FINANCIAL REGULATION

How Do Bank Regulators Determine Capital Adequacy Requirements?

Ever wonder what the answer to this question is? If so, read my new paper at SSRN. I make four claims:

1. Bank regulators have used a process which I call “norming,” by which I mean choosing capital levels that weed out the worst banks but leave most of them untouched.

2. Norming is self-evidently (as a matter of the theory of financial regulation) a bad way to regulate banks, guaranteed to produce excessively generous rules that allow most banks to take excessive risks.

3. Inadequate capitalization of banks contributed to the financial crisis of 2007-2008.

4. If regulators had been required to use cost-benefit analysis rather than norming, they would have issued stricter capital adequacy rules.

INTERNATIONAL LAW

Obama’s treatyish climate agreement

The Times reported last week that President Obama plans to negotiate a non-legal climate agreement with other major emitters so as to avoid a Senate vote that would otherwise be required for a “treaty.” The treaty obligations are somehow both “voluntary” (for the benefit of the Senate audience) and “legally binding” (for the benefit of Obama’s constituents). Times reporters now routinely state that the president is “circumventing Congress” whenever he does something on his own, whether or not the Constitution, precedent, or statutes gives him the authority to do so. So I wrote this Slate piece to explain that President Obama’s approach was not unconstitutional, or even particularly notable. Presidents can make agreements with foreign countries and then engage in parallel play with foreign leaders–conforming to the agreements to the extent they have independent authority to do so. They have done so for decades if not centuries.

I expected that this latest development would be additional grist for the mill of Obama critics who think that he is a “domestic Caesar,” but the outrage seems to have been lost amid the general disintegration of international order.

LEGAL SCHOLARSHIP

Adrian Vermeule on Philip Hamburger’s “Is Administrative Law Unlawful?”

Adrian Vermeule writes:

Philip Hamburger’s recent book asks “Is Administrative Law Unlawful?” My answer is “No.” Here it is.

P.S. Mike Ramsey implies that the review is inconsistent with an earlier book, The Executive Unbound.

I deny that consistency is a virtue for academics, but I can’t see any inconsistency anyway. Mike hasn’t grasped the sheer pedantic arrogance of my position (not to be attributed to Eric), which is that only those of us who understand the basic doctrines and principles of administrative law are entitled to debunk them. Philip Hamburger doesn’t seem to understand them, so his attempt at debunking misses the mark. I happen to think that there is a valid debunking, different than Philip’s, but that doesn’t help those who have failed to pass the pons asinorum of the subject.

LEGAL SCHOLARSHIP

Do Republican law professors strategically conceal their views?

law professor ideologyThe figure above is from my paper with Adam Chilton, An Empirical Study of Political Bias in Legal Scholarship. I highlight it here because it received a great deal of attention in a recent workshop. It shows that Republican law professors (more precisely, law professors who make net donations to Republican candidates) tend to write a mix of conservative, liberal, and “neutral” papers, while most Democratic law professors write uniformly liberal papers or nearly so. (The numbers on the x-axis refer to the number of conservative papers minus number of liberal papers written by a professor out of a total of five. For example, -5 means that a professor writes five liberal articles; +2 means that a professor writes on net two conservative articles, which could mean three conservative, one liberal, and one neutral article, or two conservative and three neutral articles, and so on.)

What is the explanation for this pattern? I can think of five (which are not all mutually exclusive). (1) Democrats honestly write liberal papers that accurately reflect the world as it is, while Republicans do so only occasionally. (2) Republicans are open-minded and write papers contrary to their political leanings if truth leads them in that direction, while Democrats are ideologues. (3) Republicans who end up in academia are just not politically passionate, while Democrats are. (4) Republicans benefit intellectually from being in an environment where most people challenge their views, while Democrats suffer from herd behavior. (5) Republicans behave strategically, deliberately writing some liberal papers (or entering fields with weak ideological valence) in order to avoid being seen as excessively conservative by colleagues, deans, and students who mostly disagree with them.

In this recent workshop, a number of conservatives in the room argued that explanation (5) was the correct one. Apparently (and this is news to me), law professors sometimes (often?) advise politically conservative applicants for teaching positions to look for topics where conservative principles or methods would lead them to reach liberal conclusions. In contrast, the liberals at the workshop reported that they had not had not been told to mask their ideological leanings in whole or in part. This is anecdotal evidence from just a few people, but it does explain the pattern we observe in our data.

LEGAL SCHOLARSHIP

Are Republican law professors cited more often than Democratic law professors?

A number of people asked me this question in light of my paper, An Empirical Study of Political Bias in Legal Scholarship (with Adam Chilton), which I discuss here. To answer this question, we obtained citation data from Gregory Sisk (see this paper for his methodology). The results (the number of articles that cite a specific professor over the last five years, averaged over each group) are below:

Affiliation Mean Citations Median Citations
Democrat 329 251
None 236 164
Republican 492 326

So the answer is “yes” (at a statistically significant level). It is interesting, and possibly puzzling, that non-donors are cited less often than both Democrats and Republicans are. Maybe articles with a political bent attract a greater number of responses, and so professors who do not write them are less frequently cited.

That said, what is the explanation for the more frequent citation of Republican professors? I can think of the following possibilities:

1. Liberal law faculties discriminate against Republicans by implicitly imposing a higher standard for hiring them. Thus, Republicans who are hired are better scholars than Democrats, and hence are cited more often, even if the scholars in the larger pool of potential hires are equivalent in ability.

2. Liberal law professors, being more numerous, write more papers than Republicans do (in aggregate). Because they must find someone to criticize in their papers, they end up citing Republicans frequently. Citations by Republican law professors are divided among the larger pool of Democratic professors, so on a per capita bases the latter are less frequently cited than the former.

3. The most distinctive ideas (whether correct or not) are produced by Republicans because they are better able to resist pressures to conform and to repeat conventional wisdom. Distinctive papers are more likely to be cited than papers that repeat old ideas.

4. Republican scholars cite other Republican scholars more frequently than Democratic scholars cite other Democratic scholars because Republicans, feeling beleaguered in the liberal academy, have a greater sense of solidarity, and help each other out through excessive citation.

Better data would allow one to explore these alternative explanations. I should include the usual caveat that many people doubt the reliability of citations as a measure of scholarly quality or influence.

CONSTITUTIONAL LAW

More on the power to enforce (or not to enforce) immigration law

My latest (and, I hope, last) argument is at Slate. I respond to Douthat and Salam. My initial response to the Douthat column that got the ball rolling was at The New Republic. Both Douthat and Salam responded with ad hominem attacks (Salam later took his down). Douthat’s response is here (he thinks wrongly that Obama can’t reverse his policy, and he’s wrong to say that Obama is “legalizing” illegal immigrants); Salam’s two later responses are here and here.

I left out of my most recent piece for reasons of space one additional point that is worth making: it is wrong to claim that Obama has put into place (“de facto”) the path-to-citizenship law that Congress has refused to pass. Obama has no power to grant citizenship to anyone, and his enforcement authority expires with his term.

MISC.

July 4 in Chicago: A reply to Reihan Salam

Various commentators seem to be shocked by my claim that the president can refuse to enforce the immigration laws. They think that such an action would violate the Constitution. No lawyer does, aside from a few with idiosyncratic views about the Constitution. Let me see if I can explain why.

Last July 4, I took a stroll along the Chicago lakefront in my neighborhood. As far as the eye could see, ordinary people were setting off fireworks, and not just everyday firecrackers, but what seemed like commercial-grade fireworks that showered sparks on us from high in the air. Numerous police officers stood around and watched. Even though fireworks (beyond smoke bombs and sparklers) are quite illegal in Chicago, no one moved to make an arrest or even issue a warning.

This is a familiar example of executive discretion. Hundreds of people violated the law. The police did nothing about it. Why not? Maybe because they did not have enough resources. Maybe because the mayor thought arrests would be unpopular. Maybe because the police enjoyed the fireworks display. Who knows? It doesn’t matter. No one thinks that the city government behaved unconstitutionally though quite a few citizens complained. (This has been going on for many years.)

Obama’s (apparent) plan not to enforce immigration laws is just another example. His critics have worked hard to distinguish it from run-of-the-mill enforcement discretion that the Constitution places in the executive branch. Reihan Salam makes several attempts.

First, the president can use his law enforcement discretion to “husband enforcement resources” but only to advance the immigration law, and that’s not what he’s doing. But Chicago did not “husband enforcement resources” to advance “fireworks law.” It simply disregarded the fireworks ordinance. It husbanded resources for goals (for example, keeping order) that it deemed more important than stopping people from shooting off fireworks. There is no rule that enforcement discretion is somehow law-specific.

Second, Salam argues that the president can’t do what Congress didn’t intend. Congress didn’t intend to allow the president to give work permits to millions of illegal immigrants. True, but state and city lawmakers didn’t intend to allow Chicago police not to enforce the fireworks law. Or, to draw a closer parallel, to give fireworks permits to thousands of amateurs. The law reveals an intent that is exactly the opposite.

Third, the president can’t prospectively “suspend” the law. (He’s not suspending it–he can’t do that–but never mind.) Here we see a difference. The Chicago police do not announce in advance that it will suspend the law requiring people to obtain a license to shoot off fireworks. That the police are issuing “fireworks permits” hither and yon, akin to Obama’s work permits. But everyone knows that this is the policy. No one has explained why announcement of prospective action–which serves important rule-of-law values by informing the public of policy–is a defect rather than an improvement over the Bush era, where virtually no employer was ever punished for employing illegal immigrants but a policy of non-enforcement was never announced.

Question: How many employers were punished by the Bush administration in 2006 for employing illegal immigrants? Answer: zero. It’s true that he didn’t announce a policy of granting work permits to  illegal aliens. But that was his policy. Why didn’t Salam argue then that Bush was violating the Constitution?

The truth is that a huge number of laws are simply not enforced. An old example that people used to cite are sodomy laws. They were on the books; they were occasionally used against rapists when a jury couldn’t be persuaded that the victim withheld consent. Sodomy laws were virtually never enforced against (otherwise) law-abiding people. All kinds of old laws sit on the books that no one bothers to enforce. And not just crazy old state laws. There are thousands of intricate regulatory laws governing industries of various sorts that are never or selectively enforced.

Environmentalists and other advocates have complained for decades about executive-branch policy (yes, explicit and prospective) of issuing rules under regulatory statutes like the Clean Air Act only if those rules pass cost-benefit tests. This policy was first implemented by Reagan in 1981. The policy is plainly one of under- or non-enforcement of the law, which contains no such cost-benefit test but rather requires strict regulation. Yet I’m guessing that Salam and Douthat don’t see this policy as an example of “domestic Caesarism.” Why not, exactly?

Or if you want still more examples, consider the well-recognized phenomenon of “regulatory forbearance” in banking law where banking regulators decline to shut down a sick bank despite its violation of capital-adequacy regulations because they think it will recover. Or consider the endless statutes that ban “loitering,” “disorderly conduct,” “breach of the peace,” and the like. If police had to literally enforce these laws, we’d all be in jail. So if you wonder why courts never try to force the executive branch to enforce the law, this is why.

All that is different about the immigration example is that it is currently a hot-button political issue. As Salam seems to recognize implicitly as his piece winds down, the president is (or may be) violating a political norm, not a constitutional norm. And for that reason his decision may be a bad idea, and perhaps it will backfire. But that doesn’t make it unconstitutional.

BOOKS

Piketty and Intergenerational Wealth Transfers

Glen Weyl and I wrote a piece for The New Republic on Piketty’s book. Piketty’s book has received a lot of attention for two reasons–the first is that it is rigorous and fascinating; the second is that its focus on inequality resonates with public anxieties about the direction of the market economy.

There is a sensible argument about inequality and there is a dubious one. The sensible argument is that today certain lucky folks–financiers, start-up entrepreneurs who hit the jackpot, top CEOs, and so on–who earn vast incomes, almost certainly far in excess of what is needed to motivate people to generate value for the economy, and in many cases (above all, in finance) even in excess of whatever value they do generate, should pay higher income taxes. Many people think that Piketty’s book makes this argument. But while Piketty endorses this view, or at least seems to, this view is not the distinctive contribution of his book.

The book is called “Capital in the Twenty-First Century,” not “Income in the Twenty-First Century.” Piketty argues that extreme inequality is the result of the accumulation of capital in the hands of the few across generations. And because the rate of return on capital is higher than the “natural” rate of economic growth, inequality can only increase. This argument really is distinctive–it is the distinctive contribution of the book–and it is what leads him to endorse a wealth tax (as opposed to a higher income tax, though he does support a higher income tax as well). This argument is dubious. It rests on implausible assumptions about how super-rich people spend their money, and, most of all, how they transfer it to heirs.

BOOKS, INTERNATIONAL LAW

James Morrow, Order Within Anarchy

This book explores compliance with the laws of war, focusing on laws regulating the treatment of POWs, using theoretical models and empirical data. Governments take an instrumental  approach to the law: they follow it when it serves their interest. The major way this can happen is if retaliation by the enemy is worse than any temporary gains from violating the law while the enemy follows it. Thus, a state may violate the law if (1) the law puts it at disadvantage and so it gains from disregarding it even if the enemy does as well; or (2) the law puts the enemy at a disadvantage so it cannot be expected to comply with it. Mutually beneficial cooperation can break down because the rules are unclear, but trying to get them precise in advance is difficult because of uncertainties about future changes in technology and the like.

A good companion book is Isabel Hull’s A Scrap of Paper, which examines the laws of war during World War I. Hull also addresses the laws of neutrality, which create more complex strategic interactions than POW rules do. A belligerent wants to inflict as much harm on the enemy as possible,  including interference with trade with neutrals, but up to the point where the neutrals themselves protest and may join forces with the enemy. The legal rules play an even more limited role than POW rules do. Neutrals have complex attitudes toward the belligerents, and some will tolerate violations of the law of neutrality by one belligerent because of their hostility to the other.

Hull is a historian while Morrow is a political scientist but the books tell a similar tale about governments’ instrumental attitudes toward international law. International law professors, who regard international law from a static, doctrinal perspective, and against all evidence take compliance for granted rather than as a problem that influences how the law is interpreted, could learn a lot from these books.

INTERNATIONAL LAW

Would it be lawful for Israel to shut off electricity to Gaza?

Yes, says Avi Bell (updated version here). No, says twelve other scholars in Israel. This is a purely hypothetical question because Israel has expressed no intention of shutting down the flow of electricity into Gaza, and probably wouldn’t gain anything by doing so. But since you asked….

International law does not bar a belligerent from cutting off electricity. Indeed, a belligerent is free to bomb the power plants of its enemy, as the United States has recently done in Iraq and Serbia. Gaza has only a few power plants and receives most of its electricity from Israel. Israel could cut off electricity even if it were not at war with Gaza, just as it could refuse to trade with Gaza. Being at war with Gaza, it could not only shut off electricity, it could blow up Gaza’s plants.

A possible counterargument would be that Israel occupies Gaza. An occupier normally must maintain services for the people living in occupied territory. So one question is whether Gaza is occupied. No: Gaza has its own government and own militia. Yes: Israel controls the borders and can intervene at will. I think the better answer is No–Gaza is blockaded and besieged but not occupied.

But the 12 authors don’t argue that Israel occupies Gaza. Instead, they argue that Israel has certain obligations to Gaza because Israel used to occupy Gaza and since withdrawing has prevented Gaza from developing infrastructure by blockading it. There is an Israeli Supreme Court case that lends credence to this theory, but international law does not. There is no legal authority for the principle that a belligerent that has withdrawn from a country has any obligations toward it that arise from the former occupation. Nor can the authors cobble together a description of the contours of those obligations if they did exist, so even if Israel owed obligations toward Gaza of some sort, it would hardly follow that it cannot cut off electricity if it believed that doing so advanced a legitimate military objective.

I suspect that Israel has sensible political reasons for not cutting off electricity, and so let us hope that this debate remains theoretical.

Kirkland and Ellis Distinguished Service Professor, University of Chicago Law School