Slate’s David Weigel ran an otherwise informative piece on Cass Sunstein’s testimony, as head of OIRA, at a recent House Energy and Commerce Committee.  The headline?  Nudge on Trial: Cass Sunstein Defends the White House Against a Republican Attack.  From Weigel’s description of the hearing, there was some general hand wringing about whether there is too much or too little regulation, whether the number of regulations is higher or lower under the Obama administration than during the George W. Bush administration, some run-of-the-mill posturing from questioners.  Weigel concludes the hearing ended “with Sunstein having done no obvious harm to his mission.”

All fine.  And like I said — the article was informative with regard to the hearing.  But its a pretty sloppy and misleading headline.   There are, I think, some interesting issues concerning whether the Obama administration has retreated from behavioral economics a la Nudge, whether (as Ezra Klein contends) Republicans hate behavioral economics, and the role of behavioral economics in administrative agencies and regulation.   Unfortunately, the article really wasn’t about Nudging or behavioral-economics based regulation at all.  If Nudge is going to have its trial — it will be another day.

In the meantime, you can start here for some good background reading on the topic.

Filed under: behavioral economics, free to choose symposium, journalism, regulation

Along with co-author Judd Stone, I’ve posted to SSRN our contribution to the Review of Industrial Organization‘s symposium on the 2010 Horizontal Merger Guidelines — The Sound of One Hand Clapping: The 2010 Horizontal Merger Guidelines and the Challenge of Judicial Adoption.

The paper focuses on the Guidelines’ efficiencies analysis.  We argue that while the 2010 HMGs “update” the Guidelines’ analytical approach in generally desirable ways, these updates are largely asymmetrical in nature: while the new Guidelines update economic thinking on one “side” of the ledger (changes that make the plaintiff’s prima facie burden easier to satisfy, ceteris paribus), they do not do so with respect to efficiencies analysis on the other side of the ledger.  These asymmetrical changes thereby undermine the new Guidelines’ institutional credibility.

In particular, we focus on the Guidelines’ treatment of so-called “out-of-market” efficiencies as well as fixed cost savings.  In both cases we argue that updates were appropriate and consistent with the Agencies’ expressed preference to more accurately reflect economic thinking and shift from proxies to direct assessment of competitive effects.   If anything, the Guidelines appear to be more skeptical of efficiencies arguments than the previous version, adding “the Agencies are mindful that the antitrust laws give competition, not internal operational efficiency, primacy in protecting customers.”  We then turn to discussing the implications of this “asymmetrical update” for judicial adoption of the Guidelines.  Some have discussed the possibility that these Guidelines will be less successful with federal courts because they downplay market definition.  As I’ve said here many times, I do not think the Agencies (if out of nothing but self-interest) will avoid market definition.  However, we argue that the asymmetrical updating problem is a more serious one, and that widespread and wholesale adoption of the HMGs should not be taken for granted.

Here is the abstract:

There is ample justification for the consensus view that the Horizontal Merger Guidelines have proven one of antitrust law’s great successes in the grounding of antitrust doctrine within economic learning. The foundation of the Guidelines’ success has been its widespread adoption by federal courts, which have embraced its rigorous underlying economic logic and analytical approach to merger analysis under the Clayton Act. While some have suggested that the Guidelines’ most recent iteration might jeopardize this record of judicial adoption by downplaying the role of market definition and updating its unilateral effects analysis, we believe these updates are generally beneficial and include long-overdue shifts away from antiquated structural presumptions in favor of analyzing competitive effects directly where possible. However, this article explores a different reason to be concerned that the 2010 Guidelines may not enjoy widespread judicial adoption: the 2010 Guidelines asymmetrically update economic insights underlying merger analysis. While the 2010 Guidelines’ updated economic thinking on market definition and unilateral effects will likely render the prima facie burden facing plaintiffs easier to satisfy in merger analysis moving forward, and thus have significant practical impact, the Guidelines do not correspondingly update efficiencies analysis, leaving it as largely as it first appeared 13 years earlier. We discuss two well-qualified candidates for “economic updates” of efficiencies analysis under the Guidelines: (1) out-of-market efficiencies and (2) fixed cost savings. We conclude with some thoughts about the implications of the asymmetric updates for judicial adoption of the 2010 Guidelines.

Download and read the whole thing.

Filed under: antitrust, business, economics, legal scholarship, merger guidelines, mergers & acquisitions, scholarship

In a must-read op-ed in today’s Wall Street Journal, Yale Law’s Jonathan Macey weighs in on Goldman Sachs’s decision to allow only foreign gazillionaires — no Americans, regardless of their wealth or sophistication — to invest in new shares of Facebook.

Numerous observers have portrayed Goldman’s move as a “victory for the SEC.”  The New York Times‘ Dealbook called it “a serious embarrassment for Goldman.”  In reality, Macey contends, “[i]t is the SEC that should be embarrassed” for fostering a system in which, as Larry put it,  “the US securities laws exclud[e] US investors from investing in a US company in the US.”

Echoing a number of Larry’s observations, Macey explains:

Thanks to SEC regulation and the litigious atmosphere it fosters — not to mention Sarbanes-Oxley’s onerous burdens on corporate executives — the whole capital formation process is moving offshore. The U.S. share of total equity raised in the world’s capital markets is shrinking, while the number of U.S. companies listing their shares for trading exclusively in foreign markets has risen steadily for the past five years.

Macey then points a finger at the SEC’s overarching regulatory philosophy, which views investors — even rich, sophisticated ones — as needing governmental protection and displays scant regard for the unintended consequences of paternalistic limitations on the freedom of contract:

The SEC’s fundamental approach to regulation involves depriving investors of opportunities in order to protect them. This was not much of a problem in the immediate post-World War II period. Before Japan and Europe rebuilt, and before China emerged as an economic giant, the U.S. had the only large pools of investment capital in the world and dominated the financial scene. During this happy period of U.S. primacy, the SEC, along with most academics, took the rather ludicrous view that it actually deserved the credit for the primacy of U.S. capital markets. That world is long gone.

Still, according to the SEC, all investors large and small must be protected against the danger that they will succumb to a feeding frenzy of enthusiasm when given the opportunity to invest in a new deal. For example, the SEC rules governing the Facebook offering until Goldman pulled the plug include the requirement that the stock being sold “cannot be the subject of advertising, general promotional seminars or public meetings in connection with the offering.” The concern here is that publicity about a deal might, heaven forbid, create interest among investors. …

The investors who supposedly are being protected by the SEC’s rules here are not unsophisticated small investors. Goldman had limited the marketing of Facebook’s shares to the billionaires and large institutions that constitute its wealthiest clients.

Finally, Macey suggests that the Obama Administration, which has recently committed itself to ferreting out cost-ineffective regulations that “make our economy less competitive,” take a long, hard look at the “investor-protective” securities rules that drive capital overseas and prevent American investors from having access to the wealth-enhancing opportunities available to their European and Asian friends:

Ironically, the Goldman decision to move the Facebook deal offshore was announced just as President Obama was acknowledging in these editorial pages that “regulations do have costs” and saying that he would order a government-wide review to eliminate rules that cripple economic growth. That review should include the rules promulgated by the SEC, lest we continue to see U.S. capital markets fade into irrelevance.

If we ever get another President who believes that markets, while imperfect, generally work well, that government intervention often fails to make things better, and that regulations should be narrowly tailored to fix legimitate market failures, he or she should look hard at Prof. Macey for a spot on the SEC.

C. Boyden Gray and John Shu offer a very helpful discussion on this issue in an article in Engage.  Here is the abstract:

President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank” or “the Act”) into law on July 21, 2010. The massive and complex Act is reportedly the result of many compromises. Dodd-Frank’s intent, according to its title page, is “[t]o promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

Of particular interest to me was this portion of the discussion of the Bureau of Consumer Financial Protection (BCFP):

One of the BCFP’s stated objectives is to protect consumers “from unfair, deceptive, or abusive acts and practices and from discrimination.”75 The BCFP may halt a company or service provider from “committing or engaging in an unfair, deceptive, or abusive act or practice” with respect to offering or transacting in a consumer financial product or service.76 In fact, Dodd-Frank makes it unlawful for consumer financial product companies or service providers to “engage in any unfair, deceptive, or abusive act or practice.”77 The Act extends this liability to any entity that “knowingly or recklessly provide[d] substantial assistance” to the offender.78

clearly defi ne vague terms such as “unfair,” “deceptive,” “abusive,” and “discrimination.” BCFP is vested with the sole discretion to decide what those terms mean and how they are applied to consumer financial products and services and the consumer financial industry.79 For example, Dodd- Frank defines an act or practice as “abusive” if it “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service,” or if it takes “unreasonable advantage” of a consumer’s “lack of understanding” of the “material risks, costs, or conditions of the product or service” or a consumer’s “inability” to protect his own interests “in selecting or using a consumer financial product or service.”80 Given that each and every consumer has different abilities to understand a term, condition, material risk, and cost; and each and every consumer has varying levels of ability—or desire—to protect his own interests, the Act’s standard can readily be caricatured as “we know it when we see it.”

Moreover, the Act does not seem to include the concepts of deception or fraud with respect to the term “abusive,” which would mean that the BCFP could still declare illegal products and services whose terms, conditions, risks and costs are fully disclosed, so long as the BCFP labels them “abusive.” Moreover, the BCFP’s charter
is so vast that its power could be characterized as including the practical authority to re-write consumer financial protection laws if it chooses to do so. Accordingly, it is reasonable to argue that Congress must do the re-writing, not an agency that escapes
meaningful oversight.

Those challenging Dodd-Frank will maintain that Congress structured the BCFP in such a way that it unconstitutionally escapes both Article I and Article II oversight. The key is that the Act houses the BCFP within the Federal Reserve, thereby placing one protected entity (the BCFP) within another (the Fed).81

The article provides a good summary of the provisions of Dodd-Frank as well.

At the excellent Core Economics blog, Andreas Ortman discusses an Australian policy debate involving the Review of the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System (also known as the Cooper Review), and more specifically, retirement savings and the superannuation system.  The Cooper Review drafters contend that the behavioral economics literature strongly supports a mandated default option (MySuper).

Read the full piece here.

Lynn Stout, writing in the Harvard Business Review’s blog, claims that hedge funds are uniquely “criminogenic” environments.  (Not surprisingly, Frank Pasquale seems reflexively to approve)…

Read the full piece here. 

There’s been much teeth-gnashing following yesterday’s ruling by a Virginia judge that the “individual mandate” portion of Obamacare is unconstitutional.  Among many other places, see the ongoing discussion at The Volokh Conspiracy.  I have a quick, non-constitutional response.

Read the full piece here. 

Recent coverage of the A&P bankruptcy has alluded to its era of “dominance” in grocery retail, describing it as “the Wal-Mart of its day.”   See this earlier post on the unconvincing antitrust case against Wal-Mart.  However, what the A&P bankruptcy brings to mind for me is Justice Stewart’s famous dissent in Von’s Grocery.  The famous line from Stewart’s powerful dissent objecting to the majority’s analysis, devoid of economic analysis and full of now well known contradictions, is his description of the merger law: “the only consistency is that the government always wins.”

Read the full piece here. 

Tiffany Joslyn provides a useful summary of the criminal provisions of the Dodd-Frank Act at the Federalist Society National Federal Initiatives Project.  One of the things Joslyn points out is that the Act includes new criminal consumer protection liability…

Read the full piece here.