It is interesting to see the House sweat over whether they have to act on a bill that passed the Senate 96-3.  But part of the reason may be because the expert networks about which the SEC is so suspicious, at least if they are the political variants of the same, will have to register as lobbyists.  Can't imagine the hedge fund industry expected that.  Anyway, this Times piece is pretty interesting.

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Mitt Romney's tax returns have inspired a national conversation about charitable giving and taxes. Romney deserves kudos for his charitable giving, which extends well beyond the LDS Church.

While charitable contributions and taxes are sometimes portrayed as substitutes, we think of charitable giving as "generous" and we think of paying taxes as a necessary cost of living in a civil society. Thus, Learned Hand aptly described our attitude toward the payment of taxes: "any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).

Despite this widespread view toward the payment of taxes, Romney is still criticized for not paying (or wanting to pay) more taxes. In a WaPo piece from earlier today, for example, Rabbi Sharon Brous of Los Angeles observes, "On one hand, I really admire his sense of obligation to his immediate community, but I would offer that perhaps he might adopt a more expansive notion of what community is." This, despite the fact that Romney was not using the most tax-advantageous method of making his charitable contributions. (Thanks, Miranda.)

Rather than blaming Romney for paying too little in taxes, perhaps we should encourage more charitable giving. Again from the WaPo story:

Overall, Americans give between 2 and 3 percent of their income to charity, according to the Philanthropy Roundtable, but in the first few years of the recession, that number dropped, too. Newt Gingrich gave just $81,000 — 2.58 percent of his $3.1 million income and a fraction of his 2005-06 tab at Tiffany’s — to charity in 2010....

The more individuals and corporations give, the less the government has to. Giving, and giving until it hurts, forces you to recognize that, like a parent, you’re responsible for other people — whether in your own community or around the world. When you lay down your money, you say, “This (church sanctuary, child, environmental hazard) is my problem.” Providing a sense of interconnected obligation is traditionally what religious communities have done best, and it is no surprise that the religious groups that are growing fastest in America — Mormons, Pentecostals, certain sects of Jews — are those that make demands on their members' time and money.

Rather than comparing effective tax rates, perhaps we should compare rates of charitable contributions plus taxes to reveal who is really supporting society. 

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The Republican debate in South Carolina was the most entertaining of this election cycle. Just for some extra fun, I was following the Twitter chatter. The only person from the debate who is trending on Twitter: Juan Williams.

If you ever want confirmation that beauty is in the eye of the beholder, follow a debate on Twitter. Still, looking at the debate grades, lots of people seemed to agree that Newt Gingrich and Rick Perry did well, while Rick Santorum lagged behind. The effort to "unite the conservatives" has been a failure, so far.

Before the debate, Romney was threatening to run away with the nomination, but he did not help himself tonight, and he may have hurt himself. The Twitter traffic was not kind. The candidates have another debate on Thursday, so it's hard to say how this weak performance will affect the voters of South Carolina, but the non-Romneys are energized and Mitt looked confused.

Fox used Twitter traffic to evaluate the winners and losers in the debate. One of the big winners in the Twitterverse was Ron Paul, even though most of the people issuing grades had him dead last. Who are these people tweeting away during the debate? Are they representive of anything?

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Res ipsa loquitur ...

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..and that's the problem Mitt Romney's got right now.  You can argue that it's hard to feel too sorry for private equity types: they certainly tend to live up to their name, keeping their name and doings out of the limelight (unless they're going public this year, and have to reveal that their top 3 execs made $402 million).  It's that privacy that's hurting Romney now.

The mystery of private equity is something I confront each spring as I being my Life Cycle of the Corporation course.  As the title suggests, it covers a corporation's life, from founding through venture financing, going public, and being public (and M&A and bankruptcy, time permitting).

Fully a third of the substantive classes focus on venture financing.  That because it takes a while for the students to grasp what venture capitalists do.  We watch a movie.  We discuss term sheets and Series A financing documents.  We have a negotiation exercise, pitting company counsel against investor counsel.  By the end of the unit, they really do get it.  But it takes three weeks.

Most of America hasn't done this.  So maybe when they hear, as the Journal reported yesterday, that of the 77 companies Bain invested in during its tenure, 22% filed for bankruptcy or stopped operations by year 8, or that "most of the 50-80% of annual gains" Bain produced came from "a relatively small number of deals, and some of these winning companies later ended up filing for bankruptcy protection", that sounds scandalous.  To me, it sounds like Bain hit it out of the park.  But I know the odds are against a successful exit, even for a venture-backed corporation.  I know it's normal for a few "home-runs" in a fund to make up for a lot of ho-hum investments and some real stinkers.  Most Americans don't know that.

Like Gordon, I think Perry's "vulture capitalist" label is unfair and misplaced.  But there aren't really any venture capitalist household names--Gordon Gekko is one popular image of private equity, and he plays a villain.  Steve Jobs may be an entrepreneur-hero, but the public doesn't lionize the VC funds that got Apple off the ground. 

Gordon says this issue "should be a winner for Mitt, if he can make the connection to average voters."  The question for me, is whether  Romney is going to try to explain venture capital and private equity to the average American in soundbites.  My experience tells me that might be a tall order. 

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The "King of Bain" video by Invest in America is here. If you are inclined to embrace the Romney-as-Raider narrative that Newt Gingrich has been developing, you might find this film effective, but it's hard to imagine independent-minded voters being persuaded. 

One problem is that many of the claims and insinuations in the film are facially ridiculous. For example, the first case study of Romney's rapaciousness is about a company called UniMac. According to the film, this was the Bain formula: buy a great company, degrade the products, fire the employees, and sell the company at a huge profit to the Canadians. In that order.

The bigger problem is that the tone and rhetoric of the film are well-designed to affirm preexisting beliefs, but not likely to persuade those who are independent or inclined to favor Romney. Romney buys big houses, and he makes them bigger! He is rich, and he likes money! He says crazy stuff like, "everything corporations earn ultimately goes to people"! His own firm took "foreign seed money from Latin America"! And in case you missed the fact that Mitt isn't like you, look at a clip of him speaking French!

It's just over the top.

"More ruthless than Wall Street," Romney apparently coined the term "creative destruction." (Sorry, Mr. Schumpeter.) For Newt Gingrich, this film is just about destruction. Ultimately, I think it will be self-destruction. 

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The WSJ has a story about Mitt Romney's time at Bain Capital. Lots of Bain's investments failed, but that's no surprise for a venture capital/LBO firm. The firm had some home runs, too, which is also no surprise. Neither the failures nor the home runs are entirely attributable to Mitt, of course, so I am not sure this report will get much traction among voters. One thing we know for sure, and that is the investors in Bain profited handsomely:

The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward.... The Journal analysis shows that in total, Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.

I have known a number of people who worked with Mitt at Bain, and, if memory serves, all of them had good things to say about Mitt. I am not sure any of them thought that he was the world's greatest businessman, but he was no slouch, either.

Does this matter in choosing a President? Mitt certainly thinks it matters. He keeps pressing his experience at Bain, partly as evidence of his leadership and partly as evidence of his understanding of how to create jobs. I don't find this part of his leadership narrative all that compelling because he was the investor -- a sounding board with money -- not the entrepreneur. On the jobs issue, however, I think this is an angle worth exploiting. Building successful companies is a theoretical exercise for most politicians, including President Obama, but Mitt has been part of the process.

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Time Magazine’s “person of the year” is the “protestor.” Occupy Wall Street’s participants have generated discussion unprecedented in recent years about the role of corporations and their executives in society. The movement has influenced workers and unemployed alike around the world and has clearly shaped the political debate.

But how does a corporation really act? Doesn’t it act through its people? And do those people behave like the members of the homo economicus species acting rationally, selfishly for their greatest material advantage and without consideration about morality, ethics or other people? If so, can a corporation really have a conscience?

In her book Cultivating Conscience: How Good Laws Make Good People, Lynn Stout, a corporate and securities professor at UCLA School of Law argues that the homo economicus model does a poor job of predicting behavior within corporations. Stout takes aim at Oliver Wendell Holmes’ theory of the “bad man” (which forms the basis of homo economicus), Hobbes’ approach in Leviathan, John Stuart Mill’s theory of political economy, and those judges, law professors, regulators and policymakers who focus solely on the law and economics theory that material incentives are the only things that matter.

Citing hundreds of sociological studies that have been replicated around the world over the past fifty years, evolutionary biology, and experimental gaming theory, she concludes that  people do not generally behave like the “rational maximizers” that ecomonic theory would predict. In fact other than the 1-3% of the population who are psychopaths, people are “prosocial, ” meaning that they sacrifice to follow ethical rules, or to help or avoid harming others (although interestingly in student studies, economics majors tended to be less prosocial than others). 

She recommends a three-factor model for judges, regulators and legislators who want to shape human behavior:

 “Unselfish prosocial behavior toward strangers, including unselfish compliance with legal and ethical rules, is triggered by social context, including especially:

(1)         instructions from authority

(2)         beliefs about others’ prosocial behavior; and

(3)         the magnitude of the benefits to others.

Prosocial behavior declines, however, as the personal cost of acting prosocially increases.”

While she focuses on tort, contract and criminal law, her model and criticisms of the homo economicus model may be particularly helpful in the context of understanding corporate behavior. Corporations clearly influence how their people act. Professor Pamela Bucy, for example, argues that government should only be able to convict a corporation if it proves that the corporate ethos encouraged agents of the corporation to commit the criminal act. That corporate ethos results from individuals working together toward corporate goals.

Stout observes that an entire generation of business and political leaders has been taught that people only respond to material incentives, which leads to poor planning that can have devastating results by steering naturally prosocial people to toward unethical or illegal behavior. She warns against “rais[ing] the cost of conscience,” stating that “if we want people to be good, we must not tempt them to be bad.”

In her forthcoming article “Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’” she applies behavioral science to incentive based-pay. She points to the savings and loans crisis of the 80's, the recent teacher cheating scandals on standardized tests, Enron, Worldcom, the 2008 credit crisis, which stemmed in part from performance-based bonuses that tempted brokers to approve risky loans, and Bear Sterns and AIG executives who bet on risky derivatives. She disagrees with those who say that that those incentive plans were poorly designed, arguing instead that excessive reliance on even well designed ex-ante incentive plans can “snuff out” or suppress conscience and create “psycopathogenic” environments, and has done so as evidenced by “a disturbing outbreak of executive-driven corporate frauds, scandals and failures.” She further notes that the pay for performance movement has produced less than stellar improvement in the performance and profitability of most US companies.  

She advocates instead for trust-based” compensation arrangements, which take into account the parties’ capacity for prosocial behavior rather than leading employees to believe that the employer rewards selfish behavior. This is especially true if that reward tempts employees to engage in fraudulent or opportunistic behavior if that is the only way to realistically achieve the performance metric.

Applying her three factor model looks like this: Does the company’s messaging tell employees that it doesn’t care about ethics? Is it rewarding other people to act in the same way? And is it signaling that there is nothing wrong with unethical behavior or that there are no victims? This theory fits in nicely with the Bucy corporate ethos paradigm described above.

Stout proposes modest, nonmaterial rewards such as greater job responsibilities, public recognition, and more reasonable cash awards based upon subjective, ex post evaluations on the employee’s performance, and cites studies indicating that most employees thrive and are more creative in environments that don’t focus on ex ante monetary incentives. She yearns for the pre 162(m) days when the tax code didn’t require corporations to tie executive pay over one million dollars to performance metrics.

Stout’s application of these behavioral science theories provide guidance that lawmakers and others may want to consider as they look at legislation to prevent or at least mitigate the next corporate scandal. She also provides food for thought for those in corporate America who want to change the dynamics and trust factors within their organizations, and by extension their employee base, shareholders and the general population.

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As promised this post will be about recent proposals advocating that governments adopt various measures of aggregate happiness to complement such traditional measures of economic well-being as Gross Domestic Product (GDP) or Gross National Product (GNP). The basic premise for these proposals can be found in the first major campaign speech that Senator Robert F. Kennedy gave on March 18, 1968 at the University of Kansas. That speech challenged the prevailing orthodoxy of how governments measure progress and well-being.

Not surprisingly, the speech is right in that many items that are part of GNP do not reflect genuine social progress. To be clear and for the record, most economists themselves have long understood that GDP is an imperfect proxy for social welfare. Such proposed refinements as the idea of Net Economic Welfare (NEW) attempt to improve GDP by placing values upon and subtracting the costs on such negative externalities as crime, congestion, and environmental pollution from GDP. The last paragraph of the speech is what proposed social measures of subjective well-being intend to capture:

"Yet the Gross National Product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans."

Of course, the claim that GNP "measures everything, in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans" is a bit overstated. Nonetheless, GNP can be improved to better measure what governments and societies value. There is currently a lively debate over whether and if so, how governments can pragmatically measure aggregate happiness. One reason that such a debate is and will be contested is that once an item is measured and recorded, that item becomes harder to ignore and is likely to become a part of policy discussions. As Kenneth Arrow pointed out on pages 47-48 of his book, The Limits of Organization,

"The Full Employment Act of 1946 amounted to nothing more than a statement that full employment was at last on the Federal agenda, and many felt that this was a hollow victory indeed. But those who opposed it so violently were not deceived; in the long run, this recognition was decisive, though the process of implementing the responsibility was slow indeed. Once an item has arrived on the agenda, it is difficult not to treat it in a somewhat rational manner, if that is at all possible, and almost any considered solution may be better than neglect."

Professors Kahneman and Sugden introduce a methodology of policy evaluation based on experienced utility to environmental economics that avoids well-known problems of preference anomalies for contingent valuation studies. French President Nicolas Sarkozy recently created a Commission on the Measurement of Economic Performance and Social Progress, chaired by 2001 Nobel Laureate in economics, Joseph E. Stiglitz. The report by this commission makes a number of recommendations, including “Recommendation 10: Measures of both objective and subjective well-being provide key information about people’s quality of life. Statistical offices should incorporate questions to capture people’s life evaluations, hedonic experiences and priorities in their own survey." In a discussion paper titled Beyond GDP and Back: What is the Value-Added by Additional Components of Welfare Measurement, economists Sonja C. Kassenboehmer and Christoph M. Schmidt analyze quality-of-life indicators that are suggested in the Stiglitz Report to find that much of the variation in many well-being measures is already well-captured by such traditional economic indicators as GDP and the unemployment rate, but because the correlation of alternative indicators with monetary measures is far from perfect, there is room to augment traditional statistical reporting by non-standard indicators.

British Prime Minister David Cameron recently announced similar plans to collect national well-being measures that incorporate life satisfaction. In an article titled Emotional Prosperity and the Stiglitz Commission, British economist Andrew Oswald argues that countries are capable of and should measure their emotional prosperity and focus on mental well-being. In that article, Oswald summarizes seven studies that suggest emotional prosperity and broad measures of psychological well-being have recently been declining over time. In a National Bureau of Economic Research working paper titled, Beyond GDP? Welfare across Countries and Time, American economists Charles I. Jones and Peter J. Klenow propose a simple summary statistic for a country’s flow of well-being that combines data about consumption, inequality, leisure, and mortality.

In an article titled Happiness and Public Choice, European economists Bruno S. Frey and Alois Stutzer caution that a policy of maximizing aggregate happiness faces a number of difficulties including that it reduces people to being merely happiness metric stations in addition to discounts problems with political institutions and incentive distortion. In their article, they instead propose two practical ways to utilize happiness research for policy: (1) facilitate identification of those institutions that assist people in best achieving their personal goals and in so doing contributing maximally to individual happiness, and (2) provide crucial information as inputs to political discussion process. 

Instead of maximizing a measure of aggregate happiness, it might be more politically feasible to minimize a measure of aggregate misery, stress, or unhappiness, such as the U-index, which in their article titled Recent Developments in the Measurement of Subjective Well-Being, Daniel Kahneman and labor economist Alan Krueger proposed and defined to measure the fraction of time that people spend experiencing unpleasant emotions. The U-index provides empirical information about negative emotional experiences that society may care about.

Another way to incorporate happiness data into policy analysis is to introduce maximum levels of a measure of unhappiness or minimum levels of a measure of happiness as constraints that government policies must satisfy while optimizing some objective function or goal besides happiness or unhappiness. This approach is analogous to philosopher Robert Nozick’s approach in his book titled Anarchy, State, and Utopia to incorporating rights as constraints that are not to be violated as opposed to rights as part of a policy goal to be optimized.

In her article titled Happiness on the Political Agenda? PROS and CONS, philosopher Valérie De Prycker argues that actual incorporation of happiness research into policy implicates a number of value-loaded ethical, ideological, and moral issues. But, in his article titled Greater Happiness for a Greater Number Is that Possible and Desirable?, sociologist Ruut Veenhoven believes that empirical research about life satisfaction refutes all theoretical philosophical objections against the greatest happiness principle. In yet a third article titled Greater Happiness for a Greater Number: Some Non-controversial Options for Governments, social scientist Jan C. Ott believes that governments can increase average happiness, eventually reduce happiness inequalities, and realize both purposively by non-controversial means. In another article titled Good Governance and Happiness in Nations: Technical Quality Precedes Democracy and Quality Beats Size, Professor Ott examines how quality of governance and in particular technical as opposed to democratic quality is correlated with average happiness of a country's citizens and finds that technically good governance appears to be a universal condition for happiness independent of culture. Once technical quality of governance reaches a minimum level, democratic quality of governance adds substantially to the positive effects of technical quality of governance upon average happiness.

In his chapter titled That Which Makes Life Worthwhile in the book Measuring the Subjective Well-Being of Nations: National Accounts of Time Use and Well-Being, behavioral economist George Lowenstein proposes that time-use surveys ask people not just about how much positive and negative affect is felt during a particular activity, but also if people believed that a particular activity was a valuable or worthwhile use of their time or instead a waste of their time. In their article titled Accounting for the Richness of Daily Activities, psychologist Mathew P. White and economist Paul Dolan ask people not just about how they felt during a particular activity, but also six additional questions about such non-hedonic aspects of experience as being engaged, focused, and finding meaning. These fundamental insights about how people care about not just positive affect, but also meaning in their lives raise questions about whether law and policy should care more about positive affect versus meaning in people’s lives.

In the article titled The Metrics of Subjective Wellbeing: Cardinality, Neutrality and Additivity, Australian economist Ingebjørg Kristoffersen provides a legitimate source of uneasiness about basing social policies upon aggregation of empirical happiness data via his quantitative analysis of certain mathematical properties of empirical happiness data that continue to remain contentious among economists, namely additivity, cardinality, and neutrality of such data, even though psychologists have to some degree already been able to address how to make international, interpersonal, and intertemporal comparisons of happiness data. This mathematical analysis also serves to provide a cautionary, persuasive critique of recent proposals by law professors for governments to eschew cost-benefit analysis and instead to determine and evaluate policy based upon aggregation of happiness, defined simply as experienced positive feeling.

Finally, a concern with experienced subjective well-being captured by self-reports of happiness is what economist Carol Graham terms a paradox of happy peasants and miserable millionaires, due to differences in anticipations or expectations between poor and rich people. As Graham notes, optimism among poor individuals can be a tool for their survival and parents who are poor may revise their own personal expectations downward but maintain hopeful expectations for their children. If peasants report being happy due to lowered expectations and (perhaps some) hedonic adaptation, while millionaires report misery due to envy towards even richer people and (perhaps unrealistic) expectations, should law and policy be more concerned over self-reported unhappiness of rich people, or about increasing self-reported happiness of poor folks, even if that means encouraging or nudging poor individuals to expect more of their future? 

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For those inclined, like me (and Andrew Gelman, representing most political scientists, as far as I can tell) to look at systemic reasons for the results of presidential elections, rather than to gaffes or brilliant speeches - and really, could five great debates really be a good reason to chance the country's leadership? - Nate Silver has a bracing challenge to the conventional wisdom.

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Just in time for the season of commencement speeches, the New York Times has bleak news on employment prospects for graduates.

So far this problem has been seen primarily in economic terms. It has generated debate on whether college or professional  school is a good investment. It has led to questions about whether the country overinvests in higher education or is over-subsidizing student lenders or under-regulating for-profit or non-profit institutions.

One question has been seldom asked: if bleak job prospects persist – if they are not just a temporary product of the economic cycle – how long until they become a political issue? And when would a political issue transform into a political movement? A highly-educated, underemployed younger generation has long been a volatile political catalyst in many countries, as witnessed most recently by the Arab Spring.

The United States, of course, still offers graduates much different economic prospects. It also has a much different political culture. The young are much less likely to vote than the elderly.  At the risk of overgeneralization, they also may be less ideological, treating politics more as a matter of consumer choice of disparate issues (‘I’ll take one of these and a little of that’) while expressing more skepticism of entrenched movements.

Apathy and inertia might be overcome, however, by prolonged stagnation in employment markets. If graduate unemployment or underemployment becomes an issue, it may very well link to other issues that pit the younger generations against baby boomers and older cohorts. For example, will younger generations be willing to bare the increased burden of keeping social security and pension plans afloat? Will the personal – who is not retiring in the office, who is spending the inheritance, who is supporting whom in the family– become political? Will the legacy of previous generations in other areas – such as environmental policy – play into this political dynamic? Issues that have been framed as matters of “intergenerational equity” might become flashpoints in intergenerational conflict. It would be a striking development for the baby boom generation, which defined itself as fighting conventions of their parent’s generation, to find itself challenged by their children and grandchildren.

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Earlier this week Gordon posted from the ALI meeting that the institute is considering several new law reform projects including:

• Fraud;
• Corporate criminal liability;
• Copyright law; 
• Financial regulation;
• Update of the Principles of Corporate Governance;
• Cyberlaw;
• Transmission of wealth; 
• Tax; and
• International consumer protection.

Both Gordon and one commentator (Brett McDonnell, our frequent guest) noted that many of these topics would move ALI away from its traditional law reform role in common law towards more regulatory and statutory subjects. Of course, the ALI (together with the National Conference of Commissioners on Uniform State Laws) has played a role in drafting model statutes such as the U.C.C. and the Model Penal Code. But both of those projects largely involve state law. There are some big challenges with ALI venturing deeper into statutory and regulatory territory, particularly in federal matters. The first is maintaining relevance. Dodd-Frank already left the station without any systematic involvement from groups of legal academics (some would say to the detriment of the statute). Barring a fresh crisis, how likely is it that Congress will revisit financial reform in a wholesale manner any time soon? Would Congress leave any role for ALI in tax reform? How much timely influence would ALI projects with their long gestation periods have given the rapid spinning of Congress’s issue attention cycle?

I do see a value in introducing more deliberation into the legislative process. Even so, ALI is more likely to add value by linking into the regulatory process. But there is usually a shot clock to notice-and-comment rulemaking.

ALI should strongly consider taking a much different tack with respect to issues with a strong regulatory component. Instead of the slow cooking approach, ALI should assemble a pool of experts on given regulatory issues who either alone or in groups could quickly respond to proposed rulemakings.

There is a massive demand for this, particularly right now in the financial realm. Dodd-Frank still has dozens of rules in various stages in the sausage-making assembly line.  Personally, I have been frustrated.  There have been any number of proposed rules on which I would like to comment, but I have not had the time.  Academics are also, unfortunately, not professionally rewarded for contributing to policymaking in this manner to a sufficient extent.  But, participation in the ALI, on the other hand, remains a feather in an academic's cap. 

This leaves a void and a serious imbalance in rulemaking.  Wall Street can afford to hire law firms to comment extensively on each rule and outgun almost any other interest group. Even if you have doubt that such a thing as “the public interest” exists, this should give you pause. If you have a free market streak, aren’t you concerned that Wall Street will use its clout to defend implicit subsidies and restrict competition?

This points to a second challenge for ALI as it dives deeper into statutory and regulatory issues: getting entangled in intractable political issues. But is this anything new under the sun? Going back over 60 years, a number of legal realists questioned whether various ALI law reform projects were burying political questions and at times favoring commercial interests over other groups (even as many other legal realists participated in these projects). To some extent, this criticism may be leveled even today: when the U.C.C. defines concepts like “good faith” and “ordinary care”, it often tends to look to standards by businesses or banks and not from the perspective of consumers. (In the social realm, many faith-based groups have protested when states have adopted the Model Penal Code because, it did not outlaw sodomy, among other things.)

Rather than attempt to paper over politics, a “pool of experts” would allow academics and jurists in the pool to generate either a consensus comment to a rule or individual comments. A multitude of comments might have less force than a consensus comment, but it also might present agencies with a broader spectrum of positions. Sometimes dissenting voices prove the most valuable.

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Too Big to Fail.

Bailouts of megabanks preserved our financial system-for better and for worse. Next time around, Dodd-Frank allows winding down of big firms that cause systemic threats.  But as I far as I can tell, the Act doesn’t require any liquidations—it’s up to the Treasury Secretary to decide whether to appoint the FDIC as receiver, (and up to the FDIC to pass the actual rules ).  So it’s not clear whether there will be political courage to use this power in a future crisis; likely there will be bailouts again. 

The obvious solution to the too-big-to-fail problem is to start breaking up the too-big ones that almost failed last time, and to prevent any more from getting that big.  Then we can see a little creative destruction now and again.  [How to do it?  Luckily, I don’t have to bother with that part, since this forum is about the next two years and this is so not going to happen any time soon (if ever).]

Monetary policy: [Yes, I know this is mostly Fed policy, not legislative]

 One has to wonder: the economy almost self-destructed because of easy credit, and the solution is…to ease up on credit? 

I understand, and generally sympathize with, demand-side economics, and it may be the only way to mitigate the current pain of job losses.  And I find it hard to believe there’s currently a real danger of inflation in the near term (those who claim to be worried about these days are probably most concerned about bond prices).  But in the longer term, economic growth based entirely on expanding domestic demand seems like a snake eating its own tail.  Is it prudish--or radical--to suggest there’s something wrong with our culture of consumption?   If it needs fixing, punishing savings with low/negative interest rates ain’t the way to start.  I don’t profess to have a palatable alternative.  Maybe that’s the point—it’s time to take the nasty medicine….But I have tenure, so it’s too easy for me to say that. 

 Do nothing:

Looks like I'm not the only wishing I'd written Dave Hoffman’s post, but since he got there first, let me polish the apple a bit: Instead of passing new laws, how about actually enforcing the laws already on the books?    Oh, yeah, enforcement is the job of the executive branch.  Then how about Congress just refrains from obstructing the enforcement of the ones it just passed?  [Edit: Underbelly has more juicy stuff on this.] Just a thought.

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Like Professor Zaring, I agree that the likely outcome of a Republican-controlled House and a razor thin Democratic majority in the Senate is to shift more of the policymaking action to agencies. What I would like to pick my co-blogger’s brain on is: what influence can the newly shaken up Congress have on the regulatory process? What influence will they have?

We’ll be having our first Masters Forum of the academic year on a business law “Agenda for the Next 2 Years” tomorrow (Thursday) and Friday here at the Conglomerate. Our panel of law professors will bring their expertise in a broad range of fields – corporate law, securities, bankruptcy, tax etc. – to bear on what the new Congress and the President should focus during the 112th Congress. To frame that discussion rather than preempt it, here are a few questions and thoughts on the potential role of Congress in the administrative process.

First, here is why the questions are important: both financial reform and healthcare reform left quite a bit of work to be done by agencies. Kim Krawiec, in our Masters Forum over the summer on Dodd-Frank, counted 243 rulemakings and 67 studies required by the Act. In some ways, the Dodd-Frank was like a rough outline of a novel and now the hard work of writing is left to agencies.

Second, if the election yesterday was a backlash against big government, the politics of different regulatory reforms vary considerably. Contrast health care reform, which united the GOP in opposition, with financial reform, which garnered support from several moderate Republican senators. In other words, opposing Dodd-Frank rulemaking may bring a much different set of risks and costs than opposing health care. Who wants to give a future election opponent material for attack ads on “shilling for Wall Street?”

Third, there are required studies and rulemaking galore in Dodd-Frank, but it is crucial to draw some distinctions: In some cases, an agency has a mandate to write rules. For example, the Federal Reserve is required to issue rules defining the prudential regulations that will apply to those institutions designated as systemically important by the Financial Stability Oversight Council. (Holy mole – that is a mouthful!) Of course, the Fed has quite a bit of leeway in writing these rules. In other cases, an agency may have to do a study and has authority to write rules, but can choose not to do so. Case in point – the SEC and fiduciary duties for broker-dealers. A third category are required studies that leave it up to Congress to figure out what to do. For example, the GAO must conduct a study on what the effects would be if Congress repealed the Tower Amendment, which prevents the SEC and Municipal Securities Rulemaking Board from requiring that municipal entities make filings with either agency before issuing securities. In this last category, it is clear what powers Congress has. By contrast, Congress doesn’t have a veto in ordinary rulemaking and adjudication by agencies (cases like INS v. Chadha cut back on attempts by Congress to insert themselves formally into the administrative process in creative ways).

Congress can and does use its investigative powers to shape agency rulemaking indirectly. Here the numerous studies required by Dodd-Frank may provide members of Congress of both parties with a natural “conversation starter.” Congress can also wield its other powers – Senate confirmations and the power of the appropriations purse strings to “shape” agency behavior. Which is where all those fights in Dodd-Frank over whether an agency is independent, including how the agency is funded, will matter.

However, fights over nominations and appropriations are not without risks for Congressional opponents of agency action. Recall the government shutdown in 1995. Which brings us back full circle to the differences in the politics of health care versus financial reform (versus tax reform etc.)

That’s enough for now. Let’s see what the Masters have to say tomorrow.

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The NYT is tracking pre-election Twitter traffic here. Among the shifting constellation of red dwarfs and blue giants, Christine o'Donnell is like a massive black hole, absorbing thousands of "at tweets" (click "play" when you get there) ... and that doesn't seem like good news for her.

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