All posts by Eric Posner

MISC.

King v. Burwell: my prediction

Okay, I’ll say it. I predict that the plaintiffs will win  by a vote of 5 to 4. Not that they should. Why?

1. While I agree with the government that Chevron deference is warranted, this doctrine is too squishy to constrain a majority of the Court. Academic research shows that Supreme Court justices don’t take Chevron very seriously.

2. And while I think the government’s interpretation is better than the plaintiffs’, I don’t think the plaintiffs’ interpretation is crazy. This sort of thing–where the relevant statutory language taken in isolation seems clear and is allowed to trump context even if context provides powerful evidence that the language was not intended–happens all the time in the courts. Whatever you think of textualism and how it should be done, the conservative justices won’t have to engage in embarrassing linguistic gymnastics to find for the plaintiffs.

3. And, finally, as I explain in Slate, justices who hate Obamacare and see it as an extension of the hated New Deal administrative state will, even if they try to be conscientious, find the plaintiff’s interpretation more persuasive. This is the well-known power of motivated reasoning. Not that I’m subject to motivated reasoning, or am I?

MISC.

New Rambler Review

Announcing The New Rambler, an online review of books. Its mission is to publish high-quality reviews of intellectually ambitious books, in the spirit of The New York Review of Books, The Times Literary Supplement, and the back half of the (old) New Republic.

Our first few reviews are up. We’ll be adding new reviews every day or two for the next few weeks.

Check out the site, and let one of us know if there is a book that you’d like to review or see reviewed.

CONSTITUTIONAL LAW

More thoughts on Judge Hanen’s opinion on DAPA

At Slate. I thought the opinion was interesting but unpersuasive. Josh Blackman, by contrast, likes the opinion but not because of what it says:

Judge Hanen, however, showed his hand by explaining that the president had engaged in a “complete abdication” of the law. Rather than enforcing the law, Hanen saw Obama’s actions as making law: The executive is “is not just rewriting the laws; he is creating them from scratch.” This is the role of Congress, not the president.

So Blackman thinks that Judge Hanen’s real objection to DAPA is based on the Constitution, not the APA. He may well be right. But then why didn’t Judge Hanen rule on the constitutional merits? Probably because if he had, the opinion would have been even weaker than it was.

INTERNATIONAL LAW

Libya, humanitarian military intervention, and the “responsibility to protect”

From Thomas G. Weiss, RtoP Alive and Well after Libya, Ethics and International Affairs (2011):

Perhaps Libya will make policy- and decision-makers realize that between 1999 and 2011 we witnessed not too much military intervention to protect human beings but rather not nearly enough. The international action against Libya was not about bombing for democracy, sending messages to Iran, implementing regime change, keeping oil prices low, or pursuing narrow interests. These may result from such action, but the dominant motivation for using military force was to protect civilians. A collateral benefit is that the (to date) encouraging nonviolent and democratic revolutions in Tunisia and Egypt may have greater traction. Now that the Arab world is no longer a democracy-free and human rights–free zone, Qaddafi’s “model” for repression will no longer be interpreted as an acceptable policy option by other autocratic regimes.

From the Economist, Jan. 10, 2015:

Meanwhile Libya’s ungoverned spaces are growing, and with some 6,000 km of border the country’s problems are hard to quarantine. Each month 10,000 migrants set sail for Europe. Libyan arms in the hands of groups allied to al-Qaeda in the Islamic Maghreb triggered the collapse of order in northern Mali two years ago; some of those who subsequently fought against the French there have now returned to Libya, where they are reportedly running jihadist training camps. On January 3rd, IS claimed to have extended its reach to Libya’s Sahara too, killing a dozen soldiers at a checkpoint on a jihadist transit route to the Sahel. The conflict is as likely to spread as to burn itself out.

MISC.

How Judge Hanen was able to rule against President Obama’s immigration program

He redefined non-enforcement of law (which is generally discretionary and non-reviewable) as the conferral of a benefit, namely, “three years of immunity from [the] law” and “legal presence status” (p. 87). While the president can underenforce statutes based on his constitutional authority, he can’t confer these “things,” these benefits, on unauthorized aliens without statutory authority.

But there are no such things. The beneficiaries of the program do not receive “immunity” in a legal sense because the president can change his mind and prosecute or deport them. “Legal presence status” similarly just means non-enforcement.

The grain of truth in Judge Hanen’s opinion is that “legal presence status” does typically trigger a right to a driver’s license under state law. That is a benefit. The government replies that states could refuse to issue driver’s licenses to aliens who are legally present under the program. The judge is (I think, rightly) skeptical of this argument. But he is rightly skeptical only because the Supreme Court has held that the president’s non-enforcement decisions in the area of immigration take precedence over state law. Which gets us back to where we started: legally speaking, the program is a non-enforcement program, unreviewable for that reason.

MISC.

A Framework for Bailout Regulation

A new paper, written with my colleague Tony Casey. The abstract is below.

During the height of the financial crisis in 2008 and 2009, the government bailed out numerous corporations, including banks, investment banks, and automobile manufacturers. While the bailouts helped end the financial crisis, they were intensely controversial at the time, and were marred by the ad hoc, politicized quality of the government intervention. We examine the bailouts from the financial crisis as well as earlier bailouts to determine what policy considerations best justify them, and how they are best designed. The major considerations in bailing out and structuring the bailout of a firm are the macroeconomic impact of failure; the moral hazard effect of the bailout; the discriminatory effect of the bailout; and procedural fairness. Future bailouts should be guided by principles that ensure that the decisionmaker properly takes into account these factors.

MISC.

King v. Burwell and ideological voting

Adrian Vermeule has argued that under the Chevron rule, the Supreme Court should defer to the government’s interpretation of the relevant portions of the ACA because the disagreement among lower court judges indicates that the statute must be ambiguous. Of the nine judges (six appellate, three district court) who have voted or ruled on the merits of the challenge, six agree with the government and three agree with the plaintiffs. If we believe that the judges acted in good faith, then their disagreement about the meaning of the statute is itself evidence that the statute is ambiguous, triggering Chevron deference to the government’s interpretation if it is reasonable.

But what if we don’t believe that they acted in good faith? The judicial behavior literature sometimes gives the impression that judges are algorithms through which presidents ensure ideological outcomes that they prefer. If judges just vote their ideology, then disagreement does not mean that the statute is ambiguous; it just means that the judges have different ideologies. (N.B.: the literature does not come to such an extreme conclusion, but it gives credence to the widespread view that ideological leanings of judges matter, particularly for high-profile, ideologically charged cases.)

So what do the data show? I compile the relevant information in the table below.

Judge Winner Nominating Pres. Court
Spencer Government Reagan E.D. Va
Friedman Government Clinton E.D.C.
White Plaintiffs Bush E.D.Ok
Griffith Plaintiffs Bush D.C. Cir.
Randolph Plaintiffs GHW Bush D.C. Cir.
Edwards Government Carter D.C. Cir.
Gregory Government Clinton/Bush 4th Cir.
Thacker Government Obama 4th Cir.
Davis Government Obama 4th Cir.

 

Surprise! All the judges voted consistently with their ideological priors, as measured by the president who nominated them–with one quasi-exception and one real exception.

The quasi-exception is Judge Gregory. Clinton appointed him during a recess, and then Bush nominated him. He voted in favor of the government. The other is Judge Spencer, who was nominated by Reagan and ruled in favor of the government.

One ought to consider the argument that, taking into account ideology, Judge Spencer’s ruling is the only one that is credible because his opinion was the only one that was clearly counter-ideological. Judge Gregory–as someone who was acceptable to presidents from both parties–might also be considered credible for just that reason.

On my version of the Vermeulean vote-counting approach, then, the government also wins. Of course, supporters of the ACA probably shouldn’t take much comfort in this analysis. If judges normally vote their ideology, then more likely than not the Supreme Court will ignore both my and Vermeule’s analysis and vote 5-4 in favor of the plaintiffs.

Guest Post, LEGAL SCHOLARSHIP

Political Opposition to Chinese M&A Attempts

rhodiumgroup_graph

A guest post from Adam Chilton:

When do attempts by Chinese firms to acquire American companies generate political backlash in the United States? In a paper that was just published, The Political Economy of Inward FDI: Opposition to Chinese Mergers & Acquisitions, I explored this topic with Dustin Tingley, Chris Xu, and Helen Milner.

As the above figure from our paper shows, investments from China in the United States have increased dramatically in the last 15 years. During that time, Chinese firms have attempted or completed Mergers & Acquisitions with over 500 American companies. These M&As have even included Chinese firms taking over large publicly recognized American companies like IBM’s Thinkpad division and Smithfield Foods. Although some of these transactions have gone largely unnoticed, others have generated considerable backlash from both the public and government officials.

To test what factors predict political opposition to these deals, we utilized a dataset of 569 attempts by Chinese firms to complete M&As with American companies between 1999 and 2014. For each transaction, we searched a number of news databases to determine whether each transaction generated political opposition. We then collected information on a variety of factors about the companies involved and the relevant industries for each transaction so we could test what factors are associated with M&As generating political opposition.

We found that political opposition is more likely when the American companies targeted by Chinese firms are in security sensitive industries or economically distressed industries. We also found evidence of reciprocity: opposition is more likely when the American companies face restrictions from acquiring firms in the same sectors in China. If you’re interested in learning more about the results, or the methods and data we used, the paper is available on SSRN.

MISC.

More on speech and sex codes in universities

Not many people liked my Slate piece, which defended speech and sex codes in universities. Here’s a representative response by Robby Soave at Reason. My argument was that college students need protections that adults can do without because they are (usually) young, and (often) not mature enough (yet) to flourish without them. They go to college because they need an education, and one thing they need to learn is how to interact with people. You can find my reasons in the original piece.

Soave admiringly quotes Greg Lukianoff, president of the  Foundation for Individual Rights in Education (FIRE). FIRE has done some good by bringing to public attention many of the abuses that universities engage in, but the group has a bizarre, self-contradictory mission, which is to demand that private universities (as well as state universities) comply with the First Amendment. This mission is self-contradictory because private universities are not governed by the First Amendment. So what we have is an organization that is dedicated to advancing the First Amendment trying to control how universities exercise their First Amendment rights.

The people at FIRE are aware of this problem.  FIRE gives a pass to any university that states “both clearly and consistently that it holds a certain set of values above a commitment to freedom of speech.” But this means that while FIRE holds itself out as a pro-speech organization, it is really a pro-clear statement organization. It says it goes after universities that say they support freedom of speech while also imposing speech codes. Of course, the universities are not lying or pretending; their codes are on the web, and anyone can see them. FIRE doesn’t explain why, if it has no problem with universities that exercise their First Amendment rights by promoting (say) religious rather than free-speech values, it does have a problem with universities that balance free-speech values with other values.

Anyway, here’s the quote from Lukianoff that impresses Soave so much:

MR. LUKIANOFF:  ….  Essentially, just to summarize it, the way I’ve heard it made in the past is essentially that what we’re really saying is that 18- to 22-year-olds are children. And they must be therefore treated the same way as K through 12 are. They can’t handle the real world. They can’t handle the duties of citizenship. It’s an argument that I’ve definitely heard.

And if you’re saying that basically we should—that maybe below-graduate-level study should be ruled the same way high school students should be—I would disagree with you.

But that’s definitely an argument that people should make that straight out, but you run into a couple moral and philosophical problems with that.

One of them is the moral and philosophical underpinnings of the 26th Amendment.  Essentially, we have decided in this country that 18-year-olds… that is considered the age for majority.

We also send our 18-year-olds to war.  Unless you’re actually also willing to make the argument that nobody below the age of, I don’t know, 22 should go to war, and we repealed the 26th Amendment, we’ve got a serious problem.

[…]

MR. LUKIANOFF:  I just want to make one last point, and do not forget that some of the greatest contributions of colleges and universities come out of their graduate and Ph.D. programs. And so what I’ve watched is people try to argue that because of the presence of some 15- to 16-year-old super-geniuses at some of these campuses, that we should be therefore limiting speech on college campuses, forgetting that [that] would also limit the speech of 45-year-old Ph.D.’s.

 There are an awful lot of lapses of logic and factual errors in such a short quotation. The argument that 17-22 year-old students should be subject to restrictions does not entail that those restrictions should be the same ones that apply to kindergardeners or even 12th-graders. The 26th amendment does not establish the age of majority but the voting age. The age of majority remains subject to the discretion of state governments, as do related laws like the age of consent. Although currently nearly all states treat 18 as the age of majority, they don’t have to, and they haven’t always.

“We” did not decide anything through the 26th amendment. It was ratified in a different era, by people in the thrall of the youth movement who were reacting against the authoritarian tendencies of the day. As I argued in Slate, people have been reconsidering some of the unquestioned truths of the 60s. The most obvious manifestation of this is the drinking age, which is 21. “We” may trust youngsters to vote and serve in the military but we don’t trust them to handle alcohol wisely. Finally, universities are perfectly capable of distinguishing undergraduates from graduate students, and relaxing rules for the latter.

It takes a particular type of legalistic mind to believe that some magic number–say, 18, or 21, or whatever–distinguishes “children” and “adults.” And not a very good one. All of law is shot through with rules and exceptions that make presumptions about maturity but allows them to be rebutted, recognizing that people mature at different rates, and may be mature enough to be trusted with some things (votes) but not others (alcohol), depending on their upbringing, their surroundings, and no doubt biological processes as well. The 18-year-olds who enter the military do not enjoy freedom of speech but are subject to extreme discipline and rigorous training that ensures that they act appropriately in a military environment.

I want to make a final, more speculative point. There are many religious universities which impose quite strict codes on their students. Notre Dame, for example, appears to ban premarital sex as well as all kinds of offense-giving that it believes is inconsistent with Catholic teachings. BYU prohibits cursing and regulates clothing and grooming. Students have always been free to self-select into such institutions, and have in great numbers. The current panic about university-imposed restrictions on personal behavior was not a reaction to the religious institutions. It did not begin until secular universities began to worry about offense-giving to racial and sexual minorities. Conservatives who claim to be worried about freedom of expression are really objecting to the corruption of the youth–17-22 year-olds who conservatives believe are too immature to resist bad arguments and influences–by people whose moral values they disagree with.

As for the libertarians at places like Reason, they would do well to reflect on what exactly their libertarianism entails. Freedom of speech or the right to choose how and where to be educated? If students are mature enough to choose universities that subject them to religious or modern hate-speech style restrictions or none at all, then libertarians should cheer them on. If students are not mature enough, then libertarians should agree that university codes are not objectionable. We can then argue about what those codes should be, but my main argument stands unrefuted.

Guest Post, MISC.

Guest Post: Evelyn Blacklock on King v. Burwell–text and context

Evelyn Blacklock, a student at Harvard Law School, writes in with these insightful comments on statutory interpretation in King v. Burwell.

Although it involves a complex statutory scheme, King v. Burwell asks the Court to answer a relatively straightforward question: is the IRS’s interpretation of the ACA reasonable?  The Court’s task is to identify the statute’s range of reasonable interpretations and determine whether the IRS’s interpretation falls within that range.  If it does, the IRS wins, even if the Court thinks it is a second-best interpretation.

As many have noted, King will therefore test the Court’s approach to contextual interpretation.  To identify the statute’s range of reasonable interpretations, the Court must consider the contested provision, § 36B, “both on its own and in relation to the ACA’s interconnected provisions and overall structure so as to interpret the Act, if possible, ‘as a symmetrical and coherent scheme.’”  So much is not controversial.  The real question is how the Court will use context.  As the lower court opinions demonstrated, there are different ways to approach contextual interpretation.

One way is to consider how the relevant context might inform the meaning of the contested provision.  The Fourth Circuit in King v. Burwell took this approach: the court admitted that a “literal reading” of § 36B seemed to favor the challengers’ interpretation (limiting tax credits to state Exchanges), but it also examined related provisions to see if they “shed any more light” on the question.  Both § 36B(f), the “reporting” provision, and section 1312, the “qualified individuals” provision, seemed to assume that tax credits would be available on state and federal Exchanges.  Given those and other contextual signals, King concluded that the IRS’s interpretation—allowing tax credits on both kinds of Exchanges—fell within the statute’s range of reasonable interpretations.

The D.C. Circuit in Halbig v. Burwell, meanwhile, took a different approach.  The court considered the same context, but inverted the inquiry: rather than ask whether context “shed any more light” on § 36B, Halbig asked whether the literal reading of § 36B—limiting tax credits to state Exchanges—would render those other provisions, which arguably assumed the availability of credits on federal Exchanges, absurd.  The court concluded that the challengers’ reading might render related provisions odd, but not utterly absurd, and rejected the IRS’s interpretation.

Halbig’s approach seems a strange way to go about determining interpretive reasonableness.  As a (very simplified) example, suppose I live in an interpretive community where “milk” usually means “whole milk.”  I have a recipe that calls for “milk.”  It so happens that this recipe appears in a cookbook of low-fat recipes.  I interpret this particular recipe as calling for “skim milk.”  Is my interpretation reasonable?  To answer that question, it would be natural to consider whether the rest of the cookbook seems to assume the use of low-fat ingredients; that contextual information might not be conclusive evidence of the meaning of “milk,” but it would surely be a point in favor of the reasonableness of my interpretation.  It would be odd, on the other hand, to gauge the reasonableness of my interpretation by starting with the assumption that “milk” must mean “whole milk” unless that reading would render the rest of the cookbook absurd.  The first approach uses context to determine whether my interpretation might fall within the total set of all reasonable interpretations; the second instead uses context only to confirm that a presumptively ideal interpretation is not unreasonable.  The second approach actually tells us nothing about whether my interpretation is reasonable—it tells us only that at least one other interpretation is acceptable.

Put another way, rather than use statutory context to test the reasonableness of the IRS’s interpretation, Halbig found a point estimate of statutory meaning and then effectively imposed a presumption against finding any wider range of reasonable interpretations beyond that point unless outright absurdity resulted.  As the government put it in its petition for rehearing en banc, “‘absurdity’ was the wrong test.  The majority erred by purporting to discern the plain meaning of one provision before considering all relevant provisions of the Act.”  (Or as a recent brief noted: “[C]ourts must interpret a provision in the first instance in light [of] its context and place in the statutory scheme. . . . [T]he question here isn’t just whether Petitioners’ reading of Section 36B renders absurd the various [related] provisions . . . . Rather, the question is this: What does the ACA, read as a whole, say about tax credits when you take into account all its provisions?”)  Halbig’s approach shifts the inquiry from whether there is a range of reasonable interpretations to whether the court’s initially favored interpretation—what it perhaps sees as the best interpretation—makes the rest of the statute unreasonable.  So long as it doesn’t, the court’s interpretation wins.  The court will not accept second-best, but still reasonable, interpretations unless the agency can rebut a presumption in favor of the court’s point estimate by clearing absurdity doctrine’s high bar.

None of this is to suggest that the statute is simple or that the IRS must necessarily win.  The suggestion, rather, is that when courts face a question of interpretive reasonableness, and when reasonable meaning depends on context, courts should not short-circuit the inquiry by examining context only after establishing a preferred interpretation, and then only in order to gut check that preferred interpretation.

BOOKS

Richard McAdams’ The Expressive Powers of Law

Cover: The Expressive Powers of Law in HARDCOVERBack in the 1990s, there was a lot of interest among law professors about the interaction between law and social norms. There were several conferences. I wrote a book about it. Even the New Yorker published an article about it. There had been a general sense that traditional economic models then being used in law and economics took too much for granted–suggested that the government could in an uncomplicated way lay down the rules for people to follow and then sanction them if they violate those rules. In fact, people often act in orderly ways and generate public goods for themselves without resorting to law. They may not even know about the law. Robert Ellickson wrote a famous book about this phenomenon. If all this is so, the question is how.

Game-theoretic models–then newish among lawyers (although decades old), now familiar–seemed to offer explanations. And they had interesting implications. Scholars quickly realized, and showed with these models, that poorly designed law, if it did not respect or work off of social norms, could damage them, possibly, or in other ways generate perverse consequences. Maybe people would be less likely to trust the government and follow its laws if the government tries to change the social norms they care about. On the other hand, the models provided no guarantee that social norms would be efficient, contrary to Ellickson.

The literature seemed to have run out of steam a number of years ago. The game-theoretic models turned out  to be not very tractable. They seemed to be able to explain too much. (Game theory is good at showing that cooperative behavior is consistent with rationality, less good at showing that it is entailed by it.) Or maybe we don’t need (as well as can’t have) a general theory of social norms. It’s enough to know a lot about whatever particular area of human behavior you’re writing about.

Richard McAdams has published a new book called The Expressive Powers of Law. It is in some ways a throwback to the earlier literature. It puts a great deal of emphasis on the way that “focal points” can structure people’s behavior when people are otherwise trying to coordinate with each other. The government can manipulate focal points, and in that way influence people’s behavior for the better. But in the complex informational environment in which people operate, there are limits to how much the government can do. The strength of the book lies in the careful way that it explores those limits, and throws cold water on some excessively ambitious claims about how the government can “send a message” in order to influence behavior. This excellent book is well worth a read.

FINANCIAL REGULATION

Toward a Pigovian State

It is well-known that Congress and regulators do not use Pigovian taxes in order to deter pollution and other negative externalities. It is less well-known, or perhaps not known at all, that regulators possess the authority to impose Pigovian taxes. They just don’t use it. Why not? My colleague Jonathan Masur and I document the regulatory landscape and try to answer this question in a paper now available at SSRN.

FINANCIAL REGULATION

Vigna & Casey: Bitcoin and regulation

Vigna and Casey rightly reject claims by some bitcoin enthusiasts that bitcoin shouldn’t be, or can’t be, regulated. It can and will be, and indeed already is subject to regulation in many jurisdictions, as the authors document. But they can’t help arguing that bitcoin poses a challenge to government.

Anyone who remembers the 1990s will recall the argument that the Internet poses a challenge to government. The argument then was that the government would not be able to censor people because of the decentralized structure of the Internet. Freedom would flourish, despots would fail. You can’t turn the Internet off; nor can you change its rules.

But the government can go after the “joints” of the Internet—the ISPs, the search engines, the social media sites, and they do. Authoritarian governments have discovered that the Internet provides a valuable means for social control. Ordinary people don’t take all the precautions that are theoretically possible, benefit from the convenience of large intermediaries, and in this way make themselves vulnerable to legal sanctions if they use the Internet to break the law, or–in authoritarian countries–merely criticize the government.

The same will surely be true for bitcoin. Ordinary people are not going to use “dark wallets.” They will turn to the institutions that they trust—yes, banks, or brand-name Internet companies like PayPal and Google—and the government will use these institutions as levers for regulating, just as it has for other types of Internet usage.

The authors suggest that bitcoin took hold in the wake of the financial crisis. Because people could no longer trust “money,” they would put their trust in bitcoins. If people really thought this, they made a serious error. The financial crisis was not caused by fiat money (or, as the authors insist on putting it, “centralization,” meaning the Fed). It was caused by bad investments; and one can just as easily make bad investments with bitcoins as with dollars.

Financial crises would occur in a bitcoin-based financial system just as they did under the gold standard. Centralization (in the government) is needed to address financial crises; so if bitcoin makes centralization impossible, we would be in deep trouble. Fortunately, it does not. As I argued earlier, a bitcoin-based financial system would operate through banks and other intermediaries, and the government would regulate bitcoin by regulating them, just as the government regulates Internet users by regulating ISPs, search engines, and social media sites.

Moreover, as the authors point out, bitcoin investors have already realized that bitcoin will become more stable, trustworthy, and hence profitable if the government regulates it. As money pours into the system, the pressure for regulation will increase rather than diminish.

INTERNATIONAL LAW

Guest Post: Ukraine and Russia–You Break It, You Bought It

The following guest post comes from Joseph Blocher and Mitu Gulati, Duke Law School.

Let’s begin with a point of agreement: Ukraine’s financial condition is bad. Its currency is in free fall, its foreign hard currency reserves have collapsed, its economy is shrinking, and it is fighting a war. Absent a big IMF-EU bailout soon, Ukraine will default.

That $ 15-20 bn bailout that Ukraine needs, however, does not appear to be forthcoming.  There are many reasons for this, but a big one is probably that western politicians know that a large portion of Ukraine’s debts are owed to Russia—including a $3 bn bond debt that matures in 2015. In other words, bailing out Ukraine would effectively mean transferring funds to Vladimir Putin. The bailout will probably come eventually, but it will not be the full amount Ukraine needs to pay its creditors. In the meantime, how can Ukraine (a) make up for the shortfall, and (b) make the bailout more palatable to western taxpayers?

We suggest that Ukraine respond to the Russian debt claims by arguing that it is entitled to a set-off for Russia having taken large portions of its territory. This argument will likely to made before an English judge, since the $3 bn debt is governed by English law.

As we explain in our article, traditional international law essentially gives that English judge two extreme and unappealing options.  Either Ukraine had an exclusive right to determine Crimea’s fate regardless of the Crimeans’ wishes (the standard rule of territorial integrity), or Crimea was so egregiously oppressed that it had an exclusive right to determine its own fate (the principle of self-determination or remedial secession).

This is a disappointing menu of options, and seems particularly ill-suited to the Ukraine-Crimea-Russia crisis. We accept the idea of remedial secession, but it seems unlikely that Crimeans suffered the extreme humanitarian abuse necessary to justify it. And the traditional rule that nations can buy and sell regions as they see fit seems antiquated and in conflict with the right of self-determination that the UN Charter gives to “all peoples.”

There has to be an in-between category, one that covers situations where a region is systematically disfavored but not horribly. In this in-between scenario, where the people of a region are clearly denied equal rights and representation (a standard we borrow from the Charter), we suggest that those people should have a right to look for a better sovereign partner.  Further, the current sovereign should not be allowed to bar their exit. But, unlike in the scenario where the people are being abused so badly that they get to exit for free, there should be compensation owed to the former sovereign. Put another way, when a nation oppresses a region—albeit not egregiously—we would protect its sovereignty with a liability rule rather than a property rule. The “damages” due to the parent nation (in this case Ukraine) would be set by the market (i.e., bids from outside nations), with a right of appeal to an international body like the ICJ.

For purposes of illustration, let us assume that, prior to the Russian seizure of Crimea, Ukraine was denying representation and equal rights to the people of Crimea, but not (as some Russian sympathizers have suggested) oppressing them so severely as to trigger the right of remedial secession.  This would trigger our liability rule. In such a scenario, a transfer might be legitimate (if the Crimeans actually chose Russia from among all other suitors), but still not free. Ukraine must be compensated for the loss. And because Russia is Ukraine’s largest creditor, that compensation could take the form of an offset.  Alternatively, a stay could be issued on the ability of Russia to enforce its debt claims until the compensation amount is decided. The end result would be a legitimate, compensated transfer of territory that reduces the incentives for further violence on either side.

Of course, it is somewhat complicated to apply this rule post-hoc, since Russia has already taken Crimea, and no bidding ever occurred. But—assuming that Crimeans genuinely prefer to be part of Russia, which is a plausible but not uncontestable assumption—this is a challenge for the valuation, not for the application of the concept.

Going forward, we think that a market for sovereign control could help lessen the incentives for conflict. Under the current regime, Russia had every incentive to stir up trouble within Crimea, then justify military intervention so as to protect the Russian-sympathizing population there. But such intervention carried both risks and costs for Russia, which wants its acquisition to be recognized as legitimate under international law. A market would have given Russia an alternative: direct that military spending into a financial offer, which could lead to a voluntary and more legitimate cession. It is nowhere near a silver-bullet solution. But surely anything that provides some marginal deterrent to the next crisis is a step in the right direction.

FINANCIAL REGULATION

Vigna & Casey: Bitcoin and economic decentralization

The authors argue that bitcoin reflects a wave of decentralization, and will advance decentralization as well. However, they are not very clear about what decentralization means. They use the term to refer both to the elimination of big firms, including monopolists, and the elimination of certain functions of government. This is puzzling because often it is government centralization (antitrust laws) that counters economic centralization (monopolies). I will discuss the first meaning here.

Vigna and Casey think that if bitcoin became a worldwide currency, banks would go out of business. This is wrong. Banks would stay in business; they would accept bitcoins as deposits and make bitcoin-denominated loans. We know that this is the case because banks existed on the gold standard; indeed, gold was the original basis of fractional reserve banking (by goldsmiths who stored gold for customers and made loans backed by a portion of that gold). Theory tells us this as well. People won’t want to hold bitcoins in their wallets if they don’t plan to use them immediately. They will deposit them with banks, and banks will turn around and lend most of their bitcoins to borrowers while retaining reserves to service the short-term depositors. Banks exist not because of some property of fiat money; they exist because people with short-term money surpluses gain by lending them through an intermediary who can check the creditworthiness of borrowers and monitor repayment.

The effect of technological change like bitcoin on economic centralization is unpredictable. The home computer was supposed to be a great decentralizer: anyone could afford one and so computing power was no longer monopolized by giant firms like IBM. But then came Microsoft. The Internet was supposed to decentralize, but then came Google and Facebook. Bitcoin might weaken banks (because people wouldn’t need check-writing services and credit cards), but it also might strengthen banks or bank substitutes (because people need a service to keep track of their bitcoin transactions, and to insure them against mistakes and fraud).

FINANCIAL REGULATION

Vigna & Casey: Bitcoin and the law

Vigna & Casey argue that the technology underlying bitcoin may make the legal system unnecessary (though they later express some reservations about this argument). Whatever their view, bitcoin (or what they mean is the technology underlying bitcoin) will not do away with the law.

The authors suggest that a credit default swap could be automated using bitcoin technology; this would eliminate the need to rely on lawyers, judges, and bureaucrats. The authors make an important error. Let’s use the more familiar example of life insurance to show why. If the insured party dies, 99.999% of the time lawyers and judges do not need to be called upon. The insurer simply pays the beneficiary. Automating this process would reduce transaction costs by exactly zero.

Now consider a more difficult case. The insured party disappears while on a trek in the Amazon, or on an around-the-world boating trip. Must the insurer pay the beneficiary if death is ambiguous? Or suppose that the policy excludes liability in case of suicide, and the death of the policyholder looks like a suicide but it is not clear. What then?

There is no way around this problem: if the language of the policy is unclear, or the facts are unclear, someone must make a judgment. This cannot be automated.

Similar problems arises with CDSs. Sometimes, it is not clear whether the underlying bond has defaulted or not. In those cases, the legal system is needed. And where the legal system is not needed because the contract language is clear and the facts undisputed, bitcoin technology provides no advantage.

Maybe someday AI will enable computers to make judgments currently entrusted to lawyers and judges. Until that happens, bitcoin technology will not replace the legal system.

FINANCIAL REGULATION

Vigna & Casey: Bitcoin and trust

Vigna and Casey make much of the claim that bitcoin is trustless. If I buy a cup of coffee using bitcoins, the café doesn’t need to trust me, or a bank. The blockchain ensures that I own the bitcoin I send. Under the current system, one must trust banks; and if a bank doesn’t trust you, then you can’t use a credit card and are shut out of the system.

But there are many reasons to be skeptical of this account, and also of its import. First, one cannot access the network and store coins without using an intermediary. People can download wallets, but ordinary people—as opposed to experts—will worry that the wallets cannot be trusted, indeed, may not know where to go on the Internet to find safe and reliable wallets. Thus, as V&C describe, intermediaries have been developed so that ordinary people can use bitcoins. These intermediaries are just companies with websites that offer bitcoin-related services. But people need to trust these intermediaries, and intermediaries will charge them one way or another. So it turns out that bitcoin is a version of our payment system that cuts out some intermediaries but by no means all.

Second, as V&C describe, bitcoin itself relies on trust. One must trust that the code has been well-designed, and that the five guys with access to it will use their access wisely to tweak the code when it falls short (as it already has). One must trust that these guys and others like them, their chosen successors, will continue to develop the bitcoin to address new, unpredictable challenges as they arise. One must trust that they can ensure that no one ultimately corners the bitcoin supply. Trust is not eliminated; it is just displaced to a new set of people, who will supposedly act in our interest. If bitcoin ever becomes a currency, these five guys will be seen as the J.P. Morgan of bitcoin—a private individual who everyone depends on to save the system. This situation will not be tolerated any more than Morgan was; the code will be entrusted to the government.

Third, trust is not, in fact, a big issue currently. People trust banks except during financial crises, and (as I will discuss) a bitcoin economy would be subject to financial crises as well. Trust returned to our financial system quickly after the financial crisis, thanks to government intervention.

So it’s not true that bitcoin does away with trust. And if bitcoin reduces reliance on trust a bit, there is little reason to think that matters.

Part I here.

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Vigna & Casey’s The Age Of Cryptocurrency

age of cryptocurrencyThis book, written by two Wall Street Journal reporters, is the first journalistic account of the rise of bitcoin and related cryptocurrency technologies. The authors write well and clearly, and the book is illuminating. And the authors try hard to bring journalist objectivity to the extreme claims of bitcoin proponents. But they mostly give in. One can only cringe at sentences like this one:

 We may well be on the verge of a profound societal upheaval, perhaps the most significant since the sixteenth century…. (p. 278)

 We’re not. Or if we are, it’s not because of bitcoin. Even if the most extreme and implausible claims of bitcoin proponents (or “evangelists” as they are aptly called) came true, and bitcoin became a worldwide currency, we’d just be back in the nineteenth century, when countries were on the gold standard, albeit a digital version of it. Bitcoin just is the gold standard with bits rather than gold. (The authors, who gently mock goldbugs, don’t seem to realize that they are themselves “bitbugs.”) To be sure, transactions would be cheaper—we’d save some of the 1 to 3 percent that we now pay to use credit cards. That would help out a lot of people, but most people wouldn’t notice. And we wouldn’t worry about inflation (but we would worry about deflation and financial panics). Maybe life would be a bit better, or (as I suspect) a bit worse, but it wouldn’t be much different.

The book revolves around a number of themes: the role of trust in the financial system; the forces of decentralization; and the relationship between cryptocurrencies and the law. These are interesting issues, and all deserving of careful thought. But while the authors have sensible things to say about them, and try to carefully weigh the arguments on each side, in the end I believe they come down on the wrong side on nearly every issue. I will post some observations about this book over the course of this week.

MISC.

Who is the meanest supreme court justice of all time?

Scalia, right? Nope. Scalia barely cracks the top ten, behind Alito, Kennedy, Thomas, and even Breyer. The actual measure is “friendliness” rather than meanness, and these guys have among the lowest friendliness scores, which is the percentage of positive words used by justices in their opinions minus the percentage of negative words. (Negative and positive words taken from here.)

The friendliness score comes from A Quantitative Analysis of Trends in Writing Style on the U.S. Supreme Court, a new paper by Keith Carlson, Michael Livermore, and Daniel Rockmore, and it contains all kinds of other fun stuff, like the influence of law clerks on judicial writing style. The authors are pioneers in the use of textual analysis to analyze supreme court opinions. One of their findings is that opinions of modern justices are a lot less friendly than the opinions of earlier justices. (They are also written at a lower grade level.)

The friendliest justice–by a long shot–is John Jay, reflecting perhaps his experience as a diplomat. But he wrote very few opinions. I’m therefore handing the title to #2, Oliver Ellsworth. And the meanest? An obscure, one-term justice named Thomas Johnson. [N.B.: an earlier version of this post confused him with William Johnson. The ABA Journal correctly identified him.]