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Academic commentary on law, business, economics and more

March 30, 2010	

	 Antitrust Exam Question:  Do the Major Institutional Investors Have
an Antitrust Problem?
	posted by Thom Lambert at 8:48 am

		The Wall Street Journal is reporting that major institutional
investors — CalPERS, CalSTRS, the Teacher Retirement System of
Texas, etc. — have collectively adopted a set of recommended
practices that is “rankling” private equity firms.  Had I
not discussed the article in my Antitrust class, I’d use it as
the basis for an exam question.  Here are the basics:
Private equity funds are normally organized as limited partnerships,
where the investors are the limited partners (i.e., they lack
management control, but their liability is limited to the amount of
their investment in the firm) and the managers that make investment
decisions are affiliated with a general partner, whose liability is
unlimited.  The rights of limited and general partners are set forth
in a limited partnership agreement.  The limited partners —
largely institutional investors like pensions, endowments, etc.
— typically compensate the managers by paying annual management
fees and allowing them to collect “carried interest,”
which is a share of the profits of the fund’s investment
(assuming that the investment reaches a minimum rate of return or
“hurdle rate”).  Because limited partnerships are
creatures of contract, all these arrangements are agreed upon from the
outset.  So are the rights of the limited partners.
In the last few months, a group of major institutional investors, the
Institutional Limited Partners Association (ILPA), promulgated a set
of investor principles that call for certain caps on fees, increased
disclosure, particular methods for calculating carried interest, and
greater investor oversight.  The ILPA has 215 members controlling $1
trillion in private equity assets.  In addition, the ILPA seems to be
soliciting other (non-member) private equity investors to endorse its
On first glance, this resembles a buyers’ side conspiracy: 
Multiple “buyers” of investment services have agreed not
to purchase from “sellers” who do not adhere to preferred
terms, including preferred pricing terms.  If that’s
what’s going on, then the arrangement among the institutional
investors violates Section 1 of the Sherman Act, even if the parties
to the agreement collectively lack market power.  (See Footnote 59 of
Not surprisingly, the members of ILPA insist that they haven’t
“agreed” to withhold investments from funds that decline
to follow the recommended principles.  Instead, they say, their
principles simply “reflect suggested best practices and are
intended to serve as a basis for continued discussion among and
between the general partner and limited partner communities with the
goal of improving the private equity industry for the long-term
benefit of all its participants.”  They further maintain that
“the authors, sponsors and the groups … that have provided
an endorsement of these Principles are not specifically committing to
(nor seeking the commitment of) [sic] any private equity investor to
each and every outlined term.”  Thus, they conclude, their
mutual endorsement of a set of best practices does not constitute a
contract, combination, or conspiracy to withhold investment funds from
fund managers who fail to adhere to the recommended practices.
According to the Journal, though, the most prominent institutional
investors are using these widely endorsed principles for more than
just “a basis for continued discussion” with fund
The nation’s two largest pension funds — the California
State Teachers’ Retirement System and Calpers — have held
discussions with each other about whether to insist that
private-equity firms agree to the principles, according to people
familiar with the talks. Texas Teachers has told at least one firm
that the principles were non-negotiable and had to be accepted,
according to people familiar with the situation.
Lawyers for private-equity firms also point to a public remark made by
Calpers spokesman Clark McKinley in trade publication Pension &
Investments.  “We are collaborating with other investors in an
effort to get better alignment with private-equity partners, including
more favorable fees. This requires more than a unilateral action by
any one investor,” Mr. McKinley said.
If the point of the principles is merely informational — i.e.,
to set forth a set of best practices that will minimize agency costs
— then why solicit public “endorsements” of the
principles?  On this question, Mr. McKinley’s remarks are pretty
revealing.  They suggest that a single investor’s insistence on
adherence to the principles wouldn’t work; fund managers would
find other, more accommodating investors.  But if all the major
institutional investors adopted the same stance, the fund managers
might have to give in to their demands.  Could we infer an Interstate
Circuit-like agreement from institutional investors’ parallel
action in adhering to the principles?
If there’s no “agreement” to adhere to the
principles themselves, could liability arise from the concerted action
of signing on to the principles, thereby creating a
“facilitating device”?  I’m analogizing here to the
data exchange cases, where the mere exchange of cost or price
information among competitors can create antitrust liability even if
there’s no agreement to adhere to specified prices.  Data
exchanges, unlike horizontal agreements to adhere to price schedules,
are not per se illegal; instead, they are evaluated under a rule of
reason that looks hard at the nature of the information exchanged (the
degree to which it could facilitate price-fixing) and the structure of
the market in which the competitors participate (the degree to which
it is susceptible to cartelization).  If a court were to analyze the
principles as a facilitating device, it would likely examine their
content — e.g., the degree to which they are specific enough to
form the basis for price-fixing — and the
“cartelizability” of investors in private equity funds. 
Under such a rule of reason analysis, liability is unlikely.     
Even if a court were to conclude that actual price-fixing had
occurred, it’s hard to imagine that it would impose liability on
the institutional investors:
Buyout executives acknowledge that there even if there are legal
problems with ILPA members’ conduct, there is likely to be
little sympathy for the plight of private-equity firms.
“Even if there was an antitrust problem from a legal
perspective,” said one senior private-equity executive at a
large firm, “I don’t see the Justice Department coming to
the rescue of Henry Kravis and Stephen Schwarzman.”
Still, I think, this arrangement could form the basis for a pretty
good Antitrust exam question.

            Filed under: antitrust ,  markets ,  private equity
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March 29, 2010	

	 “So when you listen to economists, you’re listening to
	posted by Josh Wright at 9:18 am

		So says David Zaring over at the Conglomerate — at least when
it comes to the topic of regulation.  I don’t buy it.  
Anyway, here’s the complete quote for context:
Economists love to suggest new regulatory structures (or, more often, 
why they will not work).  But, of course, they have no training in 
regulation, and the training they do have – in quantitative data
 analysis – has nothing to do with regulation.  So when you
listen to  economists, you’re listening to amateurs.  But
perhaps everyone is an  amateur in making governance proposals? 
Consider political scientists.   Sure, they should understand how
regulation works.  But I don’t think  they do in a
“here’s the proposal you ought to enact” kind of
way.  At  least, I haven’t seen much of that from them, and I
suspect it is  because they study governance institutions as they
actually perform, not  as they should be (and also because they are
largely trained in  quantitative analysis).  So that would seem to
make room for lawyers,  who do prescriptive work and do understand
governance … but, then,  there’s the question about
whether those prescriptions are based in an  identifiable skill set or
just the musings of smart people.
So the more general point, and more interesting, point that is the
subject of the post is the possibility of an “expertise
gap” with respect to institutional design that neither lawyers,
nor political scientists nor economists are properly trained to do. 
Maybe.  Though there doesn’t seem to be any shortage of
opinions from those groups on precisely how the Consumer Financial
Protection Agency, for example, ought to be structured.
From reading the post, David might be surprised to hear that economic
training (at least you know, back in the good old days) is about more
than fixed point theorems and clustered standard errors.   Anyway,
one thing that economists are and have traditionally been trained to
think about is incentives.  For example, incentives within
organizations like teams, or firms, and yes, even government
agencies.  Of course, there is also public choice.  Here’s an
example of economists thinking about how to organize economists in
competition agencies.  Economists think hard about incentives of
individuals and groups, and these insights can be incredibly useful
for thinking about the way that regulation works — not just
measuring its consequences.
Now — of course — offering useful insights about how
different regulatory design might influence the incentives and
decisions of various stakeholders is not the same as designing the
regulatory structure.  No doubt that both political scientists and
lawyers offer some valuable inputs to the production function as
well.  But the claim that economic training “has nothing to do
with regulation” seems wrong to me.  So does the claim that
most modern economists spend their time talking about why regulatory
proposals won’t work.   Of course, as an economist who has
spent some time talking about why the CFPA proposal won’t work,
perhaps I’m not the right person to ask.

            Filed under: business ,  corporate governance ,  economics
,  financial regulation ,  regulation
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March 27, 2010	

	 “Like A Rain Dance That Produces No Clouds”
	posted by Josh Wright at 7:27 pm

		My colleague Tom Hazlett, along with George Bittlingmayer and Arthur
Havenner, provides some economic wisdom on why they don’t call
it stimulus anymore:
Counter to the predictions put forward a year ago by the 
Administration, when it claimed that “more than 90 percent of
the jobs  created are likely to be in the private sector,” U.S.
companies employed  3.9 million fewer workers in January 2010 than
they did one year  earlier. Public employment bucked the trend,
staying constant even as  governments contended with sharply reduced
tax revenues. While the jobs  held by those 22 million public workers
helped support many families,  the “stimulus” failed to
trigger private sector employment growth.
In late 2009, the Congressional Budget office pegged employment gains 
due to the American Recovery and Reinvestment Act (A.R.R.A.) of 2009
at  600,000 to 1.6 million, while estimating its full cost at $862
This implies a price tag, at the median estimate, of about $800,000 
per job. These forecast job gains are not permanent, but  temporary.
The Administration’s January 2009 forecast was that the 
A.R.R.A. was needed to reduce the path of unemployment for five years,
 when the unemployment rate – if we did nothing – would
decline to the  level projected with the “stimulus.” Using
this five-year time horizon  projects annual costs of approximately
$160,000 per job.
That’s a rich bonus payment. The system is borrowing heavily to 
finance it. Deficits last year and this are running at 10 percent of 
GDP, easily the largest in post-WWII U.S. history. They are projected
by  CBO to remain at three percent of GDP in 2020 – when over 3%
of GDP  will be devoted to simply paying interest on the national
The term “shovel ready” seems to have disappeared from the
language  just as quickly as it arrived. The idea that greater public
borrowing  would leverage capital expenditures to put the U.S. back to
full  employment is now replaced by boasts that Washington has saved
Albany,  Springfield and Sacramento from laying-off government
workers. Whatever  the value of that gold-plated jobs program, it is
not “stimulus.”
Like a rain dance that produces no clouds, we are now into our fourth 
round of federal deficit creation – the automatic
“stabilizers,”  followed by the Bush (2008), Obama I
(2009), and Obama II (2010)  versions. With each dry day, the deficit
dancing intensifies. When the  rain finally falls, we will be told
that the recovery is a tribute to  the Keynesian Gods. But it’s
already clear that something has gone  wrong: the
“stimulus” chant has fallen silent. Our dance on a fiscal 
cliff has lost its theme music.

            Filed under: economics ,  markets ,  stimulus debate
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March 25, 2010	

	 The Market Responds
	posted by Michael Sykuta at 3:19 pm

		The final vote hasn’t even been taken to “fix” the
omnibus (or ominous) health care “reform” legislation that
President Obama signed into law this week, and already the first
volley of the market’s response has been sounded. 
Today’s Wall Street Journal Online reports that “Prices of
most Treasury notes and bonds were lower after relatively  tepid
demand … sending the  10-year note’s yield to its highest
level since June.”
Seems the prospect of a $1 trillion dollar health care program and the
debt it will require (despite the fabled “analysis” by the
GAO), is already beginning to weigh on the suppliers of investment
capital.  The WSJ piece goes on to quote James Caron of Morgan
Stanley as saying, “The weightiness of supply [of treasuries]
finally broke the camel’s back.”
No, I am not surprised. Nor should be anyone who has kept a clear view
of the federal government’s spendthrift policies, exacerbated
since the beginning of the Obama era. The only surprise may be at how
quickly the market has reacted to the flood of federal debt offerings
that have been stacked up on the horizon.
What’s in this for you, dear consumer? Higher interest rates and
reduced access to credit. Now that isn’t necessarily a bad
thing. Most Americans could use a diet from their leveraged spending
habits. However, reduced credit does mean reduced
consumption–i.e., lower economic growth. And it does mean that
some productive investment is less likely to happen as higher interest
rates reduce the present value of investments. This, dear consumer, is
what is meant by “crowding out.”
The first volley is fired. There is only so much General Bernanke can
do to protect the ramparts. Barring significant reductions in federal
spending, look for continued “tepid demand” and
commensurately higher interest rates over the next several months.
Even if you aren’t one of those being directly taxed to support
the new health care “law of the land,” you will be paying
for it one way or another.

            Filed under: economics ,  markets ,  politics
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March 24, 2010	

	 Maybe We’ll Get Us a Calorie Czar!
	posted by Thom Lambert at 3:40 pm

		Yesterday, Todd predicted that Obamacare will result in greater
government involvement in heretofore private decisions that impact
health.  Since the government is now going to pay (via insurance
subsidies) for many more Americans’ health care, it has a much
stronger interest in how they live.  So do we taxpayers who must pay
for the government’s largesse.  As Todd explained:
Once I am paying for your health insurance, I suddenly care a lot
whether you … eat that Big Mac for lunch instead of the salmon
salad. In today’s new America, I suddenly really care how much junk
food the people making less than $88,000 eat — I pay for every
Dorito that crosses their lips. … (Evidence this is our future
comes from the UK, where 75% of people in a recent survey supported
greater government control over individuals’ food choices.)
This need to control people’s lifestyle choices in order to
constrain spending on their health care explains Section 4205
(”Nutrition Labeling of Standard Menu Items at Chain
Restaurants”) of the recently enacted health care legislation. 
Today’s New York Times and Wall Street Journal are both
reporting on this little-discussed provision of the legislation.  As
both papers explain, the law requires chain restaurants (20 or more
outlets) to display calorie information on menus, at the order
counter, and at the drive-through.  
Specifically, the restaurants must display “the number of
calories contained in the standard menu item, as usually prepared and
offered for sale” and “a succinct statement concerning
suggested daily caloric intake, as specified by the [FDA] by
regulation….”  In fact, the restaurants must provide the
caloric content of each item on a salad bar:  “[I]n the case of
food sold at a salad bar … a restaurant or similar retail food
establishment shall place adjacent to each food offered a sign that
lists calories per displayed food item or per serving.”  
I don’t know how effective this rule will be in getting people
to eat more healthfully, but I suspect it will be fairly costly to
implement.  I’m also skeptical of the informational value of a
“succinct statement concerning suggested daily caloric
intake” — if such a thing is even possible.  To generate a
number resembling an individual’s optimal caloric intake, you
would need to know, at a minimum, the person’s gender, age,
height, weight, and activity level (see, e.g., these calorie
calculators).  I therefore can’t see how the FDA could formulate
a “succinct” statement of optimal calorie levels.  Of
course, the folks at FDA are experts.  Maybe they’ll find a way.
There has been some talk recently about whether the Obama
administration has given up on the “libertarian
paternalist” approach advocated by regulatory chief (and Nudge
co-author) Cass Sunstein.  Section 4205 suggests that it hasn’t.
While I’m skeptical that it will work, I sure hope it does. 
Otherwise, our dear leaders are likely to jettison the libertarian
part of their libertarian-paternalism, and those nudges will become

            Filed under: health care reform debate ,  markets , 
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	 A proposed amendment to our Constitution
	posted by ToddHenderson at 7:46 am

		Ask any conservative what the problem with America is today, and the
answer you will get is government spending. But ask that same
conservative, or any conservative for that matter, what to do about
it, and the shoulders will inevitably shrug. Politicians, including
conservatives, simply cannot be trusted when they get control of the
purse strings. The problem is a familiar one in law and elsewhere
— it is called the pre-commitment problem. Political leaders can
promise to cut spending, but can’t resist reneging on the
promise when in power; governments can promise not to bail out banks,
but know that they must when the manure hits the fan. (For instance,
Fannie Mae bonds explicitly disclaimed  any government guarantee, but
the bail out of Fannie Mae continues to cost us tens of billions of
There are solutions. The most famous is when Odysseus lashed himself
to the mast of his ship to resist the temptation to steer toward the
Siren’s songs. What Odysseus did was raise the costs for any
future action, therefore making it less likely. So how can we raise
the cost for congressional profligacy?
We cannot just hold ourselves to the commitment to vote the bums out
of office. This just moves the pre-commitment problem back one step
and puts it squarely in our lap. Sitting here today, I might want to
reduce the size of future government, but when the choice is to cut my
benefits, it may be harder to vote that way. In addition, we might all
collectively lament the growth in government (rising from less than 10
percent of GDP 100 years ago to over 40 percent today), but we might
also all individually value the pork our representatives bring home to
our district.
So what about a constitutional amendment setting a limit on the size
of government? Our founders tried to do this, but instead of setting a
dollar or percentage limit, they used enumerated powers. They thought
telling the government what it could do (and what it implicitly could
not do) would constrain the Leviathan. But this didn’t work. It
worked for a time, but it was an imperfect pre-commitment device, as
it has been eroded by hundreds of years of court rulings cutting the
other way. Instead of telling the government what it can and cannot
do, what about telling the government how big it can be.
I propose a new amendment to the Constitution:
“Spending by the federal government shall not exceed 25 percent
of the Gross Domestic Product in that year, except in cases where
Congress has declared war against another sovereign nation and such
additional spending is essential to the defense of the
According to constitution expert Tom Ginsburg, this sort of
constitutional provision would be unique in the world, which is odd
since the growth of government is a universal problem. (Switzerland
has a balanced-budget provision and a limit on tax rates that comes
close.) But this wouldn’t be the first time that America has
blazed a trail for solving an age-old problem.

            Filed under: markets
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	 The Case Against the Antitrust Case Against Google
	posted by Geoffrey Manne & Josh Wright at 2:32 am

		We have just uploaded to SSRN a draft of our article assessing the
economics and the law of the antitrust case directed at the core of
Google’s business:  Its search and search advertising
platform.  The article is Google and the Limits of Antitrust: The
Case Against the Antitrust Case Against Google.  This is really the
first systematic attempt to address both the amorphous and the
concrete (as in the TradeComet complaint) claims about Google’s
business and its legal and economic importance in its primary
market.  It’s giving nothing away to say we’re skeptical
of the claims, and, moreover, that an approach to the issues
appropriately sensitive to the potential error costs would be
extremely deferential.  As we discuss, the economics of search and
search advertising are indeterminate and subtle, and the risk of error
is high (claims of network effects, for example, are greatly
exaggerated, and the pro-competitive justifications for Google’s
use of a quality score are legion, despite frequent claims to the
contrary).  We welcome comments on the article, and we look forward
to the debate.  The abstract is here:
The antitrust landscape has changed dramatically in the last decade. 
Within the last two years alone, the United States Department of
Justice has held hearings on the appropriate scope of Section 2,
issued a comprehensive Report, and then repudiated it; and the
European Commission has risen as an aggressive leader in single firm
conduct enforcement by bringing abuse of dominance actions and
assessing heavy fines against firms including Qualcomm, Intel, and
Microsoft.  In the United States, two of the most significant
characteristics of the “new” antitrust approach have been a more
intense focus on innovative companies in high-tech industries and a
weakening of longstanding concerns that erroneous antitrust
interventions will hinder economic growth.  But this focus is
dangerous, and these concerns should not be dismissed so lightly.  In
this article we offer a comprehensive cautionary tale in the context
of a detailed factual, legal and economic analysis of the next
Microsoft: the theoretical, but perhaps imminent, enforcement action
against Google.  Close scrutiny of the complex economics of
Google’s technology, market and business practices reveals a range
of real but subtle, pro-competitive explanations for features that
have been held out instead as anticompetitive.  Application of the
relevant case law then reveals a set of concerns where economic
complexity and ambiguity, coupled with an insufficiently-deferential
approach to innovative technology and pricing practices in the most
relevant precedent (the D.C. Circuit’s decision in Microsoft),
portend a potentially erroneous—and costly—result.  Our analysis,
by contrast, embraces the cautious and evidence-based approach to
uncertainty, complexity and dynamic innovation contained within the
well-established “error cost framework.”  As we demonstrate,
while there is an abundance of error-cost concern in the Supreme Court
precedent, there is a real risk that the current, aggressive approach
to antitrust error, coupled with the uncertain economics of Google’s
innovative conduct, will nevertheless yield a costly intervention. 
The point is not that we know that Google’s conduct is
procompetitive, but rather that the very uncertainty surrounding it
counsels caution, not aggression.

            Filed under: antitrust ,  business ,  economics ,  google
,  law and economics ,  legal scholarship ,  markets ,  scholarship , 
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March 23, 2010	

	 Varney’s comments from the DOJ/USDA hearings [#dojusda
	posted by Geoffrey Manne at 10:10 am

		The DOJ has posted the transcript from the recent DOJ/USDA hearings
on antitrust in agriculture here.  I figured our readers might be
especially interested in seeing Christine Varney’s comments
(especially without having to slog through all 350 pages to find
them!).  I have bolded some of the most interesting parts of her
As a special bonus, at the end of this post, I also reprint some of
the particularly choice comments on Chicago economics by one of the
farmer panelists.  I leave it to readers to decide whether the
juxtaposition has any deep meaning.  I will say this: Technological
innovation, increasing economies of scale, shifts in international
trade and its restraints, and demographic changes–among other
things–have no doubt wreaked havoc on many small farmers and
farm communities.  The same can be said of the buggy whip makers,
Atari game system manufacturers, and polio hospital administrators, to
name but a few.  It is probably impossible to separate the populist
impulse to serve (or, for politicians, to appear to serve) the
Jeffersonian farmer from the enforcement of the antitrust laws, and
this is why antitrust in agriculture will continue to be so
contentious and so problematic.
Do be sure to check out the farmer’s comments at the end of the
post. (more…)

            Filed under: ag/antitrust workshop ,  antitrust , 
business ,  markets ,  politics
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	 The dark side of altruism
	posted by ToddHenderson at 6:22 am

		Have you ever been tempted to buy a beggar a cup of coffee or a
sandwich instead of giving money? If so, you have, like a young Anakin
Skywalker, taken your first step to the dark side of altruism.
Don’t get me wrong, I’ve been there too. The reason I
offered food instead of (money for) vodka is because I wanted to
“help” the beggar. From my lofty perch (that is, sober,
housed, and employed), I wanted to impose my values on him. Like a
father choosing broccoli instead of ice cream for his kids, I thought
I knew better what was good for the beggar — what he really
wanted if only his thought processes were rational.
At some level, this is sensible. If I am paying, either directly in
the form of the handout or indirectly in the form of the obvious
externalities from the beggar (e.g., crime, stink, etc.), then it
makes sense for me to try to reduce these costs.
But the dark side of caring is the perversity of this control. Once we
start thinking this way, the creep towards totalitarian nannyism is
hard to resist. Once I am paying for your health insurance, I suddenly
care a lot whether you get an abortion, have that gender-switching
surgery you’ve always wanted, or, most ominously, eat that Big
Mac for lunch instead of the salmon salad. In today’s new
America, I suddenly really care how much junk food the people making
less than $88,000 eat — I pay for every Dorito that crosses
their lips. And, for the record, I hate this about me and about New
America. (Evidence this is our future comes from the UK, where 75% of
people in a recent survey supported greater government control over
individuals’ food choices.)
The problems with altruism are well documented. The IMF for years
tried to control the internal policies of countries that it bailed out
or loaned money to. These attempts were failures, both because the
experts don’t always know what they think they know and because
the meddling inevitably involves backlash, power grabs, corruption,
and so on. (The IMF has abandoned these policies.) This instinct was
also a source of the eugenics movement. Once we think of people as
cost centers instead of autonomous individuals, the cost-benefit
calculations can lead to some disturbing results. German posters from
the eugenics era provide a nice example.
The battles ahead for New America are likely to be just as dirty. The
battle over abortion in the Stupak Incident is just a preview of what
is to come as every interest group wanting to feed at the trough,
remake America, press for rights they hold dear, and so on, head for
Washington to convince our dear leaders why the rest of the country
should or should not pay for their pet project.Whatever the negative
impact of me acting as a control freak is on my neighbor the beggar
will be dwarfed by the nation as control freak. At the individual
level, the control we try to exercise might actually be a good thing.
But multiply it by 300 million, centralize it in Washington, and
unleash the forces of public choice on it, and watch the beginning of
the end of our freedom.


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March 21, 2010	

	 Don’t Like the Texas Board of Education’s Brainwashing? 
There’s a Simple Solution.
	posted by Thom Lambert at 3:19 pm

		Lots of liberals, such as Wall Street Journal columnist Thomas Frank
and folks from the Huffington Post and People for the American’s
Way’s Right Wing Watch, are all up in arms over the Texas Board
of Education’s recent efforts to push Texas’s public
school curriculum in a decidedly “conservative” direction.
 As Todd and Josh noted, the Board recently voted to require high
school economics curricula to cover the ideas of free marketeers F.A.
Hayek and Milton Friedman. The Board also called for curricula to put
less emphasis on that godless Thomas Jefferson and more on Protestant
reformer John Calvin; to replace the term “capitalism”
with “free market system” (apparently on grounds that the
former term is often used derisively, as in “You capitalist
pig!”); and to include consideration of the “unintended
consequences” of a number of such “liberal”
initiatives as the Great Society, affirmative action, and Title IX.
Given the massive size of the Texas public school system, the
curricular changes ordered by the Texas Board of Education are likely
to influence textbooks used all across the nation.  Thus, liberal
critics contend, a small group of right-wingers in Texas is
effectively pushing their own contestable values and beliefs on
schoolchildren all over the country.  That’s troubling, they
And they’re right.  Who are these folks to decide that your
children or mine should learn more about Christian theologians John
Calvin and Thomas Aquinas and less about deist founding father Thomas
Jefferson?  While I agree with Todd and Josh that Hayek’s ideas
are worth learning in a high school economics class, I think
it’s troubling (and I’m certain F.A. himself would concur)
that this is happening because some know-it-all elites in Texas
decided that Hayek’s ideas are worthy and others’
But there’s a simple solution to this problem: Get the
government out of the curriculum-setting business altogether.  We
could take the money the government spends running its own schools and
give that money to parents to spend on the education they think their
child should receive.  At a minimum, we could let parents who want to
opt-out of a government-sponsored school take the money that would
have been spent on their child’s public education and apply it
to tuition at another school.  This sort of system would not only
improve educational standards by enhancing the competition public
schools face, it would also permit parents to control the substantive
content of the education their children receive — to avoid
indoctrination they deem offensive or wrong.  We could, of course,
have some basic standards for schools that receive tax revenues (e.g.,
they would have to produce students that perform adequately on skills
and knowledge tests, etc.), but this decentralized approach could
avoid the thorny values issues that are inevitable when any small
group of government elites — be they conservative or liberal,
religious or anti-religious — decide what matters will be taught
and how.
Unfortunately, many modern liberals (though not the ones whose
children are trapped in failing public schools!) reflexively oppose
school choice.  Thomas Frank, for example, refers to vouchers as one
of those cold-hearted capitalist innovations that oppress the populist
masses.  And just this week, 54 of 59 Democratic (or
Democratic-caucusing) Senators voted to kill the popular voucher
program in the District of Columbia.  
Maybe all this mess in Texas will at last convince these so-called
liberals to finally become pro-choice on something other than

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March 20, 2010	

	 Politically-Mandated Credit Card Interchange Fees Won’t Create
Jobs (But They Will Hurt Consumers and the Economy)
	posted by Geoffrey Manne & Josh Wright at 11:02 pm

		by Geoffrey A. Manne, Joshua D. Wright and Todd J. Zywicki
Cross-posted at Business in the Beltway (at and The Volokh
In a recent commentary at, former Clinton administration
economist Robert Shapiro argues that some 250,000 jobs would be
created, and consumers would save $27 billion annually, by reducing
the interchange fee charged to merchants for transactions made by
consumers using credit and debit cards.  If true, these are some
incredible numbers.
But incredible is indeed the correct characterization for his
calculations.  Shapiro’s claims, based on a recent study he
co-authored, rest on tendentious accounting, questionable assumptions,
and—most crucially—a misunderstanding of the economics of
interchange fees.  Political price caps on interchange fees won’t
help the economy or create jobs—but they will make consumers poorer.
First, Shapiro estimates the employment impact of a redistribution of
fees using the same stimulus multiplier that the Obama administration
uses to tout the effect of its stimulus package.  But it is
completely inappropriate to simply “plug in” the multiplier for
government stimulus to calculate the effect of a reduction of
interchange fees —unless the interchange fees currently paid to
banks somehow simply disappear from the economy, contributing nothing
to job creation, lowering the cost of capital, or increasing access to
credit.  Even assuming that some portion of the fees are pure profit
for card issuers, those profits must be paid out to shareholders or
employees, invested, or used to bolster bank balance sheets (which
provides capital for lending).  So, unlike the stimulus, this is at
best merely a politically-mandated wealth (and employment)
redistribution from card issuers to merchants, and any calculation of
apparent economic gain must be offset by a similar calculation of loss
on the other side.  Having ignored this offset, Shapiro’s
conclusions are completely untenable.
But Shapiro also misunderstands the economics of payment card networks
and the role of the interchange fee within them.  For example,
Shapiro estimates that 70% of merchant savings from reduced
interchange fees would be passed on to consumers in the form of lower
retail prices.  But that is pure speculation.  In Australia, where
regulators imposed price controls on interchange in 2003, fees paid by
merchants have fallen but consumers have seen no reduction in the
prices that they pay.  And where merchants have been permitted to
impose surcharges on credit users, the surcharge can, and often does,
substantially exceed the interchange fee cost.  It is not for nothing
that merchants have spent millions trying to push interchange fee
regulation through Congress.
In addition, Shapiro suggests that interchange fees are excessive in
light of the “transaction and processing costs of using credit and
debit cards.”  But his estimation of these costs is dramatically
off-base.  Not only does he appear to exclude the cost of the delay
between the time merchants receive payment (almost immediately) and
when consumers pay their bills (at the end of a billing cycle), he
ignores what may be the most significant single cost of consumer
credit operations (and corresponding benefit to merchants): the cost
of credit loss. (more…)

            Filed under: business ,  credit cards ,  economics , 
financial regulation ,  law and economics ,  markets ,  personal
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	 Paul M. Bator award
	posted by ToddHenderson at 8:08 am

		I loath the Oscars, Golden Globes, and other award shows. Is there
anything worse than a bunch of self-important blowhards congratulating
themselves and blathering about how they are what makes the world a
place worth living? Well, perhaps, a bunch of conservative students
and law professors doing the same thing might be worse. So I found
myself at the Federalist Society Students Symposium this year as the
recipient of the 2010 Paul M. Bator Award. As you can see in the video
of my remarks here, I wasn’t exactly sure what I was doing there
and I took a different lesson from the award than others.

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March 19, 2010	

	 Leegin Legislation Update
	posted by Josh Wright at 6:33 am

		A Senate panel approved the Leegin Bill on a voice vote (HT: Main
Justice).  The story behind the link suggests that there is some
Republican opposition brewing.  I suspect there will be hearings. 
The Bill’s findings make the following two observations:
(3) Many economic studies showed that the rule against resale price 
maintenance led to lower prices and promoted consumer welfare, and;
(4) abandoning the rule against resale price maintenance will likely
lead to higher prices paid by consumers and  substantially harms the
ability of discount retail stores to compete.  For 40 years prior to
1975, Federal law permitted States to enact  so-called `fair
trade’ laws allowing vertical price fixing. Studies  conducted
by the Department of Justice in the late 1960s indicated that  retail
prices were between 18 and 27 percent higher in States that  allowed
vertical price fixing than those that did not. Likewise, a 1983  study
by the Bureau of Economics of the Federal Trade Commission found 
that, in most cases, resale price maintenance increased the prices of 
products sold.
I believe both of these statements are, at best, misleading, and that
Leegin was correctly decided.  From an antitrust perspective, the
issue of whether RPM should be afforded per se treatment is whether
the practice “always or almost always reduces output.” 
Judge Douglas Ginsburg has more eloquently explained the empirical
logic behind the per se standard in Polygram, noting that the issue is
properly understood as whether there exists “a close family
resemblance between the suspect practice and another practice that
already stands convicted in the court of consumer welfare.” 
The real question is whether we know that resale price maintenance
— please don’t call it price-fixing — is whether the
practice is so likely to generate competitive harm that it should be
condemned without rule of reason inquiry.
As we’ve discussed previously, the empirical evidence on RPM
simply does not satisfy this standard.  Quite the opposite, an
objective assessment of the empirical evidence suggests that RPM is
The findings articulated in the Bill are misleading because (1) they
rely on studies from the 1960s which have been superseded by better
empirical studies and an improved theoretical lens through which to
understand RPM, and (2) by emphasizing the “price” test
the findings fail to note that the overwhelming majority of the
studies suggest that RPM increases output, a finding at odds with the
anticompetitive theories.  Of course, a finding that the most likely
effect of the legislation restoring the per se rule is to reduce
output and consumer welfare would not, I suspect, attract the same
number of votes or public support.
For interested readers,  testimony/ presentation slides at the FTC
Workshop on Resale Price Maintenance are available.
The TOTM archives on RPM, including a number of great posts from Thom,
are here.

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March 18, 2010	

	 Breaking Antitrust News: Imposing Duty to Promote Rivals Helps
	posted by Josh Wright at 8:53 pm

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

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