 

Fannie Mae is a disaster waiting to happen. The trouble is that it is neither fish nor fowl. Fannie Mae's government connections insulate it from discipline by markets and investors. Worse yet, the markets believe (with some justification) that the federal government has (implicitly) guaranteed fannie Mae's debts, which allows it to also avoid by market discipline by borrowing at below-market rates. Moreover, because the board includes political appointees, it is further insulated from investor discipline. The solution is privatization. Let it run as a for-profit corporation in a competitive market, with full disclosure. If it is not privatized, however, increased regulatory scrutiny will be essential. (See an excellent paper by two economists entitled Competition for Fannie Mae and Freddie Mac.)

Update: Paul at Dog Eared Town has more, with examples of what looks like at least misfeasance.

Wal-Mart's Woes, Online Shopping, and the Economy: A Comment

Bad news at Wal-Mart panicked some observers into worrying that the holiday shopping season will be a bust this year, dragging down the economy.

Wal-Mart said sales had not met expectations in the week ended on Black Friday -- the day after Thanksgiving and one of the year's biggest shopping days. (Source: CNN Money)

It turns out, however, that the holiday shopping season is booming almost everywhere except Wal-mart:

Near-record crowds turned out for the holiday shopping season's Thanksgiving weekend kickoff, bringing with them unexpectedly robust sales gains to many malls and retail chains across the country.

Except, surprisingly, at Wal-Mart Stores Inc.  (Source: WSJ($))

This is an important story because Wal-Mart's vast size has made it a bellwhether for the retail segment and, indeed, for the market as a whole. We thus need an alternative version of the story in which Wal-mart's troubles actually indicate that the economy is doing well.

Here's one possibility that occurs to me: Whenever I've shopped at Wal-Mart, its product mix has always struck me as being decidedly down market, even as compared to other big box stores. (CostCo, for example, has a well-deserved reputation as, of all things, a fine wine merchant.) Wal-Mart products seem cheap both in price but also quality. During economic bad times, price may dominate consumer decisionmaking, which gave Wal-Mart a huge advantage. As the economy improves, however, perhaps consumers are willing to spend a few bucks more to get a more up-scale product than Wal-Mart offers.

Consumers may be getting tired of Wal-Mart's product selection, especially in hot holiday categories such as electronics, computers, apparel and athletic footwear.

"It's great if you attract lower income shoppers looking for low prices, but what if those shoppers who were really struggling between 2000 and 2003 now have jobs? They might be spending more and looking for different merchandise...maybe something Wal-Mart doesn't have," said Richard Hastings, retail analyst with Bernard Sands. ...

For example, Wal-Mart's challenge to the Sony plasma screen TV is a slightly lower-priced alternative priced at $4,935 from Tatung. "Wal-Mart doesn't have the type of brands that generate consumer excitement." (Source: CNN Money)

In contrast, returning to the CostCo example:

Costco sells more fine wine than anyone else, and doing so has become a key part of its strategy to lure more upscale shoppers. Someone who spots a deal on a 1993 Dom Perignon ($80) may also pick up a pair of Waterford goblets for $60. Exploiting such buying patterns has helped Costco to push its average checkout ticket to $109, compared with $60 to $80 at competing warehouse clubs, according to Bill Dreher, a senior retail analyst at W.R. Hambrecht. (Source: Time)

It'll be interesting to compare CostCo's sales figures to those of Wal-Mart for the holiday season as a whole. If CostCo out-performs Wal-Mart on key retail metrics like average checkout price, sales per square foot, gross margin return on inventory, or same store sales, we'll have pretty good evidence for the proposition that it is product mix that is proving to be Wal-Mart's problem.

An alternative hypothesis that bears consideration is the growth of on-line retailing. Certainly, the numbers so far for this holiday season suggest an uptick in the number of shoppers buying online:

Online shopping visits reached a record high this year on Thanksgiving Day, with the ensuing "Black Friday" coming in second, according to HitWise, an analysis firm that monitors Web traffic. Shopping and classifieds Web sites claimed 11.39 percent of all U.S. visits on Thanksgiving Day, breaking the 2003 high of 8.96 percent set on the holiday last year, according to Bill Tancer, vice president of research. (Source: Always on)

Let's not get carried away, however. The actual number of people shopping online remains quite small relative to those braving the crowds in bricks-and-mortar stores:

The day after Thanksgiving, as consumers trooped out in droves to traditional stores and malls to mark the start of holiday selling season, remained busy for online retailers. Nielsen//NetRatings reported 13.3 million people visited online stores on Friday, or 11 percent more than a year ago. EBay.com drew 5.4 million, followed by Amazon.com at 2.6 million and Walmart.com at 1.4 million. (Source: Always on)

The number of folks who braved the crowds to go the mall is ten times greater:

The National Retail Federation (NRF) reported a blockbuster weekend, with 133 million shoppers flooding stores hunting for popular electronics, clothing and music. (Source: E- commerce)

So don't go running out to buy tech stocks just yet. Indeed, the advantage of bricks-and-mortar stores may be even more pronounced than the raw figures suggest. At least some of the 13 million on-line shoppers may not have bought anything; instead, they may just have been using the Internet as a research tool:

"Even diehard holiday shoppers that weather the Black Friday crowds at sunrise know to research the Web for product selection and price comparisons before heading out to the mall," Ken Cassar, director of client analytics, Nielsen//NetRatings, said. (Source: E-commerce)

In sum, my guess is that Wal-mart's woes are unique to it rather than, as in the past, suggesting a systemic problem with the economy. I'd also guess that online e-commerce has a ways to go before it can be invoked to explain any decline in retail sales.

Update: Sean Hackbarth has an alternate theory.

Stout on Disney

My UCLA law school colleague Lynn Stout has a very thoughtful op-ed in today's LAT on the shareholder suit against Disney's board over the huge executive comp payout to Michael Ovitz. Her key point is a very important one:

Many observers see the case as a trial over whether Disney board members made a stupid decision. And it certainly seems they did. First, they followed the advice of Disney's imperial CEO, Michael Eisner, and hired Ovitz ? once known as "the most powerful man in Hollywood" ? as Disney's president and Eisner's heir apparent. Then, 14 months later, the board fired him, again at Eisner's behest. But because the board did not fire Ovitz for gross dereliction of duty or illegal behavior ? "cause" ? Ovitz was entitled to a $140-million consolation prize under the terms of his contract. It is this payout that prompted the lawsuit accusing Disney's board (which included Ovitz and Eisner) of breaching their fiduciary duties.

The case seems easy. The Disney board made a huge and costly mistake. It should be held liable. Shareholders should be made whole. Right?

Wrong. The Disney case is a hard one, due to a basic doctrine of corporate law called the business judgment rule. This rule allows disinterested corporate directors to make foolish, even disastrous, decisions without being second-guessed by courts, so long as their process was reasonable and their decision "informed." The rule says, in effect, that it is the process, not the outcome, that matters.

Exactly right. If you want to learn more about the business judgment rule, check out my law review article The Business Judgment Rule as Abstention Doctrine. And if that's not enough for you, check out my treatise Corporation Law and Economics (makes a great holiday gift), which offers up over 60 pages on the business judgment rule.

I am not making this up

Martha Stewart is becoming quite the jailbird gourmet and whips up dishes with illicit ingredients she smuggles back to her cell by stuffing them down her bra, according to a newspaper report Friday.

The New York Post, which cited anonymous letters by disgruntled fellow inmates, said the domestic queen -- imprisoned at the federal facility in Alderson, W.Va. for lying about a well-timed stock sale -- has been caught with such contraband as brown sugar, powdered sugar, cinnamon, butter and other food, all stashed away inside her locker.

Inmates tell the Post that Stewart sneaks condiments and small items out of the cafeteria and back to her quarters by "stuffing them in her bra," then uses a kitchenette with a microwave to fashion the culinary treats. (Source: CNN Money)

I'm speechless. Well, not quite. The woman has become a self-parody, whose life is starting to resemble a SNL skit.

Academic blogging

I'm sure all academics who blog occasionally wonder whether their Dean/Department Chair will give them credit for time spent blogging when it comes to tenure, promotion, or merit raises. (I do.) If you're one of those who wonder, be sure to check out this post by John Quiggin for its link to a major recap and also its interesting observations on the incorporation of blogging into more mainstream academic activities.

I am not making this up

Martha Stewart is becoming quite the jailbird gourmet and whips up dishes with illicit ingredients she smuggles back to her cell by stuffing them down her bra, according to a newspaper report Friday.

The New York Post, which cited anonymous letters by disgruntled fellow inmates, said the domestic queen -- imprisoned at the federal facility in Alderson, W.Va. for lying about a well-timed stock sale -- has been caught with such contraband as brown sugar, powdered sugar, cinnamon, butter and other food, all stashed away inside her locker.

Inmates tell the Post that Stewart sneaks condiments and small items out of the cafeteria and back to her quarters by "stuffing them in her bra," then uses a kitchenette with a microwave to fashion the culinary treats. (Source: CNN Money)

I'm speechless. Well, not quite. The woman has become a self-parody, whose life is starting to resemble a SNL skit.

Why I Love Brock Yates

I love cars. I love car magazines. I especially love Car & Driver, however, mainly because of the irrepressible rantings of Brock Yates. In this month's column, for example, he starts off with a quick hit on some of my least favorite people:

The small claque of unrepentant socialists, liberal bed-wetters, and graying refugees of the 1960s counterculture, all of whom perhaps by accident read this journal, quickly discover that we remain devoted to a sybaritic celebration of essentially useless, antisocial, high-speed, gas-guzzling, overpowered automobiles.

Having annoyed the enviro-weenies, he then moves on to make a serious point about the future of the American auto industry:

The thrust of the data indicates a strong penchant among American social leaders for European machinery, with a surprising disdain for Japanese and American-branded iron. ...

This indicator of automotive tastes comes hard on the heels of new data from the Kelley Blue Book?a publication that makes hard-edged, impartial evaluations of used cars. The Kelley recently released a list of models that it expects to hold their value well above the industry average of 30 percent after five years. ... Those include the BMW 5-series, the Mini Cooper, the Acura TL, the Infiniti G35 coupe, the Mazda RX-8, the Mercedes-Benz CLK320, the Nissan 350Z, the Volvo XC90, and the Porsche Cayenne. ...

There are several points to be made in all this garble. For one, upscale European makes?Porsche, BMW, Mercedes-Benz, and Audi?control the market in perceived status and performance. Second, Japanese makes?Toyota, Nissan, Honda, Infiniti, Lexus, and Mazda?score well on the long-term-value curve. Third, and most alarming, our beloved domestic brands tend to be bottom feeders by these measurements. With the exception of the Corvette and the Escalade, American market strength remains fixed in the categories of light trucks and mid-priced SUVs. ...

Well, what's the problem? Why can't the US industry just keep churning out F-150s and Suburbans? Yates explains:

The heart and soul of the automobile business will always be the four-place sedan, as exemplified by the best from BMW, Toyota, Honda, etc. While the boys in Detroit offer us such tepid dishes as the Ford Five Hundred and the Chevrolet Malibu Maxx, the Europeans and the Japanese continue to expand their lead in this core market.

I think he's exactly right. Depending on your price point, if you set out to buy a 4 place sedan, my guess is that most people would think about a Camry or Accord, an A4 or a 3-series, or maybe an E 330, or a 745 or a SL 500 or a LS 430. Where are the great American sedans? Where are the American halo sedans that could compete with Maybach or Bentley? Where are the incredibly reliable daily drivers like the Accord or the Camry? It's not the American worker who is at fault. After all, lots of Camrys and 3-series and other foreign models are made right here in the US. Something is wrong with the management of American car companies - and has been for a very long time.

When I was a kid, my Dad and his friends all aspired to drive Cadillacs. I don't know many kids for whom that is true these days. The American auto industry needs to get back to that place.

Update: Adrian Tschoegl emailed some interesting thoughts:

A BMW is a Euro- denominated good.  When the US$ falls against the Euro, the price of new BMWs in US$ should rise. (Even though BMW now builds cars in the US, these compete with BMWs built in Europe.) If the price of new BMWs rises, the price of used BMWs should rise.  Before looking to used car prices as indicators of quality one should check for exchange rate effects.

In response to which, I asked: To what extent can BMW offset exchange rate effects with hedging? Also by producing cars here?

Adrian responded:

BMW can hedge. 

Let's take the case where it hedges its operations in the US but not Germany.  Then, as the US$ weakens, we can expect entrepreurs to start buying up used BMWs in the US for sale in Europe as prices for used BMWs in Europe, expressed in US$ terms, rise.  BMW, not having hedged its European costs, will not be able to reduce the price of its new cars in Europe, and the prices of used BMWs in Europe will retain their normal discount vis-a-vis new cars.

As the US$ weakens, the gap between the price of a used BMW in the US and one in Europe will widen.  The demand for used BMWs in the US will drive up prices for used BMWs there.  As the prices for used BMWs in the US rises, this will put upward pressure on the prices of new US BMWs.  First, if used BMWs sell for almost as much as a new BMW, buyers will be willing to pay more for the new car as they can anticipate that they will not lose much on resale.  Dealers will respond by being unwilling to discount or bargain, or even by adding "dealer's surcharges". Second, if the gap between US and European prices widens sufficiently, buyers will start arbitraging new cars as well, with Europeans coming to the US to buy their BMWs, perhaps in connection with a holiday in Florida.

If BMW has hedged sufficiently it may be able to keep its prices in Europe unchanged in US$ terms. This means that they will fall dramatically in euro terms.  Then there is no US-Europe arbitrage opportunity.  However, this has an immediate consequence of changing where the BMW sits in the hierarchy of cars.  If Robert Franks (Luxury Fever) is correct (and my research suggests that he is) and we buy cars to signal status, then if BMWs become cheap in Europe relative to other luxury marks, they will lose their up-market image and market.  Instead, they will be competing with imports from the US or Asia.   Sales volumes will increase, but there is the risk that when the euro weakens against the US$ BMW will not be able to recapture its position as a status symbol as there will be lots of them around and everybody and his sister will have one.

One can, therefore, expect that BMW will not reduce the European price of its cars to keep the price steady in US$ terms, even if it has hedged.  We can suspect that it will try and walk a middle path, raising prices in the US a little and holding its European prices down a little, to limit arbitrage, while still watching the pricing of BMWs against competing marques.  As the price of new BMWs rises in the US, the prices of used BMWs in the US will also rise as the two are substitutes.

The result, from the US buyer's point of view, will be that the BMW value in resale is rising, but the reason will be the exchange rate as the quality of the car has remained unchanged.

Basically, when you are buying a BMW or a Mercedes, you are buying an asset whose value is correlated positively, though less than perfectly so, with that of euro-denominated assets such as French premier cru chateaus.  (I mean the vinyards, though one can think through the issues with respect to the wines themselves too.)

Religious Law Schools

The NYT finally has deigned to notice developments in faith-based legal education. New law schools (such as Liberty University, St. Thomas, and Ave Maria) with an explicit religious identity and mission. Old and well-established law schools whose leaders are intentionally reviving their religious identity and mission (such as Villanova).

The new law schools say they are a sort of counterweight to the views that dominate the legal academy.

"The prevailing orthodoxy at the elite law schools is an extreme rationalism that draws a strong distinction between faith and reason," said Bruce W. Green, Liberty's dean. ...

Peter H. Schuck, a law professor at Yale, where 92 percent of faculty political contributions went to Democrats, said Dean Green was right to question whether religious perspectives are welcomed at mainstream law schools.

"There is a sort of soft tolerance of competing views," Professor Schuck, who described himself as a political moderate, said, "but no real interest in exposing students to seriously developed contrary points of view that proceed from a strong faith-based perspective. Fundamentalism is derided."

It's not just Fundamentalism that is derided, of course; at many law schools, one also finds a noticeable strain of anti-Catholicism. Hence, it is interesting that what is going on at Catholic law schools got only a glancing mention from the Times. At St. Thomas, for example, Dean Thomas Mengler has committed the institution to creating a a "national law school of the highest quality that will be grounded in the rich Catholic intellectual and moral tradition and focused on its Judeo-Christian heritage."

The most inspiring part of our mission is our commitment to establish a law school dedicated to graduating lawyers who view their professional lives as a calling or vocation. We want to educate students to become, in the words of Robert Greenleaf, servant-leaders. We are trying to create a program that in several ways fosters our students’ development of a professional character and identity that draws on their faith and core values. Throughout the academic program, we are encouraging our students not to run away from but to draw on their innermost selves.

My St. Thomas colleagues and I are mindful of the many obstacles in our path, including hostility from within the academy. ...

Inside and outside the classroom, our faculty and students will study, teach, and write about the law by employing all the methodologies common to the legal academy and profession – textual analysis, common law reasoning from precedent, historical and interdisciplinary inquiry, clinical practice, and appeal to our ideals. But to these methodologies, we expect our faculty, staff, and students to bring a special insight, an additional perspective and voice, not typically heard at other law schools. We expect our community to explore the spiritual side of our lives, the implications of religion for development of the law and legal profession, and, most profoundly, the extent to which our faith and core values should guide and shape our professional choices, actions, and directions.

I'd strongly encourage you to go read the entire essay from which that passage was excerpted; it is as fine a statement of the mission of a religious law school as I have ever seen.

Equally fine, however, is an essay by my friend Mark Sargent, the very able dean of the Villanova law school, whose stated mission is creating "an 'inclusive' Catholic law school that is committed to academic freedom, religious and ideological diversity and liberal values, but is also unapologetically and actively committed to discerning and expressing distinctively Catholic approaches to law and lawyering."

Taken together, Mengler and Sargent make a persuasive case that there is something distinctive and useful about a faith-based legal eduction.

I've spent time as a guest speaker at both St. Thomas and Villanova in recent years. Both are doing exciting things. The revivial of serious Catholic legal education that they represent deserves more exposure than the glancing mention given this phenomenon in the Times; neither they - nor, I suspect, Liberty - deserve the somwhat sneering tone with which the Times derides the teaching at Liberty (on which see Ann Althouse).

Conservatives Outnumbered in the Academy

The problem has gotten so bad that even the NYT finally took notice:

At the birthplace of the free speech movement, campus radicals have a new target: the faculty that came of age in the 60's. They say their professors have been preaching multiculturalism and diversity while creating a political monoculture on campus.

Conservatism is becoming more visible at the University of California here, where students put out a feisty magazine called The California Patriot and have made the Berkeley Republicans one of the largest groups on campus. But here, as at schools nationwide, the professors seem to be moving in the other direction, as evidenced by their campaign contributions and two studies being published on Nov. 18.

One of the studies, a national survey of more than 1,000 academics, shows that Democratic professors outnumber Republicans by at least seven to one in the humanities and social sciences. That ratio is more than twice as lopsided as it was three decades ago, and it seems quite likely to keep increasing, because the younger faculty members are more consistently Democratic than the ones nearing retirement, said Daniel Klein, an associate professor of economics at Santa Clara University and a co-author of the study.

In a separate study of voter registration records, Professor Klein found a nine-to-one ratio of Democrats to Republicans on the faculties of Berkeley and Stanford. That study, which included professors from the hard sciences, engineering and professional schools as well as the humanities and social sciences, also found the ratio especially lopsided among the younger professors of assistant or associate rank: 183 Democrats versus 6 Republicans.

The standard explanations for this phenomenon among certain leftist faculty is that conservatives are either (a) greedy and therefore pursue higher paying careers or (b) too dumb to get hired. I've suggested alternative explanations in these pages in prior posts. (See, e.g., Conservatives in academia, which includes links to subsequent posts on the same topic.) Hence, I think I'll take a pass on substantive comment this time around. You might want to check out Ann Althouse's typically perceptive comments, however.

Smoke Gets In Your Eyes... Or Does It?

My latest TCS Daily column

Smoking bans continue to proliferate. California (where I live) long has banned smoking in almost all places open to the public, including many outdoor venues. In New York City, I'm told that the best place to stand in a bar is the doorway, since you're apparently only allowed to smoke outdoors but also only allowed to drink indoors.

The phenomenon is going global in a big way. Scotland recently adopted a plan to ban smoking in many private workplaces that are open to the places -- including bars and restaurants -- starting in 2006. Just a few days later UK Health Secretary John Reid proposed banning smoking in any place in which prepared food is served.

Some of these folks want to save smokers from themselves. Personally, I don't see why they have the right to do so. Why is it that people have the right to use contraceptives (Griswold v. Connecticut) or abort their babies (Roe v. Wade), but don't have a right to smoke?

One answer, of course, is that smoking has negative externalities. It seems reasonably well-settled that secondhand smoke can be dangerous. But does that justify banning smoking on private property that's open to the public?

Externalities sometimes justify government intervention. If I run a factory that spews pollution into the air, the damage to my neighbors and the environment is part of the overall social cost of running my factory. Because I don't bear those costs, however, I have no incentive to reduce the pollution my factory generates. By adopting appropriate regulations, the government can force me to internalize the cost of pollution, which is a fancy way of saying that the government can force me to take those costs into account when I make decisions.

The mere existence of an externality does not justify legislation, however. In a free society, with limited government and respect for private property rights, at least two conditions must be satisfied before government intervention is warranted. First, my actions must in fact produce external costs. Second, there must be a market failure -- that is, people must be unable to solve the problem without government help.

Because I've conceded the first prong of the test, the merit of public smoking bans comes down to the question of whether the problem can be solved through private ordering. In other words, if we let the owners of private property decide whether people will be allowed to smoke on their premises, will non-smokers be exposed to unreasonable costs?

An affirmative answer is clearly appropriate in some situations. There are some public places in which non-smokers may find themselves a "captive audience" -- that is, situations in which the non-smoker cannot avoid exposure to secondhand smoke. Government offices that serve the public are a good example. If a non-smoker gets a traffic ticket, he may have no choice but to go down to the courthouse. A smoking ban thus might be reasonable in the court building.

These sorts of situations are quite limited, however. Let's start with the most basic example: my backyard. Should I have the right to smoke a cigar on my back porch, where the only ones who smells it are my dogs? Presumably so, since I'm not imposing on anyone (my dogs seem to like the smell).

If you admit that a ban on smoking in my backyard is not appropriate, let's turn to restaurants. Smoking bans routinely apply to restaurants, but restaurants are clearly places in which private ordering can work and in which government intervention is unnecessary.

Consider the following case: The 21 Club restaurant had a long history of being a cigar-friendly environment. Non-smokers who ate there did so knowing that they may be exposed to cigar smoke. On what basis can such people complain? Do they not assume the risk of being exposed to secondhand smoke by visiting an establishment that allows patrons to smoke cigars? Conversely, other restaurants -- say, those wishing to attract a family clientele -- may forbid smoking in whole or in part. If I choose to patronize these establishments, I have no right to expect to be able to smoke there.

This is what I mean by a system of private ordering: If the place is one that nonsmokers can readily choose to avoid, then they have no right to insist on imposing their preference for a smoke-free environment on me or (and this is the key point) the owner of the establishment. Absent a showing that private ordering can't work, the owner of private property has a right to decide what conduct will take place on his property even if that property is open to the public. So long as non-smokers are free to decide not to enter an establishment in which smoking is allowed, the necessary prerequisite for regulating private property simply doesn't exist.

The same sort of analysis could be extended to a host of contexts. Many argue for a ban on smoking in the workplace. And if, for example, an employer concludes that it is cheaper to hire non-smokers, who could object to his banning smoking on his premises? But if another employer concludes that it is cheaper to hire smokers -- perhaps because they'll take lower pay in order to be able to smoke at work -- why should we object to that choice'? So long as non-smokers have other employment options, if they choose to work for an employer that allows smoking, they have no basis to complain. Indeed, there is no externality, because the employer's decision imposes no costs on the non-smokers to which they have not consented.

Many restaurants and workplaces have voluntarily banned smoking. In view of this evidence that private ordering can work, I see no justification for overriding private property rights by banning smoking in private establishments.

Specter Spanked?

In his Political Capital column for today's WSJ($), Alan Murray notes the vast importance of tort reform for the business lobby:

Now that the wolves of organized labor have been defanged, it is the hyenas of the trial bar who loom largest in the nightmares of corporate CEOs. Most can recite by heart the results of a Tillinghast-Towers Perrin survey that says torts cost the U.S. economy nearly $250 billion a year. They know from personal experience the headaches that class- action lawsuits have caused in their boardrooms.

For big business, the defeat of the trial lawyers was Election Day's sweetest victory. The tort bar provided heavy funding to the Democratic Party, Senate Minority Leader Tom Daschle and Democratic vice presidential candidate John Edwards. The U.S. Chamber of Commerce boasts that it backed legal-reform candidates in 16 state Supreme Court and attorney general races around the country, and won 15 of those races.

In the election's wake, business lobbyists have been salivating over the prospect that legal-reform bills would be the first measures to benefit from a new political climate. First up, they argue, should be a bill to curb class-action lawsuits, which enjoys the support of a majority of senators and nearly passed earlier this year. Soon to follow, they hope, could be bills to create a fund for resolving asbestos-related lawsuits and a measure to rein in medical- malpractice suits.

I won't rehash the arguments here; I'll content myself with disclosing that I regard tort reform as good politics (defunding the left's biggest bankrollers) and good policy.

Murray goes on to note, however, concerns that likely Senate Judiciary chair Arlen Specter would oppose tort reform (a point that's been noted in these pages, as well):

[The] business lobbyists worry their victories might be diluted if Sen. Specter claims the Judiciary chairmanship. He supported the class-action bill and worked hard to reach an asbestos settlement, but he also is one of the rare Republicans who enjoys support from the Association of Trial Lawyers of America. Lawyers and lobbyists were the top contributors to his Senate campaign this year, providing nearly $1.8 million in campaign cash. His son, Shanin Specter, is a well-known trial lawyer in Philadelphia, and his firm, Kline & Specter, which specializes in lawsuits against doctors, provided $93,250 in contributions to Sen. Specter's re-election, according to the Center for Responsive Politics.

"Why would Republicans, after defeating [Sen. John] Kerry, Edwards, and Daschle...hand the Judiciary Committee gavel to someone who shares this triumvirate's disdain for tort reform?" asked Tad DeHaven of the National Taxpayer's Union in an open letter to senators.

Fortunately, Murray suggests that the kerfuffle over Specter led by pro-life forces may force Specter to modify his position not only on judges, but also on tort reform:

In the end, Sen. Specter probably will get his chairmanship. And he will repay his obligations, not to the trial lawyers who funded his campaign, but to the senators who elected him chairman. He will support the President's judicial nominees, regardless of their positions on abortion. He will move quickly to limit class- action lawsuits, complete an asbestos settlement and possibly even curb medical-malpractice suits. As a result, 2005 could become a watershed year for reining in the excesses of the U.S. tort system.

From his lips ....

Stan Henderson

I had many fine teachers in law school, but one who stood out as possessing a particularly impressive combination of teaching skill, scholarship, and general all-around human decency was Stanley Henderson. On the occasion of his retirement, he has penned a typically lovely essay ruminating on the art of being a law teacher. Here's a taste:

We educate law students through cases, and every case tells a story of people and their problems. And every class has a story of its own. It must be remembered that the ideas making up our common law are “constructed” ideas. The problem, as you know, is that they are also undergoing constant “reconstruction.” So we who “do law” live with much ambiguity and uncertainty. Our task in the Academy is to discover, and to understand, what it is that gives “commonness” to our common law.

That is why the inquiring element—the putting of hard questions—is therefore central to the enterprise. It is, after all, the “hard” cases that increase our confidence in identifying the “easy” cases. ...

The point to be underscored is that, whatever the time period, it is passion and commitment that bring one to law study in the first place. And that is what carries one through law school and beyond, whatever the career path. ...

You now know that we teachers spoke the truth when we told you that we could do no more than prepare you for a lifetime of self education.

We “passed on the culture” mainly by sowing seeds. But the real game—the discovery of self and a sense of purpose, of proportion—was always yours, when you sat here in rows, and when, in the years since, you have faced into the headwinds, at times fierce.

An aspiring law teacher could do worse than to emulate this gentle yet demanding man.

Stan Henderson

I had many fine teachers in law school, but one who stood out as possessing a particularly impressive combination of teaching skill, scholarship, and general all-around human decency was Stanley Henderson. On the occasion of his retirement, he has penned a typically lovely essay ruminating on the art of being a law teacher. Here's a taste:

We educate law students through cases, and every case tells a story of people and their problems. And every class has a story of its own. It must be remembered that the ideas making up our common law are ?constructed? ideas. The problem, as you know, is that they are also undergoing constant ?reconstruction.? So we who ?do law? live with much ambiguity and uncertainty. Our task in the Academy is to discover, and to understand, what it is that gives ?commonness? to our common law.

That is why the inquiring element?the putting of hard questions?is therefore central to the enterprise. It is, after all, the ?hard? cases that increase our confidence in identifying the ?easy? cases. ...

The point to be underscored is that, whatever the time period, it is passion and commitment that bring one to law study in the first place. And that is what carries one through law school and beyond, whatever the career path. ...

You now know that we teachers spoke the truth when we told you that we could do no more than prepare you for a lifetime of self education.

We ?passed on the culture? mainly by sowing seeds. But the real game?the discovery of self and a sense of purpose, of proportion?was always yours, when you sat here in rows, and when, in the years since, you have faced into the headwinds, at times fierce.

An aspiring law teacher could do worse than to emulate this gentle yet demanding man.

More on Senate stock trades

I reported a few weeks ago on a study finding an unusual level of stock trading profits being made by US Senators, which implied that they were traing on the basis of inside information learned on the job. Securities Litigation Watch now reports that the SEC has decided not to go forward with an investigation:

As reported in this article in Sunday's Philadelphia Inquirer, the authors of the study conclude that these results "suggest that senators are trading stock based on information that is unavailable to the public, thereby using their unique position to increase their personal wealth...." The study adds that it is as if "senators knew appropriate times to both buy and sell their common stock."  The article quotes Ziobrowski  as stating in a recent interview that "there is cheating going on, at a 99 percent level of confidence."

The Inquirer article states that according to Ari Gabinet, head of the SEC's Philadelphia Office, "agency staff reviewed a draft of the study in March but decided not to press the issue because it is hard to win insider-trading cases without detailed knowledge of what, if any, privileged information the subjects received and proof insiders used it to trade. The SEC lacked such information in the senators' case."

Huh?  Yes, it's hard to win insider trading cases but the SEC does so routinely by using its subpoena power to gather documents and testimony that often will provide "detailed knowledge of what, if any, privileged information the subjects received and proof insiders used it to trade."

The article also points out that "the SEC may have little incentive to tangle with the Senate, given their relationship. Senators approve members of the SEC's governing body, as well as the agency's budget."

Gee, you think? If it had been anybody else than US Senators, the SEC would have been sending out subpoenas and combing trading records and generally doing its thing. Anyway, kudos to SLW for a great followup on an interesting story.

Mandatory Disclosure and Vaccines

In my article Mandatory Disclosure: A Behavioral Analysis, I argued that one problem with the SEC's rules requiring disclosure from corporations is that managers likely will make better decisions than regulators about what needs to be disclosed:

[Mandatory disclosure] functions in ways not unlike price controls. A regulatory regime is unlikely to peg prices at the equilibrium point at which marginal cost and marginal benefit are equal. As with any legal rule, the mandatory disclosure regime thus is likely to be under- and/or over-inclusive. Under-inclusive disclosure rules harm investors by denying them information they need. Over-inclusive rules harm investors by requiring the firm to spend money on unnecessary disclosures, which essentially comes out of the investors’ pockets. Investors presumably do not want management to engage in disclosure that produces diminishing returns; i.e., investors will not want management to spend a dollar on disclosure unless that expenditure produces at least a dollar’s worth of benefit to the shareholders. Under a regime of voluntary disclosure, management has an incentive to provide disclosure until it achieves that equilibrium. Because management’s wealth is closely tied to the firm’s financial well-being, it has an incentive to achieve an efficient trade-off between lowering the cost of capital and spending money on disclosure. The government has no comparable incentive. …

As a practical matter, legislators and regulators necessarily have less information about the needs of a particular firm than do that firm’s managers and directors. A fortiori, legislatures will make poorer decisions than the firm’s directors.

My thanks to an alert reader for sending me a real world example that I think proves my point (from USA Today):

The national stockpile of vaccines for children, planned as a cushion against shortages or emergencies, is seriously understocked, health officials say.

The problem isn't money. Funding to buy a six-month supply of recommended childhood shots from vaccine makers is available through the Vaccines for Children Program, which has allotted $172 million for the purpose. The glitch, says Stephen Cochi, acting director of the Centers for Disease Control and Prevention's Immunization Program, is a Securities and Exchange Commission accounting regulation that bars vaccine makers from claiming sales to the stockpile program as revenue until they're delivered to the customer — in this case, the CDC.  ...

Under SEC rules, companies can't record sales as revenue while the vaccine remains in the factory. The rules do allow for exceptions, but the vaccine stockpile doesn't meet one of the criteria. The "unintended consequence," Cochi says, is that three of the four vaccine makers have pulled out of the program, leaving only Merck.

Ian Spatz, Merck's vice president for public policy, says the company is sticking with the program, but it would like to see the regulation change because it could discourage drug companies from participating. "Imagine, for all the products Merck sold, if we couldn't record them as revenue," he says. "Our shareholders would not be pleased."

No [expletive deleted]. Is it me or this just nuts? Companies have spent money on raw materials, labor, and capital equipment to make vaccines. The Government has paid the manufacturers for the drugs. Yet, under the SEC rules the manufacturer can't recognize those payments as revenue until the drugs are actually removed from the factory for use. Meanwhile, so as to reduce the risk that the perishable vaccines will be damaged or spoiled, the Government requires the company to keep the vaccines in the factory until the very last minute before use. According to UPI, this can "mean a delay of up to a year in recognizing revenue from the contracts, potentially hurting officially reported profits and earnings per share and, by extension, stock prices."