regulation boththeleftandright p. 18 · regulation antitrustphilosophiesdivide boththeleftandright...

RegulationAntitrust Philosophies Divide

Both the Left and Right P. 18

Trade’s Benefits Involve Morethan Comparative Advantage P. 36

Regulatory Reform RequiresCleaning Out Statutory “Junk” P. 24

Th e C at o Re v i e w o f B u s i n e s s a n d G o v e r nm e nt SUMMER 2018 / Vol. 41, No. 2 / $6.95

DISPLAY UNTIL OCTOBER 1, 2018

Regulators’ War onEntry-Level

JobsGovernment pushes

employers toward theconventional

and thecollege-educated

CONTENTS

Regulation, 2018, Vol. 41, No. 2 (ISSN 0147-0590). Regulation is published four times a year by the Cato Institute (www.cato.org).Copyright 2018, Cato Institute. Regulation is available on the Internet at www.cato.org. The one-year subscription rate for an individual is $20;the institutional subscription rate is $40. Subscribe online or by writing to: Regulation, 1000 Massachusetts Avenue NW, Washington, DC 20001.Please contact Regulationby mail, telephone (202-842-0200), or fax (202-842-3490) for change of address and other subscription correspondence.

COVER:Illustration by Keith Negley

Volume 41, Number 2 / Summer 2018

P. 14

FeaturesB A N K I N G & F I N A N C E

14 Back to the Future of ArbitrationShould businesses be so hostile to class actions?By Richard A. Booth

A N T I T R U S T

18 Antitrust’s Unconventional PoliticsThe ideological and political motivations for antitrustpolicy do not neatly fit the standard left/rightdichotomy.By Daniel A. Crane

R E G U L AT O R Y R E F O R M

24 Cleaning Out the Statutory JunkHow can we push lawmakers to discard the legislativetrash?By David Schoenbrod

I N T E L L E C T U A L P R O P E R T Y

30 The Same Old SongInstead of yet another regulation-heavy music copyrightlaw, Congress should change its tune and empowermarkets.By Thomas M. Lenard and Lawrence J. White

C O M M E R C E & T R A D E

36 Brain-Focused Economics: More Than JustComparative AdvantageEconomists since Adam Smith have underestimated thewelfare gains from free trade.By Richard B. McKenzie

L A B O R

44 How Labor Regulation Harms Unskilled WorkersAs government expands regulation of employers, theywill increasingly turn to fewer, higher-skilled workersand automation.By Warren Meyer

Briefly Noted2 Can Your

Neighborhood BookieCompete with theInternet?By Ike Brannon

4 How’s Your Trade WarGoing?By Pierre Lemieux

6 Rent-Seekers InfiltratePublic UtilityRegulationBy Kenneth W. Costello

7 Can We CutGovernment Spending?By Ryan H. Murphy

10 USDA Is Supposedto Regulate AnimalHealth, Not AnimalHappinessBy Henry I. Miller andJeff Stier

12 The New Perils of DataLocalization RulesBy Ike Brannon andHart Schwartz

In Review52 Enlightenment Now

Review by David R. Henderson

55 The Myth ofIndependenceReview by Vern McKinley

57 A Culture of GrowthReview by Pierre Lemieux

60 The Left BehindReview by Dwight R. Lee

63 Pricing LivesReview by Sam Batkins

65 Who Gets What—and WhyReview by Phil R. Murray

67 The Republic of VirtueReview by George Leef

69 Radical MarketsReview by David R. Henderson

72 The Vision of a Real FreeMarket SocietyReview by Art Carden

74 The Tyranny of MetricsReview by Pierre Lemieux

77 working papersReviews by Peter Van Dorenand Ike Brannon

Final Word80 Siding with the Nerds

By Tim Rowland

P. 24 P. 30 P. 44

2 / Regulation / SUMMER 2018

B R I E F LY N O T E D

Can Your NeighborhoodBookie CompeteWith the Internet?✒ BY IKE BRANNON

In the olden days, people who wanted to bet on the local sportsteam had few options other than their neighborhood bookie, whocould usually be found ensconced in a local bar. With the right

introduction, he would gladly allow a gambler to place a bet on nearlyany event he wished, and would even extend credit.

IKE BR ANNON is president of Capitol Policy Analyt-ics, a consulting firm in Washington, DC.

Today, however, things are different.The mob, which was the primary sponsorof major sports gambling for most of thepast century, is quiescent and the humbleneighborhood bookie faces new competi-tion from sports books in Las Vegas andon the internet. With the Supreme Courthaving recently invalidated the 1992 Profes-sional and Amateur Sports Protection Act,which outlawed sports gambling in moststates, more states are likely to get in thegame. Legal internet wagering that doesnot involve overseas bookies will probablybecome possible in the near future as well.

In a world awash in legal betting andmore on the way, how are bookies faring inthe 21st century? Quite nicely, it appears.Despite some practices that seem almostantiquated, the economics of gamblingtilts toward the local, illegal betting syndi-cate in many places. Against the odds, thelocal bookmaker has prospered against thelegal competition.

Special odds, special customers / The firstadvantage that bookies have over Vegas andmuch of the internet is the ability to pricediscriminate, or offer different odds to dif-ferent customers. They do this in two dif-ferent ways. First, bookies usually increasethe point spread for the hometown teamto take advantage of those people who betwith their hearts instead of their heads. Forinstance, while the Chicago Bears may haveto win by 5 points over the Lions to pay off

for betters in Las Vegas, in Chicago theymay have to win by 8.

Aha, a clever person might say, why don’tI bet on Chicago in Las Vegas, where I get abetter point spread, and bet against Chicagoin Chicago, where the odds now favor theiropponent? This way, if Chicago wins bymore than 8 points I win in Vegas alone,if they win by less than 5 points I win inChicago alone, but if they win by a marginbetween 5 and 8 points I win in both places.

While this may appear to be a no-losesituation, it fails to account for the bookie’sfee for taking the bet. This cost—also knownas “vigorish” (after the Russian word for“winnings”) or “juice”—amounts to 10% ofthe bet in most places, an extremely durableand consistent percentage.

Koleman Strumpf, a Wake Forest Uni-versity economist, has researched the eco-nomics of gambling using private datafrom several bookies. He argues that theconstancy of the “vig” was partly theproduct of mob-coordinated collusion.Its existence means that unless the arbi-traging bettor can expect to have the finalpoint margin fall between the two pointspreads more than 10% of the time, thenthe transactions costs of the bets will eatup any profitable arbitrage opportunities.Strumpf found those arbitrage possibilitieswere invariably wiped out by the vigorish.

The local neighborhood bookie can alsoprice discriminate based on the idiosyncra-sies of individual bettors. If, for instance,a particular bettor always wagers on hisbeloved team, the point spread given to him

by the bookie will start to slide up abovewhat is given to other bettors. Indeed, oneof Stumpf’s sources of information is atranscript of an audiotape where two book-ies mock a regular customer for failing torecognize the relatively poor point spreadsthat they give him, spoken in languagereminiscent of The Sopranos.

Letting it ride / One myth that Strumpfdebunks with his research is the notionthat bookies go to great lengths to avoidputting themselves at risk from game out-comes. The point spread ideally is set sothat an equal number of bets is placedon both teams, leaving the bookie off thehook. However, prognosticating how peo-ple are going to bet is difficult, and havinga game with uneven bets is not unusual.However, should a bookie find himselfwith a lot more money riding on one side,he often doesn’t do anything about it.

What could he do? For starters, he couldchange the point spread to attract com-mensurately more bets on the low-moneyteam, but this exposes the bookie to a pos-sible disaster. Suppose a point spread thatfavored Oakland by 10 points over SanFrancisco drew $20,000 more in bets onSan Francisco on the first day. The bookiecould lower the spread to new bettors to 8points in the hope that this would balancethe bets on both teams. However, considerwhat would happen should Oakland win byexactly 9 points. He now has to pay the earlySan Francisco bets and the late Oaklandbets, and he’s out $40,000. To avoid suchpossibilities, many bookies refrain fromsetting the point spread until a day or twobefore the actual game, giving them timeto see how the point spread in Las Vegashas settled.

Bookies do not often lay off bets withanother book to insulate them from risk.With sufficient liquidity, an occasionalimbalance in bets ought to be somethinga bookie can withstand. Despite whatStrumpf regards as relatively low earningsfor such a service (he estimates averagebookie income of around $200,000, mostlytax-free of course), he suggests that theyusually do not face liquidity constraints.

SUMMER 2018 / Regulation / 3

The competition / The biggestthreat to the neighborhoodbookie is the rise of offshorebetting houses that can bereached via the internet. Suchvenues remain far from thelong arm of the law (and themob, so far) and have severaladvantages. First, the internetgambling sites generate enoughvolume to compete on the vigo-rish, offering rates as low as 2%to high-volume betters. Second,the internet bookies can exploittheir vast data to exercise muchmore sophisticated price discriminationthan bookies.

One curiosity that Strumpf discoveredwas that neighborhood bookies are veryreluctant to store their data on computer,and almost to a man they continue to usethe same sorts of books used for the past100 years. They mayfind it easy to remem-ber that Neil from Carroll Gardens alwaysbets on the Knicks, but there probably areother gambling patterns they could exploitif they used computerized tools. The inter-net bookmakers are doing precisely that.

However, bookies are ahead of theinternet in offering credit to bettors. Thisservice is a way to develop loyalty amongcustomers, who are more likely to tryto bet their way out of a losing streak.Of course, collecting on a debt can betricky. One way that bookies deal withthis is through surrogates, who bringnew bettors to the bookie. In exchangefor providing the bookies with fresh bets,the surrogates receive a proportion of thelosses of their bettor. The beauty of thearrangement, at least for the bookie, isthat the surrogates are also on the hookshould the bettor attempt to renege on adebt. With such motivation, it’s clear whybettors fear the consequences of unpaidgambling debts. Such a system seems ill-suited to the faraway headquarters of theinternet gambling sites.

Congress appears unlikely to pass newlegislation that restricts gambling at thefederal level, although various stakehold-ers—mainly casinos—have begun to lobby

for restrictions to be placed on sports gam-bling in some way to limit their competi-tion from the internet or non-Vegas locales.

The practice of placing bets with localbookies is neither inherently more norless virtuous than betting in Las Vegas.Journalist Alan Erhenhalt noted in his1995 book The Lost City that the local bet-ting syndicate in Bronzeville, an African-American neighborhood in Chicago, wasa central ingredient of the close-knit com-munity of the 1940s and 1950s. To besure, some of the less salutary aspects oflocal bookmakers offend our sensibilities.But just as the mob was purged from LasVegas, could such heavy-handed tactics bepurged locally? The answer may depend onwhether bookmaking is legalized; the factthat sports gambling has long been largelyillegal explains why the mob is the greatestpurveyor of sports bookmaking.

Peoria tale / In the interest of full dis-closure, I should note that my great-grandfather and namesake operated agambling establishment in Peoria, IL inthe years before and during World WarII, and the money earned from this busi-ness paid for my college education andmy siblings’. Gambling was then legalin the city, but the mob provided andmaintained the slots for the saloon andran the constant poker game, splittingthe profits evenly with my great-grandfa-ther—net of the payoffs for governmentofficials, of course.

After the war, Peoria cracked down on

gambling for a very good reason:it was inexorably connected tothe organized crime and cor-rupt government that plaguedthe city. There appeared to be noway to combat the latter prob-lem without getting rid of gam-bling as well.

In the 1990s, legal gamblingreturned to Peoria in the form ofa riverboat casino, which thus farappears to be free of organizedcrime and has not appreciablyincreased the corrupt behaviorby government officials in the

area. Peoria has its share of citizens withgambling problems, of course, but the riv-erboat casino has provided entertainmentfor area residents as well, without the needto travel to an Indian reservation or LasVegas. The influx of tourists to Peoria (nottypically considered a tourist destination)has provided numerous well-paying jobsfor the community.

Peoria still has its share of neighbor-hood bookies, ubiquitous enough thateven I, a non-gambler who is now onlyan occasional visitor to my hometown,know more than one person there whotakes action on college football games.My friends in Peoria who take part in theweekly betting pools at our neighborhoodbar rarely go to the riverboat casino, and Idoubt they would do so even if the policebroke up their betting pools instead ofparticipating in them.

Just because something is impossibleto stop does not mean it should be legal,of course. At the same time, determiningthe legality of an activity based on the size(and political acumen) of the seller makeslittle sense. If gambling is fine for largecasinos and the government, it is difficultto see why a prohibition should exist forbookies or internet sites. Explicit legality(and not the tacit legality that exists inmost places) would quickly give recourseto gamblers worried about a kneecappingfrom Skinny Pete, being forced to payusurious interest rates, or other unsa-vory practices commonly associated withshady bookies.P

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How’s Your Trade War Going?✒ BY PIERRE LEMIEUX

Last March, after announcing tariffs of 25% on steel and 10% onaluminum, President Trump tweeted that “trade wars are good,and easy to win.” This seems predicated on the strange theory

that Americans win when their government impedes them from buy-ing what they want to buy.

PIERRE LEMIEUX is an economist affiliated with theDepartment of Management Sciences of the Universitédu Québec en Outaouais. His latest book is What’sWrong with Protectionism? Answering Common Objections toFree Trade (Rowman & Littlefield, 2018).

A national government imposing tariffs(or other customs barriers) uses its owncountry’s consumers and importers ashostages when it threatens foreign gov-ernments against harming its exporters.What a protectionist retaliation threat reallymeans is, “If you harm your own consumerswith your tariffs, I will hurt mine with mytariffs!” No wonder that protectionism wasdismissed by Adam Smith and David Humein the 18th century. Smith did concede thatretaliatory tariffs could be good—if theyprompted the targeted government to backoff—but he didn’t hold out much hope forthat happening.

Trade war casualties / Ask American steeland aluminum consumers if a trade waris good. Not unexpectedly, by the end ofApril, aluminum prices were up by about10% in America according to data fromInvestmentMine, a research consultant.American manufacturers of steel productsare complaining about higher prices fortheir input. According to the Wall StreetJournal, the steel and aluminum tariffsare the darkest cloud over the boomingchemical industry in America. Ultimately,of course, American consumers will paythe price.

Even from the very imperfect metric ofjobs, the steel tariff is very likely to be detri-mental. Many more Americans are occupiedin steel-using industries (around 2 million)than in steel-making (140,000). Economistsat the Federal Reserve Bank of New Yorkconcluded that “the 25 percent steel tariff is

likely to cost more jobs than it saves” (LibertyStreet Economics, April 19, 2018).

More important, the tariffs will destroyvalue by making consumers pay more thanthe real cost for what they want.

At the time of this writing in early May,it is still too early for a quantitative assess-ment of the effect of tariffs that Trumpimposed on washing machines in Janu-ary. (See “Putting 97 Million Householdsthrough the Wringer,” Spring 2018.) How-ever, according to preliminary data fromthe Bureau of Labor Statistics, the (domes-tic) producer price index of all majorhousehold appliances increased 1.3%between January and April, while house-hold appliance prices had been stable forseveral years before. As these data cover allmajor household appliances, they suggestthat the effect of the tariff on the price ofwashing machines is substantial—which isnot surprising as that was precisely the aimof the protection requested by domesticproducer Whirlpool.

Targeting China / Ask American farmers iftrade wars are good. China is the secondlargest market for American agriculturalexports (and was the largest as recently as2016). U.S. pork and sorghum have alreadybeen hit by retaliatory tariffs or “depos-its,” and threatened tariffs have reducedChinese purchases of American soybeansand corn. The Chinese market accountsfor half of American exported soybeans,the largest agricultural export. Americanfarmers are starting to hurt, but Trumpsuggested that they could be compensatedby special subsidies. So the U.S. govern-ment is going to tax Americans to offsetsome of the damage from taxing Ameri-

cans. “Saturday-morning-cartoon centralplanning,” quipped Sen. Ben Sasse (R, NE).

On the one hand, the U.S. govern-ment helps farmers, making them moredependent on government. For example,the Foreign Agricultural Service of theU.S. Department of Agriculture marketsAmerican agricultural products abroad,notably through its many offices in China.On the other hand, the same govern-ment impedes farmers’ exports throughits trade policy. Government planning hasnever been a model of rationality, exceptfrom the viewpoint of politicians andorganized interests.

Much could happen by the time thisarticle is released. The new 25% tariffs thatwere announced on $50 billion in Chineseimports could be imposed. A promisedretaliation by the Chinese governmentwould likely follow. More damage wouldbe done if the trade war intensifies. TheU.S. government has its sights set not onlyon China but also on Europe and on NorthAmerican Free Trade Agreement countries(and some other countries). The risk that atrade war could precipitate a recession is sig-nificant. Alternatively, trade tensions couldabate, perhaps because of stock marketresistance and pressure exerted on Trump.

Isn’t it astonishing that so muchdepends on one single man in Washing-ton, DC? In this respect, Trump may haveas much power over the national economyas his Chinese counterpart.

A trade war hurts consumers, but it alsodisrupts production. As supply chains havebecome more integrated (and efficient)across borders, more businesses are takingthe side of consumers over special inter-ests. In early April, 107 trade groups, ledby the National Retail Federation and theInformation Technology Industry Council,warned the U.S. House of Representativesagainst launching a trade war. It is becom-ing clear that the current protectionismonly benefits a small number of large pro-ducers and their few employees.

The Trump administration’s invocationof national security as justification forsome of the tariffs is mainly a protectionistexcuse. So are, in large part, its allegations


of Chinese intellectual property (IP) theft.“IP theft” covers many different things: (1)counterfeit or pirated products, (2) actualtheft (often cyber theft) of trade secrets,and (3) the Chinese government’s require-ment that foreign firms that establish apresence in China enter into joint ventureswith local firms, which often involve tech-nology transfers to the latter. The secondform of “IP theft” certainly looks like realtheft, but the first one is debatable, espe-cially under the absolutist, criminalizingview of the U.S. government. (Interestingly,as Stanford law professor Paul Goldsteinnotes, the U.S. government did not protectforeign copyrights until 1890 and waitedanother century before joining the majorinternational copyright treaty.)

Concerning the third form of IP “theft,”the “forced” technology transfer, of courseit’s not nice for the Chinese governmentto directly or indirectly require technologytransfers or provide “incentives” for them,as the U.S. trade representative often com-plains. But nobody is forcing Americanfirms to establish business in China. Onecan export to the Chinese market fromthe United States or else simply ignore theChinese market altogether. Technologytransfer is only one of the conditions thatprofit-maximizing corporations acceptvoluntarily in order to access markets inliberty-challenged places. None of thiswould happen in an ideal world, but theU.S. government should be content tomake America ideal for liberty.

Moreover, ordinary courts, even Chi-nese courts, are often available to enforceIP claims. International treaties couldaddress remaining problems. Using tradesanctions to solve problems of IP protec-tion, says Goldstein, “is like performingmicrosurgery with a sledge hammer.”

Free to consume and compete / One officialjustification for the trade war with Chinais that Chinese exporters are subsidizedor otherwise assisted by their governmentand thus have unfair advantages whencompeting against American companies.The fact that Chinese producers and Chi-nese taxpayers are forced to subsidize theirexporters does not justify the U.S. gov-ernment’s further reducing the freedomof Americans—their freedom to import,in this case. If other people’s oppressionwere a good justification for underminingliberty, trade and everything else would bea race to the bottom: the least-free in theworld would dictate everybody else’s levelof freedom. It would be better to let Amer-icans be free to import and let Americanbusinesses compete, even if they are not ona level playing field.

The notion of a level playing field ishighly suspicious anyway. Where in theworld or even inside America is there a levelplaying field? And how do you measurethe tilt of this metaphorical field? Is it atilt that average wages are 40% lower inMississippi than in California? Directlyor indirectly, governments intervene in theeconomy, including the federal and stategovernments in America. Public expendi-ture on education, for example, is higher inAmerica (4.2% of gross domestic product)than in Germany (3.7%). Would this justifyGerman firms complaining that they facean unequal playing field?

Moreover, if entrepreneurial privatecompanies need protection in order tocompete with Chinese state companiesor subsidized “private” ones, where is theadvantage of private enterprise? We mightas well install a Chinese sort of economyin America. In reality, the more Chinesefirms are dependent on—and run by—their

government, the less efficient they willbecome. The more state-controlled Chi-nese society becomes, the more likely Chi-nese taxpayers won’t be able to continuesubsidizing their government’s cronies.

Some may respond that there already isonly a relatively small difference of degreebetween Chinese and American state capi-talism. If that is the case, indeed, Americamight not be able to maintain its historicaleconomic advantage. But that would becaused by too little free enterprise here,not too much.

The U.S. government should not worryabout poor Chinese taxpayers and straight-jacketed businesses in China. We may hopethat they will improve their dire situationwith time. But there is little we can doabout what’s happening in China exceptto give an example of economic freedomand efficiency, which will not be done withprotectionism. But the U.S. governmentcan do a lot about freedom at home bynot impeding American consumers andbusinesses that want to import from, orinvest in, foreign countries.

Losing the war / Even if retaliation againstforeign protectionism were to succeed inopening trade, it would strengthen thefalse idea that what we give up in trade(exports) is more important that what weobtain (imports). As James Mill wrote inhis 1824 Elements of Political Economy:

When one country exchanges …, thewhole of its advantage consists in thecommodities imported. … This seems tobe so very nearly a self-evident proposi-tion, as to be hardly capable of beingrendered more clear by illustration;and yet it is so little in harmony withcurrent and vulgar opinions that it maynot be easy, by any illustration, to gain itadmission into certain minds.

Thus, a strategy of retaliation, even if suc-cessful in the short run, may actually com-promise free trade in the longer run.

A related question is whether Americacould lose the trade war by being sidelinedbecause American protectionism pushestoward the East the center of gravity ofP

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world trade. This is not impossible as faras formal trade agreements are concerned.From this point of view, pulling out fromthe Trans-Pacific Partnership might havebeen America’sfirst trade war defeat. Trumpmay now be realizing this, as he voiced awish to reenter the agreement. But it mustnot be forgotten that trade agreementsare not the essence of free trade, and thatthe Trans-Pacific Partnership was as muchabout regulating trade as about freeing it.

What’s important is whether Americansremain free to import and whether Ameri-can businesses can freely pursue oppor-tunities wherever they see them. Alas, thesame protectionism that leads the U.S.government to disengage from the formalworld trade system is likely to underminethe freedom of American consumers andbusinesses to make their own individualdecisions on where to buy or invest in thewide world.

Rent-Seekers InfiltratePublic Utility Regulation✒ BY KENNETH W. COSTELLO

Public utility regulators should stick to their knitting: setting justand reasonable rates and taking other actions that improve thelong-term welfare of utility customers. After all, the raison d’etre

for public utility regulation is to protect customers from “monopoly”utilities. Pursuing other purposes besides consumer protection only

KENNETH W. COSTELLO is a principal specializing inenergy and the environment at the National RegulatoryResearch Institute.

a high price, contrary to what some envi-ronmentalists have argued.

In combating climate change, somestates like California seem to adopt a moralimperative to eliminate both fossil fuelsand (puzzlingly) nuclear power from themix of a utility’s generation portfolio.Studies and real-world experience haveshown that such a scenario could drive upelectricity rates substantially, reduce thereliability of electricity service, and inflictharm on the overall economy.

Studies have also warned that reducinggreenhouse gas emissions to the so-called“80 by ’50” target” (i.e., reducing carbondioxide by 80% by 2050, the target of manyclimate advocates) would be prohibitivelyexpensive and hard to achieve withoutthe continued operation of nuclear powerplants. One can ask whether Californiaand other states are more intent on end-ing nuclear power than mitigating climatechange. They believe that aggressivelyswitching to renewable energy and electri-fication is the optimal strategy forfightingclimate change. All eyes will be on whattranspires in these “green” states from thisgrandiose experiment.

Whose benefit? / Before proceeding withany action, states should ask themselveswhat benefits electrification and high reli-ance on renewable energy offer relative tothe costs. It is unlikely that any state wouldrealize net benefits if the intent of theseactions is solely to mitigate carbon emis-sions. It is somewhat puzzling why a stateon its own (like California or New York),without cooperation from other states orthe federal government or other countries,would revamp its energy sector at a hightransition cost for a policy goal that wouldlargely benefit the rest of the world.

If I were a state regulator, I wouldthink twice before prioritizing climatechange over the economic welfare of thecitizens of my state, especially when itinvolves subsidies from those who standto benefit little. Isn’t constituent welfaresupposed to be the chief concern of stateutility regulators?

Within the regulatory agencies them-

mental consequences of major pipelineprojects, assessing their effects on climatechange—let alone measuring them—over-stretches the commission’s capability as aneconomic regulator. This should in no wayimply that we should refrain from mitigat-ing climate change, but that responsibilityshould fall on environmental agencies andother governmental entities with morecapability than FERC to address climatechange. Even if FERC has an accurate mea-surement of net changes in greenhousegas emissions (a big if) and a reasonableestimate of their effect on climate change,it is unclear how FERC should use thatinformation in pipeline certification.

There is enormous uncertainty overwhat effect a reduction in greenhouse gasemissions would have on the economyand society in general. We need to behumble about what we know about cli-mate change and not expend considerableresources—read: trillions of dollars—thatcould jeopardize people’s economic well-being. Make no mistake about it, viewingclimate change as an urgent problem thatmust be mitigated at any cost would carry

diminishes regulators’ ability to achievethis objective.

However, utility regulators have provensusceptible to rent-seeking efforts by vari-ous special interests at the expense of thegeneral public. For instance, some specialinterests succeed at persuading regula-tors—often with incomplete and slantedevidence—that the special interests’ favoredenergy technology would best serve societyand even save the world.

Climate change / The Federal Energy Regu-latory Commission’s recent developmentof gas pipeline certification exemplifiesthis. The agency is under pressure fromenvironmentalists to consider the climate-change effect of new pipelines. While onecan sensibly argue that FERC shouldignore concerns over greenhouse gas emis-sions, the courts so far have agreed withthe environmentalists.

Here’s the problem: even if FERC hasthe obligation to consider the environ-


selves, emphasis on special-interestdemands from clean air advocates, ven-dors, and others who are not utility cus-tomers has escalated to squeeze out publicinterest goals. Commissioners and man-agers are the guilty parties here, whethertheir political leanings are on the left orthe right. One example is interest groupsthat regard anything less than a maximumeffort to address climate change as a socialinjustice. But an obsession with climatechange can threaten other policy objec-tives, like reasonable and stable rates, eco-nomic growth, and reliable utility service.California and other states may be goingdown this primrose road.

As pressures intensify for more cleanenergy sources, utility regulators have hadto grapple more with the economic ineffi-ciencies of cost socialization and subsidies.One path is for regulators to encouragedistributed generation, electric vehicles,

and other new technologies, but not to giveaway the store. Cost subsidization can beunfair to some customers as well as to com-peting third-party providers. Regretfully,the evidence confirms that some stateshave been on the forefront of bad policiesthat have inflicted a regressive-tax-typewound on lower-income folks.

Utilities, regulators, and legislaturesdon’t have to be leaders in supporting newclean-energy technologies, especially thosewhose futures are in doubt. As “free riders,”they can learn from the experiences—bothpositive and negative—of so-called leadingstates while still contributing to greenhousegas reduction in the long run. The followerscan view activities in states like Californiaand New York as a public good. This pos-ture seems rational in view of the highlyuncertain future of most new technolo-gies and other developments in the electricpower industry.

Can We Cut GovernmentSpending?✒ BY RYAN H. MURPHY

Wealthier countries have larger governments. The questionis, why?

One explanation is that many of the goods that govern-ments spend money on are, in technical terms, superior goods, meaningthat when you are wealthier, you buy more of them as a percentage of

RYAN H. MURPHY is a research assistant professor inthe O’Neil Center for Global Markets and Freedom atSouthern Methodist University.

capacity, which is the ability of govern-ments to raise tax revenue, and thus growthe government through that mechanism.

Wagner’s Law, named for turn-of-the-20th century economist Adolph Wagner,posits a direct correlation between a society’swealth and the size of its government. IfWagner’s Law generally holds, it could leadto a certain amount of defeatism amongfree-marketersandotheradvocatesofsmallergovernment. Over the long term, total gov-ernment spending has comprised a growingpercentage of U.S. gross domestic product,as depicted in Figure 1. Inevitably increasingpublic spending is one possible reading ofRobert Higgs’s “ratchet effect” found in his

classic work Crisis and Leviathan, where crisesratchet up the size and scope of governmentunder “emergency” provisions, but publicspending never returns to pre-crisis levelsonce the emergency ends. More recently,Will Wilkinson of the Niskanen Center pro-claimed, “There’s simply no path here tosmaller government [for the United States].”

But Wagner’s Law, if stated as literallytrue and inevitable, is wrong. There areperiods of time in which national incomeincreases but government spending as apercentage of GDP falls, as reflected in theearly- to mid-1980s and mid- to late-1990sin Figure 1. The issue, then, is of degree:how frequently can government spendingfall in the long run in wealthy countries,and by how much?

International data / To get a sense of howoften wealthy countries violate Wagner’sLaw over time, one can look at how oftengovernments cut the size of their statesin the very long run. I did this using datafrom the most recent Economic Freedomof the World report published by the Fra-ser Institute (along with other EconomicFreedom Network think tanks, includingthe Cato Institute). The specific data Iexamined were:

■ government consumption—that is,government spending on goods andservices used for direct satisfaction—as a percentage of all consumption

■ transfers and subsidies as a percentageof economic output

■ government investment—that is,government spending on productiveassets—as a percentage of all investment

Country tables in the current edition of theEconomic Freedom of the World report providedata for the years 1980 and 2015, so thoseare the years I compared for this research.

Table 1 lists the 24 members of theOrganization for Economic Cooperationand Development in 1990, along withtheir GDP per capita in 1980 (in 2010U.S. dollars). Three sets of columns givethe three measures of government spend-ing listed above in both 1980 and 2015. Ifthe strong version of Wagner’s Law were

your income. Others posit that publicinvestments in education and health con-tribute to economic growth by improvingproductivity, which in turn increases grossdomestic product per capita. Alternatively,wealthier countries are able to “buy”more of something called “state capac-ity,” which is what academics call the abil-ity of governments to accomplish whatthey set out to accomplish. Half of thisis clearly a good thing because it meanshigher quality courts and legal systems.But the other side of state capacity isfiscal



to hold, the 1980 figures would alwaysbe smaller than their 2015 counterparts.Government consumption and spendingon transfers and subsidies are the clearertests of the hypothesis, although all threemeasures should be given some weight ifWagner’s Law is to mean that increases inthe size of government are inevitable.

These measures of government spend-ing differ in terms of how much theyeach vary across countries. A change offive percentage points represents a greaterchange for one type of government spend-ing than another. To better express howbig the changes that occurred in govern-ment spending from 1980 to 2015 reallywere, I calculated the standard deviationof each variable in 1980. I then divided thechange from 1980 to 2015 by this standarddeviation. For example, in Belgium, gov-ernment consumption as a percentage oftotal consumption increased from 21.55%in 1980 to 31.82% in 2015. As the standarddeviation among these countries in 1980was 5.72%, Belgium’s 10.27% increase cor-responds to 1.80 standard deviations.

Table 1 highlights the countries andvariables that declined from 1980 to 2015.It does indeed seem difficult to cut govern-ment consumption. Of the 24 countries,only three—Canada, the United Kingdom,and the United States—cut governmentconsumption over this time period. Thecuts in the UK and the United States werenot at all trivial, though, amounting to

more than half a standard deviation apiece.Still, if this were the entire story for gov-ernment spending, it would give somecredence to the defeatist story regardinggovernment spending.

However, between 1980 and 2015, eightof the 23 countries for which completedata are available cut their transfers andsubsidies as a percentage of GDP, and asignificant majority—19—cut their govern-ment investment as a percentage of totalinvestment. Of those latter countries, 14cut government investment by more than astandard deviation. The only country thatincreased government investment by at leasta standard deviation was Greece.

What caused this decrease in spendingis rather obvious: the West decided to stopplaying soft socialism at the so-called “com-manding heights” of the economies andprivatized a number of government func-tions. That very recent historical episode,in which nearly every advanced economy inthe world washed its hands of so much stateownership, certainly appears like it shouldcount as a cut to the size of government.

Why did it happen? / There may be someamount of substitution between thesethree areas of government spending, ofcourse. Only one country, the UK, cut itsspending across all three areas. Canadais one of a handful of countries that cutits transfers and subsidies to a nontrivialdegree and also cut its government con-

sumption, but its government investmentticked upward. So how should we inter-pret these numbers?

First, it is absolutely not true that thereare inevitable barriers to reducing govern-ment investment. And there is plenty ofopportunity for more reductions: public–private partnerships, which promise toshift many of the tougher issues regardinginfrastructure to the private sector, are onlynow beginning to get off the ground. Evenin the United States, which never went tothe soft socialist extremes that much ofEurope did, there are plenty of opportuni-ties to privatize infrastructure—especiallyin airports, a step already taken in manyareas of the world.

Second, despite the headwinds of ris-ing entitlements for the elderly across alladvanced economies, there are several exam-ples of countries that have managed to cuttransfers and subsidies over the last 35 years.

Third, cutting government consump-tion may offer a tougher task, but thereare clear policy proposals to do so on thetable right now. These include the termi-nation of various privileges enjoyed bypublic sector unions, which in turn couldlead to expenditure cuts. But it would besomewhat surprising if government con-sumption is the higher-hanging fruit incomparison to transfer payments, giventhe demographic challenges that facenearly all of these countries.

Another point of interest is that coun-tries with a legal system originating in Brit-ain—in this sample, Australia, Canada, Ire-land, New Zealand, the UK, and the UnitedStates—are disproportionately representedamong the countries in cutting spendingover this time period. The importance oflegal origins in determining institutionalquality and outcomes is a recentfinding insocial science, and it is possible that this isanother instance of that effect coming intoplay. If this is the case, this is another fac-tor supporting the prospects of U.S. cutsin government spending.

Conclusion / There is little reason forsmall-government advocates to be pessi-mistic about the prospects for reducing

Figure 1

U.S. Government Expenditures as a Percentage ofGross Domestic Product

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 201510

15

20

25%


government size. Government investmenthas fallen tremendously throughout theWest, and transfers and subsidies seem tofall if there is the political will for it. Thecategory of government spending that hasbeen more stubborn in the recent past isgovernment consumption, but this is withtwo caveats: it actually fell in the UnitedStates between 1980 and 2015, and thereare rather clear-cut ways for dealing withthis particular set of issues, including miti-gating the effects of public sector unions.While ultimately there may be more impor-tant priorities than reducing the rate atwhich government spending grows, theidea that government spending cannot ever

be reduced is not supported by the analysis.The late public choice economist Rob-

ert Tollison once said, “We’re all part of theequilibrium.” By that he meant that eventhough it may not look like public policythink tanks and other academic institu-tions have much of an effect on policy,their actions contribute to whatever publicpolicy equilibrium we experience. Thisnotion is supported by recent research onthe effects of op-ed writing on public opin-ion. It would be safe to assume that if freemarket intellectuals cease to make the casefor less government spending, we shouldexpect more government spending in thefuture than we would have otherwise.

READINGS:

■ “Foreigners Show Airport Privatization Works,”by Nick Zaiac. American Institute for EconomicResearch, Jan. 1, 2018.

■ “Investment in Human Capital,” by Theodore W.Schultz. American Economic Review 51(1): 1–17 (1961).

■ “The Economic Consequences of Legal Origins,” byRafael LaPorta, Florencio Lopez-de-Silanes, and AndreiShleifer. Journal of Economic Literature 46(2): 285–332(2008).

■ “The Long-Lasting Effects of Newspaper Op-Edson Public Opinion,” by Alexander Coppock, EmilyEkins, and David Kirby. Quarterly Journal of PoliticalScience 13(1): 59–87 (2018).

■ “What If We Can’t Make Government Smaller?”by Will Wilkinson. Defending the Open Society (Nis-kanen Center), Oct. 19, 2016.

Table 1Categories of Government Spending by OECD Country

Country GDP perCapita, 1980(Thousandsof 2010 U.S.

dollars)

Government Consumption as a %of Total Consumption

Transfers & Subsidies as a % of GDP Government Investment as a %of Total Investment

1980 2015 Differencein StandardDeviations



Australia 29.79 23.23 23.99 0.13 10.10 12.75 0.41 28.40 12.27 -1.83

Austria 27.63 24.82 27.44 0.46 22.10 25.62 0.55 44.50 12.98 -3.57

Belgium 27.43 21.55 31.82 1.80 26.00 28.71 0.42 26.80 10.21 -1.88

Canada 31.77 28.83 26.92 -0.33 14.50 9.62 -0.76 12.60 16.11 0.40

Denmark 36.38 34.01 35.23 0.21 20.80 21.10 0.05 25.00 18.80 -0.70

Finland 25.66 24.93 30.60 0.99 14.30 23.74 1.47 23.30 19.93 -0.38

France 26.96 23.55 30.28 1.18 26.10 28.27 0.34 27.40 16.76 -1.21

Germany 26.06 26.30 26.30 0.00 17.60 25.68 1.25 25.70 10.83 -1.68

Greece 19.14 14.69 22.34 1.34 8.59 22.51 2.16 32.00 47.58 1.77

Iceland 26.65 22.21 31.86 1.69 10.60 8.70 -0.30 15.30 20.00 0.53

Ireland 17.11 21.96 26.89 0.86 17.50 16.51 -0.15 24.60 9.57 -1.70

Italy 24.45 19.75 23.69 0.69 20.90 24.94 0.63 25.90 13.25 -1.43

Japan 25.49 14.29 25.83 2.02 9.20 23.75 2.26 19.60 15.93 -0.42

Luxembourg 42.64 17.75 36.14 3.22 N/A 22.00 20.86 -0.13

Netherlands 30.08 22.22 36.22 2.45 29.40 24.61 -0.74 14.80 18.19 0.38

New Zealand 22.38 22.59 24.56 0.34 21.90 14.06 -1.22 30.80 16.66 -1.60

Norway 48.54 28.57 35.16 1.15 22.10 17.68 -0.69 35.90 21.10 -1.68

Portugal 12.39 16.76 21.59 0.85 16.30 20.61 0.67 42.20 13.56 -3.25

Spain 17.44 16.45 25.11 1.52 12.30 21.23 1.39 27.10 11.04 -1.82

Sweden 31.09 36.25 36.53 0.05 24.70 20.59 -0.64 41.20 19.29 -2.48

Switzerland 54.89 16.68 17.36 0.12 13.40 14.93 0.24 N/A

Turkey 4.99 15.89 18.52 0.46 6.00 14.65 1.34 40.00 21.66 -2.08

UnitedKingdom

21.87 26.62 22.99 -0.64 15.80 15.15 -0.10 29.10 16.25 -1.46

UnitedStates

28.73 21.21 17.50 -0.65 10.90 14.87 0.62 17.71 16.10 -0.18

SOURCE: Economic Freedom of the World: 2017 Annual Report, Fraser Institute, Sept. 28, 2017.



USDA Is Supposed toRegulate Animal Health,Not Animal Happiness✒ BY HENRY I. MILLER AND JEFF STIER

Last December, regulators at the U.S. Department of Agricultureruffled a lot of feathers by withdrawing a regulation published onthe final full day of the Obama administration that would have

created new requirements for producers of “organic” eggs and poul-try. Called the Organic Livestock and Poultry Practices (OLPP) rule,

HENRY I. MILLER , a physician and molecularbiologist, is the Robert Wesson Fellow in ScientificPhilosophy and Public Policy at Stanford University’sHoover Institution. JEFF STIER is a senior fellow at theConsumer Choice Center.

it would have, among other things, speci-fied that to boast the coveted “USDAOrganic” seal, animals would need to beraised with certain minimum amounts ofspace, light, and access to the outdoors.

USDA officials offered several ratio-nales forfirst delaying and then withdraw-ing the Obama rule. First, they arguedthat by being overly prescriptive, the rulecould discourage the development of new,innovative organic farming practices thatwould both meet humane standards andalso keep costs under control. Second,the Trump USDA interpreted the relevantenabling statute more narrowly than theprevious administration and judged thatthe rule exceeded statutory authority.Finally, the USDA said that “withdrawalof the OLPP also is independently justifiedbased upon USDA’s revised assessments ofits benefits and burdens and USDA’s viewof sound regulatory policy.”

The notice itself included many pas-sages justifying the withdrawal, including:

■ “The OLPP final rule consisted, in largepart, of rules clarifying how produc-ers and handlers participating in theNational Organic Program must treatlivestock and poultry to ensure theirwellbeing…. [The Agricultural Market-ing Service] is proposing to withdrawthe OLPP final rule because it now

believes [the Organic Foods ProductionAct (OFPA)] does not authorize theanimal welfare provisions of the OLPPfinal rule. Rather, the agency’s currentreading of the statute, given the relevantlanguage and context, suggests OFPA’sreference to additional regulatorystandards ‘for the care’ of organicallyproduced livestock should be limitedto health care practices similar to thosespecified by Congress in the statute,rather than expanded to encompassstand-alone animal welfare concerns.”

■ “USDA believes that it may not lawfullyregulate outside the boundaries oflegislative text … and that it lacks thepower to tailor legislation to policygoals, however worthy, by rewritingunambiguous statutory terms. Rather,USDA believes it may properly exercisediscretion only in the interstices createdby statutory silence or ambiguity andmust always give effect to the unambig-uously expressed intent of Congress.”

■ “The OLPP final rule is a broadlyprescriptive animal welfare regula-tion governing outdoor access andspace, transport, and slaughter, amongother things.… USDA’s general OFPAimplementing authority was used asjustification for the OLPP final rule….But nothing in Section 6509 authorizesthe broadly prescriptive, stand-aloneanimal welfare regulations containedin the OLPP final rule. Rather, section6509 authorizes USDA to regulate withrespect to discrete aspects of animal

production practices and materials:Breeder stock, feed and growth promot-ers, animal health care, forage, andrecord-keeping. Section 6509(d) is titled‘Health Care.’ Subsection 6509(d)(1)identifies prohibited health care prac-tices, including sub-therapeutic dosesof antibiotics; routine synthetic internalparasiticides; and medication, otherthan vaccinations, absent illness.”

Fundamental problem / Many large-scaleorganic egg producers applauded theUSDA’s withdrawal of the OLPP rulebecause it would have required themto modify their facilities at significantexpense. But proponents of the rule criedfoul at the change in course. For them, therule would have been afinancial boon, inas-much as they were already generally con-forming to the standards they had spentyears lobbying for. The rule would have per-manently protected their businesses fromlarger-scale producers who sought to enterthe organic marketplace with innovativeanimal welfare approaches.

The Washington Post quoted the outragedcomments of Jesse Laflamme, co-ownerand CEO of egg producer Pete and Ger-ry’s Organics: “What’s so upsetting is thatthere is such a gap between what organicconsumers expect and what these factoryfarms are producing.”

Therein lies the fundamental problemwith the premise of government standardsfor organic agriculture, whether it involvesthe production of meat and eggs or farm-ing of grain, fruits, and vegetables. Theentire enterprise is driven more by whatthe purchasers of organic products expector feel, rather than any evidence-basedcriteria. They often resemble the membersof a religious cult. People should be freeto exercise their beliefs, to be sure, but thegovernment should not be in the businessof codifying or promoting them.

Why, then, did the USDA becomeinvolved in organic certification in thefirstplace? When the organic standards werepromulgated in 2000, then–secretary ofagriculture Dan Glickman was unequivo-cal about the fundamental meaningless-


ness of the organic designation:

Let me be clear about one thing, theorganic label is a marketing tool. It isnot a statement about food safety. Noris “organic” a value judgment aboutnutrition or quality.

It’s worth repeating: the organic label isno more than a marketing tool. And it’s acynical one, because so many unsuspect-ing consumers are ripped off by the higherprices of organic products, without pal-pable benefit. That’s why, far from settingmore rigid standards for the organic label,the feds should fully extricate themselvesfrom defining “organic.” That definitionwould be best adjudicated by the market,at the expense of those who are willing topay the premium.

Organic agriculture has morphed intoa massive special-interest bonanza. Annualsales of organic food in the United Statesnow exceed $40 billion. Federal spending onorganic agriculture has mushroomed from$20 million in the 2002 Farm Act to morethan $160 million in the 2014 version (withfurther increases under consideration). Andaccording to the USDA, during the Obamaadministrationthe USDA“signedfivemajororganic trade arrangements and has helpedorganic stakeholders access programs thatsupportconservation,provideaccesstoloansandgrants, fundorganicresearchandeduca-tion, and mitigate pest emergencies.”

Free to choose / The government shouldnot be putting its thumb on the scales inthose ways. It is especially noteworthy thatother, analogous special interests—such asthe producers of kosher and halal foods—don’t receive similar government benefits.And for that they are better off.

There are enough kosher food–certi-fying organizations to meet a very widerange of belief systems, for example, andconsumers are free to choose products onlyfrom groups that meet their standards.This approach allows those who seek toadhere to the strictest standards to havecertifying agencies on which they can rely,while also allowing those who accept morerelaxed standards to have a wide range of

affordable products that meet their reli-gious needs. They are, in Milton Fried-man’s memorable phrase, free to choose.

This democratized private-sectorapproach has had the effect of expandingthe market for fresh kosher meat in theUnited States. In smaller communitiesthat can’t support a market for the signifi-cantly more expensive “glatt” kosher meat(which must meet the strictest standard),kosher consumers can go to Trader Joe’sstores throughout the country and pur-

chase meat that satisfies a more basic andaffordable kosher standard.

Some of this stratification is taking rootin the organic industry already. Some true-believers are promoting a kind of stricter-standard, “organic-plus” designation.That’s fine: as long as the government isn’tinvolved and there isn’t fraudulent advertis-ing, we don’t care if, in order to avoid earthlycontamination, organic-plus produce isrequired to be produced on the moon.

The private-sector approach to certify-ing faith-driven food purchases expandsthe market and keeps cost down by allow-ing consumers to pay premiums thatreflect their beliefs. And it doesn’t costnonbelievers a penny.

Organic food companies know this.That’s why those who favor the OLPP are sooutragedabout itswithdrawal.Withoutnew,more rigid, federally mandated standards,they’re forced not only to compete amonga range of organic options, but also have tojustify the higher cost of their own productsthrough marketing—at their own expense.

Organic boosterism at the federal levelis not without consequences. Consumershave been snookered into believing thatorganic food is healthier, safer, or better forthe environment than non-organic options,although the scientific evidence argues oth-

erwise. Lower crop yields are inevitable givenorganic farming’s systematic rejection ofmany advanced methods and technologies.Those lower yields, in turn, increase thepressure for the conversion of more land tofarming and more water for irrigation, bothof which are serious environmental issues.

Because prices for organic food are muchhigher, those misconceptions eat away atconsumers’ buying power. And whileorganic marketers like to promote the ideathat “organic” implies “locally grown,” the

United States is actuallya net importer of organicgoods, including (suppos-edly) organic grains fromcountries like China,India, Turkey, and Roma-nia,withnowaytobesurethose countries adhere to“organic” standards that

even remotely resemble those in the UnitedStates. Moreover, there is documented wide-spread cheating in the organic designationof eggs, milk, and imported grains.

Let’s return to the OLPP rule and theUSDA’s decision to withdraw it. The with-drawal elicited bitter condemnation frommany organic farmers and the OrganicTrade Association, whose long-standinglobbying for the rule was rent-seeking, pureand simple. The group knows its constitu-ency, whose views were reflected in a March2017 survey by Consumer Reports. In thatsurvey, some 60% of Americans said that itis extremely or very important that animalsused to produce organic food “are raised onfarms with high standards for animal wel-fare.”Further,54%saidthat it is extremely orvery important that eggs labeled “organic”come from hens that are “able to go out-doors and move freely outdoors.”

We support the withdrawal of the OLPPrule, but see it only as a first step in endingthe federal imposition of belief-based food-production standards. If industry and con-sumers want such standards, they are freeto form nongovernmental entities at theirown expense to develop whatever rules orsets of rules they prefer. If they do so, we—asbelievers in market-driven solutions—willgladly give them our blessing.

As long as the government isn’t involvedand there isn’t fraudulent advertising,we don’t care if“organic plus”produce isrequired to be produced on the moon.



The New Perils of DataLocalization Rules✒ BY IKE BRANNON AND HART SCHWARTZ

Our increasingly connected globe has resulted in more databeing generated each and every year, a progression that hasbecome geometric. The world produced more data in 2017

than in the previous 5,000 years of recorded human history combined,according to Art Landro, the CEO of Sencha, a company that develops

IKE BR ANNON is president and HART SCHWARTZ isa senior analyst for trade and data analytics with Capi-tal Policy Analytics, a D.C. economic consulting firm.

data-centric websites and applications.What’s more, the value of data in the

aggregate has increased over time, ascomputing power and human ingenuityadvanced in tandem to apply the data toanswer a myriad of questions, includingsuch important issues as drug efficacy,crop fertility, weather forecasting, and—ofcourse—consumer and voter behavior. So aswe produce more data, we are doing morewith it as well—or at least not disposing of it.

As data become more valuable, govern-ments across the globe have respondedby asserting more control over the dataproduced in their jurisdiction. Often theserules require that companies collectingdata in a country also maintain the datain that country. Governments often justifythese “data localizations” requirementsby appealing to the need to ensure cyber-security or maintain the privacy of citizens.

There are certainly a range of legitimateinterests in the realm of sovereignty, secu-rity, and human rights that may conflictwith economic considerations. But broaddata localization requirements can tip into“data protectionism” whose effect maybe to impede the continued growth ofinternational trade. The U.S. InternationalTrade Commission (ITC) reports that halfof all global trade in services depends onaccess to cross-border data flows.

In short, the rhetoric and motivationsfor continued actions to restrict dataflowsacross borders should always be subject tostrict scrutiny.

ization worldwide. By their estimation,such measures have grown sharply over thelast few years in apparent lockstep with thegrowth of data.

Increasing data localization has imposedhigher costs on multinational firms thatoperate across borders. By constraining thefreedom to share data across locales aroundthe globe, these regulations force firms tohire more people in the country where thedata originated rather than permittingcompanies to locate the operations wheretheir staff is best-equipped for the particulartask. Such restrictions concomitantly limitpotential productivity gains and essentiallyforce firms to make costly investments inlocaldata infrastructuretocomplywith localcontent laws. Ultimately, other businessesand their consumers pay the costs of datarestrictions via higher prices and less choice.In the long run, such rules ultimately createsmaller, less robust markets across the globe.

Estimated economy-wide losses / Severalorganizations have conducted economet-ric studies to understand the economy-wide effect of data localization measures.Table 1 shows thefindings of the EuropeanCenter for International Political Economy(ECIPE) along several key metrics.

Other research echoes ECIPE’sfindings.In 2014 the ITC found that “foreign digitaltrade barriers” depressed U.S. gross domes-tic product by 0.1–0.3%, which amounts tobetween $16.7 billion and $41 billion perannum. A study conducted in 2016 jointlyby the Center for International GovernanceInnovation (CIGI) and Chatham Houseestimated that digital trade barriers reducedGDP by 0.10% in Brazil, 0.55% in China,0.48% in the EU, and 0.58% in South Korea.

Payment companies in China / The opera-tions of digital payment companies inChina are an excellent example of thebusiness strategy quandaries presentedby data localization measures. Digital pay-ments in China have been rising at a stun-ning rate, from 6.3 per Chinese residentin 2011 to 26.1 in 2015. Considering thatin developed countries such as Germany,France, and the United States, 200–400

Typesofdatalocalization / James Kaplan andKayvaun Rowshankish, partners with theconsultingfirm McKinsey & Co., suggest inan article published in the Global Commis-sion on Internet Governance that there are fourmain categories of data localization, listedbelow from most to least stringent:

■ Geographical restrictions on data export(“data copy cannot leave”), which forceforeign companies to create separatein-country servers or other infrastruc-ture to hold the data. South Korea andEgypt impose a variant of this.

■ Geographical restrictions on data locationrequire foreign companies to retain alocal replica of the data. Indonesia andMalaysia impose such rules on busi-nesses operating within their borders.

■ Permission-based regulations mandatethat foreign companies must gain con-sent from their customers for cross-border data transfer. Brazil, Argentina,Switzerland, and Luxembourg eachrequire some sort of permission beforedata can be transferred.

■ Standards-based regulations allow for-eign companies to move data freelybut companies must ensure securityand privacy for customers.

Data localization can also be classifiedaccording to whether it is absolute or con-ditional. Absolute measures stipulate thatsome combination of data storage, process-ing, and access must occur locally. Con-ditional measures, in contrast, effectivelyban the exit of data from the jurisdictionby placing extremely restrictive conditions.

The ITC tracks the growth of data local-


such payments are made annually perperson, and considering the 1-billion-plus Chinese population, the long-termgrowth potential in China is enormousfor the digital payments industry.

The market includes more than tradi-tional payments from transaction charges,transfer fees, interest income, andmaintenance fees. These data canbe monetized into many lucrativeincome streams, including targetedadvertising for merchants basedon smartphone location, custom-ized information on likelihood ofrepayment, and precise measure-ments of customer tolerance offinancial risk.

Developing the full scope of thebusiness model depends upon theownership of the data streams, andthat is now problematic for non-Chinese companies. Last year Chi-na’s new Cybersecurity Law tookeffect. Of particular concern is amandate that “critical information infra-structure” must store personal informa-tion and other important data on serversphysically located within mainland China.This clearly constitutes a data localiza-tion provision, and a very wide assortmentof digital activities could be subject to itbecause of the vagueness of the provision.

Foreign companies thus must installand maintain data servers within China andaccept the risk of unpredictable penalties asa result of the open-ended nature of the leg-islation. This makes sustained investmentvery challenging. Kaplan and Rowshankish,the McKinsey consultants, state:

Executives reported that they havesevere difficulties gaining a clear andcomprehensive view of the full setof regulations. Many are worded sovaguely that it is impossible, they say, topredict what is and is not allowable.…The uncertain environment makes itparticularly difficult to plan and executelarge technology investments.

How can digital payment companiesinvest in China in such a climate? Manyfind they have little choice but to submit: if

companies choose not to participate, theircompetitors can potentially grab the mar-ket and use afirst-mover advantage to reapa windfall as the value of data explodes.

Policy options / The preponderance ofglobal trade restrictions creates difficult

tradeoffs for tech companies and othermultinationals that depend on data fortheir business. Governments face difficulttradeoffs as well. They wish to attract for-eign investment while protecting their cit-izens according to their own national val-ues of privacy, security, and human rights.They wish to adjudicate data-related dis-putes in their own domestic legal systems,and in a post–Edward Snowden world,they desire to avoid foreign surveillanceof domestic data.

Attempts to regulate this situationthrough trade agreements have runaground. To some extent these failuresreflect the underlying difficulty of reconcil-ing commercial and noncommercial data.Only a fraction of the growing volume ofcross-border data flows is of a financial,commercial, or transactional nature. Mostpersonal data take the forms of emails,videos, text messages, and phone calls.

Typically, trade agreements conductdispute resolution through panels of tradelawyers. But when cross-border data leadsto disputes involving civil matters such astorts or criminal matters such as harass-ment, and when these disputes would

normally engage local courts in domesticlegal systems, trade lawyers cannot appro-priately handle such matters. In additionto the practical difficulties involved inharmonizing enforcement across widelydiffering domestic judicial systems, thelarger Westphalian nation-state principle

of noninterference in the internal affairsof other nations presents another obstacle.

Nevertheless, for the continued growthof global trade, some type of reciprocatedbalancing must take place between theneeds of global businesses and the preroga-tives of sovereign governments. Perhapsthe place of departure could involve, atleast initially, recognizing the sheer mul-tidimensional complexity of the matter.Progress toward new solutions may pro-ceed from awareness that most cross-bor-der dataflows are not in fact trade-related.

Could it be possible, then, to imagine aworld in which each differentiated dimen-sion of cross-border data is regulated by aseparate type of agreement, within a dif-ferent sphere of international law? Couldlaw enforcement, trade, cybersecurity, andother domains each receive their ownseparate international agreement, so as toavoid the pitfalls of previous attempts at“all-in-one grand bargains” that fall apartif any one element cannot be agreed? In aworld in which economic protectionismis on the rise, finding a new path for-ward for “data protectionism” is of greatimportance.

Table 1Predicted Losses in Case of Economy-Wide Data Localization

Lost GDP Lost consumerwelfare

Lost wages perdata worker (% of

monthly salary)

Lost domesticinvestments

Brazil -0.80% $15 billion -20% -5.4%

China $63 billion -13%

European Union -1.10% $193 billion -5.1%

India -0.80% $14.5 billion -11% -1.9%

Indonesia -0.70% $3.7 billion -12.6%

South Korea -1.10% $15.9 billion -20% -3.6%

Vietnam $1.5 billion -3.1%

Source: European Center for International Political Economy (ECIPE)


In the 1999 movie Office Space, the (more or less) goodguys hatch a plan to divert to themselves fractions ofcents that their sleazy employer Initech had appar-ently been overcharging its customers by rounding upbillings. Had any customer discovered Initech’s scam,he might have filed a class action seeking a refundfor himself and all others who had been cheated. But

the chances are that the customers committed themselves toarbitrate disputes and waived any right to join a class actionwhen they signed a purchase order or clicked “Agree” on Ini-tech’s website (if it had a website in 1999). So the firm couldsettle up privately with any customer who complained—maybeeven under a nondisclosure agreement—and would not need tochange its ways.

Until recently, there was some doubt whether such waivers wereenforceable. But last October, the U.S. Senate voted to rescind a newrule promulgated by the Consumer Financial Protection Bureau(CFPB) that would have overridden these now ubiquitous provi-sions barring consumers from joining any class action. So consumerclass actions are pretty much dead in thefinancial industry, at leastfor now. But business may regret this apparent victory.

To be sure, the CFPB is itself controversial. It is an odd agencyborn of the 2010 Dodd–Frank Act and seen by many conservativesas the pet project of Sen. Elizabeth Warren (D–Mass.). It is notoverseen by a bipartisan panel of commissioners, but rather by anappointed director. That director was Richard Cordray, who beganhis tenure via an attempted recess appointment by President BarackObama and whose statutory successor has since been replaced byPresident Trump with Mick Mulvaney (who also continues to serveas director of the Office of Management and Budget).

That controversy aside, the Senate vote was no doubt influ-enced by a Treasury Department report issued the day before the

R ICHARD A. BOOTH holds the Martin G. McGuinn Chair in Business Law atVillanova University’s Charles Widger School of Law.

Back to the Futureof Arbitration

Should businesses be so hostile to class actions?✒ BY RICHARD A. BOOTH

vote, lambasting the CFPB and the rule. The most striking featureof the report is its title, “Limiting Consumer Choice, ExpandingCostly Litigation: An Analysis of the CFPB Arbitration Rule.”

Limiting consumer choice? Really?In practice, consumers have zero choice whether to agree to

arbitration. Indeed, they seldom know that they have done sountil they complain. But in the era of fake news, it seems Treasuryis entitled to its own facts.

The Treasury critique may seem persuasive: Only 13% of con-sumer class actions result in recovery, of which 31% goes toplaintiff attorneys. And just 4% of class members claim theiraverage $32.35 share of successful class recoveries. Treasury saysthis means that consumers place little value on class actions. Butif only 4% bother to seek payment when they are already entitledto it, how many will initiate arbitration?

The likely effect of abrogating the CFPB rule is that financialinstitutions will escape the need to answer at all for abusive prac-tices. No doubt that was the real goal.

But the CFPB rule was not about compensation or complianceor consumer choice. The idea that consumers will choose a bankor credit card based on whether it comes with arbitration or per-mits class actions is ludicrous. The rule was about deterring busi-ness practices that gouge consumers, so to focus on consumerrecovery misses the point. The focus should be on the payout bythe wrongdoers and not on who gets the money.

There is no doubt that class actions can be abused by unscru-pulous plaintiff attorneys. The mere threat of liability to a classcomprising thousands of consumers (or investors) may be enoughto induce a defendant to settle even if the claim is frivolous.Indeed, it is quite rational to do so if the case can be settled forless than the cost of seeking dismissal in court. And there are lawfirms that have made a business of exploiting the math.

On the other hand, there is no doubt that class actions can bebeneficial. As the U.S. Supreme Court stated in Califano v. Yamaski

B A N K I N G & F I N A N C E

(1979), class actions can save “the resources of both the courts andthe parties by permitting an issue affecting every [class member]to be litigated in an economical fashion” where “the amounts atstake for individuals may be so small that separate suits would beimpracticable”—that is, too costly to try one at a time.

Moreover, an individual plaintiff cannot simply declare anaction to be a class action. Under Rule 23 of the Federal Rulesof Civil Procedure, the court must approve the lead plaintiff andlawyer (among other things) before the action can be certifiedto proceed as a class action. If the court does not do so, the casereverts to a simple lawsuit between plaintiff and defendant.

To explain: A class action is an ordinary lawsuit in which theplaintiff asserts claims typical of those of many other potentialplaintiffs. So the plaintiff seeks to act as a representative for hun-dreds or thousands of others with similar claims. One might thinkof it as a test case in which the claims of absent class membersare actually tried and settled. Since the named plaintiff serves asa fiduciary for absent class members, he or she must be foundto be worthy: not only to be typical, but also to be an adequaterepresentative. But a lead plaintiffwho is subject to an agreementto submit to arbitration—who has no right to be in court in the

first place—can hardly be an adequate representative for absentclass members (although they may have no right to be in courteither). Indeed, defendants routinely oppose class certificationon such grounds—and prevail—thus sending plaintiffs back tobilateral trial or arbitration of their individual claims.

AVOIDING THE BILL OF PEACE?

It is surprising that business has been so hostile to class actionsbecause they provide a way to adjudicate numerous small claimsall at once, thus precluding never-ending bother by the Lilliputianswarm. It is telling that when the class action first emerged underEnglish law, it was called a Bill of Peace. One would think that theprospect of dispensing with the claims of thousands of consumersall at once—cutting off the claims of absent class members whomay not even know they have a remedy—would be quite attractive.

Alas, abrogation of the CFPB rule returns us to the legal worldas it was following the 2011 Supreme Court decision in AT&TMobility v. Concepcion. There, the plaintiffs had signed up for cellphone service and a free phone. When AT&T sent them a billfor the sales tax on the phone—$30.22—they sued and soughtto litigate the matter as a class action. But the contract of saleP

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included an agreement to arbitrate and a class action waiver. Thetrial court and the Ninth Circuit ruled that the class action waiverwas unconscionable and thus unenforceable under a Californiastatute as interpreted by the state’s courts because it effectivelyprecluded anyone from suing for such a small sum.

The Supreme Court reversed, holding that California lawwas preempted by the Federal Arbitration Act (FAA) adoptedby Congress in 1925 to assure that contracts to arbitrate wouldbe enforced. In the majority opinion, Justice Antonin Scaliaemphasized that an agreement to arbitrate is just that: a bilateralcontract in which two parties have agreed to arbitrate any dispute.As a legitimate private contract, it should be enforced as written,particularly in light of the FAA. But Justice Scalia also observedthat class arbitration is oxymoronic—that a class action is inher-ently inconsistent with arbitration (although the Court hadpreviously suggested quite the opposite regarding cases in whichthe parties agree to class arbitration).

In the end, the argument from contract (and the FAA) provestoo much. An agreement to arbitrate is just that: an agreementbetween two parties to handle a dispute between the two of them.I cannot waive your rights. You cannot waive my rights. So howis it that the rights of similarly situated consumers to join forcesunder established rules of civil procedure has disappeared as aresult of many individual one-on-one contracts that supposedlyaffect only the rights of the signatories?

To be clear, the CFPB rule would not have affected bilateralarbitration provisions. Rather, it would have prohibited banks andother financial firms from relying on such provisions to avoid liti-gating a class action in court. But it is not clear that the FAA policyfavoring the enforceability of agreements to arbitrate ought to applyto class waivers. A class waiver is not an agreement to arbitrate. Itis an agreement to refrain from exercising a right. It is black letterlaw that a waiver will be strictly construed. As such, a waiver is quitedifferent from a positive agreement to arbitrate a claim. The factthat a class waiver has been attached as a rider to an agreement toarbitrate does not mean the rider falls within the FAA.

DANGER OF ABUSE?

Moreover, the danger of abusive class actions is overblown. Again,the rules require that the court approve both the individual rep-resentative plaintiff and class counsel. Thus, the court has thepower to remove and replace both plaintiff and lawyer if neces-sary to protect the interests of the class. In addition, the courtmust approve the definition of the class, thus determining whois or is not a member and the scope of the action. Perhaps mostimportant, the court must approve the voluntary dismissal orsettlement of the action: once filed, a class action may not bedropped because the plaintiff or lawyer has a change of heart(say) as a result of being paid off individually by the defendant.

Thus, the only real danger of abuse comes from failure of thecourts to do their job. Indeed, several state courts became havensfor class actions, presumably because judges were less than rigor-

ous in enforcing the rules. Thus, Congress passed the Class ActionFairness Act (CAFA) of 2005, which among other things providesfor the transfer of a state-court class action to federal court if theamount at stake is $5 million or more.

The bottom line is that a class action does not belong to theindividual—or lawyer—whofiles it. The point is emphatically illus-trated by Standard Fire Insurance Co. v. Knowles (2013), wherein thenamed plaintiff and her lawyer agreed in advance that the classwould seek a total award of less than the $5 million limit thatwould trigger removal of the case under CAFA from an Arkansasstate court to federal court. The Supreme Court rejected thistactic because neither the class lawyer nor the class plaintiff canbind absent class members until the court certifies the actionas a class action. To repeat: how is it that the rights of similarlysituated consumers to join forces under established rules of civilprocedure disappeared as a result of many individual one-on-onecontracts that supposedly affect only the rights of the signatories?

WHAT ABOUT PUNITIVE DAMAGES?

Assuming that we want consumers to be made whole, howshould we go about it?

Consider the recent litigation about bank overdraft fees gener-ated by some banks’ practice of clearing big checks before smallchecks, thus resulting in a fee for each overdrafted small check. Itis unlikely that the aggregate effect of the practice would even beconsidered in bilateral arbitration. The bank would likely arguethat the dispute is with this customer, who should have read thefine print and been more careful with his money. And even if a fewconsumers prevail, why would the bank change its ways? In contrast,a class action can address distinct collective interests of consumers.

Proponents of arbitration argue that it is quick and cheapbecause it can dispense with many of the niceties of litigationin court. But it is also private. There is typically no publishedopinion. Thus, the public is deprived of information about theirrights and remedies. And the law ossifies.

In the absence of a class action, punitive damages or somespecified financial penalty may be necessary. If a wrong is diffi-cult to detect or victims may not always sue, the wrongdoer maynot be deterred from bad behavior by the prospect of paying upwhen caught—especially if the wrongdoer gains from the wrong.Thus, the law imposes treble damages for antitrust violationsand disgorgement plus treble damages in cases of insider trading.

If there is no such statutory remedy, punitive damages canaddress the problem. For example, if there is a 20% chance that aconsumer will notice an overcharge and a 50% chance that a con-sumer who notices will sue, it makes sense to award damages equalto ten times the individual harm in order to deter the defendantfrom overcharging others. Merely to make the consumer wholeis no way to deter the seller from continuing the practice.

Surprisingly, the Supreme Court held in Mastrobuono v. Shear-son Lehman Hutton (1995) that punitive damages can be awardedin arbitration. Before Mastrobuono, well-settled state law prohibited


punitive damages in arbitration. Traditionally, the courts viewedpunitive damages as more in the nature of a criminal fine or pen-alty based on harms suffered by others not present in a bilateralarbitration. But the Supreme Court ruled that this sensible doc-trine was trumped by the FAA. Sound familiar? As in Concepcion,the Court ruled that the FAA trumped the common law.

Should we rely on a class action where we calculate the aggregateloss and write everyone a small check? Or should we rely on individu-als tosue in isolationandseekpunitivedamageswhere theaggregaterecovery may be some multiple of the gain to the wrongdoer?

Needless to say, the prospect of a big award of punitive damageswill motivate consumers—and their lawyers—to ferret out wrongs.But what is to prevent multiple lawsuits for punitive damages withthe possible result that defendant businesses pay out far morethan their ill-gotten gains and the losses suffered by consum-ers—especially when word spreads that the courts are handing outfree money? It was just such a feeding frenzy that led the SecondCircuit Court of Appeals, in Roginsky v. Richardson-Merrell (1967),to overturn an award of punitive damages in a classic opinion byJudge Henry Friendly (at a time when class actions had scarcelybeen born). Do we really want a legal system based on the illogicof the lottery? One can well imagine defendant companies crying

“Uncle!” and seeking the protection of class action status.In short, punitive damages are a poor substitute for a class

action, and especially so in arbitration. Estimating the chances ofdetection and recovery is better suited to a court that is attuned topublic policy and sees many cases. Moreover, if punitive damagesare intended in part to be exemplary—to set a public example—how exactly does that work in arbitration where the reasoningand decision remain private?

To be clear, the rationale for punitive damages disappears in aconsumer class action. If all of the victims of a scam are party tothe action, there is no need to multiply the damages. Moreover,one would think that business would prefer such a Bill of Peace—settling all claims likely for cents on the dollar—over bilateralarbitration with the possibility of repeated awards of punitivedamages. Apparently not. Could it be that business reckons itwill escape the need to answer at all for abusive practices becausefew consumers will bother to file claims?

PURPOSE OF DAMAGE AWARDS

A lawsuit serves two important functions. One is compensation:to make whole someone who suffers harm at the hands of awrongdoer. The other is deterrence: to discourage wrongdo-ing by imposing compensation. Ideally, these two functionscomplement each other. As Judge Learned Hand explained in thelegendary 1947 decision in United States v. Carroll Towing, the lawshould provide compensation to victims only if the cost to avoidthe harm is less than the cost of the harm itself. Ronald Coasemade essentially the same point in a classic 1960 Journal of Law& Economics article, “The Problem of Social Cost,” for which hegot a theorem named after him—not to mention a Nobel Prize.

If compensation is too generous, there will be too many law-suits and potential defendants will be too cautious. That is essen-tially what has happened with securities fraud class actions wheredefendant companies gain little or nothing from the so-calledfraud but where the damages that may be claimed by plaintiffsare so generous that almost every case that survives a motion todismiss quickly settles for the entire amount of any insurancecarried by the defendant.

Theproblemisquite theopposite inmostconsumerclassactionswhere aggregate compensation is a small fraction of ill-gottengains. Punitive damages seek to address this imbalance typically byawarding some multiple of compensatory damages to reflect theunlikelihood of detection and legal action. Quite aside from the con-tradictions inherent in what amounts to a criminal penalty payableto a lucky individual plaintiff rather than the state, the calculus ofprobabilities is speculative at best. Indeed, the law resorts to broad-brush concepts that seek to capture the intent of defendants (likeInitech) who bank on not getting caught or pursued.

It does not help that one often hears the argument fromconsumer activists that punitive damages are intended to punishwrongdoers—that the idea is to inflict real financial pain becauseotherwise the defendant will treat the award as nothing morethan a cost of doing business. Quite to the contrary, the pointof punitive damages should be to assure that businesses as wellas individuals bear the full cost of their economic activities. Inother words, we want businesses to internalize such costs. Giventhat many lawyers and judges (including the Supreme Court)seem not to understand how punitive damages should work, itis little wonder that defendants quake at the possibility of anaward of punitive damages in a class action, notwithstanding thecontradictions inherent in such a result. No doubt such fears wereresponsible in part for abrogation of the CFPB rule.

The tragedy is that class actions can address the problemsinherent in punitive damages. By compensating all individualplaintiffs for their actual losses, there is no need to speculate abouthow many fail to recognize that they have been harmed or fail tocomplain. And given that only a small fraction of consumers whounderstand their rights would seek redress, do we really care thatsome of the recovery goes to the lawyer who organizes the effort?

CONCLUSION

The Treasury Department prevailed in the Senate by focusingattention on compensation and poking holes in the idea thatconsumers are made whole by class actions. But the focus shouldbe on deterrence—the payout—not the recipient.

While it is easy to calculate how much consumers receive, there isnogoodwaytomeasuretheeffectsofdeterrence.Howdowequantifythe benefit of preventing schemes that do not materialize becausea thoughtful businessperson foresees the prospect of a class action?

No empirical study is likely to show the best way to prevent aone-off scam that is unlikely to be repeated. But that is no reasonnot to get the rules right—or at least to try.


Antitrust law now stands at its most fluid andnegotiable moment in a generation. Thebipartisan consensus that antitrust shouldfocus solely on economic efficiency and con-sumer welfare has quite suddenly come underattack from prominent voices calling for a

dramatically enhanced role for antitrust lawin mediating a variety of social, economic, and political frictionpoints, including employment, wealth inequality, data privacyand security, and democratic values. To the bewilderment ofmany observers, the ascendant pressures for antitrust reformsare flowing from both wings of the political spectrum, throwinginto confusion a conventional understanding that pro-antitrustsentiment tacks left and antitrust laissez faire tacks right.

On the left, the assault on the consumer-welfare-oriented sta-tus quo has migrated from reformist organizations like the OpenMarkets Institute and anti-corporate progressives like Sen. Eliza-beth Warren (D, MA) to the House Democratic Leadership, whichhas staked the 2018 midterm elections on an economic platformincluding antitrust reform as a centerpiece. In the DemocraticParty’s center, the formation of a House Antitrust Caucus andreform bills introduced in both the House and Senate underscoreincreasing political traction to jettison the consumer welfare statusquo. The Democrats’ antitrust plank in their “Better Deal” platformasserts that consumers are but one of several classes that antitrustshould protect, with workers, suppliers, and small business takingon equal status. Significantly, the document launches harsh criti-cisms of the past 30 years of antitrust enforcement as excessivelylax—a period over which a Democratic president oversaw antitrustenforcement more than half of the time. The Democratic leader-

DANIEL A. CR ANE is the Frederick Paul Furth Sr. Professor of Law at the Universityof Michigan. This article is based on a longer article forthcoming in the Virginia LawReview Online

Antitrust’sUnconventional Politics

The ideological and political motivations for antitrust policy do notneatly fit the standard left/right dichotomy.✒ BY DANIEL A. CRANE

ship has made clear that it does not intend to exclude the Clintonand Obama administrations from its criticism and that it intendsto advocate a major, trans-partisan rethinking of antitrust policy.

On the right, President Trump has attacked concentratedeconomic power in “Big Media” and his Justice Department haslaunched a surprising, aggressive challenge to the AT&T–TimeWarner vertical merger. Trump’s trustbusting might be dismissedas a feature of his idiosyncratic populism or, less charitably, abu-sive vendettas against corporate political foes such as CNN andAmazon, but the reformist sentiment on the right is far fromlimited to the president. Similar sentiments have been expressedby such diverse conservative figures as activist Steve Bannon,who wants to turn Google and Facebook into public utilities,conservative economist Kenneth Rogoff, and Trump’s decidedpolitical foe Bill Kristol, who criticizes conservative icon RobertBork’s consumer welfare standard and proposes a significantreinvigoration of the antitrust laws to limit the growing power oftech’s “Big Five” (Amazon, Apple, Facebook, Google, and Micro-soft). The American Conservative magazine recently turned on Borkwith surprising ferocity, asserting that “whereas prior generationsof lawmakers protected the American citizenry as businessmen,entrepreneurs, and growers, Bork led a revolution that sacrificedthe small producer at the altar of efficiency and cheap goods.”

Standing against the anti-incumbent challengers from bothpolitical wings is a broad, bipartisan establishment center seekingto defend the consumer welfare framework. Until recently, thisestablishment center seemed far from unified. Since the rise of theChicago School view of antitrust in the 1970s, antitrust law hasbeen contested on terms that seemed generally to track left/rightpolitical ideology, with those on the left favoring more aggressiveintervention and those on the right more laissez faire. But therising tide of calls for a radically different version of antitrust hasled to a circling of establishment wagons around the consumer

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BRANDEIS AND BORK AS IDEOLOGICALTOUCHPOINTS

Although American antitrust policy has been influenced by awide variety of ideological schools, two influences stand out ashistorically most significant to understanding the contemporaryantitrust debate.

The first is a Brandeisian school, epitomized in the title ofLouis Brandeis’s 1914 essay in Harper’s Weekly, “The Curse ofBigness.” Arguing for “regulated competition” over “regulatedmonopoly,” he asserted that it was necessary to “curb[] physi-cally the strong, to protect those physically weaker” in order tosustain industrial liberty. He evoked a Jeffersonian vision of asocial-economic order organized on a small scale, with atomis-tic competition between a large number of equally advantagedunits. His goals included the economic, social, and political. Asexplained in a dissenting opinion by William O. Douglas in the1948 Columbia Steel case, Brandeis worried that

size can become a menace—both industrial and social. It canbe an industrial menace because it creates gross inequalitiesagainst existing or putative competitors. It can be a social men-ace—because of its control of prices.

The Brandeisian vision held sway in U.S. antitrust from theProgressive Era through the early 1970s, albeit with significantinterruptions. Its spirit animates a long chain of important casesfrom Chicago Board of Trade in 1918 (authored by Brandeis himself)

welfare standard. Left-leaning organizations that once led thecharge for more aggressive enforcement now find themselvesdefending the consumer welfare idea in principle, even whilecalling for more aggressive enforcement within that paradigm.Meanwhile, conventionally conservative or pro-business organiza-tions continue to defend the consumer welfare standard againstassaults from their own right flank.

Although unconventional in present terms, the emergingpolitical dislocations over antitrust policy reflect longstandingideological ambiguities about and within the anti-monopolytradition. In particular, the current political fracturing over anti-trust is best understood by examining three ideological frictionpoints that have emerged periodically within American history:

■ the ideological ambiguity surrounding the associationbetween large scale in business and government

■ the shifting meaning of “monopoly” from exclusive grant ofgovernment privilege to purely private power and a relatedquestion about the sources of monopoly power

■ pragmatic concerns about the ability of the capitalist orderto survive without regulatory interventions to smooth itsroughest edges

Taken in the context of these longstanding friction points, thestrange bedfellow coalitions uneasily rising around contempo-rary antitrust reform aren’t that strange at all.


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to TOPCO in 1972, and a string of congressional reforms includ-ing the Clayton and Federal Trade Commission Acts of 1914, theRobinson–Patman Act of 1938, and the Celler–Kefauver Act of 1950.

The ascendant Chicago School of the 1960s and 1970s threwdown the gauntlet to the Brandeisian tendency of U.S. antitrust law.In an early mission statement, Bork and Ward Bowman character-ized antitrust history as “vacillat[ing] between the policy of preserv-ing competition and the policy of preserving competitors from theirmore energeticandefficient rivals,” the latterbeinganinterpretationof the BrandeisSchool.Chicagoansarguedthatantitrust law shouldbe concerned solely with economic efficiency and consumer welfare.

“Bigness” was no longer necessarily a curse, but often the productof superior efficiency. Chicago criticized Brandeis’s “sympathy forsmall, perhaps inefficient, traders who might go under in fullycompetitive markets.” Preserving a level playingfield meant stiflingefficiency to enable market participation by the mediocre.

Beginning in 1977–1978, the Chicago School achieved analmost complete triumph in the Supreme Court, at least in thelimited sense that the Court came to adopt the economic effi-ciency/consumer welfare model as the exclusive or near exclusivegoal of antitrust law. (Adoption of Chicago School interpretationsof consumer welfare and policy positions on particular competi-tive practices would occur neither immediately nor completely.)In 1979, citing Bork, the Court declared that “Congress designedthe Sherman Act as a ‘consumer welfare prescription.’” Overtime, the maxim that antitrust law should protect “competitionrather than competitors” became canonical. Brandeis had beendisplaced by Bork.

If the last three or four decades of U.S. antitrust policy havelargely belonged to Bork—at least at an ideological level—the Borkvs. Brandeis dichotomy is far from settled. The voices at the cuttingedge of the rising reformist movement—particularly those alignedwith the influential Open Markets Institute—explicitly style them-selves as a “New Brandeis” school in order to re-up the historicalcontest between the Brandeisian and Chicago School orders.

THE LINGERING SHADOWS OF JEFFERSONIANISMAND HAMILTONIANISM

Although it is conventional to understand Brandeis’s anti-bignessideology as an aspect of Progressivism standing in contrast toChicago’s big business conservatism, the story is historically morenuanced. Brandeis’s preoccupation with “bigness” was not limitedto large corporate scale; he was also deeply concerned with largegovernmental scale generally, and a large-scale federal governmentin particular. As George Washington University law professor Jef-frey Rosen observed in a June 2016 article in The Atlantic, “Denounc-ing big banks as well as big government as symptoms of what hecalled a ‘curse of bigness,’ Brandeis was determined to diminishconcentrated financial and federal power, which he viewed as amenace to liberty and democracy.” Brandeis styled himself a Jeffer-sonian and his ideology resonated with the Jeffersonian preferencefor small-scale yeomanry and localized political organization.

In lionizing large corporate scale, the Chicago School aligneditself with the Hamiltonian vision for a robustly mercantile soci-ety grounded on powerful financial and economic institutions.By doing so, Chicago always risked alienating the libertarianright, with its affinity for Jefferson’s vision of small-scale govern-ment and industrial production. Many libertarians have foundit hard to attack bloated government without also worryingabout bloated business. (Witness the rise of the Tea Party, whicharose in large part as a reaction to corporate bailouts.) Influentiallibertarians like Friedrich Hayek saw a role for antitrust law incurbing monopolistic abuses because they understood unfetteredcorporate power as a threat to personal liberty.

The divide between the competing Hamiltonian and Jeffer-sonian ideals on organizational scale and their implicationsfor efficiency and liberty thread through antitrust’s intellectualand ideological history, often disrupting conventional politicalalignments. Teddy Roosevelt, a deep admirer of Hamilton, wascomfortable with large scale in both government and business.Far from a “trustbuster,” Roosevelt opposed breaking up Stan-dard Oil, viewing large aggregations of capital as inevitable andnecessary—so long as they were superintended by a strong federalgovernment. Roosevelt’s affinity for large-scale government andbusiness earned him the epithet of “socialist.”

That charge was hyperbolic, but not directionally implausible.In the late 19th and early 20th centuries, American socialistslooked with suspicion on the antitrust laws because they viewedthe rise of the Gilded Age trusts as salutary stepping stones togovernment appropriation of the means of production andindustry. Socialist presidential candidate Eugene Debs, himselfthe defendant in an antitrust prosecution, argued:

Monopoly is certain and sure. It is merely a question of whetherthey will be collectively owned monopolies, for the good ofthe race, or whether they will be privately owned for the power,pleasure and glory of the Morgans, Rockefellers, Guggenheims,and Carnegies.

Conversely, influential conservatives in antitrust’s formativeera favored aggressive antitrust enforcement as an antidote to thesimultaneous aggrandizement of government and business. Inthe crucible election of 1912, William Howard Taft argued againstProgressive proposals to create a new Federal Trade Commission,asserting that his administration’s aggressive enforcement recorddemonstrated how traditional prosecutorial and common lawprocesses could obviate the need to create new large-governmentalorganizations to combat big business. Taft’s pro-enforcementsaber-rattling reached such a crescendo that Wall Street beganto wonder whether Roosevelt might be the candidate more sym-pathetic to their interests.

The New Deal, too, saw the Democratic Party equivocatebetween contending Jeffersonian and Hamiltonian impulses on thequestion of governmental and business scale. The first New Dealperiod, from 1933 to early 1935, was dominated by the National


Industrial Recovery Act, which encouraged a centralization ofboth governmental and industrial power. Brandeis led the chargeon the Supreme Court to strike down the NIRA in 1935, warningthe White House that the Court would not tolerate continuedcentralization of business or governmental power. From 1935until the beginning of the war, the New Deal administration fol-lowed a policy of aggressively Brandeisian antitrust enforcement.Then, facing a need to mobilize big business for the war effort, theadministration abruptly shifted course and embraced a “businesscommonwealth” model of partnership between big governmentand big business.

After the war, the perception that industrial concentration inGermany and Japan had fueled the rise of fascism contributedto a two-decade period of intensive antitrust enforcement—par-ticularly against mergers—launched by the Celler–Kefauver Act of1950. Here again, the ideology of the anti-monopoly movementwas ambiguous in conventional left/right terms. The anti-monop-olist Sen. Estes Kefauver (D, TN) warned that the consequence offurther industrial concentration would be government takeover,and that could lead either to fascism on the one hand or socialismor communism on the other. Other proponents of the act arguedthat the antitrust laws were “one of the greatest bulwarks againstcommunism” and that the rising tide of industrial concentrationwas driving the country toward “collectivism.” It is no coincidencethat the most anti-consolidationist statute in American historywas passed during the period of the Red Scare.

The ambiguity in the relationship between corporate scale andgovernmental scale has translated into a historical ambiguity inthe politics of antitrust enforcement. Just as the two major con-temporary political parties each blend contradictory Hamiltonianand Jeffersonian elements, so too antitrust ideology has not neatlytracked left/right dichotomies. On a statistical basis, civil antitrustenforcement by the government peaked during the conservativeNixon and Ford administrations. The Chicago School rode thewave of Ronald Reagan’s decoupling of the curse of bigness; bignesswas a curse in the government only, not in business. But Chicago’sdecoupling of the ideological aversion to large scale in governmentand business is not inevitable and may be, in historical perspective,anomalous. As historian Richard Hofstadter has written, Americanfeelings about large organizational units in government and busi-ness have generally tracked in parallel. Historically, it is no anomalythat small-government conservatives wouldfind common groundwith Brandeisian progressives in resenting the growth and powerof large-scale industrialfirms, which are not so easily distinguishedfrom large-scale governmental agencies.

THE SHIFTING MEANING OF “MONOPOLY”

The ideological valence of the anti-monopoly principle is ambig-uous in contemporary left/right terms, owing in large part to ahistorical shift in the meaning of the word “monopoly,” par-ticularly in its popular and pejorative senses. Is a monopolist aprivate firm that corners a market through nefarious or shrewd

tactics? If so, the law’s anti-monopoly response codes “regulatory”and “interventionist” in left/right terms. Or is a “monopoly” acronyist intervention by the state to prevent free market competi-tion? In that case, the anti-monopoly principle codes as “deregu-latory” and “free market.” Both of these senses of “monopoly”have been used historically, and their contemporary manifesta-tions remain tangled.

Throughout much of the Anglo-American anti-monopolytradition, “monopoly” primarily denoted a governmental grant ofan exclusive privilege—a “letters patent” in the sense of the classiccommon law case. Until the late 19th century, the American anti-monopoly tradition was concerned primarily with governmentalcronyism and exclusive privilege. Over time, however, the primarylegal meaning of “monopoly” has shifted from the government-granted to the purely private.

This shift became apparent in U.S. antitrust law in 1943when, in Parker v. Brown, the U.S. Supreme Court held the Sher-man Act inapplicable to anticompetitive structures created bystate regulation. Parker grew out of the Supreme Court’s post-1937 constitutional jurisprudence rejecting Lochner-era judicialscrutiny of regulatory schemes impairing property or contractrights. Just as the post-1937 constitutional dispensation wouldavoid second-guessing state regulatory judgments in favor ofjudicially preferred economic theories, so too the courts wouldreject efforts to use the Sherman Act to the same effect (to thedismay of conservatives, who favored the judiciary as a bulwarkagainst over-regulation).

From one perspective, Parker stood the meaning of “monopoly”on its head. Whereas the primary meaning of “monopoly” inthe Anglo-American tradition had been a governmental grant ofexclusive privilege—an interference with the natural rights of othermarket participants—that primary sense of “monopoly” was nowto be excluded altogether from the Sherman Act’s anti-monopolylegal regime. Only purely private monopolies—the second sense ofthe word discussed above—would be covered by antitrust.

The Parker doctrine of state action immunity from antitrusthas not developed to immunize state regulation from ShermanAct preemption as strongly as Parker’s language would suggest,and the doctrine’s evolution continues. In the push and pull overthe doctrine’s boundaries, it has largely been advocates of theChicago School’s consumer welfare approach who have argued fornarrowing state-action immunity on the view that states system-atically distort competitive processes for the benefit of rent-seekers.This simultaneously pro-antitrust and deregulatory perspectivetracks that strand of the anti-monopoly tradition accusing thegovernment as culprit.

ARE PRIVATE MONOPOLIES THE PRODUCTOF GOVERNMENTAL INTERVENTION?

This ambiguity over the meaning of “monopoly” and its atten-dant legal and policy implications cashes out also in legal andeconomic discourse over the sources of monopoly power. A


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neo-classical economic view, today associated with ChicagoSchool ideology, holds that markets are contestable and thatany monopoly power gained through anticompetitive means isquickly eroded, but with one important exception: governmen-tally created entry barriers.

If regulation and governmental favoritism are the onlyimportant sources of durable monopoly power, then one poten-tial policy response is not to worry about privately acquiredmonopoly—essentially, to turn the Parker state action immunityregime on its head and only police state-granted monopolies.But there is another possibility flowing from the opening prem-ise, which is to hold that any observed instances of genuinelydurable monopoly power must be the result of some seen orunseen governmental distortion. In this latter view, when whatat first blush may seem to be purely private monopoly powerpersists over time, there must be some underlying governmentaldistortion accounting for it. Then, this argument goes, evencommitted libertarians should favor antitrust intervention toterminate the monopoly.

This view is not hypothetical; it explains some of the right’shistorical affinity for antitrust enforcement despite the right’sotherwise laissez faire predilections. The clearest case in point isthe 1983 consent decree breaking up AT&T. How did the largestanti-monopoly corporate breakup in history occur at the handsof the Reagan administration and its decidedly Chicago SchoolJustice Department? The answer lies in Assistant Attorney GeneralBill Baxter’s conviction that AT&T was exploiting its status as aregulated monopolist to stifle competition. What has come to beknown as “Baxter’s law” posits that rate-regulated monopolistsmay extract monopoly profits from vertically integrated marketswithout running afoul of the “one monopoly profit” theorem.Suspecting government regulation as the deep source of AT&T’spersistent monopolistic behavior, the conservative Reagan admin-istration was willing to break it up.

Similar suspicions that “Big Tech” companies like Googleand Facebook are the monopolistic beneficiaries of subtle gov-ernmental cronyism show up today on the political right. ThatBig Tech tends to be associated politically with the DemocraticParty only furthers these perceptions. Those inherently suspi-cious of governmental interventions in markets may understandBig Tech as the unnatural spawn of governmentally grantedprivilege and private greed. Conversely, those more sympatheticto governmental intervention may find nothing alarming aboutthe multiple ways in which Big Tech appropriates governmen-tal benefits through such vehicles as intellectual property law,government subsidies, or the Digital Millennium CopyrightAct. But these matters divide the left as well. The Open MarketsInstitute was forced out of the progressive-leaning New AmericaFoundation over Open Markets’ criticisms of Google. In light ofthe contestable boundaries of the public/private divide and theshifting meaning of monopoly, it is not surprising to see politicalalliances fraying over antitrust reform.

PRAGMATIC CONCERNS OVER ANTITRUST’SALTERNATIVES AND CAPITALISM’S SURVIVALA final reason that the politics of antitrust sometimes confoundthe conventional left/right divide has to do with the pragmaticsense that some regulatory interventions may be necessary topreserve capitalism politically, and that antitrust may be theleast objectionable one. This “antitrust or else” perspective hascharacterized the politics of antitrust from the beginning.

The conventional view that Congress intended the ShermanAct to seriously undermine the trusts is balderdash. The 51st Con-gress that passed the Sherman Act was dominated by industrialmagnates who wanted to avert more radical reforms. Speakingon the Senate floor in 1890, Sen. John Sherman (R, OH) warnedhis brethren—many of whom were controlled by the trusts—thatCongress “must heed [the public’s] appeal or be ready for thesocialist, the communist, and the nihilist.” Sherman thus con-ceived of his eponymous antitrust statute as politically necessaryto diffuse more radical political movements—as a sort of Band-Aidon capitalism.

The idea that antitrust legislation and enforcement are neces-sary accommodations to public demand has a long pedigree inboth conservative and more progressive circles. Writing in 1914,William Howard Taft described the Sherman Act as “a step takenby Congress to meet what the public had found to be a grow-ing and intolerable evil.” Notably, he did not share the public’sconcern nor attribute such a concern to Congress. Similarly,Theodore Roosevelt was relatively unconcerned with the trustspersonally, but “saw the trust problem as something that mustbe dealt with on the political level; public concern about it wastoo urgent to be ignored.”

Beyond the concern that, absent antitrust, capitalism itselfmight succumb to reformist pressures, there is a more modestpossibility that, absent antitrust, political pressures would lead tooverregulation. Antitrust and administrative regulation are con-ventionally viewed as alternatives to address market failures. Fromthe Reagan administration to the Financial Crisis of 2008, theoverall arc of American law involved simultaneous deregulationand relaxation of antitrust enforcement. If popular dissatisfac-tion with the economic status quo grows, demand might grow topull either the regulatory or antitrust lever. Those ideologicallycommitted to a light governmental hand on the market mightprefer the antitrust alternative.

It is hard to judge at any given moment how much politicalsupport for antitrust intervention is motivated by genuine concernover monopoly and competition, and how much of it derives fromthe fact that, in the face of popular demand for a governmentalcure to a perceived evil, it is often easier to delegate the solution toantitrust than to propose a regulatory solution. From the ShermanAct forward, however, it is certain that antitrust has often beendeployed as a foil to more interventionist forms of regulation. Theideological and political implications of that move are complex andnot neatly housed in left/right categories.

Robert Higgs, Founding Editor

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On April Fool’s Day of 2018, an aban-doned Chinese satellite named HeavenlyPalace fell out of orbit and plunged intothe Pacific Ocean. There’s a half millionpieces of detritus in orbit ranging in sizefrom inoperative satellites like HeavenlyPalace, which weighed nine tons, to stray

nuts and bolts. Most of this space junk stays aloft, but because ittravels at speeds six times faster than a bullet, even a small piececan kill an astronaut or ruin a working satellite. Fortunately,engineers have developed defenses against space junk.

“Statutory junk” is my term for the mishmash of statutorycommands to administrative agencies that have accumulatedover the decades and now are having unintended consequences.Enforceable in a court of law, even a few words of statutory junkcan thwart a statutory purpose or impose unnecessary burdenson the public. Unfortunately, Congress typically fails to protectus from the statutory junk.

The Supreme Court spotted a particularly big hunk of statutoryjunk in a decision rendered a few months before Heavenly Palace fellto earth. National Association of Manufacturers v. Department of Defensearose from the Clean Water Act’s requiring a permit from the U.S.Environmental Protection Agency or the Army Corps of Engineersfor any discharge of a pollutant, including fill, into “the waters ofthe United States.” “Thewaters of the United States” clearly includesmore than just navigable rivers, but it doesn’t include backyard pud-dles.Drawingthe linesomewhere betweenpuddlesandnavigable riv-ers determines whether huge numbers of manufacturers, developers,farmers, highway departments, individual homeowners, and othersmust get permits. The stakes are high because the permit process isonerous even if the activity does no significant environmental harm.Yet, where the activity does such harm, the process is vital.

DAVID SCHOENBROD is a professor at New York Law School and author of DCConfidential: Inside the Five Tricks of Washington (Encounter Books, 2017).

Cleaning Out theStatutory Junk

How can we push lawmakers to discard the legislative trash?✒ BY DAVID SCHOENBROD

To draw this line, the EPA and the Corps jointly issued aregulation in 2015. The question before the Supreme Court wasnot, however, the validity of this regulation but rather in whatcourt to file the many cases challenging its validity. The choicewas between a single court of appeals or multiple district courts.

In her opinion for the unanimous Court, Justice Sonia Soto-mayor noted powerful policy reasons favoring jurisdiction in asingle court of appeals. This choice would speed a final decisionon the validity of the regulation and avoid disputes about the indi-vidual permits having to be litigated in two separate cases. None-theless, the Court concluded that jurisdiction must be in multipledistrict courts because that’s what the statute’s language dictated.The same problems will likely repeat themselves when the Trumpadministration promulgates its replacement of the 2015 rule.

Congress had never thought about how its jurisdictional textwould apply to a challenge to a regulation defining “the waters ofthe United States.” Lawmakers could have avoided the unintendedconsequences with just a few words of new text. The need for itwas apparent: the regulation had been pending at the agencylevel for years and the statutory language on jurisdiction was wellknown to practitioners in the field. The lawmakers’ failure to actmeant that, on top of the time that will be wasted because of thestatute’s inadvertent choice of jurisdiction, years were wastedlitigating where to file the challenges to the regulation.

As illustrated by this example, statutory junk is neither pro- noranti-regulatory protection. It is pro-stupid.

This article argues that elected officials in Congress and theWhite House can organize themselves to protect us from statutoryjunk and describes how they can do so. First, however, it discusseswhy junk has become so common in administrative orbit.

THE JUNK’S CAUSE

There wasn’t much junk in the short, vague statutes of the Pro-gressive Era. They simply told agencies in essence, “Here’s a

R E G U L AT O RY R E F O R M


problem, solve it.” In recent decades, however, Congress beganenacting a new sort of regulatory statute.

An early example is the 1970 Clean Air Act. It directed the EPAto issue regulations sufficient to protect health from every harmfulpollutant everywhere in the United States by statutorily set dead-lines. It, moreover, gave citizens the right to sue should the EPA failto carry out any of its duties. On this basis, the bill’s chief sponsor,Sen. Edmund Muskie, claimed that “all Americans in all partsof the country shall have clean air to breathe within the 1970s.”

In, say, 1940, a promise that the federal government coulddeliver such concretely specified outcomes requiring the regu-lation of tens of thousands of major pollution sources andmillions of minor ones would have seemed laughable. Wash-

ington in 1940 worked with carbon paper and adding machines,but by 1970 it had Xerox machines and computers. It, moreover,had a track record of great accomplishments: winning World WarII, inventing the atomic bomb, harnessing nuclear power, build-ing the interstate highway system, passing important civil rightslegislation, and landing people on the Moon.

Around 1970, lawmakers began feeling pressure to guaranteepopular outcomes because voters had lost faith in the Progres-sive Era’s promise that expert agencies given broad mandates andinsulated from politics would necessarily make correct choices.Meanwhile, judicial protection of civil rights in the 1960s sug-gested that the courts could protect statutorily specified rights.

Finally, the new way of legislating made life easier for lawmak-ers. They could take credit for making the popular promise ofhealthy air, but skirt the specifics of how to do so. That wouldbe up to the agency and would come later. No wonder the CleanAir Act passed almost unanimously.

As it turned out, the EPA could not meet the statutory dead-lines without imposing draconian burdens on the economy andvoters, such as taking most of the cars off the road in Southern

California. Legislators ended up blaming the agency for missingdeadlines for healthy air, and also for regulatory burdens theEPA did impose.

Having claimed credit for the popular and shifted blame tothe agency for the unpopular, legislators came to see statutory

commands as political profit centers and so issued more andmore of them. There are, believe it or not, 940 passages in the1990 version of the Clean Air Act that state the EPA administra-tor “shall” do a certain task. Many of those commands must becarried out repeatedly. The commands, moreover, are not brief.The statute has as many words as a typical 450-page book.

Because the commands are based upon circumstances thatmay have changed or understandings falsified by experience, theyoften are stupid. Consider the statute’s command that sourcesemitting more than “250 tons per year” of regulated pollutantsobtain a particular sort of permit requiring an arduous process.The statute set the threshold at 250 tons so that only a smallnumber of big polluters such as large power plants would have toget the permits. But the threshold as applied to regulate green-P

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house gases, which get emitted in immensely larger quantitiesthan the previously regulated pollutants, would require permitsfor so many more sources—even high schools—that the processwould grind to a halt. So the EPA decreed a special thresholdfor greenhouse gases that began at 100,000 tons rather than250 tons.

In Utility Air Regulatory Group v. EPA, a majority of the SupremeCourt ruled the EPA cannot disregard such clear statutory text.To avoid paralyzing the permit process, the Court interpreted thestatute to exclude greenhouse gases from the pollutants that trig-ger the permit requirement, but nonetheless require greenhousegas emissions of sources to be regulated if some other pollutanttriggers the permit requirement.

One might disagree with the Court’s opinion or the agency’sfinding that greenhouse gases are a danger, but not the point thatthe case illustrates: there’s junk in the statute.

Breaking the logjam / Because of the controversy over climatechange, one might understand Congress’s failure to address thisparticular piece of Clean Air Act statutory junk. But that does notexplain Congress’s systematic failure to clean up statutory junk.

In the hope of getting rid of some of the junk in environmentalstatutes, New York Law School and New York University School ofLaw launched the “Breaking the Logjam” project in 2007 to showCongress and the president to be elected in 2008 how to updatethese obsolete statutes. None had been updated since 1990. Theproject brought together environmental experts from across thepolitical spectrum. We focused on how to reform the statutes sothat agencies could clean the environment more cost effectivelyrather than on how clean was clean enough.

The leaders of the project—Richard Stewart, former chair ofthe Environmental Defense Fund; his colleague on the NYUfaculty, Katrina Wyman; and I—wrote a book, also titled Break-ing the Logjam, stating the project’s recommendations. The bookreceived favorable endorsements from high environmental offi-cials appointed by presidents of both parties.

When Stewart and I met with people from both parties onCapitol Hill, they praised the project’s recommendations andsaid they wished that Congress had already enacted them. Afterall, the recommendations would produce a better environmentat less cost. Yet, they doubted that they could get them enacted.Why? Because updating the statutes would require legislatorsto take responsibility for hard choices on how clean is cleanenough. On the other hand, if they left the statutes unchanged,they could continue to pin most of the blame on agencies andthe states for both the harm to the environment and the regula-tory burdens.

Statutory junk is not confined to environmental legislation,but extends to instructions to agencies on other kinds of regula-tion. As Philip K. Howard observes in his 2014 book The Rule ofNobody, “American democracy is basically run by dead people”including “past generations of legislators.”

HOW TO MAKE LAWMAKERS RESPONSIBLEFOR THE JUNK

Because lawmakers get away with blaming agencies for the harmthat statutory junk does to their constituents, making these law-makers responsible for regulations would prompt them to payattention. This is an age-old problem; Harvard Law School deanJames Landis, a leading New Deal agency official, was frustratedthat legislators criticized agencies for doing what they, the legis-lators, had created them to do. In his 1938 book The Administra-tive Process, he wrote that for administrative officials, “it is an actof political wisdom to put back upon the shoulders of Congress”responsibility for “controversial choices.”

Landis proposed two ways to do this: bar any major adminis-trative decision from going into effect until Congress passes a billapproving it through the Constitution’s full legislative process, orallow one or two houses of Congress, acting without the president,to veto a major administrative decision. With either legislativeapproval or legislative veto, Landis claimed, the agency wouldbe “the technical agent in the initiation of rules of conduct, yetat the same time … [the elected lawmakers would] share in theresponsibility for their adoption.”

Congress included the legislative veto in dozens of stat-utes. In 1983, however, the Supreme Court found this mecha-nism unconstitutional because it allowed one or two houses ofCongress to take legislative action without going through theConstitution’s full legislative process. The next year, JusticeStephen Breyer, then a judge, wrote in his 1984 Georgetown LawReview article, “The Legislative Veto after Chadha,” that Con-gress could, consistent with the Constitution, use legislativeapproval if it really wanted to be responsible for regulations.His implicit point was that Congress is none too anxious toshoulder responsibility.

Chevron / The blame for the harm from statutory junk falls notjust on agencies that apply the statutes, but also on the judgeswho interpret them. Then, however, to avoid the hot seat inmany cases, judges began to cite the Supreme Court's decisionin Chevron v. Natural Resources Defense Council (1984) as requiringthem to go along with agency interpretations of statutes unlessthe interpretation clearly contravenes unambiguous statutorytext. Chevron does give agencies some leeway to avoid statutoryjunk, but it is an insufficient response.

Agencies sometimes lose despite Chevron, as National Associa-tion of Manufacturers and Utility Air Regulatory Group demonstrate.Even when agencies ultimately win, they and the public mustfirstundergo years of uncertainty before administrative proceedingsand judicial review produce a definitive outcome. For exam-ple, even though the agency did finally prevail in the SupremeCourt’s 2014 decision in EPA v. EME Homer City Generation, it tookmultiple administrative proceedings and judicial reviews to winapproval of a way to interpret the Clean Air Act to skirt statutorytext not designed for the problem at hand.


Although sometimes protecting the public from statutoryjunk, Chevron helps to shield legislators from responsibility forthe junk by holding out the hope that, armed with Chevron def-erence, federal agencies can take care of the problem. That hasthe perverse consequence of further reducing the pressure onCongress to clean up the junk.

Chevron, moreover, comes at considerable cost to the account-ability of Congress. The nondelegation canon holds that stat-utes should be construed, when possible, to reduce the scope ofauthority delegated to agencies. But Chevron allows Congress todelegate authority simply by writing sloppy statutes or failing toclean up statutory junk.

The Supreme Court may end up declaring Chevron dead, but

will likely still cut agencies much slack unless there is some otherway to reduce the harm from statutory junk, such as lawmakersbearing responsibility for the harm it does.

Attempts at responsibility / In 1995, some members of Congressasked me to help design a bill to make legislators responsiblefor regulation. I suggested legislative approval tweaked with asuggestion by Judge Breyer that the bill include rules that wouldforce prompt votes on agency regulations. The rules would barlegislators from amending the proposed regulation, limit debate,and thwart filibusters by requiring votes by a deadline.

The bill, the Congressional Responsibility Act, began to gaintraction, at which point some lawmakers became concerned thatits passage would mean they would have to take responsibilityfor hard choices. So Congress pulled a switcheroo: it passedthe sound-alike Congressional Review Act, which President BillClinton signed into law in 1996. It gives legislators the option oftaking responsibility rather than forcing them to do so. They hardly evertake that option. In the Congressional Review Act’s first 20 years,Congress used it to negate only one regulation. Congress invokedit infrequently because presidents are apt to veto bills negatingtheir appointees’ regulations and, in any event, members of Con-gress are reluctant to cast votes on hard choices.

There was, however, a flurry of activity under the statute in2017. Thatflurry was a function of the election of a new presidentwith a radically different regulatory philosophy than his prede-cessor. The outgoing administration, assuming that its favored

candidate would win the 2016 election, neglected to take precau-tions available under the statute that would have helped shieldits regulatory handiwork. That mistake is unlikely to be repeated.So, after its 2017 moment in the sun, the Congressional ReviewAct will again return to the shadows.

In any event, it’s a poor way to deal with statutory junk. It pro-vides no way to improve regulations that are suboptimal becauseof statutory junk or prompt the issuance of good regulations thatstatutory junk stymied.

REINS / The Congressional Review Act let legislators appear to beresponsible for regulation without actually taking responsibility,but the statute’s disuse made that pose increasingly unconvinc-

ing. To strike a more convincing pose, workbegan in 2009 on a bill based upon theCongressional Responsibility Act bill, butwith many perverse twists.

One gets a sense of the perverse twistsfrom its title, “Regulations from the Exec-utive in Need of Scrutiny Act” (REINS),which blames the executive for regulatoryburdens. Yet, the ultimate source of theseburdens is Congress, whose statutes arestructured to maximize the political advan-tage to legislators rather than the net ben-

efit to their constituents.In addition to Landis’s pro-responsibility process, REINS con-

tains many anti-regulatory features. It would command agenciesto reduce the cost of existing regulations to fully offset the costof any new regulations. So, REINS’s sponsors would shift to theagencies blame for the cuts in regulatory protection needed todeliver on the popular promise of limiting regulatory burdens.Both REINS and the Clean Air Act try to promise the popularand shift blame for the unpopular, but in response to the oppo-site poles of the political spectrum. Thus does blame-shiftingpromote polarization.

Worse still, the command in REINS to cap regulatory costspotentially clashes with the commands in many existing statutesto increase regulatory protection. There is no evidence that thebill’s sponsors have thought through how these clashes shouldbe resolved. Years of litigation would be required to decide howagencies should respond to such clashing commands. This wouldsow uncertainty, which hurts economic growth.

Yet more uncertainty would come from another provisionof REINS that abolishes any existing regulation that Congressdoes not approve within the next 10 years. This provision allowsa member to call for separate votes on any such regulation andalso for separate votes on conditions for its approval. This is anunworkable procedure for the huge number of current regula-tions, and so most of them will disappear, but it will be yearsbefore business knows which ones will stay and which will go. So,again, uncertainty would hurt economic growth.

Chevron shields legislators from responsibility for thestatutory junk by holding out hope that federal agenciescan take care of the problem. That further reducespressure on Congress to clean up the junk .


R E G U L A T O R Y R E F O R M

The House has passed REINS legislation for many years, butits anti-regulatory, junk-strewn twists have kept it from getting thebipartisan support needed to get by a filibuster in the Senate. NoDemocratic senatorsupports it.SoREINSlet its sponsorspretendtowanttoberesponsiblewithouteverhavingtoshoulderresponsibility.

Responsibility for Regulation Act / Congress should take responsi-bility by passing what I call the Responsibility for Regulation Act.As detailed in my recent book DC Confidential, it would includethe Landis legislative approval of major regulations and Breyer’sfast-track legislative process, but exclude the anti-regulatoryfeatures of REINS.

It would work today even though Congress is more polarizedthan it was in 1938 or 1984. The polarization is heightened byCongress members claiming credit for popular goals but wash-ing their hands of responsibility for specific regulatory actions.That is how lawmakers can be for regulatory protection withoutbeing responsible for regulatory burdens or against regulatoryburdens whithout being responsible for less regulatory protec-tion. In contrast, if lawmakers were actually forced to vote onconcrete regulations—for instance, one that cuts pollution frompower plants by a given percentage—those who vote “Yea” wouldbe responsible for both cutting pollution and inflicting regulatoryburdens, and those who vote “Nay” would be responsible for bothtolerating pollution and avoiding regulatory burdens.

So, for example, Republican legislators wouldfind that votingreflexively against climate change regulations would come at apolitical cost when, according to a 2017 Rasmussen poll, “56%of likely U.S. voters favor an EPA regulation that requires a one-third drop in carbon dioxide emissions from power plants overthe next 13 years, while 33% oppose such a regulation.” And so,too, Democratic legislators would find that voting for PresidentObama’s Clean Power Plan would have come at an unnecessarilyhigh political cost because, as a result of statutory junk, the CleanAir Act forecloses efficient ways to cut greenhouse gases. In sum,lawmakers on both sides of the aisle would be more balancedthan their present posturing sounds.

Lawmakers’ responsibility for both regulatory costs and benefitswould trigger a series of constructive changes. Agencies, to get theirregulations approved, would propose regulations that balancecompeting concerns in a way likely to garner majority support inCongress. Lawmakers in turn would want to enable agencies topromulgate regulations that achieve more protection with lowerburdens. To help them do so, they would want to get rid of statutoryjunk. They wouldfinally have a personal political incentive to do so.

To take advantage of all these improved incentives, commu-nication between Congress and agencies should begin before theagency promulgates the rule. To that end, the new bill shouldrequire agencies to alert Congress of proposals of major rulesand any way that, in the agency’s opinion, current statutes wouldprevent the agency from promulgating what the agency consid-ers to be an optimal rule. Then, at the proposal stage, legislators

could, at their discretion, hold hearings, introduce legislation, orcommunicate with the agency individually or through commit-tees. In addition, the bill should include a provision that adds anextra 30 days to the deadline for a final roll call vote if a majorityof the agency’s oversight committee in either chamber signs apetition calling for a hearing after promulgation.

With Congress having a real incentive and a process to dealwith statutory junk, courts should be more willing to cut backthe leeway that they give agencies.

WOULD CONGRESS EVER TAKE RESPONSIBILITY?

Although seemingly allergic to responsibility, legislators mightjust enact a pro-responsibility bill. Now, as Frances Lee demon-strates in her 2016 book Insecure Majorities, both parties “cham-pion ‘all gain, no pain’ positions,” such as the Clean Air Act andthe REINS bill, in order to appeal to their bases, hide the harmdone to other interests, and win majorities in Congress.

Yet, this dynamic could change. One of the parties might come tofind that shouldering responsibility would appeal to centrist votersand be more effective at winning majorities. Here’re some indicia:

■ Many voters do want elected lawmakers to take responsibil-ity for regulations. For example, a 2017 Rasmussen pollfound that voters, by a margin of 56% to 25%, believe thatCongress should have to vote on major EPA regulationsbefore they go into effect.

■ Distrust of the federal government in general and Congressin particular has reached record levels in recent years. Nowonder. Congress is supposed to compromise on the dif-ferences among us, but its “all gain, no pain” techniquesinflame the differences and bring erratic government.

■ As the parties in Congress have grown more rabid, an increas-ing portion of voters identify themselves as independents.

Besides, many members of Congress are not just incumbentreelection machines. Some want to be proud of the work theydo. Some want to be part of an institution that is not despised.Some want to be statesmen.

Regulation as usual is under threat from another direction. Asmall group, the Madison Coalition, has gotten the legislaturesof 26 states to pass resolutions calling for Congress to propose aconstitutional amendment that would, in essence, put Landis’slegislative veto into the Constitution. The support to date is stillshort of what is needed to amend the Constitution, but that asmall group with scant resources has gotten so far in a few yearssuggests the vulnerability of the present, responsibility-shirkingsystem. Still, I prefer the Responsibility for Regulation Act tothe constitutional amendment because statutes are easier to get,easier to change, and Congress could use the act only to vote onmajor regulations rather than individual cases.

I don’t know what the future will bring. But the political par-ties in Congress may well find themselves in a race to show theyare willing to shoulder responsibility.

OUR VISION is a world where free market environmentalism is thedefault approach to conservation.

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W hen Spotify went public earlier thisyear, the company faced a $1.6 bil-lion lawsuit alleging that it wasstreaming such hits as Tom Petty’s

“Free Fallin’,” the Doors’ “Light MyFire,” and tens of thousands of othersongs without obtaining the neces-

sary licenses and compensating copyright holders. Spotify has notbeen the only target of such action. Apple Music and other stream-ing services have also been hit with copyright infringement lawsuits.

The basic problem is that Spotify and other streaming servicesare trying to license music using a set of arcane procedures andinstitutions that, in some cases, haven’t changed in a century, touse on a platform that didn’t exist even a few years ago. While itis difficult to understand the full details of this system, it is easyto understand that it is a mess. Given that streaming servicesnow account for more than 60% of music revenues and digitaldownloads account for another 20%, the gap between the highlyregulated world of music licensing and the realities of the marketwill grow increasingly large.

There have been some recent efforts to modernize music licens-ing. But all too often these efforts fall back on more regulationrather than a greater reliance on market processes. They are justslightly newer choruses of the same old song.

THE PROPERTIES OF MUSIC

Music is a classic example of a good with non-trivial initial fixed(“first-copy”) costs and low (often near zero) marginal costs. Tocreate music, composers and songwriters must devote effortto creating a song. Similarly, embodying that song in a soundrecording requires the production efforts of musicians and/orvocalists, as well as recording technicians, producers, etc. Butonce the song exists in recorded form (or even as sheet music),

THOMAS M. LENARD is president emeritus and a senior fellow at the TechnologyPolicy Institute. LAWRENCE J. WHITE is the Robert Kavesh Professor of Economicsat New York University’s Leonard N. Stern School of Business.

The Same Old Song

Instead of yet another regulation-heavy music copyright law,Congress should change its tune and empower market forces.✒ BY THOMAS M. LENARD AND LAWRENCE J. WHITE

the marginal costs of distributing it to users are relatively low—and in the digital age they are realistically close to zero.

If copies of the song can be distributed without restriction, com-petitive markets are likely to drive the price of the distributed songto (near) zero. In that case, the creators will be unable to recoup theircosts, which will discourage the initial creation. This is a familiartension between the short-run desirability of allowing information(and music is clearly “information”) that already exists (which hasall of the properties of a “public good”) to be sold or distributed atits marginal costs and the long-run desirability of providing incen-tives for the information to be created in the first place.

The solution to this problem is to give creators a propertyright—a right to license (and thereby also to exclude)—that wouldallow them to recoup their costs and earn a profit (if, of course,their creation meets a market test). And, indeed, there is such aproperty right in the United States and most other countries:copyright. In the United States, music has been covered by copy-right since 1831. Initially, music copyright just protected compos-ers and/or the publishers of sheet music against unauthorizedcopying of that sheet music. Copyright protection was extendedto cover public performances of music in 1897. A decade later,music copyright (in 1909) was extended to cover “mechanical”reproductions such as piano rolls, physical recordings, and (as ofthe mid-1990s) digital downloads. And in the mid-1990s, a newlaw established a separate copyright to cover the creators (i.e., therecording artists and/or the recording companies to whom theartists might assign their rights) of sound recordings.

Under current law, copyright lasts for the life of the creatorplus 70 years or, if the copyright is owned by a corporation, 95years after publication. After the expiration of the copyright, themusic enters the public domain, and anyone can freely copy it.

THE UNDERPINNINGS OF WELL-FUNCTIONINGMARKETS—AND THE PROBLEMS FOR MUSIC

Well-defined, enforceable property rights are a necessary condi-tion for well-functioning markets. Low transactions costs are also

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important. And, as public real estate registry rolls have illustrated,having a central registry of who owns what rights can enhancethe functioning of markets where the goods and services thatembody those rights are traded.

Unfortunately, the characteristics of music—plus some idio-syncratic features of the U.S. market—have impeded freely func-tioning competitive markets in music licensing and distribution.Instead, the markets have been heavily regulated.

If music copyright owners are going to enforce their owner-

ship rights, they need to beable to sign licensing con-tracts with users, monitortheir music use, collect theappropriate royalties, andenforce the property rightagainst infringers. But theinfrastructure for suchefforts is unlikely to becomplementary with song-writing or song-recordingtalents. And in a countrythe size of the United States—with tens of thousands ofmusic distribution outlets(e.g., terrestrial radio sta-tions, TV stations, theaters,nightclubs, bars, restaurants,music halls)—the contract-ing, monitoring, royaltycollecting, and enforcementefforts would be substantial,especially in the pre-digitalera. In the digital era, stream-ing services need to obtainrights to tens of millions ofsongs to operate successfully.

Unsurprisingly, inter-mediaries have sprung upto help with these transac-tions costs. For songwritersand composers, music “pub-lishers” began undertakingthe intermediary functionwhen sheet music was theprimary way that music wasdistributed. For perform-ing artists, it has been therecording companies (whichare frequently described as

“record labels” or even just as“the labels”). But the econo-mies of scale in contracting,

monitoring, royalty collecting, and enforcement by the early 20thcentury appeared to be beyond even the largest music publishers,and the first of a series of collective “performing rights organiza-tions” (PROs) to carry out these functions—the American Societyof Composers, Authors, and Publishers (ASCAP)—was formed in1915. It was followed in 1930 by the Society of European StageAuthors and Composers (SESAC) and by Broadcast Music Inc.(BMI) in 1939. Most recently, a new PRO, Global Music Rights(GMR), was formed in 2013. ASCAP and BMI dominate this area.

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Similarly, after “mechanical rights” became protected, theNational Music Publishers Association in 1927 formed a PRO-like subsidiary, the Harry Fox Agency, to carry out these functionswith respect to mechanical rights.

It was no accident that, when Congress created the copyrightfor sound recordings in the 1990s, it anticipated that a PROwould be needed. But rather than allow the market to developone or more PROs for those rights, it authorized the Librarianof Congress to designate the PRO. SoundExchange, which wasoriginally a subsidiary of the Recording Industry Association ofAmerica and was subsequently spun off as a nonprofit organiza-tion, is that designated PRO.

Perhaps surprisingly, despite the presence of (literally) a hand-ful of PROs, a comprehensive database of who owns what rightswith respect to music distribution has not come into existence.The existence of “blanket licenses” that are made available bythe PROs—which allow a user to distribute all of the music thatis in a PRO’s repertoire—has traditionally reduced the need forsuch a database. The institution of the blanket license has clearlyreduced transactions costs. But the absence of that database hasrecently impeded efforts by digital streaming services, such asPandora, to negotiate effectively with individual music publishersfor distribution rights. It also makes it more difficult to identifyand pay rights holders, which at least partly accounts for thenonpayment problem and consequent lawsuits against Spotifyand other streaming services.

One other special institutional feature of music licensingis worth noting: in the area of mechanical rights and for somecategories of distribution of sound recording rights, compulsorylicenses are required by statute. This means that, so long as amusic distributor meets a modest set of requirements, an ownerof mechanical or sound recording rights must grant a license tothe distributor. But, of course, the question of “at what price?”remains. Arm’s-length bargaining in the shadow of such a require-ment is difficult at best, and it is no accident that regulated ratherthan market-based pricing dominates the pricing of these rights.

THE COURT AS REGULATOR

Centralizing performance rights functions in a few large PROsreduced transactions costs, but it also led to the accretion ofmarket power. ASCAP became a locus of market power for theselling of music performance rights vis-à-vis the broadcastersand other distributors of the music by becoming the commonagent for thousands of otherwise-competing composers/song-writers and music publishers. This arrangement drew a govern-ment response: the Antitrust Division of the U.S. Departmentof Justice sued ASCAP in 1934 and again in 1941, arguing thatASCAP’s collective setting of royalty rates for its thousands ofotherwise-competing members constituted a violation of theSherman Act.

These suits were eventually settled with a consent decree in1941. The decree allowed ASCAP to continue functioning as

a collective licensor for its members, an implicit recognitionof the PRO’s role in reducing the contracting and monitoringtransactions costs for its members. However, the decree—includ-ing subsequent modifications—placed restraints on ASCAP’sactions. Perhaps in hopes of not foreclosing a more competitivemarket, the decree precluded ASCAP from requiring exclusivityfrom its members—i.e., members of ASCAP are free to license theirworks outside of the ASCAP framework. Prospective licenseesalso must have the option of licensing individual pieces of musicfrom ASCAP rather than being required to take a blanket license.However, distributors do typically obtain blanket licenses for theentire catalogue of works from ASCAP and BMI, and from thesmaller SESAC and GMR.

The ASCAP decree specified that the Federal District Courtfor the Southern District of New York would arbitrate disputeswhen prospective licensees and ASCAP could not agree on terms.A similar suit against BMI in the early 1940s was settled with asimilar consent decree. As a result, the Southern District is oftendescribed as “the rate court” for these disputes, and two judgesin the Southern District—one for ASCAP adjudications and onefor BMI adjudications—have become the de facto regulators ofthese license terms—including pricing—for musical compositions.

Royalty rates for the SESAC and GMR music catalogues arenegotiated directly with users. There are no government consentdecrees for those latter two PROs that apply when the parties failto agree on terms.

DEVELOPMENT OF NEW DISTRIBUTIONTECHNOLOGIES

As the analog era gave way to the digital era, Congress attemptedto modernize music licensing by enacting the Digital Perfor-mance Right in Sound Recordings Act (DPRA) in 1995 and theDigital Millennium Copyright Act (DMCA) in 1998. These actsexpanded copyright protection to public performances of soundrecordings through new digital audio transmissions, includingthe then-emerging satellite services that were the predecessorsto SiriusXM and subsequent internet-based streaming servicessuch as Pandora and Spotify.

The Copyright Royalty Board (CRB), consisting of threeadministrative judges appointed by the Librarian of Congress,establishes rates for sound recording performance rights fordistributors such as satellite radio and non-interactive streamingservices like Pandora. Different statutory standards are applicableto different categories of services; for example, the CRB’s rates forSiriusXM are different than those for Pandora. The licenses arecompulsory: the rights owners cannot refuse a licensing requestat the CRB-determined rates. SoundExchange collects and dis-tributes the royalties and also participates in CRB proceedingson behalf of the copyright holders.

Interactive digital services like Spotify are exempted from theCRB process and instead negotiate directly with the performingartists and labels.


Terrestrial radio broadcasting does not currently require soundrecording licenses, although legislation to change that has beenintroduced in Congress. The argument for exempting terrestrialbroadcast radio from paying this category of royalties was thatthe playing of music on terrestrial radio was a form of free pro-motion for the records and their artists (or the record labels thathad assembled and paid the artists) and thus the latter group(s)were already being compensated by the broadcasters.

THE LICENSING MARKET

While the music distribution system has grown more competi-tive and changed dramatically with the introduction of new tech-nologies, the music licensing system hasn’t kept pace. Using anypiece of music or recording requires obtaining multiple licenses,each of which has its own rules. Some licenses are compulsory,some are not. Most royalty rates are set in administrative orjudicial proceedings. Some are established by direct negotiationbetween rights holders and licensees.

The market for music rights largely consists of three regulatedmarkets: one for musical composition public performance rights;a second for sound recording performance rights; and a thirdfor mechanical reproduction rights. For example, Spotify andother “interactive” streaming services must obtain licenses tosound recording and composition performance rights, as well as

“mechanical licenses,” in order to stream a song legally. Mechanicalrights—the rights at issue in the recent spate of lawsuits—includethe right to reproduce and distribute copyrighted songs throughpermanent digital downloads, interactive streams, or other media.Mechanical licenses are compulsory, and their rates are deter-mined in CRB proceedings.

THE MUSIC MODERNIZATION ACT

Several music licensing proposals are now pending in Congress,the most significant of which is the Music Modernization Act(MMA), which recently passed the House of Representatives.The MMA is intended to solve the problem that is at the root ofthe Spotify and similar lawsuits, which involves nonpayment ofroyalties for mechanical rights. The bill has received widespreadsupport from most parts of the industry, including music pub-lishers and songwriters (who own and license these mechanicalrights), and digital interactive streaming services (who purchasethe licenses).

Ameliorating the nonpayment problem, as the MMA aimsto do, would be an improvement over the status quo. However,the MMA reinforces many of the long-standing aspects of musiclicensing that hinder competition: compulsory licenses, blanketlicensing by a music collective, and regulated rates by the CRB. Itdoes little to create a more competitive licensing regime with moredirect negotiation between rights holders and licensees, whichshould be the long-run goal. This is indeed the same old song.

Central to the MMA is a Musical Licensing Collective (MLC),which would be designated by the Register of Copyrights (similar

to the earlier designation of SoundExchange for sound record-ing rights). The MLC would be empowered to grant blanketmechanical licenses for interactive streaming or digital downloadsof musical works. It would be responsible for collecting royaltypayments from music services and distributing those paymentsto songwriters and publishers.

Would such a monopoly collective have too much marketpower? The MLC would perform the same functions that exist-ing PROs perform with respect to public performance rights formusical works. But those PROs—ASCAP, BMI, SESAC, and GMR—compete with each other. New PROs can and do enter this market.

The MLC would also perform the functions with respect tomechanical licenses that firms like the Harry Fox Agency, MusicReports Inc., and newer companies such as Audiam and Loudr,already do. Would these companies be driven out by the MLC?

The litigation resulting from nonpayment of royalties sug-gests dissatisfaction with the way this function is now beingperformed. However, there is no reason to believe that a govern-ment-certified nonprofit organization, facing no competition,would perform better.

In the absence of alternatives, the quality of service to thepublishers and songwriters is likely to suffer. The MMA legisla-tion envisions a process for reviewing the MLC’s performanceevery five years and possibly designating a new MLC, but thisrepresents a limited form of competition and in practice may bedifficult to implement.

The MLC also would be charged with creating and managinga database of mechanical rights. A music database is a potentiallypro-competitive outcome of the MMA. Accurate and easily obtain-able information on who owns what is a necessary preconditionfor a more competitive licensing regime with more direct bargain-ing between rights holders and licensees. However, combiningthe database with the other functions of the MLC would add toits market power.

Creating a useful database may require a push from the gov-ernment, such as is provided in the MMA. However, a number ofnongovernmental groups are already working on this problem.The Open Music Initiative—a venture of the Berklee Collegeof Music, the MIT Media Lab, and others—is developing anopen source protocol for identifying music rights holders usingblockchain technology. Other initiatives, such as Dot BlockchainMusic, are developing music rights management systems basedon blockchain. SoundExchange has put together a database ofthe songs for which royalties are being held in escrow by theCopyright Office because the licensee could not identify who topay. They will make the database available to publishers for free.

The danger is that a government-sanctioned effort wouldcrowd out these private efforts and eliminate competitionbetween various databases and database technologies. Ulti-mately, without competition, the MLC is more likely to settleon an inferior technology.

This discussion raises the question of whether the economies



of scale in maintaining a music database are large enough that itshould be considered a natural monopoly. If so, we might be lessworried about the MLC emerging as a monopoly. However, weshould still be concerned about the process of gaining a monopolyposition through a government certification process rather thanmarket competition on the merits. The presence of a number ofprivate-sector entities working in this area suggests that competi-tion—either within a multi-firm market or as competition for themarket—would produce good results.

Even if policymakers determine that the government shouldprovide assistance in some form to the creation of a music rightsdatabase, it doesn’t follow that the database function should becombined with the license administration function. And even ifthe database were a monopoly, the licensing function—whichincludes administering payments to rights holders— could andprobably should be competitive. Entities that perform thatfunction—such as ASCAP and BMI—are agents of the publish-ers and songwriters, who would benefit from competition fortheir business.

Under the MMA structure, it’s not clear if publishers or song-writers would be able to withdraw from the MLC and bargaindirectly with the streaming services. The existence of the com-pulsory license would make that difficult.

The MMA envisions a database operated by the MLC, whichpresumably is only concerned with mechanical licenses. If theMLC’s database becomes the definitive database, shouldn’t italso include information on other rights, such as performanceand sound recording rights? Wouldn’t a comprehensive databaseincrease licensing efficiency? Admittedly, a more comprehensivedatabase would be more difficult to assemble because it wouldrequire data from a much broader scope of entities.

COMPETITION IS ATTAINABLE ANDALREADY OCCURRING

The goal of more competition is attainable. There are numerousexamples of direct negotiation in this otherwise highly regulatedsector. Interactive streaming services already negotiate directlyfor sound recording rights, which suggests that direct negotia-tion could also work for other rights, including the mechani-cal rights that are the subject of the MMA. A recent CRB rateproceeding provided evidence of negotiated contracts betweenrecord labels and non-interactive services Pandora and iHeart-Media. Pandora has negotiated an agreement with Music andEntertainment Rights Licensing Independent Network (“Mer-lin”), which represents thousands of independent music labels.iHeartMedia has negotiated agreements with both major andindependent labels. The elimination of existing compulsorylicensing provisions would surely encourage more negotiation.

Pandora has negotiated contracts for composition publicperformance rights with the major publishers. The smaller PROs—SESAC and GMR—are not subject to the antitrust consent decreeand therefore are unregulated.

New companies that act as agents for rights holders are spring-ing up. Merlin, mentioned above, represents thousands of inde-pendent record labels. Kobalt has developed a digital rightsmanagement platform that helps artists and publishers collectroyalties from streaming services. Kobalt collects royalties directlyfor 8,000 artists, including Paul McCartney, and 500 publishers,including Disney. It may well be that in a digital era, the monitor-ing and other PRO-like functions that are important to rightsholders are easier to accomplish and require less scale than wasneeded in the pre-digital world.

MUSIC LICENSING REFORM: SINGINGTHE SAME OLD SONG

Whenever an opportunity for pro-competitive reform of musiclicensing arises, policymakers seem to revert to the traditionalregulatory model that discourages competition. They nevermiss an opportunity … to miss an opportunity. The MMA—with its reliance on compulsory licensing, blanket licensingby a marketing collective, and regulated rates—is the latest ofseveral recent examples.

Another example involves ASCAP and BMI, which have oper-ated since 1941 under antitrust consent decrees that encourageblanket licensing of their entire catalogues and provide for regu-lated rates by the antitrust rate court. But music publishers nowwant the ability to withdraw their catalogues partially from thePROs in order to negotiate directly with the new streaming musicplatforms. With that aim, the publishers initiated a review of theconsent decrees by the Justice Department’s Antitrust Division.The Division concluded in 2016 that it would not seek to modifythe decrees to permit partial withdrawal. This would have beenan opportunity to encourage a more competitive market withmore direct bargaining between rights holders and distributors.

Yet another example involves the payment of royalties by ter-restrial radio. As indicated above, unlike every other music plat-form, old-fashioned terrestrial radio stations—by statute—pay noroyalties (for sound recording rights) to record companies on thetheory that radio stations provide a promotional service. Some inCongress are attempting to do away with this zero-price rule. Butrather than allowing market forces to determine the royalty forradio play, the Fair Play Fair Pay Act proposes to incorporate radiointo the current regulatory system with CRB-determined royalties.

The current highly regulated system for licensing music islargely an artifact of the analog era of music distribution andperformance. The digital technologies now available make it pos-sible for competition to replace much of the traditional regulatorystructure for music licensing and rate determination.

Unfortunately, this won’t happen until lawmakers sing a dif-ferent song. The tune and lyrics ought not to be hard to learn;after all, Congress—after many decades of requiring spectrumregulation—endorsed the flexible markets that competitive auc-tions have brought for wireless spectrum usage. Perhaps Congressjust needs to sing that song in a different key.

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When his administration imposedsubstantial tariffs on steel and alu-minum imports in early 2018, Presi-dent Trump ignored more than twocenturies of economic thinking andresearch. That scholarship fortifiedAdam Smith’s key insight in The

Wealth of Nations: tariffs and other trade restrictions are (exceptunder very narrow conditions) counterproductive. They restrictthe scope of markets, curb scale economies (especially thosegenerated through specialization of labor and other resources),encourage rent seeking, and ultimately undercut employmentand synergetic growth in the jobs, incomes, and wealth of tradingnations. (See “How’s Your Trade War Going?” p. 4.)

As sound and powerful as Smith’s free-trade arguments are,modern economists who have followed in his intellectual foot-steps continue to understate the gains from unfettered trade.Accordingly, they also understate the short- and long-term eco-nomic damage done by the type of trade restrictions Trump hasimposed, even without the compounding damage of retaliatorytrade barriers erected by other countries.

What modern free-trade economists continue to overlook intrade theory is that market participants are not innately prone tohone their market decisions with the precision and correctness thatconventional economic theory assumes. In conventional (neoclas-sical) economists’ idealized models of economies, the competitivemarket forces let loose by open trading can’t improve decision mak-

R ICHARD B. MCKENZIE is the Gerken Professor of Enterprise and Society(emeritus) in the Merage Business School at the University of California, Irvine andauthor of the new book A Brain-Focused Foundation for Economic Science (Palgrave).

Brain-Focused Economics:More Than JustComparative Advantage

Economists since Adam Smith have understated the welfare gains from free trade.✒ BY RICHARD B. MCKENZIE

ing. All decisions are assumed to be perfect, as in “perfectly rational.”In real-world markets inhabited by decisionmakers who

have evolved flawed mental resources and thinking processes,competitive market forces can reduce decision-making flaws andthus lower production costs and raise real incomes by morethan conventional economists have heretofore claimed. Flaweddecisionmakers are led by competitive pressures, as if by an

“invisible hand,” toward (not to) improved (not perfect) decisionheuristics that, when adopted—even grudgingly—add to theotherwise achievable gains from trade.

Let me explain those audacious claims by returning to theconventional case for open markets and then by briefly layingout a few of behavioral economists’ major findings on pervasiveflaws in human decision making, captured—supposedly—in anarray of identified mental “biases.”

THE TRADITIONAL CASE FOR FREE TRADE

In The Wealth of Nations, Smith developed the essentials of modernfree-trade theory. Countries will tend to export those products inwhich they have an (absolute) cost advantage and import thoseproducts in which they have a cost disadvantage. That meansthat trade between people in different countries can reduce pro-duction costs and increase the real incomes of all trading coun-tries, achieved mainly through an improved allocation of worldresources. Smith’s reasoning had folksy roots: “It is the maximof every prudent master of a family never to attempt to make athome what it will cost him more to make than to buy.”

In the early 19th century, David Ricardo fortified Smith’s casefor free trade. Ricardo observed that mutually beneficial tradesare possible even under seemingly unfavorable conditions, such



as when one country has efficiency and absolute cost advantagesin all goods produced than another country. He reasoned thatcomparative costs—not absolute costs—in production matter indirecting the flow of goods in and out of countries.

To make Ricardo’s point, suppose that the United States ismore productive than China in both aircraft and smartphonesand, consequently, can produce more of either in total and withthe same resources. However, suppose that the United States canproduce an additional aircraft by forgoing the production of aboatload of smartphones. An additional aircraft built in China,on the other hand, requires forgoing the production of 10 boat-loads of smartphones.

If the U.S.-produced aircraft can be sold in trade for five boat-loads of smartphones, the United States can build an additionalaircraft, cutting its smartphone production by one boatload, andthen trade its aircraft for five boatloads of smartphones. TheUnited States is thus better off to the tune of four additionalboatloads of smartphones for domestic distribution. Similarly,China can produce one fewer aircraft to expand its smartphoneproduction by 10 boatloads, which it can use to buy two aircraft

(or buy only one aircraft and keep the extra five boatloads ofsmartphones for domestic distribution).

Economists make a variety of refinements to Ricardo’s basictrade theory. For example, open trade can also intensify competi-tion in both countries, which can further lower production costsand add to efficiency and income gains. Tariffs and quotas (andother trade restrictions) will simply deny the gains from tradeboth countries could otherwise garner. Of course, if trade restric-tions are possible, political interest groups can be expected to seekprotection from international competition, furthering their owninterests while sacrificing the general welfare by wasting resourceson “rent seeking” and by curbing competition.

CONVENTIONAL ECONOMIC THEORY

Economists’ trade theory is generally developed on the presump-tion that market participants on both sides of trades, whetherdomestic or international, are innately endowed with exquisitedecision-making prowess. In the jargon of economists, people areperfectly rational, which means they consider all relevant productioncosts, ignore irrelevant costs, and exploit all available technologicalP

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efficiencies—without being pressed to do so. Producers and con-sumers innately discount accurately and consistently all futurecosts and benefits expected to emerge from today’s decisions.

Producers also are innately inclined to maximize productionin all goods up to where all gains have been exploited (or untilthe additional cost of the last unit produced exactly equals theadditional revenue gained from its sale). Similarly, all consumerswill innately maximize their welfare by extending consumption ofall goods until the additional values of the last units purchasedequals their respective prices.

Market structures do not affect production and consump-tion decision making. They can’t. Production decisions withinmonopolies are assumed to be as flawless as they are in firms thatare fully competitive. Accordingly, all producers naturally minimizeproduction costs and fully exploit production gains, no matter theirmarket constraints. This is to say that if an industry is magicallytransformed from being intensely competitive to being monopo-listic (even a “pure monopoly,” or a single seller), the accuracy ofowners’ and their agents’ decision making will be unaffected. Theonly consequential identified change is that monopolized marketswill sell fewer goods for higher prices and profits than willfirms inmore competitive (especially perfectly competitive) markets.

Of course, this means that the advent of international tradewill not—and cannot— improve decision making in conventionaleconomic theory. There is simply no room for improvement onperfect decision making (and the underlying perfect rational-ity). Perfect is perfect: the idealized—and unachievable, for solideconomic reasons—upper bound for decision-making prowess.

By the same token, in theory, trade restrictions can have noeffect on the decision-making prowess of producers and consum-ers. Thus, the terms of trade (the exchange rate of one airplanefor five boatloads of smartphones in the above example) cannotbe affected by reductions in decision flaws. The only gains fromtrade come from exploitation of extant comparative cost advan-tages of trading partners.

Milton Friedman justified extreme premises in economictheory—whether perfect competition or perfect decision making(rationality)—on economic grounds. All theories, by the nature oftheories, are “unreal” to one extent or another. Such unreal prem-ises seek to make thinking about complex reality manageable. Ifusing a sterilized, unreal premise (perfect rationality) eases the ana-lytics and doesn’t affect the accuracy of predictions, then, Friedmaneffectively asked, “Why not use it?” He had in mind predictions onthe order of, “If the minimum wage is raised, employment will fall.”

Friedman conceded that theories could not be judged by theirdescriptive “realism,” but behaviorists didn’t get that memo fromChicago. They effectively took Friedman at his word: all identifi-able predictions of economic theories deserve scrutiny.

BEHAVIORAL ECONOMISTS’ CRITICISMSOF CONVENTIONAL ECONOMICS

Behavioral economists, following the lead of cognitive psycholo-

gists, have spent the past half century seeking to prove the obvi-ous (to all aside from a few hardnosed conventional economists):people are far from perfectly rational. Indeed, people’s decisionmaking has been found to be infused with “irrationalities” (ordecisions that violate economists’ perfect rationality premise).

Behavioral scholars Richard Thaler and Cass Sunstein havederided modern theorizing: “If you look at economics textbooks,you will learn that homo economicus can think like Albert Ein-stein, store as much memory as IBM’s Big Blue, and exercise thewill power of Mahatma Gandhi,” whereas real people have troubleremembering their passwords, finding their keys, and avoidingtemptations that make them obese and lazy and leave themimpoverished in their retirement. Behaviorists’ documentationof pervasive human decision flaws has been so thorough andimpressive that two behaviorists, Thaler and Daniel Kahneman,have received Nobel Economics Prizes.

Behaviorists have found that people fail to follow the dictatesof economic theory. For example (and the examples are numer-ous), they:

■ fail to select choice options with higher expected values.■ choose inconsistently (for example, they might choose A

over B and B over C, but then choose C over A).■ discount future costs and benefits inaccurately and incon-

sistently.■ do not “equate at the margin” (or seek to produce where

marginal costs and revenues are equal).■ weigh prospective losses more heavily than prospective gains.■ consider sunk costs.■ fail to consider opportunity costs.■ prefer pursuing business ventures with in-house resources

rather than with less costly outside resources.■ can’t even be counted on to obey the “law of demand” (a

proposition with no necessary connection to conventionalchoice theory, behaviorists argue).

Behaviorists have also found that human decisions can beswayed by the comparative “salience” of choice options and byhow the options are “framed” and “anchored,” even by incidentalconsiderations. For example, when subjects (typically students inclassroom or laboratories) are asked to write down the last fourdigits of their Social Security numbers and then asked to bid on,say, a coffee mug, behaviorists have found that those subjects withthe higher last four digits tend to bid higher prices.

Behaviorists argue—rightfully (I think)—that their many find-ings should be expected, given humans’ many cognitive limita-tions. Consider:

■ Humans would never have evolved to be perfectly rational. Ifany early human tried to make decisions with the precisioneconomists assume they do, they would have starved todeath before they finalized their decisions on what to eat,


or they would have been eaten by predators as they studiedcarefully their frequent “fight or flight” decisions.

■ All human senses are subject to limitations, as evident by the factthat they don’t see as well as hawks or smell as well as wolves.

■ Human brains are biological systems and all biologicalsystems have built-in error rates.

■ Moreover, human brains don’t have the resources (mainlyneurons and energy) to fine-tune decisions as well as econo-mists assume. The demands on the brain’s limited resourcesfrom bodily functions and sensory information inflows areenormous, which means the brain must first economize onits own internal resources before it can contemplate econo-mizing on external resources.

Behaviorists have identified at least 200 decision and behav-ioral “biases” and other cognitive flaws. These decision-makingflaws, which are considered serious and pervasive, include avail-ability bias, attention cascade, confirmation bias, congruence bias,hostile attribution bias, hindsight bias, hyperbolic discounting,illusion of validity, impact bias, information bias, irrationalityescalation, and omission and optimism bias. This list seeminglygrows by the journal publication.

Indeed, human decision making has been found to be soprofoundly and consistently defective and at odds with the con-ventional rational premise that behavioral psychologist DanAriely has concluded, seemingly representing the perspective ofmany enthusiastic behaviorists, that people are best described as

“predictably irrational.” After all, he quips, people are effectively“goslings,” with more or less the same limited mental proclivitiesto define and make their own life choices.

Because of humans’ decision-making shortcomings, behav-ioral enthusiasts have concluded that improvements in humanwelfare can be achieved broadly only by a government departmentof “choice architecture,” with hired “choice architects” responsiblefor devising “nudges” under the banner of “libertarian paternal-ism” (which, behaviorists declare, is not an oxymoron). Thesenudges would proscribe and “frame” people’s choices, which canonly enhance welfare and which the choosers would welcome inspite of any loss in choice freedom, they contend.

The behaviorists seem unconcerned that the choice architectswould be drawn from a population of predictably irrational humans,with their decisions likely as defective as those subjected to nudges.

CONVENTIONAL ECONOMISTS’ CRITICISMSOF BEHAVIORAL ECONOMICS

Behavioral enthusiasts may have fallen prey to their own centralcriticism of conventional economics: they assume too much,given that so many of their findings on flawed decision makinghave come in large measure from relatively small samples ofundergraduate students. These subjects are forced to considerchoice options, many involving relative assessments of unfamil-iar complex gambles, in confined and artificial classrooms and

laboratories where the subjects are given little time to make theirchoices and with no feedback on the flawed choices of other sub-jects. The choice options are not, as Nobel Lauriat Vernon Smithhas argued, “ecologically adaptive,” which is to say the optionsare imposed by the researchers and do not emerge from choiceprocesses familiar to or created by the subjects themselves. Inbehaviorists’ terms, the choices available are often “framed” toinduce behaviorists’ chief finding: pervasive irrationality.

My favorite behavioral “experiment,” supposedly showing wide-spread irrationality, is framed this way: Student-subjects are askedto choose between a sure-thing choice option of $800 and a gamblewith an expected value of $850 (with an 85% chance of receiving$1,000 and a 15% chance of getting nothing). The behavioralresearchers have declared the subjects’ choices to be “irrational”because upwards of 85% of them choose the lower-value sure-thing and the rest choose the gamble. But should that division beunexpected? The subjects were given little time (maybe two or threeminutes) to make their choices and were given no incentive—oreven permission—to confer with each other to determine the “right”choices. They also were not told about the choice division for allsubjects in past experiments and were given no chance tofind waysto correct the dominant “irrational” choices.

I gave my own MBA students the two options and got a simi-lar choice division. I then gave them a paper assignment to beorganized around two questions:

■ Is there money being left on the choice table?■ If there is, can they think of ways to pick up the overlooked

money?

Some 70% of the student teams (over several years of giving theassignment) had no problem devising several methods for mak-ing money off the “irrational” student choices, the most incisiveof which was to offer students choosing the sure-thing more than$800 to sell their choice option. My students quickly deduced thatif they could entice enough of their fellow subjects to make deals,they could make the gamble a money maker.

More importantly, if behaviorists’ damning view of human ratio-nality were on target, freeways and parking lots would look morelike bumper-car rinks than fairly orderly processes in which roadrage, collisions, and deaths exist but are relatively infrequent (permillion miles driven). The clear majority of freeway drivers seem toearnestly seektoavoidaccidentsanddoget toworkwithout incident.

If behavioral enthusiasts were on target in claiming pervasiveand entrenched irrationalities, we must wonder how tens of mil-lions of sophisticated smartphones (and a million other goods)involving global supply chains could be made available for sale eachyear. Yes, markets are replete with mistakes, but the order achievedin most markets hardly matches the chaos that would be expectedfrom totally defective, “predictably irrational” market participants.

Maybe both conventional and behavioral theorists have over-looked market conditions that induce participants to be more



rational than behaviorists have found them to be absent marketforces, but who will never be as rational as conventional econo-mists assume. Maybe economists should adopt a revised perspec-tive of scarcity and rationality. I recommend a “brain-focusedeconomics,” described at length in my new book A Brain-FocusedFoundation for Economic Science, that can help settle many disputesamong economists—and transform our assessments of the gainsfrom trade within markets.

BRAIN-FOCUSED ECONOMICS

In spite of their many methodological deficiencies (which I coverin detail in my book), behavioral economists (and psychologists)are certainly correct that people are not perfectly rational, oreven approximately so. They are innately prone to flawed deci-sion making, which—if not subject to correction—will undercutefficiency, profits, and consumer welfare in markets. Perfect ratio-nality is, indeed, perfectly irrational from the perfective of theeconomy of the human brain.

However, markets can help to overcome innateflaws in people’sthinking, leading to greater cost saving, efficiency, and welfare. Asnoted, with conventional economic theories grounded in perfectrationality, there is no way markets (or any other institutionalsetting) can improve (or worsen) the brain’s allocation of its ownresources and decision making. With less-than-perfect decisionmaking, improvement is not only possible but almost assured.

To accommodate behavioral findings, my proposed reforma-tion of economics starts with a founding proposition, that peopleare beset with a variety of evolved, limited, and defective mentalresources (mainly neurons and energy) and thinking proclivities.The human brain faces the classic economic problem—scarcity—and that necessitates less-than-perfect rationality andflawed deci-sion making. The brain confronts a multiplicity of demands on itsresources from all bodily organs and functions (including keepingthe heart, lungs, and digestive track—and life itself—going) andfrom a vast, unrelenting, and varying inflow of sensory informa-tion. The demands on the brain are so intensive and unrelentingthat it can’t possibly satisfy them all. This means that the humanbrain must have a rational mind of its own!

Not unreasonably, the human brain has (with a high probabil-ity) evolved to do the best it can in satisfying its demands withinits constraints, which is to say that it must weigh the competingdemands with the intent of maximizing its own net gain from theuse of its own resources. This means the brain will make internaldecisions with an evolved level of rationality, seeking to refine itsdecision making. But it will do that only up to the point that theadditional gains (which, beyond some point, will diminish) aregreater than the additional costs (which, beyond some point, willincrease). Its (ever-changing) equilibrium rationality will neces-sarily fall short of perfect rationality. Perfection is simply not anoption in nature—or in any economy, including the brain’s.

The brain will seek to reduce the pressure on its own internalresources by partially ignoring or setting aside much sensory

information and by devising heuristics for classes of decisions.Those heuristics are bound to fall short of perfection to one extentor another. The brain simply doesn’t have the resources (includ-ing time) to perfect them or ensure that its heuristics never leadto decision errors. Indeed, the brain can be expected to chooseheuristics that have built-in and economical error rates becausethe internal costs of perfecting them can be greater than theadded cost incurred from bad decisions, even when the count ofbad decisions dominates the good ones.

However, a rational brain will hardly be opposed to makingimprovements in its heuristics when the economics of doing so arefavorable. Clearly, even behaviorists believe the brain can learn orelse they would not devote their careers to their science, dissemi-nate theirfindings, and teach their classes. The human brain mustuse some Bayesian-type analytics and revisions as it gets feedbackon its internal decisions and learns. Even very young childrenquickly devise an elemental decision rule when they touch a hotpot: “Don’t touch something that has just come off the stove.”

By adopting decision-making heuristics, the brain commits toa form of “decision-making portfolio management” employingmany of the strategies and goals of financial portfolio managers.The brain will judge the value of its heuristics not strictly by theemergence of faulty decisions (as behaviorists seem prone to do).Decision errors are bound to emerge just as even successfulfinan-cial portfolios are bound to have failed investments. The issuefor the brain is whether any heuristic, and the decision portfolioorganized around it, can be improved economically, and it is in thebrain’s interest to be on the lookout for such improvements. Withimprovements, it can relax or satisfy unattended demands, suchas the development of more dendrites or muscle mass.

A rational brain, however, will not necessarily give up immedi-ately on a heuristic with the advent of a cluster of bad decisions,any more than an investor will give up immediately at the firstsign of poor results on stocks in a portfolio. The brain will wantto see evidence that the bad decisions persist because it knowsthat bad decisions can come in clusters for any heuristic. If theheuristic has worked reasonably well (or better than knownviable alternatives), it could face a form of Clayton Christensen’s

“innovator’s dilemma.” The brain may discern ways to tweak itsheuristic to improve performance, which is a positive reasonfor hanging onto it. On the other hand, there could be a betterheuristic. However, the brain could very well incur more costsby trying out replacement heuristics that prove less productivethan it will incur sticking with a heuristic that yields some baddecisions but an overall successful record.

In the process of trying to use its scarce resources, the braincould persist in making bad decisions, although it does so aspurposively as it can. An economist’s brain, for example, mightnot give up on the law of demand when confronted with occa-sional evidence of an upward sloping demand curve. The law (andthere are good reasons it is called that) has proven its worth overa wide range of applications, so it would be a waste of time and


other mental resources to run regressions every time a seeminglyconflicting price change is observed.

Behaviorists see their catalog of irrationalities or decision-making failures as show-stopping evidence of the bankruptcy ofconventional economics and as a scientific foundation for callsfor added government market intrusions. Some conventionaleconomists consider behaviorists’ evidence a professional embar-rassment or sidestep them with the Friedmanian refrain, “Alltheories are necessarily unreal,” while others have found sufficientgrounds for abandoning their deductive theories for the inductivemethods of behaviorists. Still others have reviewed their work andconcluded, “My models, while defective, work pretty darn well formy purposes, so why change?”

From my brain-focused perspective, I have come to see behavior-

ists’findings offlawed decisions—especially when they persist, evenwithpotentiallycorrective feedbackloops—asevidencethat thebrainis likely maximizing the use of its own scarce internal resources.Overall, in spite of someflawed decisions, it is accomplishing its goal:improving its own overall rationality and increasing its chances forsurvival and greater prosperity for itself and its host.

MARKETS AND DECISION-MAKING IMPROVEMENTS

The many irrationalities behaviorists have uncovered largelyemerge in temporary, nonmarket, and often artificial settings—classrooms and laboratories—that lack ongoing, evolved com-petitive market pressures and the informational feedback loopsendemic to markets. People in real markets face the pressure ofbeing outproduced, outmaneuvered, and underpriced by competi-tors (both existing and new), with many having their fortunes andshort- and long-term livelihoods at stake. They get continual, if notcontinuous, feedback on their relative success and failure from thesubmarkets they face in all directions: their many product, labor,and finance markets. People in markets are constantly scanningthe activities of others for clues on how they can (and must, to oneextent or another) enhance their performance through improvedheuristics and resulting decision portfolios, as well as the suppres-sion of innate tendencies toward making irrational choices. Theseimprovements enhance their prosperity, if not survival.

Behaviorists highlight the many wrong decisions of subsets(even supermajorities) of their subjects. They tend to disregard the

correct decisions of a subset of their subjects, as if those subjects’choices don’t matter (and so often they really don’t in classroomand laboratory settings). However, subsets of “rational” decision-makers are critically important in markets, especially with time.They show the larger group of wrong decisionmakers how theycan garner more value with fewer resources, and they put com-petitive pressures on poor decisionmakers to reform their ways.

And what of those who don’t learn or are disinclined to changetheir wayward-thinking ways? Well, most should not be expectedto last long in markets, as Friedman noted long ago. If people inbusiness tend to ignore opportunity costs, consider sunk costs,and don’t equate at the margin, their success will be limited overtime (if not converted to outright failure). They will tend to losetheir own financial and real resources and limit access to the addi-

tional resources of others. Consumers willtend to buy competitors’ products. Investorswill tend to move their financial support tothose competitors who make more rationaldecisions from better heuristics. Even work-ers will gravitate toward firms that have thegreatest access to resources and a greaterchance of survival and prosperity.

Those people resistant to correctingtheir irrational ways will select out of mar-ket dealings and crowd into nonmarketsettings. And those who do not self-select

out and misjudge their irrational tendencies will tend to be shownmarket exits, or be pressed to move off into institutional settingswith less corrective competitive pressures (for example, large busi-ness bureaucracies, governments, universities, and nonprofits,where “irrationalities” may have greater staying power). In theseways, market processes (as distinct from separated snapshot marketevents, which behaviorists’ experiments tend to capture) will makemarket outcomes far more rational than the innate, uncorrectedrationalities might suggest.

Indeed, markets will tend to make persistent participantsmore rational—more calculating and more profit-seeking—thanthey might otherwise be inclined, just as markets put pressureon firms to charge lower prices than they would ideally choose.

Smith heralded the force of the “invisible hand” in marketsthat engineered unanticipated societal gains from trades. He andhis intellectual descendants haven’t seemed to appreciate justhow deeply seated the power of the invisible hand is, the “fingers”that work inside the human brain. Since early humans learnedto exploit trades, evolution has likely favored those who madedecisions with some (relatively greater) rational care. Hence, nomatter how irrational behaviorists deem people to be today, theirrationality has likely improved over the eons because of the adventof markets (an unheralded rationality-inducing institution).

How can defective decisions made within less-than-perfect heu-ristics give rise to greater rationality and welfare gains than wouldotherwise be the case? Consider how basketball players, pressed by

In spite of some flawed decisions, the brain isaccomplishing its goal: improving its own overallrationality and increasing its chances for survivaland greater prosperity for itself and its host.



the desire to win, can improve their game by practicing long hoursto develop neuronal networks (misleadingly described as “musclememory”) to routinize or automate complex moves—say, a jumpshot—thatcanhavetheeffectof improving (notperfecting) theirgame.

TRADE RESTRICTIONS, RATIONALITY,AND DECISION MAKING

The thesis that I laid out at the start of this article should now beself-evident. Markets open to trade—domestic or international—do far more than allow prospective traders to exploit knowncomparative cost advantages. They allow the introduction ofadded competitive pressures, which can put downward pressureon price and production costs and upward pressure on productquality. That gives rise to the growth-inducing “creative destruc-tion” highlighted by Joseph Schumpeter seven decades ago.

In arguing this, I simply accept the behaviorists’ admonition toconventional economists: people are not as innately rational as con-ventionally presumed. However, acceptance of thatfinding meansthat markets can do more than Smith, Ricardo, and all followingconventional economists have assumed. Open markets, with addedcompetitive pressures, can correct and improve (though not perfect)the errant decision-making proclivities of market participants.

Thus, competitive market pressures can improve the brain’sallocation of its own resources through the development of less-flawed heuristics (and fewer irrational decisions than behavioristshave found in noncompetitive market settings). While marketparticipants will never meet the perfect-rationality standard ofconventional economists, they will not likely sink consistentlyover time to the pervasive irrationality findings of behaviorists.Hence, in market-based economies, “nudges” are less relevant andnecessary than behaviorists have surmised from their classroomand laboratory findings.

The conclusion here is, don’t look for ways to impose nudges.Instead, look for ways to increase competitive market pressures,one of which is to keep markets open to international trade(or, at least, don’t close them). And that added pressure can besubstantial, given that U.S. international trade is upwards of aquarter of gross domestic product (and a much higher percent-age for other advanced economies). The decision-making effectsof open international trade can come from improved heuristicsthat need not remain narrowly applied to exports and imports.Those heuristics can have general applicability in much ofeconomic life, including most parts of the domestic economy.

Of course, the arguments offered here lead to a conclusion notusually seen in conventional economics: trade restrictions shouldbe opposed because they likely induce more irrational decisionmaking than otherwise. These irrationalities, in turn, can inducemore unexploited mutually beneficial trades. Trade restrictionsthus do more damage—especially in the long run—than heretoforeimagined. They set in motion people’s return to a lower levels ofrational decision making, which can make behaviorists’ favorednudges all the more appealing.

CONCLUSIONIn summary, conventional economists have been on target byshowing how markets can induce people to improve the alloca-tion of scarce external resources (e.g., labor, steel, trees) throughtrades. But they have overlooked—no doubt, attributable to theirpremise of perfect rationality—how markets can improve thebrain’s allocation of its own internal resources. Better allocation,in turn, can improve decision making of market participantsand can increase the extent to which participants discover andexploit comparative cost advantages. Hence, trade restrictionscan be expected to not only deny people in trading countriesthe benefits of comparative advantages, they can worsen theirdecisions-making propensities.

Granted, the gains from trade deduced from conventionaleconomic models cannot be superseded, but only because thosemodels presume that all potential gains from trade are exploitedwithout fail. Perfect rationality combined with perfect competi-tion leads to perfect outcomes. Such perfect outcomes are simplynot achievable in a world bedeviled with scarcity.

In thinking through trade theory, we must start with where weare and ask, how can added competitive pressures from open tradelead to welfare gains? In conventional economics, the gains arelimited to improved allocations of external resources. In my brain-focused approach, competitive pressures can have the added effectsof improving the brain’s allocation of its own internal resourcesand the performance of its (less-than-perfect) decision heuristics.

Those improvements, I stress, can lead to even greater gains(or fewer losses) in the allocation of external resources. If peopleare as imperfectly rational as behaviorists insist they are, there isno reason to believe that they will, without meaningful pressures,minimize costs and discover their comparative cost advantagesor even exploit the potential trades that are self-evident in econo-mists’ blackboard discussions of the gains from trade.

Nonetheless, economic market models do have an unappreci-ated didactic purpose: they suggest an array of heuristics—tagged

“principles” (e.g., equate at the margin, ignore sunk costs)—thatmarket participants might consider adopting (or employing morefrequently) if they want to survive, if not prosper, under marketpressures. And the more competitive their markets, the moreclosely they will need to follow them, instead of following theirinnate decisionmaking biases.

READINGS

■ Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, by ClaytonChristensen. Harper Business, 1997.

■ Nudge: Improving Decisions about Health, Wealth, and Happiness, by Richard H.Thaler and Cass R. Sunstein. Yale University Press, 2008.

■ Predictably Irrational: The Hidden Forces that Shape Our Decisions, by Dan Ariely.HarperCollins, 2008.

■ Rationality in Economics: Constructivist and Ecological Forms, by Vernon L. Smith.Cambridge University Press, 2008.

■ “The Methodology of Positive Economics,” by Milton Friedman. In Essays inPositive Economics, by Milton Friedman; University of Chicago Press, 1953.

R

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Last January, economist and New York Times col-umnist Paul Krugman tweeted something thatI, as a business owner, found astonishing. Hewrote, “There is no evidence—none—that regu-lation actually deters investment.”

I am not an economist by training, so perhapsthis statement is true in aggregate across the

economy. But I know from personal experience that it is not trueat a granular level. My company has exited from certain businessesand locations in direct response to changing regulations, and Iknow others have as well. As a minimum, I believe that labor regu-lation is shifting investment away from businesses that employunskilled labor and toward businesses that employ skilled laboror increasing levels of automation.

In my business, which staffs and operates public campgrounds,I employ about 350 people in unskilled labor positions, most atwages close to the minimum wage. I had perhaps 40 job openingslast year and over 25,000 applications for those jobs. I amfloodedwith people begging to work and I have many people asking forour services. But I have turned away customers and cut back onoperations in certain states like California. Why? Because laborregulation is making it almost impossible to run a profitable,innovative business based on unskilled labor.

Why is this important? Why can’t everyone just go to collegeand be a programmer at Google? Higher education has indeedbeen one path by which people gain skills and opportunity,but until recently it has never been the most common. Mostskilled workers started as unskilled workers and gained theirskills through work. But this work-based learning and advance-ment path is broken without that initial unskilled job. For people

WARREN MEYER is the founder and president of Recreation Resource Management.

How Labor RegulationHarms Unskilled Workers

As government expands regulation of employers, they will increasinglyturn to fewer, higher-skilled workers and automation.✒ BY WARREN MEYER

unwilling, unable, or unsuited to college, the loss of unskilledwork removes the only route to prosperity.

The academic and public policy communities generally dis-cuss the effects of government interventions into labor marketspiecemeal, teasing out the effects of a particular regulation (suchas an increased minimum wage) in isolation. As an entrepreneur,I don’t have that luxury; I must comply with literally hundredsof labor regulations simultaneously. En masse, these regulationshave substantial negative effects on the ability of firms like mineto profitably employ workers, particularly the unskilled.

The purpose of this article is not to dissect the costs and ben-efits of any one particular regulation, but to survey the mass ofregulation to demonstrate how the accretion of many different,presumably well-intentioned rules to protect workers can, in total,have exactly the opposite effect, making it difficult for companiesto profitably employ unskilled labor and for those workers todevelop and advance.

I will survey the field of labor regulation in four categoriesthat roughly correspond to the effects these regulations haveon business viability: 1) regulations that directly raise the priceof labor; 2) regulations that add risk to hiring workers, and thatcan make unskilled workers particularly risky to hire; 3) regula-tions that addfixed costs for employers, increasing the minimumviable size of a company; and 4) regulations that limit businessformation and growth by making it harder to pursue new andinnovative labor models.

REGULATIONS THAT DIRECTLY RAISETHE PRICE OF LABOR

The most easily identifiable regulations that hamper employersare those that impose direct costs on the hiring and retention ofworkers. Below are some prominent examples.

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Minimum wage / Perhaps the most visible of these regulations areminimum wage laws. The federal government sets a minimumwage of $7.25 an hour (lower for workers who receive tips andhigher for private workers making products or performing ser-vices for the government). However, many states and even citieshave minimum wage laws that impose much higher require-ments. The highest are Washington state at $11.50 an hour andMassachusetts and California at $11 an hour. Many of these statelaws have escalators that are programmed to take the minimumwage to $15 over the next several years, while cities like Seattleare already at $15 an hour for larger employers. (See “A SeattleGame-Changer?” Winter 2017–2018.)

The minimum wage for certain activities like governmentconstruction projects is even higher. For example, under theDavis–Bacon Act a laborer who places and picks up orange conesaround a federal highway project in California has a minimumwage of $43.97 an hour (and yes, the wage rules are that detailed).

Payroll taxes / Employers pay several percentage-based taxes on

wages. Essentially sales taxes on labor, these are above and beyondsimilar taxes paid by the employee. Employers pay taxes for SocialSecurity, Medicare, state and federal unemployment insurance,and—in some states like California—disability insurance.

While most of these taxes are fixed and predictable, unemploy-ment insurance premiums can scale upward for businesses thatare seasonal or have a lot of employee turnover (particularly giventhat many states are not very diligent about ensuring recipients arereally looking for work, a supposed requirement of most unemploy-ment benefits). In total, the employer share of payroll taxes startsat around 8% of wages. For businesses that hire a lot of transientor seasonal unskilled labor, these taxes are as high as 16% of wages.

Workers’ compensation / All states require employers to pay forworkers’ compensation insurance for their employees, a no-faultinsurance program that covers both lost wages and the cost ofhealth care from workplace injuries (even those not resulting fromemployer negligence). When first implemented, workers’ compen-sation was inexpensive, with claims costs dominated by lost wage

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payments. As health care costs have increased, however, so too havepremiums. Premiums generally are calculated as a percentage ofwages and range from as low as 1% for skilled office workers, to10% of wages for outdoor and maintenance workers, to as muchas 50% of wages in certain injury-prone professions like roofing.

PPACA / The Patient Protection and Affordable Care Act (PPACA),more commonly called “Obamacare,” represents an enormous andcomplex new set of regulations on businesses. Perhaps the mostcostly of these are the insurance coverage requirements. The lawdefines minimum health insurance policy features, and employersmust pay penalties if they provide employees coverage below theminimum. Firms that provide insufficient health insurance (orno insurance at all) face penalties of $2,000–$3,000 per employeeper year. Consider a worker earning $8 an hour for 2,000 hours ayear (roughly full-time). This penalty acts as an effective 12%–19%additional tax an employer must pay for employing the worker,while providing compliant health insurance can cost even more.

Mandatory employee leave / Both federal law and most stateshave requirements to provide workers in a variety of situations(e.g., illness or pregnancy) with unpaid leave and full rights toreturn to their same job after the leave is over. California has amind-boggling 14 categories of leave that employers must provide,including: paid sick leave, kin care, pregnancy disability leave, vot-ing leave, jury duty and court attendance leave, crime victims leave,leave for victims of domestic violence, sexual assault, or stalking,organ donor/bone marrow donor leave, family crisis leave, volun-teer civil service/emergency responder leave, Civil Air Patrol leave,military spouse leave, military and reserve duty leave, and schoolvisitation leave. In most cases, providing this leave seldom createsa big problem for businesses, though it can create some awkward-ness (e.g., what does one do with good workers who filled in foremployees on leave, fire them when the leave is over?).

More recently, though, states have been adding requirementsfor paid rather than just unpaid leave. States like California andArizona, for example, require employers to give workers up to threedays a year of paid sick leave, an equivalent of a 1.2% tax on wages.Led by the District of Columbia, activists are pushing states torequire companies to provide up to eight weeks of paid family leave.If that benefit were to be taken once every two years, it would bethe equivalent of a 7.7% tax on the wages of young people in theirreproductive years.

Effects / Taken together, these regulations substantially increasethe minimum cost of employing even the least-skilled workers. Ina location with a $15 minimum wage, the actual all-in cost perhour with taxes and minimum benefits might be as high as $21an hour. It is very hard to run a profitable business employingunskilled workers at these sorts of costs.

Consider my business for example. A typical campground weoperate requires perhaps two hours of labor per week per campsite,

so an increase from the federal minimum wage to a $15 minimumwage might add $22 a week per site in wages and related costs.Since we typically make $2 to $3 per week in profit per site, mostor all of these extra costs will be passed on to our customers. Giventypical campsite occupancy of 2.5 days per week and $23 a nightcamping rates, customers would have to bear a 40% price increaseto cover a $15 minimum wage. In the end, we increase prices wherewe can and exit the business where we cannot.

Our relatively low net income margin of 5% (for comparison, in2016 Microsoft and Google had margins of 23% and 27% respec-tively) is not unusual for companies that depend on low-skill labor.Almost by definition, firms that depend on low-skill workers todeliver their product or service have difficulty establishing barriersto competition. It’s difficult to do anything uniquely innovativewhen much of the work is performed by employees with limitedskills. As soon as one firm demonstrates there is money to bemade using low-skill workers in a certain way, it is far too easyfor competitors to copy that model. As a result, most businessesthat hire low-skill workers will have had their margins competeddown to the lowest tolerable level.

Thus, as in my campground example, the least likely responseto regulation-induced labor cost increases is a reduction in profitsbecause profits have already been competed down to the minimumnecessary to cover capital investment and keep owners interestedin the business. The much more likely responses will be increasedprices and reduced employment. In the long-term, companies willsubstitute capital for labor, reducing employment even further.

REGULATIONS THAT INCREASE BUSINESS RISK

But regulations that directly impose costs are not the only onesthat hamper employment. Another category of troublesomeregulation imposes increased risk, which in turn harms firmprofits and viability. Here are some examples.

Liability for bad employee behavior / The legal system places muchof the liability for an employee’s actions not on the employee buton the firm’s owners. A business can put in place policies andtraining mandating the proper treatment of other employees andcustomers, but if one knucklehead out of a company’s dozens orhundreds of employees decides he is going to harass someone ordiscriminate against certain races or religions, the owners (andnot the employee) can and will get sued. Such lawsuit defensesare expensive even when thefirm ultimately prevails; I have neverseen a suit for even the most absurd of claims settled withoutspending at least $20,000 in legal expenses.

Reduced hiring information / Given firms’ liability for employees’bad behavior, employers reasonably would like to vet employeesquite diligently. However, regulations increasingly limit the infor-mation one can gather in the hiring process, greatly increasing therisk of hire. Examples include “Ban the box” (which limits employ-ers’ ability to ask about past criminal convictions), restrictions


on using credit checks on potential employees, and more recentrestrictions against asking employees about their past salary andemployment status. In addition, litigation has also made reference-checking much harder because many firms will not respond toreference checks because of fear of lawsuits over negative references.

Restrictions on terminating employees / In several ways, regu-lations increasingly make terminating poorly chosen employ-ees more difficult. For example, equal employment rules giveemployees who fall into a number of legally protected classes(e.g., certain races, ethnicities, and genders) enhanced rightsto file lawsuits or other legal complaints for things like unfairtermination. It seems that no person in history has ever believedthat his or her firing was fair, so employees may challenge evenwell-justified terminations. Termination can thus be costly andtime-consuming, as extra steps are often taken in the termina-tion process in anticipation of potential future legal action.

Another increasingly frequent source of legal challenges toterminations has been created by “whistleblower” laws. The

law protects employees who report potentially illegal corporateactivities to regulatory or law enforcement agencies. As a businessowner, I want my employees to report impropriety because I wanttofix the problem. However, over the past several years,firms havestarted to see some employees, when anticipating terminationfor poor performance (and even after such termination), makeaccusations against the company so they can then challenge thetermination as unjust retaliation for the claims they have made.

Effects / It used to be that the worst human resource risk a com-pany faced was hiring employees who simply did not justify theirsalary. However, given the current body of regulation, any poorlyselected employee is a potential ticking bomb who, through badbehavior with customers or other employees, could tie up thecompany for years in expensive litigation or regulatory actions.But as a firm’s liability for the negative activity of a poorly cho-sen employee rises, regulations are making it harder to get goodinformation to make better hiring choices, while simultaneouslymaking it harder to terminate employees who were poorly cho-sen and present threats to the workplace or customers. Whenemployers begin to look at their employees not as valuable assets

but as potential liabilities, fewer people are going to be hired.One potential way employers can manage this risk is to shift

their hiring from unskilled employees to college graduates. Con-sider the risk of an employee making a racist or sexist statementto a customer or coworker (and in the process creating a largepotential liability for the company). Almost any college graduatewill have been steeped in racial and gender sensitivity messagesfor four years, while an employer might have an hour or two oftraining on these topics for unskilled workers. Similarly, becausegood information on prospective employees—credit checks, back-ground checks, reference checks, discussions of past employmentand salary—all have new legal limitations, employers who hirecollege graduates benefit from the substantial due diligenceuniversities perform in their admissions process.

REGULATIONS THAT INCREASE FIXED COSTS

Besides adding to the direct and indirect costs of each employee,government regulations impose a number of fixed costs onemployers. These further dampen employment by affecting firm

viability. Consider the following examples.

Payroll and PPACA compliance / Payroll andthe rules that govern it—wage and hourlaws, sick day accruals, tax payments tomultiple authorities, garnishments, W-2s—have become so complex that most compa-nies cannot manage their own payroll. Incertain states, for example, companies canbe fined or sued for violations as small asusing the wrong font on payroll checks. Inresponse, businesses—even small ones—pay

thousands or tens of thousands of dollars a year for third-partypayrollfirms to manage this process. Similarly, in 2016 new ruleswent into effect requiring companies to put in place extensivetracking systems for their employees’ health insurance statusand eligibility, including detailed annual reporting that mustbe sent to every employee and the government. Many firms likemine have been forced to pay a vendor at considerable expenseto do this paperwork.

Reporting / My small company is deluged with reporting require-ments to the government, many of which touch on employment.For example, myfirm is required to collect the race, ethnicity, andgender of employees and report this information annually to thegovernment. In 2016, the federal government announced thatthis annual reporting requirement will, in 2018, be expandedfrom tracking employees in about 80 race/job/gender combina-tions to tracking them in 3,600 race/job/gender/income catego-ries. (This expansion has been suspended by the Trump admin-istration—at least for now.)

It is an unusual day in my office when I do not get yet anotherletter from some state or federal agency—the U.S. Occupational

Firms’ liabilities for the actions of a poorly selectedemployee are rising, yet regulations are making it harderfor employers to get good hiring information and toterminate employees who present threats to the workplace.


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Safety and Health Administration, its state-level equivalents,labor departments, census bureaus, tourism boards—that wantssomething filled out on my business. Whether it be the numberof labor hours worked in Florida or the number of employeeswho received first aid in California, some government agencysomewhere always wants more data.

The micro-regulation minefield / Beyond the more well-known regu-lations we have mentioned, states and municipalities have hundreds,even thousands, of other detailed employment-related laws underwhich even a conscientious employer can find itself facing enor-mous fines and legal penalties. There are far too many of these tolist, but I will discuss one example: the lunch break law in California.

In California, employers have an affirmative responsibilityto make sure employees take their lunch break. If the employeechooses to work through the break or even works through thebreak despite explicit employer mandates not to do so, theemployer is still liable for penalties. My company tried severalapproaches to documenting when employees worked throughlunch by choice (say, to get more hours of work or to go homeearlier), but all eventually failed. When we allowed employees towork through lunch at their own request, we were later success-fully sued for giving them this opportunity.

Ex post facto law / Compliance with a bewildering array of regula-tions is hard enough, but many regulations are poorly worded ordon’t take into account the full variety of working arrangementsthat exist in the private sector. One is often forced to guess exactlywhat is legal. In the case of California’s lunch break law, for example,the “safe harbor” for compliance shifted several times as the ruleswere tested in court cases. Frequently com-panies find that compliance strategies theythought were legal have to be reworked asregulations are clarified in the courts. As aresult, my company pays thousands of dol-lars each year to attorneys who review ouremployee handbook, compliance systems,timesheet process, and a myriad of otherdetails for necessary changes. In California,we do this twice a year because it is so hardto keep up with the state’s massive amountof regulatory change.

Presumption of guilt / While nominallymost labor law conforms to the samecriminal and civil legal standards of guiltand innocence that obtain in the rest ofthe justice system, in practice employersoften bear the burden of a presumptionof guilt with regulatory bodies. We mustprove ourselves innocent.

I will offer one example from my own

experience. My firm had a routine labor audit by a state labordepartment. Mostly it went well, but somehow one timesheet forone week had been lost for a single employee. The investigatorasked the employee to estimate his hours worked that week. Onevery other timesheet for years, he had reported 30–40 hours perweek. For the missing timesheet, the employee retroactively claimed128 hours, or a bit over 18 hours a day. This was obviously absurdand any reasonable person would have rejected this estimate asopportunistic and exaggerated. But my company eventually hadto pay for 128 hours (40 regular hours and a whopping 88 hoursof overtime) because we could not prove absolutely that the workerdid not work what he claimed.

Effects / Most of these regulations impose fixed costs and donot increase the cost of hiring decisions at the margin. In otherwords, if I already am paying for a payroll system, an onboardingsystem, and an injury reporting system, hiring one more persondoes not cost me much more. However, all these expenses, byraising thefixed overhead costs of a business, tend to increase theminimum size a business must be to remain viable. For example,$20,000 in fixed costs to manage these regulatory issues is likelya trivial expenditure for a multi-million-dollar corporation, butfor a company with revenues of only $100,000 a year it can bebackbreaking. Perhaps even worse for many small businesses, theonly person who can usually manage this compliance work is theowner, causing the one person who typically drives growth andimprovement in the business to spend much of his or her timeworrying about compliance issues instead.

I am embarrassed to admit that this mass of regulation hasprobably helped my business. As one of the two or three largest

Figure 1

PRIVATE SECTOR EMPLOYMENT BY SIZE OF FIRM1993–2015

1993 1995 2000 2005 2010 2015

PER

CEN

TD

IST

RIB

UT

ION

Firms with 1 to 249 employees

Firms with 250 or more employees

40

45

50

55

60%

Source: U.S. Bureau of Labor Statistics, "Business Employment Dynamics: Entrepreneurship and the U.S. Economy," April 28, 2016, Table 7.


firms in a niche industry, we have been able to absorb these costswhile most of our smaller competitors have left the business. Fif-teen years ago I used to find myself bidding against small familyfirms operating in just a single location; now, I only see competi-tion from the larger multi-location firms like mine.

On a macro scale, we would therefore expect that as thesefixed costs imposed by regulation rise, employment will shiftfrom smaller to larger companies. This is indeed what the UnitedStates has experienced for over two decades, as shown in Figure 1.

One reason for this decline is that, according to the U.S. SmallBusiness Administration, since 1992 most of the new small busi-nesses formed have had no employees at all. These zero-employeecompanies are a predictable result of the increasing regulatorycosts of hiring because these sorts of business owners are gener-ally exempt from much of labor regulation. A company in whichonly the owners provide labor is substantially less expensive tooperate than a company with even one employee.

The decline in the relative share of employment at small busi-nesses and the decreased job creation from new small businesseshave a disproportionate effect on unskilled labor because smallbusinesses have always been a particular source of opportunityfor less educated workers. In 1998, before most of these declinesin small business employment share, 52.2% of small businessemployees had high school diplomas or less, while just 44.5% oflarger company employers had this level of education.

REGULATIONS THAT DISCOURAGE NEWAND INNOVATIVE BUSINESS MODELS

In addition to the costs discussed above, regulations can alsorestrict the use of new and different business models, therebyhurting firm flexibility and innovation. This is bad for business,consumers, and the economy.

Workweek and overtime rules / All states have established a40-hour work week and require at least 150% of a worker’s wagerate—“overtime pay”—be paid for time worked over those 40hours. Certain states have even more restrictive rules. For exam-ple, California requires overtime pay after the fifth day of workor after the 8th hour in any given day, no matter how manyhours were worked the rest of the week. Massachusetts requiresovertime always be paid on Sundays. In California and someother states, employers are required to give an unpaid break forlunch of at least a half hour in the middle of a shift. However, ifthis legally mandated break becomes longer than one hour, thiswork then falls under split-shift law and the employer must pay apenalty of one hour of pay to the employee for each day it occurs.

Minimum salary / In addition to minimum wages, the federalgovernment and many states set what is effectively a mini-mum salary. This is the lowest salary at which employees areno longer required to report their work hours and thus are nolonger required to receive overtime pay. In 2016 the Obama

Labor Department raised this limit, more than doubling it from$23,660 to $47,476. Suddenly, millions of junior managers tak-ing their first steps toward higher trust and responsibility werefaced with filling out a timesheet again. (In August of last year,a U.S. District Court blocked implementation of this rule. TheTrump Labor Department is now reconsidering it.)

Shift scheduling / A number of cities and states have passed orare seriously considering restrictions on how employers set workschedules. Seattle’s new law is typical: it requires employers toset shift schedules two weeks in advance, and applies penalties ifemployees are asked to work more, less, or different hours thanshown on the schedule two weeks earlier. Employers also facerestrictions and possible penalties when assigning employeesto shifts at specific times, days, or locations of work that don’tmatch the employees’ preferences.

Effects / Often my employees ask me why labor law will notallow practices that would make a lot of sense in our businessfor both employer and employee. I tell them to imagine workersin a Pittsburgh factory, punching a time clock, working 9 a.m.to 5 p.m. Monday through Friday, working within sight of theirsupervisor, taking their breaks in the employee lunch room. Thisis the labor model regulators and legislators had in mind whenwriting the bulk of labor law. Any other labor model—seasonalwork, part-time work, working out of the home, working unpre-dictable hours, telecommuting, working away from a corporateoffice or one’s supervisor, the gig economy—become square pegsto be jammed in the round hole of labor law.

A few years ago my company was audited by a state labor depart-ment in California over workers who clean remote trailheads. Oneissue was the state requirement, discussed previously, concern-ing workers’ meal breaks. In reviewing employee timesheets, theauditor asked to see written schedules so she could compare thescheduled time to the timesheets. I told her there were none. Shewas incredulous; how could there be no written schedules? Howcould she make sure we had not denied anyone a lunch break? Isaid we had no written schedules because employees schedule them-selves—it is better for the company and way better for the employee.Employees could schedule their break—in fact, all their work—forany time they wanted so long as the work got done. Despite thisbeing perfectly sensible both to me and my employees, the audi-tor’s final recommendations included a notation that we shouldhave formal work schedules, effectively asking that we take awaythe agency and autonomy we had given our workers.

While many businesses struggle to serve diverse customer needswithin the restrictions of wage and hour laws, even more limiting tobusiness flexibility are the new shift scheduling laws like the onesin Seattle. These regulations will make running a retail service busi-ness, at least one like my own, almost impossible. There is no wayone can predict exact staffing needs two weeks in advance. In mybusiness, it is not at all uncommon for a large group to suddenly


L A B O R

show up without reservations to occupy a dozen or more campsiteswe expected to remain empty. How can this possibly be handledif substantial penalties are imposed by the government for payingextra help to serve these unexpected customers? Even ignoringchanges in customer behavior and acts of God like major weatherevents, many last-minute changes to shift schedules are caused bythe employees themselves. One employee gets sick, has car trouble,has an emergency, or just does not show up, and someone has tobe called out to fill in the gap (particularly if first-line supervisorsare no longer salaried but subject to overtime).

These rules do not just limit business flexibility in hiringhourly workers, they also make it harder to advance them. Mostemployers who hire unskilled workers promote much of theirmanagement from these front-line employees. Every one of the60 managers in my company, including my chief operating offi-cer, began in the company cleaning bathrooms. Walmart claimsthat 70% of their store management started in an entry-leveljob stocking shelves or running the register. Unfortunately, therules increasing minimum salaries will make it harder for suchunskilled workers to advance.

Certainly companies will still hire first-line supervisors even ifthey must be paid hourly. But the entire nature of these jobs willchange. Some differences are psychological; for better or worse,management thinks of salaried workers differently than hourlyworkers. The same, I can say from personal experience, is true ofthe front-line supervisors themselves, who see a switch back topunching a time clock to be a demotion.

And some differences are real. Salaried workers can try todemonstrate that they are worthy of promotion by working extrahours and showing initiative by taking on extra tasks, somethinghourly workers simply would not be allowed to do for fear ofincurring overtime charges. Without these minimum salary rules,young junior managers might work 60 hours a week to impressmanagement with their diligence and dedication, signalingthey were ready for promotion. With the minimum salary rules,employers will only have clock-punchers for junior managers. Andonce the most junior salaried workers make at least $48,000 a year,companies will more likely consider hiring college graduates forthese positions rather than promoting from their internal poolof promising unskilled workers, both because of the higher priceand risk and because there will no longer be a way for unskilledworkers to demonstrate that they are worthy of this trust.

CONCLUSION

Fifteen years ago I started my current service business. I love mycompany and my employees. But if I had it all to do over again, Iwould never start a business based on employing unskilled labor.The government makes it too difficult, in far too many ways, totry to make a living employing unskilled workers. Given a newstart, I would find a business with a few high-skill employeescreating a lot of value.

And I don’t think I’m alone. In the 1950s, 1960s, and 1970s,

there was a wave of successful large businesses built on unskilledlabor (e.g., ServiceMaster, Walmart, McDonalds). Today, invest-ment capital and innovation attention is all going to companiesthat create large revenues per employee with workers who havecollege educations and advanced skills. Only 4% of the employeesat Apple, for example, have less than a college degree.

Even in large service-sector companies that employ unskilledlabor, much of their investment today is infinding ways to reducetheir reliance on that labor. I remember a number of years agowhen the Chili’s restaurant chain started putting little electronicdisplays on their tables. At first the displays just showed advertis-ing and I thought they were an annoying waste of space. But overtime the chain began using the devices first to accept paymentfor one’s food and more recently to take food orders. They areprogressively eliminating the need for most of their wait-staff.Every major restaurant chain is doing the same thing: investingin technology to eliminate unskilled workers. Why bother tryingto figure out how to serve a rapidly evolving customer demandwith workers who are limited by government in a hundred dif-ferent ways in how and when they can labor? A website or iPadnever sleeps, never sues, never needs a lunch break (let alonedocumentation of that break), never has to have overtime, anddoesn’t have its labor taxed.

The one exception to this lack of new opportunities in theunskilled labor market has been the gig economy, particularlycompanies like Uber and Lyft that provide work opportunitiesfor hundreds of thousands of unskilled laborers. But Uber is theexception that proves the rule: it has succeeded in large part bymaking an end-run around most of the costly and restrictive laborregulations discussed in this article. Uber drivers are (at least as ofthis writing) independent contractors providing services to con-sumers to whom they are connected via the Uber app. Uber givestheir drivers a tremendous amount offlexibility: they can set theirown work schedule and shifts. Numerous regulated practices wehave discussed, for which regulators fear the danger of employerabuse (e.g., lunch break timing, shift length, work-week length,split-shifting), are all entirely within the employee’s control.

Uber thus provides a growing number of employment oppor-tunities for unskilled workers. But it’s not clear that this ulti-mately helps these workers move up the economic ladder. Thereis currently no clear path at firms like Uber or Lyft for drivers toadvance—as cashiers can at Walmart—into supervisory positions.And while I have called Uber drivers unskilled labor (since mostof us are able to drive even before we complete high school), itis not a viable work option for the very poor who don’t have theresources for cars and insurance.

Thus the mass of government labor regulation is makingit harder and harder to create profitable business models thatemploy unskilled labor. For those without the interest or abilityto get a college degree, the avoidance of the unskilled by employ-ers is undermining those workers’ bridge to future success, bothin this generation and the next. R

www.IJ.org Institute for JusticeProperty rights litigation

Russ CaswellTewksbury, Mass.

The federal government tried to take my business using civil forfeiture.

But I did nothing illegal or wrong.

I fought to protect my rights and my property.

And I won.

I am IJ.


I N R E V I E W

The Wonder of Modern Life✒ REVIEW BY DAVID R. HENDERSON

Steven Pinker’s Enlightenment Now is, quite simply, a fantasticbook. In this fact-filled and incredibly well-footnoted tome,Pinker, a Harvard psychology professor, shows how the condi-

tions of life for ordinary people have gotten much better, not just forthose in wealthy countries, but also for most people around the world.

He shows that life expectancy hasincreased almost everywhere, health andnutrition have improved, and wealth andliving standards have skyrocketed. Theenvironment has improved. The destruc-tion caused by war—and war itself—havedecreased. Safety has increased and ter-rorism is a tiny problem. Literacy hasincreased. People have become generallymore tolerant of others’ differences andpeople are happier.

He attributes this progress to theEnlightenment, the four pillars of which—as the book’s subtitle suggests—are reason,science, humanism, and progress. In layingout the facts and his argument, Pinker alsoshows a knack for the punchy, and oftenhumorous, turn of phrase. Although heoccasionally slips, as when he criticizeslibertarianism, his slips are few and farbetween.

Longer lives, better lives / He opens hiscase by discussing why, despite the enor-mous improvement in human life, manypeople think conditions are regressing. Hefollows psychologists Amos Tversky andDaniel Kahneman in attributing this tothe “availability heuristic.” Most peopleestimate the probability of an event byhow easily instances come to mind. Amurder happens in your neighborhood?Murder must be on the rise. A horribleterrorist incident happens in an Orlandonight club? Terrorism must be a huge

Bush’s Council on Bioethics. Today Kassis a ripe 79; I wonder if his view of old agehas changed.

Not surprisingly, given that life expec-tancy has increased in the last two cen-turies, so has human health. Two of thebiggest breakthroughs were vaccinationand wide acceptance of the germ theoryof disease. Much later, on April 12, 1955,when scientists announced that the JonasSalk vaccine against polio was safe, therewere moments of silent tribute. There werealso the opposite: bells ringing, hornshonking, and factory whistles blowing incelebration. I was just 4 at the time, butmy sister had had polio three years earlierand my father 12 years earlier. I wouldn’tbe surprised if there had been much joy inthe Henderson household.

Pinker highlights some scientists whosenames most readers won’t recognize butwho saved tens of millions of lives—ormore. One, Karl Landsteiner, discoveredblood groups and thereby saved a billionlives.

Abundance / A major contributor to healthand life expectancy has been developmentsin food production and distribution. Thepercentage of people in the world’s poorcountries who are undernourished fellfrom 35% in 1970 to 13% in 2015. World-wide deaths from famine were above 600per 100,000 people as recently as the1920s, but they aren’t even detectable ona graph for the years 2010–2016.

Pinker points out that this advance-ment spectacularly contradicts the pre-diction made by Stanford biologist PaulEhrlich in his 1968 book The PopulationBomb. Ehrlich claimed that between thenand the 1980s, 65 million Americans and4 billion non-Americans would starve todeath. Now, many of us, including me,have the opposite problem: too manycalories.

Ehrlich’s type of thinking led to someabhorrent public policies. Pinker notesthat Robert McNamara, while president ofthe World Bank, “discouragedfinancing ofhealth care” not because it wouldn’t work,but because of his fear that it would work

DAV ID R . HENDER SON is a research fellow with theHoover Institution and emeritus professor of economicsat the Graduate School of Business and Public Policy at theNaval Postgraduate School in Monterey, CA. He was a senioreconomist with President Ronald Reagan’s Council of Eco-nomic Advisers. He is the editor of The Concise Encyclopedia ofEconomics (Liberty Fund, 2008).

problem. As a result, writes Pinker, eventhough the “world has made spectacular prog-ress in every single measure of human well-being … almost no one knows about it” (hisemphasis).

Is there a way around the availabilityheuristic? Yes, and Pinker gives it: “Theanswer is to count” (his emphasis). Checkthe data—which is what he does.

Start with life expectancy. Just 200 yearsago, the average life expectancy in the worldwas 29 years; in Europe and the Americasit was around 35. Today the average forthe world has more than doubled—71.4years—and for Europe and the Americasthe number is about 80. Even Africa, themost troubled of the world’s continents,has done well. Pinker writes, “An Africanborn today can expect to live as long as aperson born in America in 1950.”

What about the idea that for people inthe richer countries, the added years of lifein the last few decades aren’t worth muchbecause for most of them we are sick?Wrong. Pinker cites a study thatfinds thatof the 4.7 years of life expectancy gainedbetween 1990 and 2010 in the richer coun-tries, 3.8 of them are healthy years.

In making this case, he points to doc-tor and public intellectual Leon Kass’sclaim that those added years aren’t thatworthwhile. In his 2004 book Life, Lib-erty and the Defense of Dignity, Kass asked,“Would professional tennis players reallyenjoy playing 25 percent more games oftennis?” This was presumably a rhetori-cal question, but my own answer wouldhave been, “Obviously yes.” And Kass isnot just some unknown misanthrope;he was chairman of President George W.


too well, leading to greater population.But why did the food supply grow so

much? One main factor was fertilizer,invented and perfected by chemists FritzHaber and Carl Bosch, respectively, inthe early 20th century. Another was theGreen Revolution, initiated in the 1950sand 1960s by Norman Borlaug. Borlaug,the most important practitioner of geneticmodification of wheat, “turned Mexicoand then India, Pakistan, and other fam-ine-prone countries into grain exportersalmost overnight.” Incidentally, Pinkerpoints out, contra the anti-biotechnol-ogy movement, “there is no such thingas a genetically unmodified crop.” Oneresult of this huge progressis that we may have alreadyreached “Peak Farmland”—the amount of acreage neededto feed humanity. To producea given amount of food nowtakes less than a third of theland it took before the GreenRevolution.

Wealth and income inequal-

ity / Sometimes you have toremind yourself that Pinkeris not a bona fide economistbecause he certainly under-stands some of the basics ofeconomics. In a chapter onwealth, he points out howmoves toward freer marketsin Eastern Europe, China,India, Indonesia, and other countries haveincreased wealth enormously and causedpoverty to drop like a stone. He quotesa great line from Georgetown Universityeconomist Steven Radelet: “In 1976, [Chi-nese communist] Mao single-handedlyand dramatically changed the directionof global poverty with one simple act: hedied.” In 2000, Pinker notes, the UnitedNations was thought to be overly opti-mistic in vowing to cut the 1990 globalpoverty rate by 50% by 2015. They wereoff, but in the other direction: that goalwas reached five years early.

What about income inequality? Hasn’tthat increased? Actually, no. International

income inequality fell slightly from 1950to 1990, and then fell a lot from 1990 on.Economic growth in poorer countries hasbeen high, due in part to freer marketsdomestically and to increased interna-tional trade, part of which is the result ofvastly lower shipping costs brought aboutby containerization.

Within America, notes Pinker, incomeinequality did grow between 1979 and2004. But over that same time, the per-centage of Americans with incomes (fora family of three) between $0 and $30,000(in 2014 dollars) fell from 24% to 20%, thepercentage with incomes between $30,000and $50,000 fell from 24% to 17%, and

the percentage in the middleclass fell slightly from 32% to30%. Where did those peoplego? There’s only one direc-tion left: up. What he callsthe upper middle class—families with an income of$100,000 to $350,000—rosefrom 13% to 30% of the pop-ulation.

He also cites Brook-ings Institution economistGary Burtless’s finding thatbetween 1979 and 2010, realdisposable incomes for thelowest four income quintilesgrew by 49%, 37%, 36%, and45% respectively. And it’simportant to note that pov-erty and income inequality

are two separate things. Also, if we measurepoverty by what people consume ratherthan by their income, Pinker notes, the U.S.poverty rate has fallen from 30% in 1960to only 3% today.

Greener world / Surely the environment hassuffered as higher population and higherliving standards have caused more pollu-tion, dirtier lakes, and fewer forests, right?Wrong. Pinker references an EnvironmentPerformance Index that measures the qual-ity of air, water, forests,fisheries, farms, andnatural habitats. Of 180 countries that theindex has tracked for a decade or more, 178show an improvement.

Why did this occur? It’s not despitehigher incomes, but because of them. Aspeople grow wealthier, they want moreenvironmental quality, not less. They get itby either providing it themselves—donat-ing land to a trust, for instance—or push-ing for regulations to reduce pollution.

One area about which Pinker wor-ries more than I do is climate change. Headmits that there are “judicious climateskeptics,” such as Judith Curry, who acceptmainstream science but are optimisticabout outcomes. He worries that they arewrong and that warming could be cata-strophic. To his credit, though, he doesn’tdo what many climate change believersdo: advocate a slowdown in growth in thepoorest parts of the world in order to cutcarbon emissions. Instead, he advocates asolution that has worked in pretty muchevery area of life: technological improve-ment. He advocates a carbon tax, which,if you need to do something now (I’m notconvinced that we do), would certainlyhelp reduce carbon usage. But he alsoadvocates nuclear power, arguing that reg-ulatory hurdles in the United States havekept us from enjoying the huge improve-ments in nuclear technology that havebeen successful elsewhere. Pinker is alsoopen to geoengineering, such as addingalkali to clouds or the oceans to dissolvemore carbon dioxide in water.

War / Pinker, who has written extensivelyelsewhere about war, writes a brief chapteron it in this book. The bottom line is thatthe last “great-power war,” the KoreanWar between the United States and China,occurred over 60 years ago. Wars todayare both smaller and much less bloody.That doesn’t mean there are no currenttragedies of war, such as the misery of the4 million refugees from Syria. But that isless than the 10 million displaced by Ban-gladesh’s’ war of independence in 1971.

Crime and terrorism / One of his outstand-ing discussions is on public safety. Pinkerprovides data showing that homicideshave fallen dramatically almost every-where over the last few centuries. Also,

Enlightenment Now:The Case for Reason,Science, Humanism,and Progress

By Steven Pinker

556 pp.; Viking, 2018


I N R E V I E W

more recently, the U.S. murder rate—though it rose in the late 1960s and early1970s—is now lower than it was beforethat increase.

He presents fascinating data showinghow granular the homicide rate is. It makesno sense, he shows, to think in terms of ahigh homicide rate in a country or even astate or province. You need to drill downto cities and even, within cities, to neigh-borhoods. He cites, as one example amongmany, his hometown of Boston, where 70%of the shootings take place in 5% of thecity. Pinker notes that effective policing,combined with improvements in technol-ogy that take away opportunities for crime(e.g., people carrying credit cards insteadof large amounts of cash are not attractivetargets) have made robbing people far lessappealing.

Some other notes on crime: In theUnited States, violence against wives andgirlfriends fell by about 75% between 1995and 2014. Rape and sexual assault fell byover 70% during the same period.

What about deaths from terrorism?Surely those are a huge problem today.Not in America. In 2015, for example, anAmerican was 350 times as likely to bekilled in a standard homicide as in a ter-rorist attack, and 800 times as likely tobe killed in a car crash. Pinker notes that,fortunately, terrorism virtually never worksin achieving the terrorists’ strategic goals,although, of course, it does terrify manyof us. Surprisingly, while Pinker positivelycites Ohio State University political scien-tist John Mueller in many other places inthe book, he doesn’t cite—where it wouldhave seemed de rigeur—Mueller’s Fall 2004Regulation article “A False Sense of Inse-curity,” in which he makes the case thatPinker makes.

Safety / Motor vehicle fatalities per mil-lion miles driven have fallen almoststeadily over time and were doing so longbefore 1960s regulations required safercars. Ford, he notes, offered in 1956 asafety package that included seatbelts, apadded dashboard, a safer steering wheel,and other features that would become

mandatory a decade later. Deaths fromairplane crashes, fire, drowning, andoccupational hazards—and even fromnatural disasters—have fallen fairlysteadily.

How did those advances in safety comeabout? Pinker attributes them to “grass-roots activists, paternalistic legislators, andan unsung cadre of inventors, engineers,policy wonks, and number-crunchers.”While he’s right about the inventors,engineers, and number crunchers, hemisses the most important factor: eco-nomic growth. Safety, like environmentalquality, is a normal good: the higher ourincome, the more safety we want. And themarket responds. Safety in workplaces, forexample, is not due mainly to governmentagencies like the Occupational Safety andHealth Administration; it’s due to workersbecoming wealthier and demanding moresafety. Employers who ignore this demandin their decisions about workplace safetywill find themselves paying huge wagepremiums to compensate for risk. AdamSmith, in The Wealth of Nations, recognizedthat fact 242 years ago.

Liberal society / Are you tired of all thisgood news? Pinker’s not. He shows thatthere has been a rise in freedom of speech,the openness of the political process, andconstraints on leaders’ power in democra-cies since 1800. There was a big fall in the1920s and 1930s (thanks to people likeLenin, Stalin, and Hitler), an increase afterWorld War II, and then a fall in the 1960sand 1970s. Since then, the index measur-ing these liberal protections has climbeddramatically.

If I had more space, I could elaborateeven more on the ways Pinker shows thatlife has improved.

Are there downsides? Yes. Pinker wor-ries that one small mistake could lead tonuclear war and the devastation it wouldentail. Even here, though, he notes thedecline in nuclear weapons since theyreached their peak in the late 1980s. Pink-er’s thoughts on how to avoid nuclear warare terse and well worth reading. One wayis to announce a policy of No First Use.

Criticizing libertarians / In his last few chap-ters, Pinker makes a nuanced and largelypersuasive case for reason, science, andhumanism that is well worth reading butdifficult to summarize. One discordantnote, though, is his attack on “radical lib-ertarianism.” Radical libertarians—I countmyself as one—would seem to be Pinker’sstrongest allies. He often positively quotes,for example, Cato Institute senior fellowJohan Norberg’s 2016 book Progress. ButPinker goes out of his way to attack themwithout giving sufficient citations to helpthe reader evaluate his criticisms.

In the conflict over climate policy dur-ing the Obama administration, for exam-ple, he writes that evangelicals opted for“radical libertarianism over stewardshipof the Creation.” His cited source doesn’teven mention libertarianism; instead itdiscusses religious liberty. Elsewhere hewrites that “right-wing libertarians” in“their 21st-century Republican Party ver-sion” have claimed that “raising the mar-ginal tax rate for income above $400,000from 35 to 39.6 percent means turning thecountry over to jackbooted storm troop-ers.” Although I, like virtually all of thehundreds of libertarians I know (right-wing or otherwise), opposed that tax hike,I don’t recall any libertarian making thatclaim. Moreover, in a book with 1,288 end-notes, Pinker gives no citation for it. Onemight think he is exaggerating to makea point. That’s possible, but one of themany virtues of his book is how he eschewsexaggeration.

Conclusion / I mentioned earlier thatPinker has a knack for the pithy quote.One example is his response to HenryDavid Thoreau’s famous claim that “themass of men lead lives of quiet despera-tion.” Pinker writes, “How a recluse livingin a cabin on a pond could know this wasnever made clear, and the mass of menbeg to differ.”

I’ll close with this. A friend recentlyasked me why I’m optimistic in the faceof recent bad political news. I told himthat I had just finished reading every pageof Enlightenment Now.


Financial Crisis, Blame,Reform (Repeat)✒ REVIEW BY VERN MCKINLEY

Economist Allan H. Meltzer passed away in 2017. Beyond his role asa reliable critic of the Federal Reserve, one of his greatest contribu-tions to his profession was his multi-volume history of the Fed.

Recently a number of histories of the Federal Reserve have appearedwithdispersedfocusonvariousdiscreteaspectsofitsoperations.Irecently

V ER N MCK INLEY is a visiting scholar at George Wash-ington University Law School and co-author, with JamesFreeman, of Borrowed Time: Two Centuries of Booms, Busts andBailouts at Citi, forthcoming from HarperCollins.

reviewed Peter Conti-Brown’s The Powerand Independence of the Federal Reserve (“TheUlysses/Punch Bowl View of the Fed,”Winter 2016–2017). This review focuseson The Myth of Independence by SarahBinder and Mark Spindel. Both books citeMeltzer’s work liberally.

Binder is a professor of political scienceat George Washington University and isaffiliated with the Brookings Institution,while Spindel works at his own hedge fund,Potomac River Capital. The two bring tothe book differing perspectives, represent-ing both the academic world and the prac-titioner world.

It is useful to compare and contrastBinder and Spindel’s book with Conti-Brown’s, as both focus on the issues at thecore of the Fed’s independence: its interac-tions with Congress, its underlying enablinglegislation,anditsevolvinggovernance.Not-withstanding these areas of overlap, the twobooks are very different in their approach tothe topic of independence. Whereas Conti-Brown spends a great deal of time on thebroad range of functions housed within theFed, Binder and Spindel concentrate almostentirely on monetary policy. Conti-Brownalso focuses much more on the individualchairmen and staffwho have stood out overtime and influenced the Fed’s development,allowing his somewhat stronger storytellingskills to show through. In contrast, Binderand Spindel spend much of their time div-ing into the minutiae of the politics of the

Fed, as revealed through the recitation ofvote counts on many of the 19 times thatCongress chose to revisit theFederal Reserve Act after itsenactment in 1913 throughthe Dodd–Frank Act in 2010.

Independent or interdepen-

dent? / The title of the bookmakes clear that the Fed isactually not independent ofits government creators, not-withstanding the lip servicegiven to the concept bothinside and outside the gov-ernment. “We challenge themost widely held tenet aboutthe modern Fed: centralbankers independently craftmonetary policy, free fromshort-term political interfer-ence,” write Binder and Spin-del. They convincingly maketheir case that the conceptof the Fed’s power is still evolving whenthey discuss the cycle that has character-ized the Fed’s century of existence: “Crisisbegets blame and blame begets reform.”

The authors go a step further when theyrepeatedly argue throughout the book that

Congress and the Fed are interdepen-dent. From atop Capitol Hill, Congressdepends on the Fed to both steer theeconomy and absorb public blamewhen the economy falters.… In turn, theFed remains dependent on legislativesupport.… Fed power—and its capacity

and credibility to take unpopular butnecessary policy steps—is contingent onsecuring as well as maintaining broadpolitical and public support.

Three foundings / Conti-Brown labeled themajor sequential benchmarks in the Fed’searly development as the “three found-ings of the Federal Reserve”: the FederalReserve Act of 1913; the Banking Act of1935; and the Fed–Treasury Accord of1951. Three of Binder and Spindel’s eightchapters of the book crosswalk nicely tothese same three milestone periods.

The authors first focus on the Fed’senabling legislation, its decentralized sys-

tem, and the choice of thecities for the 12 individualreserve banks by the ReserveBank Organization Com-mittee (RBOC). Some of thechoices by the RBOC wereobvious financial centers(New York, Chicago, andPhiladelphia), but at the timeothers were not (Dallas, Rich-mond, and Atlanta). Binderand Spindel conclude thatthanks to President WoodrowWilson’s appointments to theRBOC, “Democrats exploitedtheir delegated power to molda politically optimal system—one that would simultane-ously attract the support ofthe system’s member banksand benefit the credit-poor,Democratic South.”

According to the authors, this decen-tralized system was a contributing factorto the Depression within a few decades ofits creation: “The signature achievement ofWilson’s administration proved incapableof generating effective monetary policyin the 1920s, contributing directly to theonset and severity of the Great Depressionin the early 1930s.” The aftermath of theDepression is the initial instance of crisis/blame/reform that Binder and Spindel useas a case study for their political models,as they identify two major power struggleswithin the decentralized Federal Reserve

The Myth of Indepen-dence: How CongressGoverns the FederalReserve

By Sarah Binder andMark Spindel

296 pp.; PrincetonUniversity Press, 2017


I N R E V I E W

System: disagreements over discount ratesand open market operations.

Although there were multiple amend-ments to the Federal Reserve Act from 1933to 1935, the power center for governancetook a decidedly Washington-based turn:

The Fed emerged far more centralizedand more powerful in 1935 than its 1913design…. The regional reserve banksretained a role in making national mone-tary and credit policies. But enactment ofthe 1935 Banking Act diminished theirability to resist policy decisions made bya reconstituted, reinvigorated Board.

The focus of The Myth of Independencethen turns to the third and final of thethree foundings of the Federal Reserve,which had even greater implications for itsindependence. Binder and Spindel write:

Even as lawmakers moved to centralizemonetary policy decisions in Washing-ton, the Fed did not become measurablymore independent…. The Fed founditself under the thumb of the Treasurythroughout the subsequent war years.

The Fed–Treasury Accord of 1951 trans-formed the relationship between the twomajor government players in the financialmarkets. Binder and Spindel explain:

As the ultimate buyer of U.S. governmentbonds, the Fed had been compelled toeffectively monetize U.S. debt at a low,fixed rate. The Accord ended this clearsubordination of monetary policy tofiscal authorities and empowered the Fedto set interest rates unencumbered by theTreasury’s postwar financing needs.

What they bring to light is Congress’sinvolvement in developing the Accord:

Congress was at the center of the 1951dispute [as] … key lawmakers empow-ered the Fed to reassert its controlover monetary policy…. In short, theFed–Treasury divorce allowed Congressto rebalance legislative oversight overmonetary and fiscal policy.

A few years earlier, the 1946 EmploymentAct laid the groundwork for a clearer man-

date and enhanced accountability for theFed’s operations.

Name, blame, and shame / A period ofstrong growth and modest inflation dur-ing the years of William McChesney Mar-tin’s Fed chairmanship came crashing toan end with the stagflation of the mid- andlate-1970s. Under the crisis/blame/reformcycle, a heavy dose of blame was laid at thedoorstep of the Federal Reserve. As a result,the now-familiar Humphrey–Hawkins“dual mandate” of maximum employmentand stable prices (with moderate long-terminterest rates) was formally imposed:

The public held the Fed responsible forthe economic downturn…. Lawmakersblamed the Fed as well…. Unlike previouscycles that largely endowed the Fed withmore centralized power, an emboldenedCongress imposed an explicit macroeco-nomic mandate on the Fed, and requiredfar more transparency and accountabil-ity—enduring reforms that continue toshape Congress and Fed interdependence.

During this timeframe, there was alsowhat the authors call “The Original Auditthe Fed” movement. This transparencymandate is now largely championed byRepublicans, but during the 1970s it waspromoted by the Democratic Party. Notsurprisingly, there was pushback from theFed in a defense of operational opaqueness:“The Burns Fed orchestrated an aggressivelobbying campaign against each of theselegislative efforts.” The smoking gun forthis lobbying can be found in former chair-man Arthur Burns’s papers, which “detailedthe Fed press office’s efforts to place ‘hor-ror stories’ about potential audits in theWall Street Journal, Washington Post, and otherprominent news and business papers.”

Unfortunately, Burns’s campaignworked to keep government auditors fromreviewing the most sensitive of Fed policyissues. Binder and Spindel write:

Burns’s efforts paid off…. With the [Gen-eral Accounting Office, now known asthe Government Accountability Office]banned from auditing monetary policy

decisions, the limited audit has survivednearly four decades since its creation inthe wake of the Fed’s 1970s failures.

Binder and Spindel devote thefinal his-torical chapter (“The Only Game in Town”)to the Fed’s response to the crisis in 2008and 2009: “Starting in late 2008, the Fed’sunconventional, untested and exigent cen-tral bank tools blurred the lines betweenmonetary and fiscal policy, exacerbatingthe Fed’s already-tense relationship withCongress at a time of severe economicstress.” Congress in particular fought theFed on its opaque implementation of prop-ping up the financial system:

The Fed sparked public and eliteoutrage. First, critics demanded publicdisclosure of the recipients of the Fed’sloans. Given the Fed’s resistance todisclosure, it took legal and ultimatelycongressional action to force the Fedto reveal the recipients of its emergencyloans…. Lawmakers from both partiesrejected the Fed’s position that disclo-sure would undermine the effectivenessof their emergency lending programs.

Typical of previous episodes of the cri-sis/blame/reform cycle, “in reopening theFederal Reserve Act, lawmakers gave theFed more responsibility while imposingmore transparency and clipping some ofits powers,” Binder and Spindel write. Theincreased transparency did not includethe “Audit the Fed” efforts that have nowbecome much more of a cause-célèbre forRepublicans than Democrats.

Conclusion / The Myth of Independence putsin historical perspective the evolution ofthe Fed’s powers and its imposed restric-tions, making clear that politics morethan any other factor drove its creationand maintains its continued existence.Based on my reading of Binder and Spin-del, the Federal Reserve Act we are leftwith still concentrates far too much powerto influence the economy in the hands ofthe Fed’s management and only requiresminimal transparency and restrictions onthe Fed’s underlying operations.


From the Republic of Lettersto the Great Enrichment✒ REVIEW BY PIERRE LEMIEUX

Born with the 16th century, the modern era brought the Enlight-enment, the Industrial Revolution, and economic growth ata rate that the world had never seen before. Northwestern

University economic historian Joel Mokyr’s A Culture of Growth tracesthis wondrous transformation as it occurred in the West’s economy.

Mokyr leads the reader on a fascinat-ing voyage that starts about the year 1500and ends three centuries later. To trace theorigins of the modern economy, he stud-ies the culture that led to the IndustrialRevolution, and the reciprocal influenceof culture on social institutions and indi-vidual incentives.

For too many social scientists, “culture”is a sort of black box that they invoke toexplain social and economic transforma-tion, but in doing so they really say nextto nothing. Recently, economists havebecome interested in this black box andMokyr attempts to offer a look inside it.

He defines culture as “a set of beliefs,values, and preferences, capable of affectingbehavior, that are socially (not genetically)transmitted and that are shared by somesubset of society.” He argues persuasivelythat cultural change is necessary to explainthe 18th century Enlightenment and theunendingflow of technological innovationsthat followedwiththeIndustrialRevolution.

Modern growth / To appreciate whatMokyr sets out to explain, consider Figure1, which I compiled from data by the lateeconomist Angus Maddison. (No figureor table appears in Mokyr’s book.) Notethat I used linear interpolations to coverthe long stretches of time for which Mad-dison’s estimates are not available. Theseinterpolations explain why a catastrophic

event like the Black Death of the 14th cen-tury doesn’t make a blip in the line.

From Year 1 of the Common Era untilthe 18th century, human living standardsscarcely changed. World gross domesticproduct per capita inched up slightly fromless than $500 per year during the firstmillennium, to $616 in 1700, and $712in 1820. Then, productionand income exploded. In lessthan two centuries, GDP percapita multiplied by morethan 10, reaching $7,814 in2010 (the last year availablein this series). These figuresare averages over the wholeworld, estimated in constant1990 dollars. In the UnitedStates, GDP per capita (againin constant 1990 dollars)reached $30,491 in 2010.

This one dramatic trans-formation is the story ofmankind from an economicstandpoint. In compari-son, the last century’s GreatDepression barely registered.

The resulting effect on liv-ing conditions has been dra-matic. During the 17 centuries betweenYear 1 and 1700, the world populationmultiplied a paltry 2.7 times. In the fol-lowing three centuries, it multiplied bymore than 10. And recall that, since 1820,real GDP per person also multiplied by 10.Since the mid-19th century, life expectancyat birth has increased from 30 years (whichis probably the maximum it had reached

over all of previous history) to more than70 years today. Literacy jumped. Thesewere only some of the consequences ofthe “Great Enrichment.”

Starting in the late 18th century, “Smi-thian growth” was replaced by “Schum-peterian growth.” The former refers toeconomic growth through more efficientmarkets, which Adam Smith observedand promoted; the latter works throughinventions, entrepreneurial innovations,and “creative destruction,” to use JosephSchumpeter’s term.

Mokyr argues that this stunning newgrowth cannot be explained by religion,which played an ambiguous role in theacceptance of new ideas, even factoring inthe Reformation. Nor can it be explainedby an increase in human capital—educationand knowledge—because capital increaseshad occurred before but had failed tolaunch self-sustained, explosive growth.

Besides, he notes, “the greatengineers and inventors whomade the Industrial Revo-lution were rarely well edu-cated.” Instead, they werefeeding on a whole infrastruc-ture of new knowledge.

The crucial factor in theGreat Divergence shown onthe chart was a new belief inprogress. It required “think-ing outside the box” and a“willingness to rebel againstaccepted practices andnorms.” A new culture ofgrowth developed that madeexplosive growth possible.

Culture / How can we explainthe appearance of this cul-ture of growth? Mokyr

adopts an “evolutionary approach to cul-ture” borrowed from anthropology andevolutionary biology. Such an approach,he argues, helps understand the culturalchange that created the institutions thatmade possible the Enlightenment andthe Industrial Revolution. Cultural evo-lution selects the most efficient culturalelements or features, as opposed to select-

A Culture of Growth:The Origins of theModern Economy

By Joel Mokyr

400 pp.; PrincetonUniversity Press, 2016(paperback 2018)

PIER R E LEMIEUX is an economist affiliated with theDepartment of Management Sciences of the Université duQuébec en Outaouais. His latest book is What’s Wrong withProtectionism? Answering Common Objections to Free Trade(Rowman & Littlefield, 2018).


I N R E V I E W

ing individuals. This sort of evolution isrendered even more potent by the capac-ity of individuals to be persuaded and toconsciously choose their beliefs. “Choice-based cultural evolution” leads to a morerapid spread of innovations.

Mokyr borrows from a large numberof scholars in differentfields. For example,he relates this culture of growth idea toDeirdre McCloskey’s “bourgeois values.”Surprisingly, however, nowhere in A Cul-ture of Growth does Mokyr cite FriedrichHayek. Many readers would like to knowwhat, if anything, differs between Mokyr’sand Hayek’s evolutionary approach. Bothauthors warn against a too-servile use ofthe methods of biology in social analysis,but both find evolutionary theory useful.As I mentioned in a recent review of hisfinal book, The Fatal Conceit, Hayek arguedthat an evolutionary approach to socialscience was actually pioneered by AdamSmith and Adam Ferguson in the 18thcentury, well before Charles Darwin used itin biology. (See “Against Tribal Instincts,”Spring 2018.)

Cultural entrepreneurs add to themenu of beliefs, values, and preferencesamong which individuals can choose.Mokyr devotes a chapter to each of twomajor cultural entrepreneurs who spreadthe ideas that would lead to the Enlight-enment and the Industrial Revolution:philosopher Francis Bacon and scientistIsaac Newton. Bacon and Newton bothemphasized observation and empiricalverification as opposed to the mere exe-gesis of ancient texts. “Bacon’s heritage,”Mokyr writes, “was nothing less than thecultural acceptance of the growth of use-ful knowledge as a critical ingredient ofeconomic growth.”

Useful knowledge is a crucial conceptin A Culture of Growth. Exemplified by theFrench Encyclopédie and numerous techni-cal textbooks published all over Europe,useful knowledge is scientific knowledgeapplied to production. It is related to theEnlightenment idea that “the human lotcan be continuously improved by betteringour understanding of natural phenomena.”Newton thought that science could only

explain how things work—as opposed totheir metaphysical nature—which impliesthat it could produce useful knowledge.

Why culture changed / It is not totally clearwhat were the causal factors, as opposedto favorable circumstances, that led to thenew cultural belief in progress. Perhapsthe point is that the different factors co-evolved (in an evolutionary sense) to pro-duce cultural change.

Mokyr seems to propose four majorfactors:

First, there are the cultural entrepre-neurs such as Bacon and Newton, as wellas many others who walked in their steps.They contributed to changing not onlythe scientific culture, but also the politicalculture. Perhaps Mokyr could have givenmore attention to the political evolutiontoward individual rights, the rule of law,and the division of power in the state.

A second factor is the shock of newknowledge. In the late 16th and the 17thcenturies, countless scientific theories ofthe Ancients—from Antiquity to the Mid-dle Ages, from Aristotle to Aquinas—weredisproved by new observations with thehelp of instruments such as the telescopeand microscope. Ptolemy’s vision of theuniverse yielded to the new observationsand theories of Nicolaus Copernicus andJohannes Kepler. Long-distance voyagesand geographic discoveries also changedthe image of the world.

Third, governments were unable to stopthe spread of new knowledge. As DavidHume noted, the political fragmentationof Europe prevented governments fromsuppressing the new ideas they deemeddestabilizing and dangerous. “In thepolitical environment of a politically frag-mented world,” Mokyr observes, “prog-ress cannot be blocked by the coercion ofa few reactionary powers.” Not only wasEurope fractured among multiple states,but even monasteries and universities were“quasi-autonomous self-governing bod-ies.” “Members of the ‘creative classes’ …moved all over the Continent.”

Tyranny thus suffered a “coordinationfailure.”

Republic of Letters / A fourth factor—amajor one— was the “Republic of Letters,”which emerged in the 16th and 17th centu-ries and stimulated the creation and spreadof new ideas. As Mokyr puts it, the “uniquecombination of political fragmentationwith the pan-European institution of theRepublic of Letters holds the key to thedramatic intellectual changes after 1500.”

The Republic of Letters was perhaps themost extraordinary spontaneous develop-ment in Europe. It was an informal andtransnational society of scholars—philoso-phers, scientists, and other intellectuals—who criticized, developed, and discussedideas through correspondence and publi-cations. Their correspondence, made pub-licly available, amounted to an ongoingpeer-reviewed journal. The “citizens” ofthe Republic of Letters followed strict rulessuch as replying to all letters, giving duecredit to the originators of ideas, and put-ting all knowledge in the public domain.They privately produced the public goodof new knowledge.

The small elite constituting the Repub-lic of Letters formed the backbone of afree market in ideas. This market was bothcompetitive and cooperative, Mokyr notes:

There is no contradiction between thecoexistence of such harmonious andcompetitive forces, as an analysis of anymarket demonstrates. Economists haveunderstood since Adam Smith thatthe glory of the market system is thisunique combination.

The Republic of Letters included mostof the great scholars of the time: men suchas Erasmus, Bacon, Voltaire, Hume, Smith,Newton, Descartes, Condorcet, and Spi-noza, along with numerous lesser-knownfigures. It covered many European coun-tries, including Great Britain, France, Italy,the Low Countries, Germany, and Spain.Its transnational character was essential:“At least in theory,” Mokyr observes, “acitizen of the Republic of Letters was sup-posed to be a person without a fatherland.”

The Republic of Letters was criticaland antidoctrinaire. According to Mokyr,“The liberal ideas of religious tolerance,


free entry into the market for ideas, andbelief in the transnational character of theintellectual community were essential toEnlightenment thought.”

It is true that many if not most scholarsdepended on the patronage of kings andnobles. But the Republic of Letters servedas an informal accrediting process, assur-ing that the subsidized scholars were notimpostors or puppets. The selfish competi-tion between patrons for the best scholarscontributed to freedom of thought andspeech, which was basically established bythe end of the 17th century.

The market for ideas remained largelyprivate. The printing press, invented inthe 15th century, played a big role. Print-ing houses spread all over Europe. Besidesproducing periodicals and books, they“were ‘international houses’ where dis-sident foreigners could find shelter anda meeting place.” Mokyr notes that “inEurope, by and large, encyclopedias andreference books were the product of pri-vate enterprise, sometimes published verymuch against the will of authorities power-less to stop them.”

The Republic of Letters “turned outeventually to be an institution unique inhuman history and a key tounderstanding where the longroad that led to modern eco-nomic growth began.” Ideasmatter. Free markets too.

Reactionary forces / Reaction-ary forces were representedby such figures as ThomasHobbes and Jean-JacquesRousseau, but they were moreand more isolated as moderntimes rolled on. Here again,the reader would have appre-ciated a reference to Hayek—in this case, the latter’s dis-tinction between “true” and“false” individualism andbetween British and conti-nental liberalism.

Many of Hayek’s false indi-vidualists were associated withthe Enlightenment and thus

nial question of why the Enlightenmentand the Industrial Revolution happenedin Europe but not in Asia, particularly inChina. He takes much care not to assignthe blame for this to an inferior Asian cul-ture compared to Europe. Is this partlya reflection of the political correctnessthat seems required today when discuss-ing such issues, or is it just scholarly pru-dence? In any event, we should not forgetthat the citizens of the Republic of Let-ters were skeptical of conventional wis-dom and were not very politically correctin their own times.

The Industrial Revolution that hap-pened in Europe, Mokyr argues, was a rareand unexpected event. Like evolutionarysurprises, it could have not happened, orit could have happened elsewhere. “Theadvantage of models of cultural evolution,”he writes, “is that they are contingent andconcern ex ante probabilities rather thandeterministic causal models.” An industrialrevolution required progress that—insteadoffizzling out as had happened in previousexamples, including in the East—wouldstart a “positive-feedback self-reinforcingexplosive technological trajectory.”

“What was missing in China,” Mokyrexplains, “was a high level ofcompetitiveness, both in themarket for ideas and at the levelof political power.” Despite avibrant intellectual life and manytechnological discoveries (includ-ing in shipbuilding and clock-making), China’s centralizedgovernment and its conservativebureaucracy—maintained by astifling examination system—choked progress. Barriers toentry in the market for ideas werehigh. Another scholar quoted byMokyr, Eric Baark of the HongKong University of Science andTechnology, observed that scien-tific knowledge was hampered by“political correctness.”

Because it did not have thenecessary culture and institu-tions, China missed both anindustrial revolution and an

Figure 1

REAL WORLD GDP PER CAPITA, YEAR 1 TO 2010(in 1990 dollars)

0 500 1000 1500 2000YEAR

$9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Sources: Angus Maddison, Contours of the World Economy, 1–2030AD: Essays in Macro-EconomicHistory (Oxford: Oxford University Press, 2007), and the Maddison Project, http://www.ggdc.net/maddison/maddison-project/home.htm (accessed March 11, 2018). Note: Data have been linearlyinterpolated by the author for the years data points are missing.

with Mokyr’s culture of growth. To whatextent did both “true” and “false” individu-alism play a role in creating the moderneconomy? Did these two strands of individ-ualism have more in common than Hayekled us to believe?

The “battle of the books,” or querelle desAnciens et des Modernes, that agitated Europewas emblematic of the clash between oldand new ideas. By the end of the 17th cen-tury, the moderns had won. The culturalchange that had brought scientific contest-ability, useful knowledge, human progress,and Lockean rights bloomed in the 18th-century Enlightenment and the IndustrialRevolution that started toward the endof that century. The entanglement of theEnlightenment and the Industrial Revolu-tion is a major thread in A Culture of Growth.

The book ties together many compo-nents of our understanding of modernity.For example, the victory of the modernswould end “the folly of mercantilistnotions that placed the state (and not theindividual) as the ultimate object of soci-ety.” Today’s reader cannot but reflect thatEnlightenment values are now under siege.

Why not in China? / Mokyr raises the peren-


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Grim Tales of Small-TownAmerica✒ REVIEW BY DWIGHT R. LEE

Robert Wuthnow, a sociologist and the Gerhard R. Andlinger’52 Professor of Social Sciences at Princeton University, alongwith his team of research assistants, has “conducted well over a

thousand in-depth qualitative interviews” in hundreds of small com-munities. He outlines his findings in The Left Behind, describing “whatpeople in these communities think—whattheir lives are like, what they value, andhow they arrive at their opinions aboutpolitical candidates and government.”

Wuthnow emphasizes that he tried tokeep his personal views out of the narra-tive, just as he and his assistants tried todo in the interviews. From my reading, he

enlightenment à la European:

The importance of the Enlightenmentfor Europe’s subsequent economicdevelopment goes beyond its impact onthe exploitation of useful knowledgefor material progress, the essence of theIndustrial Enlightenment. It also codi-fied and formalized the kind of institu-tions any society needed to maintain itstechnological momentum: the rule oflaw, checks and balances on the execu-tive, and severe sanctions on more bla-tant and harmful forms of rent-seeking.… The historical irony is that prosperityas it was experienced after 1750 requiredcreative destruction, the very oppositeof social and economic stability.

After it discovered China, the Westeagerly borrowed Eastern ideas andimported goods. For example, “chinaware”was exotic and much in demand, and didnot disguise its foreign origins. On theirside, the Chinese elite were not interestedin “cultural appropriation” from the West,so the country remained insular and miredin the past. It was soon lagging far behindthe West in economic growth.

Culture in Mokyr’s sense includes philo-sophical beliefs. A Culture of Growth showsthat philosophical beliefs in China, despitesome diversity, lacked several ingredients ofWestern philosophy. Perhaps we can go fur-ther and say that China lacked the individu-alistic philosophy that was necessary forintellectual enlightenment and economicprogress. (See “Confucius, Autonomy, andCapitalism,” Winter 2017–2018.)

If one values individual flourishing, allthis looks to me like saying that Chineseculture and institutions were inferior toEuropean culture, even if Mokyr does notcross that bridge. It might be worth cross-ing if we want to draw lessons for our times.The death of Mao Zedong in 1976 was fol-lowed by an explosion of economic andcultural entrepreneurship in China. Eco-nomic competition soared. Production andthe standard of living there started growingsomewhat like in 19th-century Europe.

After three decades of this regime, manyobservers thought that a Chinese Enlight-

enment and Industrial Revolution wereunder way, although serious analysts likeRonald Coase and Ning Wang realized thatthis movement would soon require a liber-ation of the market for ideas. (See “GettingRich Is Glorious,” Winter 2012–2013.) Asthe Chinese government has veered backtoward authoritarianism, the prospectsfor continuing growth have dimmed con-siderably, even if this does not yet showin economic statistics. Those who, oftenfor invalid protectionist reasons, fear theeconomic growth of China can relax.

Role of freedom / Mokyr paraphrases thelate science historian Reijeer Hookykaasin saying that, at the time of the Republicof Letters, “commercial and industrial cit-ies were intellectually dynamic, far moreso than university towns.” The coevolu-tion of ideas, commerce, and industry upto the explosion of economic growth inthe 18th and 19th centuries reminds us ofhow intellectual freedom, economic free-

dom, wealth, and individual autonomyare interrelated.

A related fact is how “in the North Amer-ican colonies and the United States, the oddmixture of Puritan values with elements ofthe French and Scottish Enlightenmentwere decisive in setting the culture of theyoung republic in the 1780s.” Thomas Jef-ferson and Benjamin Franklin were twoemblematic figures of the Enlightenment.

If cultural change explains the Enlight-enment and Industrial Revolution, hascultural change really been explained? Orhave we once again credited the black box?I am not sure. But this complex and richbook certainly provides many keys to theanswer. It strongly suggests that limits ongovernment and a free market in ideascreated the conditions necessary for theEnlightenment, the Industrial Revolution,and the Great Enrichment. After readingthis book, chances are that you won’t lookat the economic, social, and political worldin quite the same way as before.

is credible when he writes, “We’ve tried asbest we could to set aside our disagree-ments with some of the things we heard,seeking instead to listen and understand.”

It is not until his epilogue that he clearlyacknowledges, “I’m part of the liberal elite,… and … opposed nearly everything aboutthe Reagan and Bush administrations,favored much of President Obama’s effortsand voted for Hillary Clinton.” Despite hispolitical views, he conveys a genuine respectfor those he and his team interviewed. Thatsaid, he is not entirely successful at keeping

DW IGHT R . LEE is a senior fellow in the William J. O’NeilCenter for Global Markets and Freedom, Cox School ofBusiness, Southern Methodist University. He is a co-authorof Common Sense Economics: What Everyone Should Know aboutWealth and Prosperity, 3rd ed. (St. Martin’s Press, 2016), withJames Gwartney, Richard Stroup, Tawni Ferrarini, andJoseph Calhoun.


his political views out of the narrative, aswill become clear in this review.

Moral communities / Wuthnow statesearly in the book that “understandingrural America requires seeing the placesin which its residents live as moral com-munities” (his emphasis). I found his useof this term interesting because JamesBuchanan employed the same term inhis 1981 monograph “MoralCommunity, Moral Order, orMoral Anarchy” to describea situation in which a set ofindividuals identify “with acollective unit, a community,rather than conceive them-selves to be independent, iso-lated individuals.” Buchananrecognized that people will“identify simultaneously andwith various degrees of loy-alty with several [such] com-munities.”

Wuthnow doesn’t citeBuchanan but sees a moralcommunity in much thesame way. He, along withBuchanan, doesn’t make anyclaims as to whether moralcommunities are good or bad. Accordingto Wuthnow, such a

community draws our attention to thefact that people interact with one anotherand form loyalties to one another….Understanding communities this way dif-fers from the notion that people are inde-pendent individuals who form opinionsbased strictly on their economic interestsand their psychological needs.

Both Buchanan and Wuthnow recog-nize that the loyalties within moral com-munities can generate hostility betweencommunities. Wuthnow sees

a darker side to the togetherness towns-people experience, [with there being] astrong sense of “us” and “them.” Theresult “ranges from negative stereotypesto overt discrimination.

While he points out that not all small-

town residents engage in such exclusion-ary behavior, he follows up with:

It was one of the ways the subjects Iinterviewed maintained their sense ofidentity. They probably revealed morethan they realized when they said thepeople they knew were all the same.

Another similarity in Buchanan’sand Wuthnow’s understanding of moral

communities is that thosecommunities are not con-fined to geographically smallareas. Buchanan is clear onthis when he extends suchcommunities from those ofnuclear families to the nationstate, with ethnic, racial, andreligious groupings included,with each of us generallybeing in several moral com-munities at the same time,along with people outsideour small geographic area.

Given Wuthnow’s focus onsmall, rural towns, it wouldbe easy to assume he limitshis understanding of moralcommunities to geographi-cally small communities. But

much of what he sees as characteristics ofthese communities—such as shared viewsand ideologies that create common under-standing and a sense of “us vs. them”—don’tdepend on physical proximity. Consider hiscomment on a moral community and thosewho share such a community:

They know the norms of the communitywell enough to abide by them withouthaving to give them much thought. Acommon identity is publicly affirmed inthe stories they tell…. [The communityincludes] people who rarely [interact] with[each other]…. The norms they espousepertain to a large share of the popula-tion…. [This moral code] is enabling interms of the expectations its membersreliably take for granted and at the sametime is constraining in terms of the beliefsand activities it encourages and the ones itdiscourages.

I believe he agrees with Buchanan that wecan identify with, and be influenced by, theviews of widely dispersed people in severalmoral communities, including those per-taining to political ideology.

Does voting reflect morality? / Wuthnowdoes not include voting in his index. Yetmuch, though not all, of what he discussesinfluences the voting decisions of peoplein rural settings.

The book opens with six paragraphs dis-cussing the role of the rural vote in DonaldTrump’s 2016 election as president. Thisdiscussion includes such topics as racismand misogyny, grievance and resentmentat Washington and being left behind eco-nomically, and “backward” voters whoseconservative ideological beliefs ostensiblymotivated them to vote against their inter-ests as Wuthnow interprets them. Thesevoters were also affected by the view thatmorality in American is declining, a percep-tion that is discussed in Chapters 5 and 6.

Wuthnow notes that both rural andurban voters see the votes of the other asclear evidence of their moral deficiency. Heis cautious about making moral judgmentsabout rural voters. But his urge to do so, atleast subtly, is there, as I discuss below. Inhis defense, it is a common urge.

Many of us are far too quick to see thosewho vote differently than we do as morallyflawed, if not evil. In fact, research indicatesthat people’s voting decisions are not verygood indicators of their moral behavior.Voting decisions are overwhelmingly influ-enced by emotional attachment to particu-lar issues and political ideology, which aregenerally more the accident of people’sbackgrounds than thoughtful moral delib-eration. We are identifying with membersof our moral political community whenwe vote the way we know they are voting.We’ve all heard some updated version ofthe Pauline Kael tale where a Blue Statevoter says, “I can’t believe Trump won; Idon’t know anyone who voted for him.”That voter may be mythical, but her politi-cal moral community probably includesmillions of Americans. If Wuthnow hadinterviewed her, he could have written that

The Left Behind:Decline and Rage inRural America

By Robert Wuthnow



I N R E V I E W

she probably revealed more than she real-ized with that statement.

With the growing emphasis on iden-tity politics, how people’s votes are seen toreflect their views of others has taken onincreased moral significance. When votingfor policies to allegedly help a group suffer-ing from discrimination, the measure of avoter’s morality is his intentions, which formany are automatically considered good ifhe votes for the policy and bad if he votesagainst it. Good intentions are not irrel-evant to moral decisions, of course, butthey are hardly the whole story.

This is not to deny that members ofsome groups have been deprived of thebasic freedoms and legal opportunitiesavailable to others (African Americans,Native Americans and homosexuals cometo mind), and that the moral thing to dois give them those freedoms and opportu-nities. A policy doing this would generatepositive-sum benefits, leaving us all betteroff materially as well as morally.

Unfortunately, the policies motivatedby identity politics often exempt the mis-treated from the responsibilities that havehistorically been associated with the suc-cessful instead of providing them withmore freedom and opportunity. Further-more, identity politics has created a politi-cal dynamic in which increasing numbersof groups have benefited from claimingthat they have been treated unjustly. Theresult is an increasing number of peopleidentified as members of unjustly treatedgroups are being pitted against each otherin a negative-sum process of political trans-fers in which they compete over who issuffering most from social injustice. This ishardly an effective way to bring us togetherby promoting social justice or harmony.

It is hard to believe that a rural voterwho votes against such a policy because shebelieves it is socially divisive and harms thepeople it is supposed to help is less moral,or more bigoted, than a city voter whovotes for it because he believes the oppo-site. Wuthnow almost seems sympatheticto this view, at least momentarily, when hewrites, “Most people living in rural Amer-ica are probably no more prone toward

bigotry than many people living in suburbsand cities.” But in the very next paragraphhe states that the

anger that prompts rural Americans tolash out at Washington is a source ofbigotry as well. It can be a thin line fromarguing that Washington is broken tosaying that President Obama was illegal,stupid and untrustworthy because hewas African American.

No one can deny that there are big-ots in rural America, just as there are inurban America and everywhere else wherehumans live. We are instinctively andemotionally a tribal species. And whenexpressing ourselves through voting orpolitical speech, we sometimes embraceideas that we would never consciously

espouse or exhibit—or even tolerate—inother contexts. The line between how wevote and how we act is not thin; indeed,it is quite thick.

Unfortunately, politicians are veryeffective at harnessing these tribal pas-sions by demonizing political opponentsand those opponent’s voters in order toget their own voters to the polls. Hateis more effective politically, and divi-sive socially, when voting is depictedas having that same moral significancefor good or evil as decisive actions. Ourtribal instincts make expressing our moralanger at opposing voters far easier thanconsidering the possibility that voterswho disagree with us are decent peopledoing what we are doing: expressingtheir emotional attachment to what theygenuinely believe is good for America.Yet doing the latter would be far moreconducive to social harmony than judg-ing the morality of others by whether theyvote like us or against us. The former is far

too strong and evidence that too many ofour differences have become politicized.

Getting to know you / The most effec-tive way to moderate our “us vs. them”impulse is by interacting with “them”as individuals, as Wuthnow recognizes.He states, “Research on prejudice towardpeople unlike yourself shows that know-ing someone personally usually has a sig-nificant effect in reducing prejudice.” Hefollows up with some examples of thishappening in small communities.

Before talking about prejudice, heemphasizes that “the limited opportunityfor social interaction in small places forcepeople to mingle on an equal footing” andhe gives examples of people interactingsocially across class lines. It doesn’t elimi-

nate the “us vs. them”impulse, as he makesclear, but it surely helpsreduce it more thanidentity politics. Wuth-now seems to accept, atleast cautiously, the viewof the small-town peoplehe interviews when they

say that “when you live in a large place, …you can isolate yourself from people unlikeyourself if you want to, but in rural com-munities you can’t.”

He cites Harvard political scientist Rob-ert Putman on the importance of socialinteraction within communities. Put-man’s 2000 book Bowling Alone worriesthat Americans’ involvement in their com-munities (e.g., visiting neighbors, beingmembers of civic organizations, doingvolunteer work) has declined to troublinglevels. According to Wuthnow, Putmanobserves that this disassociation has notbeen the case in small towns and ruralareas. Wuthnow provides support for thisnotion by referring to a survey he did inthe late 1990s in which he found “thatresidents of small towns or rural areas weresignificantly more likely than residents ofcities or suburbs to feel they can count onthe neighbors for help if someone in theirfamily became seriously ill.”

The observed politeness of people in

Our tribal instincts make expressing ourmoral anger at opposing voters fareasier than considering the possibilitythat those voters are decent people.


Manipulating the Levers ofthe Regulatory State?✒ REVIEW BY SAM BATKINS

Does America have its current regulatory state because we’rean industrious, wealthy society that decided we could affordmore regulation? Or are we a productive, wealthy economy

because of the regulatory state? Naturally, libertarians and progres-sives will have different answers to those questions.

In Pricing Lives, Vanderbilt law andeconomics professor Kip Viscusi doesn’tdirectly answer either question, but he doeshint that the current regulatory environ-ment—and by some association, our tortsystem—is a result of America’s willingnessto pay for more environmental and work-force safety protections. Just as workers arewilling to pay to reduce risk and gravitatetoward higher paying, low-risk jobs, regu-lators are employing ever-higher figuresfor the Value of a Statistical Life (VSL) tojustify more stringent regulations. In asense, American prosperity has given regu-lators ample evidence to justify a myriadof new rules.

The crux of Pricing Lives rests on thebelief that society, and corporate Americaspecifically, should confront the tradeoffsof risk and think systematically aboutsafety, striking a balance between it andpossible profits. With a title like PricingLives, there is a robust discussion of VSLand its cousin in the regulatory world, theValue of a Statistical Life Year (VSLY). Pro-

gressives and some conservatives stronglydenounce VSL and its corollaries as placinga monetary value on a human being, a taskthat they say is impossible and that theywould not do directly with their childrenor loved ones.

In fact, Viscusi and other proponentsof cost–benefit analysis note, we frequentlyplace a value on lives, only in an indirectmanner. We purchase life insurance withcertain monetary values. We typically drivesafe cars but not impregnable tanks thatwould lower the risk of a fatality to near-zero. Courts and juries have monetized thevalue of a life for centuries.

Lives are monetized frequently. Theonly question is whether government orcorporations are rigorous in their meth-odology when doing this and transparentabout their process. Viscusi devotes a greatdeal of the book to the auto industry, fromthe troublesome General Motors ignitionswitches that resulted in several recalls in2014 to the infamous gas tank design ofthe 1970s Ford Pinto. The industry hashad several other public gaffes that haveresulted in hundreds of fatalities. Yet the

SA M BATK INS is director of strategy and research atMastercard. The views expressed in this review are his own.

small towns relative to that of people incities is, at least in part, a result of thegreater social mingling in the former thanin the latter. Wuthnow doesn’t emphasisthe politeness of small-town folks, if hementions it at all, yet it is clearly reflectedin the pattern of helping others that hedoes discuss in some detail as a strengthof small towns. Yet, toward the end of hisbook, he reveals his bias by indicatingthat people’s good acts do not reflect theirmoral status if those people do not votethe “right” way.

Do good intentions trump decisive action? /In addition to the greater social interactionbetween different social groupings in smalltowns than in cities, Wuthnow recognizesthat religion “plays an important role inholding the community together [and] …supports the family values that people holddear and tells them that they should carefor their neighbors.” Yet he sees a contradic-tion in the clergy’s and lay members’ caringfor neighbors. What they “usually missedseeing,” according to Wuthnow, “was thathow they voted also affected provisions forthe needy.” They voted for conservativeRepublicans who “opposed welfare spend-ing, favored regressive tax policies.”

Wuthnow sees this as a moral “blindspot” based on the “small-town view thatlocal charity and volunteering were betterthan government programs.” He doesn’tconsider the possibility that individualstaking decisive action with their ownmoney to help the poor are engaged in anact that is both more moral and effectivethan is expressing good intentions withan indecisive vote that costs the individualvoter effectively nothing for the purposeof having the government force everyoneto contribute the same way. And speak-ing of blind spots, he doesn’t considerhow much more likely the small-towncontributor is to follow up on his contri-bution to see if it is used effectively thanis the voter to follow up on his vote todetermine how much the policy he votedfor (if enacted) benefits the poor afterbeing processed through state or federallegislatures and bureaucracies.

Conclusion / I give Wuthnow credit fordescribing the concerns, resilience, vir-tues, andflaws found in small-town Amer-ica. My biggest concern with his book isits tendency, in most cases implicit, toattribute too much moral significance tohow people vote.

I recognize this tendency is not lim-ited to him or to those embracing thesame political views he does. He was more

explicit in describing how people in smallAmerican towns lived and interacted witheach other as friends and neighbors. Fromthose accounts I got the strong impres-sion that Wuthnow would give small-townAmerican higher marks for how they actedoutside the voting booth than for howthey voted in it. And he might agree withme that the former is a better measure oftheir decency than the latter.

64 / Regulation / SPRING 2018

book isn’t a Naderesque screed againstcorporate America, but rather a plea forits wider adoption of cost–benefit analysis.

Surprisingly, corporate risk analysiswas arguably more advanced decades agothan it was in the recent ignition switchfiasco. As Viscusi recounts, Ford engagedin a detailed risk analysis of the Pinto’sdesign, but that analysis wasflawed in a number of ways.Most notably, it valued livesbased on the level of tortliability damages in wrong-ful death cases. That resultedin a value of just $200,000 foreach burn death. Accordingto Ford’s math, the cost ofa design change to preventignition of the rear-mountedgas tank was triple the VSLfor potential victims. Whenjurors learned that the cost tofix each car was just $11, theway Ford undervalued eachlife was laid bare to the public.Eventually, it cost Ford $3.1million in compensatorydamages for one victim, inaddition to $3.5 million in punitive dam-ages. Despite the automaker’s attempt tomeasure and monetize risk properly, Fordmade the wrong decision, from whichfuture businesses would learn. Viscusiargues this is to the detriment of bothcost–benefit analysis and public health.

Transparency / Imagine if the U.S. Envi-ronmental Protection Agency instituteda $20 billion regulation but, instead ofreleasing a detailed explanation of itscost–benefit analysis of the rule, it justsaid that Congress and the public shouldtrust its decision. Assuming the regula-tion survived Office of Information andRegulatory Affairs (OIRA) scrutiny, whichis unlikely, a court would probably strikeit down in short order. During the regula-tory process, industry expects high stan-dards from agencies, at least for regulatorsin executive branch agencies whose workis subject to OIRA review. However, afterthe Pinto fiasco, corporations have been

more secretive in their risk analysis thangovernment is.

With regulators, the public generallyknows the estimate on potential lives savedand how government monetizes thisfigurefor an apples-to-apples comparison withmonetized costs. Contrary to progressivecritics, VSL does not directly place a dol-

lar value on a human life.Instead, VSL is, in the wordsof Viscusi, “a reflection of themonetary risk preferences ofa particular population andthe tradeoffs exhibited dur-ing an economic era.”

For example, supposeyou’re a 45-year-old skier andyou buy a $200 helmet thatcan reduce your risk of deathby 1:50,000. You have implic-itly valued your life at $10million (i.e., $200 × 50,000).In contrast, a young skierfresh out of college, workinginternships to get by, may buya $100 helmet that reducesher risk of death by 1:25,000.This equates to a VSL of $2.5

million. This doesn’t mean her life is worthless than yours, but it does illustrate thatthe willingness to pay for risk reduction ismeasurable and quantifiable.

This begs the question about inequalityand varying VSLs for different countries.For instance, the U.S. VSL, according toViscusi, is roughly $10 million; in Australiait’s $7.1 million. India and Pakistan reportVSLs of $4.9 million and $12.3 million,respectively. Given what we know aboutwillingness to pay, Viscusi notes these fig-ures are “implausibly high.”

It is fear over implausibly high or lowVSLfigures that has driven much of corpo-rate risk analysis into the ground, or at leastinto the shadows. Public backlash againstFord’s shoddy math has made corporationsfearful of these calculations and weary ofever presenting them to a judge or jury.

Viscusi argues this is a grave mistake;both corporations and the governmentshould be rigorous in their risk analysis.Speaking directly to progressives weary of

VSL, he notes that a properly vetted cost–benefit analysis can produce more stringentregulatory outcomes. A good analysis cangenerate more protective regulatory stan-dards even if there is a dollar value placedon each life at the outset. This may soundlike music to the ears of some trial lawyersand progressive regulatory activists, even ifthey detest cost–benefit analysis.

Moving the regulatory levers / For libertar-ians, there are several notes of caution.As many have noted, the VSL has beencrawling upward for several years. Now atroughly $9–$10 million across the federalgovernment (although not uniform acrossall agencies), it was just $3 million in 2005according to a Department of Transporta-tion final rule. Moreover, since 1995 therehave been only 105 final rules that havecited a VSL, including 33 from the DOTand 21 from the EPA. This raises a seriesof questions: For regulators suddenly will-ing to embrace statistics and economics,can they manipulate the VSL to producefavorable regulatory outcomes? Why hasthe VSL tripled in roughly 10 years whenU.S. household income has not madenearly the same gains?

Viscusi doesn’t answer these questionsdirectly and they are not the focus of thebook. However, just as juries want to knowhow the sauce is made for corporate cost–benefit analysis, the public has every rightto know if the VSL is used as a backdoortool to justify additional regulatory stan-dards. Rarely is the VSL challenged in courtwhen confronting landmark regulations,and perhaps that should change. For cor-porations, the Ford Pinto disaster gavebirth to a practice libertarians and progres-sives should both detest: fear of rigorousand transparent risk analysis.

GM’s ignition switch controversy isan example of a company running fromcost–benefit analysis. Mindful of the Pintoexperience, GM apparently decided not toundertake a quantitative analysis of therisk it faced versus the cost of recalling theaffected cars. The automaker even avoidedthe use of qualitative terms that describedthe real safety risk. The result was 124 lives

I N R E V I E W

Pricing Lives:Guideposts for aSafer Society

By W. Kip Viscusi



lost, resulting in part from a corporateculture fearful of quantifying the value ofsaving lives. Instead of showing the govern-ment and potential juries their work on anappropriate VSL and the risk of fatalities,the public learned of “judgment words”banned from corporate communications.These included: “you’re toast,” “powderkeg,” “potentially disfiguring,” and “rollingsarcophagus.”

There should be general agreementacross the ideological spectrum that GM’stime would have been better spent hir-ing economists and mathematicians toevaluate the tradeoffs of a potential recall.Courts, the public, and regulators rightlysavaged the automaker for its decisions.Perhaps the silver lining to the catastro-phe is that corporate America will beginto embrace cost–benefit analysis as a toolfor better decision making and to guardagainst such brand-damaging episodes.

Viscusi does offer one idea that mayprovide a path for corporations interestedin risk analysis but weary of formally pub-lishing a VSL. He suggests the governmentgrant “safe harbor” in legislation for VSLcalculations. In other words, plaintiffswould not be permitted to introduce evi-dence on corporate risk analysis. Compa-nies would, however, be allowed to intro-duce evidence of reasonable estimates ofVSL and VSLY. This may be a practicalsolution for the wider adoption of cost–benefit analysis, but the trial bar wouldlikely stand in the way of such a provision.

In conclusion, most rational followersof the regulatory state will cheer for morewidespread use of risk analysis. If greatercorporate adoption of the practice leadsto fewer lives lost—and somehow, fewerlawsuits—all the better. However, there isa real fear that regulators and trial lawyerscould wield an expanding VSL to pushfor their preferred regulatory standards,higher tort damages, and the aim ofreducing inequality through regulation.American ingenuity has produced a greatdeal in the last 150 years, including one ofthe highest VSLs on the planet. Let’s hoperegulators don’t wield the VSL to impedefurther progress.

Shaping Markets✒ REVIEW BY PHIL R. MURRAY

Alvin Roth is the Craig and Susan McCaw Professor of Econom-ics at Stanford University and co-winner of the 2012 NobelPrize in Economics. In January of this year, at the close of his

term as president of the American Economic Association, he offeredhis presidential address, “Marketplaces, Markets, and Market Design,”

PHIL R . MUR R AY is a professor of economics at WebberInternational University.

which followed up on his 2016 book, WhoGets What—And Why. His address inter-ested me enough to pick up the book andwrite this review.

In it, he proclaims, “The new economicsof market design brings science to match-making, and to markets generally. That’swhat this book is about” (Roth’s emphasis).“My hope,” he tells readers, “is that thisbook will help you see markets in new ways.”

If there is a shortage in the market fora commodity, economists predict thatbuyers will bid higher prices and sellerswill accept the higher prices in return forincreasing the quantity supplied. In thiscase, it doesn’t matter what commodityis being traded. “The price does all thework,” he explains, “bringing [buyer andseller] together at the price at which supplyequals demand.”

However, in some cases, what is beingtraded does matter. For instance, considera “matching market” such as a marketfor donor organs. In such a market, buy-ers must choose sellers and sellers mustchoose buyers in order for the exchangeto be mutually beneficial. Roth puts itthis way: “A market involves matchingwhenever price isn’t the only determinantof who gets what.” Or who gets whom, forthat matter.

Market necessities / Some economists tryto make the world a better place by recom-mending better public policy. Roth makesthe world better by designing markets sothat they work better. “Market design” isthe set of rules according to which buyers

and sellers interact; it is also the makingof those rules.

A market works well, in the jargon ofmarket design, when it is “thick,” “uncon-gested,” and “safe.” A market is thick ifthere are many buyers and sellers. It isuncongested if buyers and sellers haveenough time to evaluate offers. In gen-eral, if buyers and sellers feel comfortableparticipating, a market is safe. A match-ing market in particular is safe if buyersand sellers honestly share who they wantto deal with. For example, school choicerequires that parents “list their true prefer-ences” for schools, which may differ fromwhat they think they might get based onthe school board’s assignment criteria.

A market “fails” or “unravels” when itbecomes thin, congested, or unsafe. Rothstrives to repair those problems.

Thickening markets / Kidney exchangeillustrates the features of a matchingmarket as well as the benefits of mar-ket design. Roth first pondered kidneyexchange in the early 1980s. He reportsthat in 2014, the shortage of kidneysexceeded 100,000. Given that shortageand the National Organ Transplant Act of1984, which bans the sale of kidneys, mar-ket designers aimed to thicken the marketby increasing the number of donors. Afterthat, the author says, “making the marketthick involved assembling databases ofpatient–donor pairs.” These pairs mustmatch based on blood type and immunesystem. Roth and his colleagues devisedan algorithm to determine matches.

To shed light on the possibilities, con-sider how a database enables “trading


I N R E V I E W

cycles.” Suppose Mr. Jones needs a kidneyand Mrs. Jones is willing to donate one ofhers, but they are incompatible. Likewise,Mrs. Smith needs a kidney and Mr. Smithis willing to donate one of his, but theytoo are incompatible. Roth’s algorithmdetermines that Mr. Jones and Mr. Smithare compatible, and Mrs. Jones and Mrs.Smith are compatible. Doctors performone transplant from Mr. Smith to Mr.Jones and another from Mrs. Jones to Mrs.Smith. This “two-way cycle”saves two lives. Likewise, a“three-way cycle” saves threelives. Last year, doctors atYale–New Haven Hospitalperformed a nine-way cycle.

Trading “chains” make themarket thicker yet. In contrastto a trading cycle in which adonor expects a loved oneto receive a kidney, a “non-directed donor” initiates achain that will include “somepatient–donor pairs, and endwith a donation to someoneon the waiting list.” Anothersignificant benefit of a chainis that transplants may occurnon-simultaneously. Notethat Mr. Smith would hesi-tate to donate his kidney toMr. Jones if he could not expect Mrs. Jonesto give up hers at the same time and placeto Mrs. Smith. Doctors perform the trans-plants in a kidney trading cycle simultane-ously in order to prevent the possibilitythat a directed donor cannot or will notgive up a kidney after his or her loved onehas already received one.

The problem with simultaneous opera-tions is that they bump into resource con-straints because of the limited availabilityof doctors, nurses, and facilities. A non-directed donor relaxes those constraints;he or she donates to Mr. Jones, and even ifMrs. Jones fails for some reason to recipro-cate, no one has donated without a lovedone receiving a kidney. To paraphraseRoth, Mr. Smith may remain in the kidneyexchange as a donor to benefit his wife atsome point in time. The author shares the

story of a non-directed donor who initi-ated a chain that involved 16 operationsover a period of years. More recently, sincepublication of this book, Roth described achain involving 60 donors and recipients.

The aforementioned resource con-straints that hindered simultaneous trans-plant operations congested the market forkidneys. Trading chains not only thickenthe market; the non-simultaneous opera-tions they make possible also decongest

the market by relieving thoseresource constraints.

D e c o n g e s t i n g m a r ke t s /Another factor impedestrading. “Keep in mind,”Roth writes, “that hospitalsearn revenue on their trans-plants; they’re commercialenterprises as well as care-givers.” Thus hospitals havean incentive to keep their“easy-to-match” pairs offthe market and refer the“hard-to-match” pairs tothe market. The problem isthat “when transplant cen-ters withhold easy-to-matchpairs and transplant theminternally, it reduces thenumber of people who can

be matched nationwide, because it’s easierto find matches for hard-to-match pairs ifthey don’t always have to be matched withother hard-to-match pairs.”

Roth and a colleague imagine that theproblem can be fixed by rewarding hos-pitals with more matches based on thenumber of easy matches they refer to themarket. Their idea is unlikely to be imple-mented, Roth laments, because health careproviders refuse to admit that “hospitalsare strategic players in competition withone another.” More lives are likely to besaved by integrating regional markets forkidneys into a national market and relyingon trading chains.

At the time he was writing, Roth antici-pated kidney exchange would go global.Since publication, that has become areality. Transplants cost less than dialy-

sis; the cost savings finance travel, trans-plant operations, and other health care forpatients and donors from poor countriesto rich countries in what one of Roth’smedical colleagues calls “reverse-trans-plant tourism.”

Recall that the National Organ Trans-plant Act prohibits the buying and sell-ing of organs. Why? Roth’s term for it isrepugnance. “Let’s call a transaction repug-nant,” he suggests, “if some people want toengage in it and other people don’t wantthem to.”

He begins his chapter on repugnanceby noting that even though there wouldbe willing producers and consumers ofhorsemeat, a majority of voters in Califor-nia banned the market. What offends thirdparties, as they observe other people buy-ing and selling, varies over time and fromplace to place. Roth gives several examples.Money lending used to be repugnant inthe West; it remains so in Islamic society.On the other hand, indentured servitudewas not repugnant in early America, buteventually became so. The French and theGermans continue to dine on horsemeat.

If anyone can think of a way to enablethe buying and selling of kidneys with-out arousing repugnance, the gains fromtrade—in terms of lives saved—would belarge. Roth presents a few ideas. Some peo-ple object to buyers compensating sellersbecause they expect the former to havehigh incomes and the latter to have lowincomes. The objection fails to see that byallowing donors to be paid, the increasein the quantity supplied of kidneys willbenefit low-income patients by reducingthe time they spend on waiting lists. Thereis nevertheless a way to avoid this objectionbased on income inequality. Roth pointsout that the government could raise taxesand buy kidneys, which would then beassigned to patients on waiting lists basedon criteria other than income.

Another objection is that allowingdonor compensation could lead to undueinfluence. For example, creditors mightpressure debtors into paying off their obli-gations by selling a kidney. To counter thisobjection, the author recommends donors

Who Gets What—andWhy: The NewEconomics ofMatchmaking andMarket Design

By Alvin E. Roth

261 pp.; Mariner, 2016


undergo a “cooling-offperiod” so that theyare sure they are making the right decision.

At the time he was writing, Roth admit-ted that he was pessimistic about overturn-ing repugnance in the buying and selling ofkidneys. He refuses to give up, however. Hislatest tack advances a question put forthby Philip Cook and Kimberly Krawiec ofDuke University: If society finds it accept-able for professional football players toput their health at risk for compensation,why not kidney donors? (“If We Pay Foot-ball Players, Why Not Kidney Donors?”Spring 2018.)

Although kidney exchange teachesmany lessons about a matching marketand market design, the book offers muchmore. Roth explains the intricacies ofmatching law students with judges, medi-cal students with residencies, and studentswith schools. He describes the latest ideasof market designers who are trying to solveproblems that arise when stock traderscompete down to a fraction of a millisec-ond, or Federal Communication Com-mission officials auction “a package oflicenses” to businesses that use a portionof the radio spectrum.

The book has an offbeat element remi-niscent of Freakonomics, the 2005 bestsellerfrom economist Steven Levitt and journal-ist Stephen Dubner. For example, Rothwrites of his and colleague Xiaolin Xing’sdiscussion of an amazing case of earlytrading in which a polygynous AboriginalAustralian tribe matched newborn boyswith the future daughters of newborn girls.Other colleagues discovered that delivering“virtual ‘roses’” on a dating website was aseffective in generating mutual interest asgood looks and a good job. The reader willencounter market maladies such as “snip-ing” (offering to buy just before the mar-ket closes) and “exploding offers” (thosethat expire rapidly). Sometimes marketdesigners solve or attenuate these prob-lems, sometimes not.

Readers of Regulation may be interestedin how Roth handles this question: “Howdo we square market design with the notionof the ‘free market’ that so many peoplehold dear?” To him, a free market is “a mar-

ket with well-designed rules that make itwork well.” Those who design the rules maybe buyers and sellers in the market as well asgovernment officials imposing mandatoryregulations. Both the private actors and thegovernment regulators, he lets us know, arecapable of making mistakes.

He thinks of “economists as engineers.”Readers might balk at that because itsounds like dreaded social engineering. But

Corruption and Government✒ REVIEW BY GEORGE LEEF

What motivated the American colonists to rebel against theBritish crown? The reasons that immediately come to mindinclude unwanted taxes, trade interference, and disrespect

for the colonists’ property rights. In his latest book, George MasonUniversity law professor F.H. Buckley argues that we should addcorruption to this list. The patriots sawthe monarchy and its officials as wallow-ing in corruption as they lived high ongraft and doled out favors to friends andcronies at public expense.

While tensions grew in the 1770s, fewBrits understood the fuss. “But what theymissed,” Buckley writes, “was the colonists’ire over corruption in the British govern-ment—the King’s Friends in Parliament,the showering of gifts on royal favorites,the patronage machines of prime ministersand of royal governors in the colonies.”

The patriots did not just want to throwoff the yoke of King George III; they wantedto create a government that would be vir-tuous. They wanted a government run forthe good of the people at large rather thanfor a few with money and influence. Theywanted to prevent corrupt bargains andself-dealing.

Constitution vs. corruption / Once inde-pendence was won and the new nation’sleaders got together in Philadelphia todeal with the evident flaws of the Articlesof Confederation, the need to keep cor-

ruption out of government was one oftheir paramount concerns. The govern-ment they envisioned, Buckley writes,

would accept the reality of our ordinaryvices, but would make it harder for themto infect the body politic. By dividingpowers and asking one branch to checkanother, the Framers sought to restrainthose who would use the means of gov-ernment to serve wasteful private ends.

From that goal sprang many of theConstitution’s features. The presidentwould not be popularly elected but ratherchosen by the Electoral College, whichwould presumably consist mostly of wiseand virtuous men. Furthermore, the Elec-toral College would meet in the separatestates rather than the nation’s capital, aprovision meant to prevent unsavory dealsamong the electors.

The president would be subject toimpeachment and it was originally pro-posed that only a majority vote in the Sen-ate was needed to remove him. (Buckleynotes that the change to a two-thirds votewas made late in the convention by a com-mittee and never debated.) To keep thepresident from squandering money on his

GEORGE LEEF is director of research for the James G.Martin Center for Academic Renewal.

Roth points out that markets are “humanartifacts” just like agriculture and the medi-cal profession. Just as farmers tweak seedsand doctors prescribe medicine, economistsmay recommend modifications that helpmarkets work better. Let’s hope that econo-mists who think of themselves as engineersuse persuasion in the marketplace of ideasand refrain from advocating coercive gov-ernment intervention.


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friends as English kings were wont to do,the Appropriations Clause stated that nomoney could be withdrawn from the Trea-sury except upon a vote of Congress. Norcould the president confer any title of nobil-ity or accept any foreign emoluments. Hecould make appointments, but only withthe advice and consent of the Senate. Thoseand other provisions were intended as bar-riers against corruption.

Buckley, who has studied the Constitu-tional Convention carefully, notes that BenFranklin even suggested making the presi-dency an unpaid office to further reduce itsattractiveness to grasping men. That idea,however, was too much for the rest of theassembly and his suggestion died quietly.

Turning to the legislative branch, eachstate’s senators would be chosen by thestate legislature rather than elected directly.(The 17th Amendment would change that.)Members of Congress were forbidden tohold any other federal office at the sametime. The powers of Congress were care-fully enumerated and did not include anyauthority to engage in what James Madi-son called “factionalism,” meaning the pro-motion of legislation intended to benefitindividuals or interest groups rather thanadvance the general good.

Slipping the constraints / The Framers puta great deal of effort into devising a gov-ernmental structure that would ward offcorruption. Alas, it has failed. The govern-ment today is riddled with the kind ofinfluence peddling and hidden deals thatdrove the patriots to take up arms in 1775.Buckley writes,

From TARP, to the Export–ImportBank, to the tariff protections offeredto favored industries, there is a growingconcern that the federal government hasbecome a necessary business partner,and that the (imagined but not neces-sarily imaginary) free market capitalismof the past has been transformed intoa wasteful crony capitalism that favorswell-connected special interests.He provides a convincing analysis of

the Constitution’s inability to maintain

the envisioned “republic of virtue.” Theseparation of powers proved no match forpresidents who were determined to act asthey wanted. He observes:

The president has slipped off manyof the constraints thatwere meant to curb hisauthority. He makeslaws by regulatory fiatand executive order, andunmakes them by refus-ing to enforce properlyenacted legislation. He canreward friends and pun-ish enemies in ways theFramers would not haveimagined.

That ’s per fect ly true,although Buckley doesn’tmention that the presidentswho were eager to slip thoseconstitutional restraintswere able to do so only withthe complicity of Congressand the Supreme Court. TheFramers’ design worked fora while, but their words onpaper could not prevent corruption oncethe ruling elite decided that limited gov-ernment was too old-fashioned.

And so we live with a level of corrup-tion that makes that of King George’s timeseem quaint. Much of today’s policymak-ing appears to have nothing to do withthe merits of the proposed legislation, thepolitical appointee, or the legal arguments,but instead is driven by money and con-nections.

Judicial corruption / Consider, for instance,the way justice often depends on wherea case is tried. Trial lawyers have workedout brazenly corrupt methods of shak-ing down out-of-state litigants in venueswhere they pretty much own the judges.

Buckley recounts an infamous Mis-sissippi case involving a contract dis-pute between a Mississippi firm and onefrom Canada. The proceedings reeked offavoritism toward the former and hatreddirected at the latter, even playing the

“race card” with the black jury. The judge,elected with plenty of support from thetrial bar, allowed the plaintiff ’s legal teamto get away with outrageous conduct (hewas later given an appointment to theFifth Circuit by President Barack Obama)

and the resulting damageaward against the Canadianfirm was staggering: $100million in compensatorydamages (including $75 mil-lion for “emotional distress”)and $400 million in puni-tive damages. Moreover, thedefendant was not allowedto appeal under Mississippirules unless it first posted abond of $625 million. Theunfortunate Canadiansfinally settled the case, pay-ing $130 million over a dubi-ous breach of contract.

There is a clear solution tothe problem of state judicialcorruption. Congress needonly adopt the proposedFairness in Interstate Litiga-tion Act, amending the law

providing that in cases involving diversityof citizenship, federal and not state courtshave jurisdiction. That is apparently whatthe First Congress had in mind when law-makers passed the Judiciary Act of 1789,which provides for removal of “diversity”cases to federal court.

The problem is that in an 1806 case,Chief Justice John Marshall read the stat-ute to mean complete diversity, so that ifthe plaintiff and at least one defendantwere from the same state, the case mustremain in state court. Ever since, lawyershave taken advantage of that decision,which Marshall later admitted was a mis-take. They find some in-state company toplead in as co-defendant, which is why onesmall drugstore in Mississippi has beensued hundreds of times, to provide thein-state connection that defeats federaljurisdiction. If Congress would pass theproposed amendment, that would wipeout a great deal of judicial corruption.That’s the book’s most efficacious idea.

The Republic of Virtue:How We Tried to BanCorruption, Failed,and What We Can Doabout It

By F.H. Buckley

246 pp.; EncounterBooks, 2017


Campaigns and corruption / But whatabout the big “money in politics” prob-lem? Going back to the 1970s, Americahas had a fixation on trying to “clean up”politics through contribution limits anddisclosure requirements. Buckley arguesthat it has all been futile. Such constraintsdo nothing to keep people and groupswith money from finding ways to influ-ence who gets elected and appointed, andwhat bills and regulations are adopted ordefeated. All they accomplish is to createtraps for the unwary that can be exploitedby partisans who want to use the law as asword to harm their opponents.

Buckley gives several jarring exam-ples of that, including the prosecution,imprisonment, and mandatory psychi-atric evaluation of conservative writerDinesh D’Souza and the SWAT raid ofthe homes of Wisconsin Club for Growthmembers for having supposedly violatedcampaignfinance laws in supporting Gov.Scott Walker. Zealots can and will hunt forpetty violations of these complicated lawsto take down people on the other side.Instead of making politics cleaner, theymake it dirtier and more vicious.

We would be better off, Buckley argues,if we repealed the current campaignfinancelaws and put in their place three rules:that all political contributions be madeanonymously, that we legislate specificallyagainst “pay for play” operations, and thatwe stop the revolving door between govern-ment jobs and lobbying firms.

Regarding the first, Buckley argues,“There’s bound to be less corruptionattached to the money when the gift isanonymous.” Moreover, a rule of anonym-ity would prevent the “outing” of donorslike former Mozilla president BrendanEich, who was forced to resign after left-wing political forces discovered his con-tribution to the campaign in Californiaagainst same-sex marriage. (See “ShouldCampaign Donors Be Identified?” Summer2001; “Answering Ayres,” Winter 2001.)

Regarding the second rule, what Buck-ley has in mind is a ban on political con-tributions from government contractorsand municipal bond dealers. Both groups

have a strong temptation to engage in rent-extraction by supporting candidates whowill channel business their way.

Concerning the third rule, he pointsout that “on leaving elective office, manycongressmen and senior staffers becomelobbyists and cash in on the contacts theyhave made. The Center for ResponsivePolitics reported in 2011 that at least 285of an estimated 1,000 former members ofCongress were registered as lobbyists, andanother 85 provided ‘strategic advice’ forclients.” Because of this well-lubricatedrevolving door between legislating and lob-bying, we probably have a lot of laws andregulations that wouldn’t otherwise comeinto existence.

In my view, those reforms have merit,but they would only make a small dent in

America’s political corruption problem.We have corruption because, like the Brit-ish monarchy, today’s government has toomuch power to tax, spend, and regulate—powers that inevitably attract the dishonestand seduce the once-honest. So long as thatpower remains, we will have corruption.

Buckley knows there’s no silver bulletto kill corruption, but he hopes to offer abit of relief. He concludes:

Rather than rely upon people’s intrinsicgoodness, we should look more modestlyfor feasible ways to guard against par-ticular kinds of corruption where we findthem. That’s what the Framers did in aim-ing to design an anticorruption covenant,and the best we can do is keep tinkeringwith the machinery they gave us.

A Radical Restructuring andRedistribution of Wealth✒ REVIEW BY DAVID R. HENDERSON

In Radical Markets, University of Chicago law professor Eric Pos-ner and Microsoft senior researcher Glen Weyl propose a radicalrestructuring of property rights, immigration policy, and voting,

as well as a substantial change in corporate law. Their most radicalproposal is to completely overturn property rights so that peoplewould need to continuously “bid” forproperty they already own. They want toalter immigration policy to allow about100 million more immigrants into theUnited States, but change who decideswhether or not to allow particular pro-spective immigrants to enter. They want toswitch to “quadratic” voting as opposed tothe current one citizen–one vote method.They also want a major change in howinvestors can hold shares in corporations.

For all of these positions, they makeclever and sometimes compelling argu-

ments. The most compelling one is onvoting. The least compelling, and alsoabsolutely horrific, one is on property.

Worse off? / Posner and Weyl begin bymaking the case that the current politi-cal and economic situation in the UnitedStates is well short of ideal. Who coulddisagree? But in making their case, theyclaim that the U.S. economy has beenstagnating for many years for most of itsresidents. They base this strong conclu-sion on thin evidence.

The closest they come to making theircase is to cite a study by Stanford Univer-sity economist Raj Chetty and co-authors,who found that only 50% of Americanchildren born in 1980 had a higher liv-

DAV ID R . HENDER SON is a research fellow with theHoover Institution and emeritus professor of economicsat the Graduate School of Business and Public Policy at theNaval Postgraduate School in Monterey, CA. He was a senioreconomist with President Ronald Reagan’s Council of Eco-nomic Advisers. He is the editor of The Concise Encyclopedia ofEconomics (Liberty Fund, 2008).

I N R E V I E W


ing standard at age 30 than their parentshad at the same age. They don’t mentionthree huge problems with the study, allof which, if corrected for, would undercutthat result.

First, as Chetty admits, the study mea-sured income not for the individual, butfor the household. Are 30-year-olds’ house-holds systematically different today thanthey were in 1980? Yes. Today, 30-year-oldsare less likely to be married and living witha spouse who earns income.

Second and related, today’s 30-year-oldsare typically not quite as far along in theircareers as their parents were in 1980. Onereason for this is that many of them werein school longer than their parents were,getting undergraduate and even graduatedegrees.

Third, to adjust for inflation so thatthey could compare incomes over time,Chetty and his co-authors used the U.S.Consumer Price Index. The CPI systemati-cally overstates inflation by about 0.8 per-centage points per year. Over a generationof 25 years, that’s an overstatement of 22%.Had they taken that into account, theywould have found that well over half—Iwould wager over 60%—of today’s 30-year-olds earn more than their parents earnedwhen they were 30.

Undercutting property rights / Posner andWeyl’s argument for overturning propertyrights is that private property inherentlyconfers market power. Indeed, the titlethey choose for their chapter on this topicis “Property Is Monopoly.”

They are right in some instances. Myhome, for example, is the only house on thepiece of property that I also own. Becausethere is no perfect substitute for that pieceof property or that house, I have a smallamount of market power. But there areclose substitutes for my home. And thereare even closer substitutes for my stocks,bonds, and car. So “Property Is Monopoly”is a highly exaggerated title.

They go from that idea—I’m skippingtheir fairly good exposition of 19th cen-tury economist Henry George’s idea fortaxing land—to their proposal for a com-

mon ownership self-assessed tax (COST)on wealth. They would have the federalgovernment impose a stiff 7% annual taxon people’s wealth. People would assesstheir own wealth, estimating, say, the valueof their house.

What would prevent people fromunderestimating the value of their assets?This is where Posner andWeyl’s proposal is horrific.Once a homeowner, say, hasstated the estimated valuepublicly, he would have tosell his house to anyone whooffers more than that value.So, for example, supposemy aforementioned houseis worth about $900,000 onthe open market. If I esti-mated the value at $900,000,my annual tax under theirproposal would be a whop-ping $63,000. If I estimatethe value below that, I wouldrisk losing the house to any-one who bids more than myestimate. To be safe, I wouldprobably estimate the valueat $1 million because I likeliving there. But then Iwould pay $70,000 in taxes on my homeannually. (Notice that a 7% annual tax onan asset would amount to an implicit taxof over 100% on the income from manyassets.)

In short, Posner and Weyl would fun-damentally undercut property rights, mak-ing them conditional. If you’ve lived inyour home for 32 years, as my wife and Ihave, and put a lot of sentimental value onthe place where you raised your children,then you would have to put a number onthat value. And in case you think you canhandle that, you must remember that theywant to do the same with virtually all ofyour net worth.

Toward the end of the book, they eventoy with having people pay taxes on theirhuman capital. They give an example of asurgeon who announces that she wouldperform gallbladder surgery for $2,000and pay a tax accordingly. She would be

obligated to provide that surgery to anyonewilling to pay $2,000. So if the surgeonwas thinking of retiring, forget it. The onlysatisfactory solution for her would be toestimate the value of her services at a num-ber that really would make her indifferentbetween working and retiring.

The authors are aware that they’re tread-ing on sensitive ground here,writing, “A COST on humancapital might be perceived asa kind of slavery.” Might be?They claim that such a per-ception is incorrect, but thereasoning behind their claimis weak.

They implicitly admitthat their proposal is coer-cive when they write that itwould be a mistake “to thinkthat the current system is notcoercive.” How is the currentsystem coercive? Here’s how:“Those with fewer marketableskills are given a stark choice:undergo harsh labor condi-tions for low pay, starve, orsubmit to the many indig-nities of life on welfare.” Inshort, to Posner and Weyl,

being relatively poor is akin to beingcoerced. I would bet that a newly freed slavein 1865, though almost certainly poor,would understand the difference betweenpoverty and coercion better than Posnerand Weyl seem to.

And let’s not forget the huge trans-fer of wealth that COST would imply,a transfer that they claim is a virtue oftheir proposal. A family with a net worthof, say, $2 million would pay $140,000 ayear. They estimate that a COST wouldraise 20% of GDP annually, half of whichwould replace “all existing taxes on capi-tal, corporations, property, and inheri-tance” and wipe out the deficit. The otherhalf would be given to each U.S. resident,which would mean a per capita annualpayment of about $5,300. Elsewhere (“APhilosophical Economist’s Case Against aGovernment-Guaranteed Basic Income,”Independent Review, Spring 2015), I have

Radical Markets:Uprooting Capitalismand Democracy for aJust Society

By Eric A. Posner andE. Glen Weyl



described the huge problems with such auniversal basic income. In short, Posnerand Weyl advocate a huge wealth transfer.

Notice, also, that the biggest revenuesources for the feds—the individual incometax and the payroll tax—would be left inplace. This means that Posner and Weyl arecalling for a gigantic increase in the size ofthe federal government.

Making immigration benefit natives / Theirother major economic proposal is onimmigration. They would take away U.S.corporations’ power to hire immigrantsand would instead give each of 250 mil-lion American adults the power to hireone immigrant. Then, the American doingthe hiring could employ the immigrant orhire the immigrant out to someone else.

What’s the American’s incentive? Eachwould make an offer to an immigrant—they use the number $12,000 per year forillustrative purposes—that would be attrac-tive to someone from a low-income coun-try, and each native would then pocketthe difference between that $12,000 andthe value of what the immigrant produces.

Posner and Weyl estimate that only 100million Americans would take advantageof this opportunity, but it’s hard to imag-ine 150 million other American adults allleaving thousands of dollars of annualvalue untapped. Although myfirst instinctwas to find their proposal wacky, after Ithought about it I found it more reason-able than I had thought at first.

Their immigration idea does, though,sound politically undoable. It’s hard toimagine Americans going along with atleast 100 million new immigrants enteringthe country in a short time. I hasten to addthat I would love it, even if I didn’t takeadvantage of the system (which I probablywould). Posner and Weyl claim that theirsystem is better than the late economistGary Becker’s proposal to auction immi-gration slots, but it’s hard to see why.

An important argument for their pro-posal is that it would offer the averageAmerican a benefit that’s much greaterthan he receives from immigration today.That’s true, but Becker’s proposal would

also do so if the proceeds from the auc-tion were used to fund an equal grant toeach American. They also claim that a pureBecker-type auction would ignore impor-tant factors such as the immigrant’s cul-tural fit to local communities or people’swillingness to welcome migrants. But amigrant bidding tens of thousands of dol-lars for the right to immigrate would surelytake such factors into account in decidinghow much to bid and where to settle.

Voting and corporate control / One of Pos-ner and Weyl’s most promising ideas isfor quadratic voting. The idea is that eachvoter could save up votes in order to castmore than one vote on a given issue thathe or she feels strongly about. But underthis proposal a voter who has accumu-lated, say, 64 votes would, by using up allthose votes on one issue, be able to castonly the square root of 64, which is eightvotes. They have a fairly good explana-tion for why they advocate the squareroot rather than the straight number, butit’s too complicated to explain in a shortspace. Suffice it to say that their proposalwould do what the current system doesn’t:allow voters to back the intensity of theirpreferences and constrain voters to maketradeoffs among issues.

The other main issue that the authorsdiscuss is the ownership of corporations.They point to the tension between theinterests of stockholders and the interestsof high-level corporate managers. Econo-mists who have addressed this issue, theynote, believe that a market for takeovers“where another firm or group of inves-tors buys an underperforming firm andfires the CEO” will discipline the man-agement. It’s true that many economistsbelieve that; the pioneering scholar inthis area was the late law and economicsscholar Henry Manne. But Posner andWeyl say nothing about one of the mainimpediments to a well-functioning marketfor corporate control: Section 13D of the1968 Williams Act.

Under Section 13D, when someoneacquires more than 5% of the voting sharesof a corporation, he must report it within

10 days of the acquisition. The problemis that all the relevant players will suspectthat the acquirer wants to purchase evenmore shares in order to have more control.Many shareholders will hold out for thehigher expected price, making the takeoverless likely and making it less attractive forfirms to attempt to get control of otherfirms in the first place.

Here’s how Duke finance professorMichael Bradley put it to me years ago.Imagine that you make a living huntingfor and reselling rare books. In a used-bookstore, youfind an autographedfirst editionof a rare book, priced at $2. You know thatyou can sell it for $1,000. But what if awell-enforced federal law requires that youinform the seller of the book’s value. Thenthe seller will hold out for much more than$2. The consequence to you is that you areless able to make a living; the consequenceto the rest of society is that fewer peoplewill be out there moving books to higher-valued uses. Similarly, the statement thata firm has newly acquired more than 5%of the voting shares of a corporation is asignal to potential future sellers of sharesthat their shares are worth more than theyhad thought, and they will be less likely tosell. The result: a substantially hamperedmarket for corporate control and morerunning room for top managers to ignorethe wishes of shareholders.

Posner and Weyl do make a somewhatpersuasive argument on cross-ownershipof shares. They argue that when largemutual fund companies such as Vanguard,Fidelity, and BlackRock own a substantialamount of stock in multiplefirms in a con-centrated industry, the mutual fund com-panies have an incentive to motivate thefirms not to compete against each otheras aggressively as they otherwise would.The authors offer evidence that this hap-pens. They propose changing the law toprohibit a given mutual fund from owninga large percentage of shares in more thanone company. That way, there would beless incentive for the funds to discouragecompetition.

Posner and Weyl point out that thefunds could still get the advantages of


I N R E V I E W

A Captivating, Frustrating‘Grand Bargain’?✒ REVIEW BY ART CARDEN

Bucknell University economist Marcellus Andrews has written aself-consciously pugnacious book proposing a radical change tothe structure of American welfare funded by a radical change to

the structure of American capitalism. No matter your ideological per-suasion, you willfind something in his Vision of a Real Free Market Societyto inspire you and something in the bookto infuriate you. That’s quite an achieve-ment for 106 sparsely footnoted pages.Andrews explores the kindsof issues that readers of Regu-lation and its sister publica-tions in the broader classicalliberal academic and thinktank universe should takevery seriously.

Andrews’s venture isinspired by Milton Fried-man’s 1962 book Capital-ism and Freedom, thoughAndrews proposes “a betterform of capitalism.” It reallyis a re-imagining of capital-ism, thinking not in termsof piecemeal reforms but interms of a new structure—and this makes the book atonce fascinating, stimulating,and frustrating. As a matterof pure policy, I can’t help butwonder if it offers a grand political bargainthat would be acceptable to both the right,which would get freer markets, and the left,which would get something akin to a BasicIncome Guarantee. Theoretically, everyonewould get richer faster in the long run. AsI tell my students, I would be a very happyeconomist if I woke up one morning andthis change had been made.

Better than a dog’s breakfast / Andrews’slanguage is strident in places, but to getlost in this is to misinterpret the kind of

book it is. The Vision of a Real Free MarketSociety isn’t the discussion that happens inthe seminar room. It’s the (usually better

and more insightful) discus-sion during the post-seminarvisit to the bar. That makes ita lot more fun to read thanmost academic books.

Brevity requires him toeconomize on nuance, butI was still surprised to readhis claim that capitalism obvi-ously tends toward monopoly,inequality, and crushed hopesand dreams for the poor.He tells us that markets aresources of “unemployment,unnecessary suffering, andenvironmental degradation.”But I think the preponder-ance of the evidence suggeststhat unemployment and“unnecessary suffering” arenot market phenomena per

se. I think these claims are empirically falseand I would suggest that the problem withmodern “capitalism” is that there’s notenough of it—or, rather, too much of themarket is captured by special intereststhat are able to profit not from innova-tion, lower prices, and greater output, butfrom higher prices and lower output madepossible by barriers to entry.

The novelty comes from Andrews’srealistic approach to policy. While I don’tshare his skepticism about untrammeledmarkets, he acknowledges the problemsof a lot of government policies on poverty,noting that they come with a whole host of

diversification because they would havemany concentrated industries in whichthey could own substantial shares of onecompany. I couldn’t find any holes in thatargument.

Interestingly, one of the concentratedindustries that the authors worry aboutis U.S. domestic air travel, but they don’tmention an obvious solution to counter-act monopolistic behavior: changing thelaw to allow foreign airlines to competeon routes between U.S. cities. Laws keep-ing out foreign airlines, which are called“cabotage” laws, are the main impedimentto foreign competition in the U.S. airlinemarket.

In their chapter on corporations, theauthors blame “monopolistic conspira-cies” for an industry practice, resale pricemaintenance (RPM), that has a far morecogent pro-competitive explanation. Sup-pliers engage in RPM when they requireretailers to charge a minimum price oncertain items. In a classic article morethan 50 years ago, University of Chicagoeconomist Lester Telser pointed out theproblem with the monopoly explanationfor RPM: suppliers would be facilitatingretail monopoly, which would result infewer items sold, hurting the supplier. Asupplier with monopoly power would bebetter advised to simply charge a high priceto retailers. So the monopoly explanationdoesn’t make sense. Telser proposed analternate explanation for RPM: encourag-ing retailers to compete not on price, buton demonstrating and exhibiting the prod-uct. This explanation seems to have stoodthe test of time, and I’m surprised thatPosner, a law professor at Telser’s school,does not discuss this explanation.

Conclusion / I hope that policymakers andothers will outright reject—with prejudice,as the lawyers say—Posner and Weyl’s dras-tic proposal for undercutting propertyrights and substantially redistributingwealth. On the other hand, I hope theyimplement the quadratic voting proposaland increase individual Americans’ abil-ity—while not taking away corporations’ability—to hire immigrants.

A RT CA R DEN is a professor of economics at SamfordUniversity.

The Vision of a RealFree Market Society:Re-ImaginingAmerican Freedom

By Marcellus Andrews

106 pp.; Routledge,2017


TIAA-CREF to divest from oil companiesand gun manufacturers. The pressure todirect funds away from politically unpopu-lar and toward politically popular causeswould be enormous.

That said, there are examples of at leastminimally competent government man-agement of resources. Oil in Alaska andNorway comes to mind, and Andrews’sproposal is especially interesting in lightof economists Damon Jones and IoanaMarinescu’s recent finding that distribu-

tions from Alaskan oil revenues appar-ently didn’t reduce Alaskan labor forceparticipation, but also in light of Finland’srecent decision to cancel its Universal BasicIncome experiment. As returns on invest-ment in the social trust fund improve,Andrews argues, we can begin phasing outwelfare as we know it. I’m less optimisticof this policy change given the enormousstakes some people have in the continuedexpansion of programs like the Children’sHealth Insurance Program, and we need totake very seriously the possibility that thiswould simply become another add-on fora very inefficient system.

Misfortunes, deserved and undeserved /Andrews makes an interesting point inhis discussion of the ways in which one’schoices have downstream consequences,but I think he goes too far. He writes, “Amiddle-aged adult who is poor, or evendestitute, because of bad choices madewhen they were young is, in a very realsense, a prisoner to another person: theirformer, frivolous, reckless self.” Yes, andI’ve said before that if I could punch oneperson in history it would be my teenageself. But I don’t think this is a sound jus-tification for redistribution at all. Why, Iwonder, should my children and I be held

“prisoner” by your “former, frivolous,reckless self”? Andrews doesn’t provide agood answer to this question or acknowl-edge the ways in which this creates an ulti-mate problem of concentrated benefitsand dispersed costs. Here, the right’s criti-cisms about virtue and incentives and soon need to be taken more seriously.

Andrews does confront two of the knot-tiest problems facing the left and right inthinking about the structure of the welfarestate. For the left, there’s the inconvenient

problem that peoplerespond to incentives,and badly structuredwelfare infrastructurepunishes labor and capi-tal accumulation, sub-sidizes dissipation, andleaves us all worse off inthe long run. We’re worse

off financially in that we can’t produce asmany goods and services, but we’re alsoworse off morally in that we make pooruse of our gifts.

The problem for the right is that peo-ple’s endowments are largely arbitrary. Ihave worked hard to get where I am in life,certainly, but I also had the good fortuneto be born into a two-parent householdwhere my parents loved my sisters and me,stuck together through thick and thin,and made (mostly) good choices. Less for-tunate people experience struggles that Isimply cannot identify with or empathize.To pretend that what I have is purely theresult of my own merit when a lot of it isthe result of my hitting the genetic andgeographic lottery is unseemly. Justiceseems to demand that others’ undeservedmisfortunes somehow be corrected.

Interventions or markets? / Here’s a point,though, on which Deirdre McCloskey, thephilosopher David Schmidtz, and I wouldagree: other people are not poor because Iam rich. I am not rich because they are poor.Only inazero-sumworld ismygoodfortunecausing another’s misery. Here, Andrews’sclaim that the free market obviously leadsto crushed dreams rings hollow. Moreover,even if we grant his claim about “the free

pathologies, inefficiencies, and failures. Ishis proposal what most libertarians wouldsee as an ideal social policy for an anarcho-capitalist paradise? Clearly not. Is it betterthan the dog’s breakfast of “welfare” as itis currently structured? Probably so.

Andrews proposes a novel twist onwhat we would normally think of as aBasic Income Guarantee or Universal BasicIncome. It is, as he puts it, a shot at “explor-ing how to combine markets with publicownership—but not management—of alarge share of the nation’s private capitalstock, which is the antithesis of social-ism as usually understood.” He proposesmoderate social ownership of some of themeans of production but not ownershipwith control. Instead, he proposes that thegovernment own shares in mutual fundsthat would be privately managed with,presumably, the income from these fundsbeing distributed to the people.

This would have the virtue, I think, of amore equitable distribution of the returnsto capital without the distortionary effectsof taxes on capital. The requirement thatgovernment own shares in privately man-aged mutual funds also means that theprofit-and-loss system is minimally com-promised. Given how much money thegovernment spends every year on war, farmsubsidies, and so on, it’s difficult to claim“We can’t afford this!” with a straight face.

But I’m not sure how “minimal” thisdistortion would remain in the long run.I’m not terribly optimistic about our abilityto insulate such funds from political con-trol. First, there is the rent-seeking bonanzathat will accompany the struggle to becomeone of the chosen few firms managing thestate’s multitrillion-dollar portfolio. Sec-ond, I agree with Milton Friedman’s cri-tique of “Social Security Socialism,” namelythat government stock purchases would“threaten our freedom” by encouraginglarge-scale government ownership of privateenterprise, even via shares in mutual funds.I doubt that the current Congress—or anyCongress—could be trusted to design rulesthat would insulate the system from over-whelming political pressure. Consider callsfor college endowments, state pensions, and

It offers a grand political bargain wherethe right would get freer markets andthe left would get something akin to aBasic Income Guarantee.


I N R E V I E W

market’s tendency to lock poor and work-ing people into society’s basement,” eco-nomic growth means that from year to yearit becomes a much nicer, well-appointedbasement with carpeting, a big screen TV,air conditioning, and other amenities.

It’shardlythecase, furthermore, that freemarkets are guilty of “denying [the unfortu-nate] access to the keys to survival, mobil-ity, and development: adequate schooling,health care, housing, safety, nutrition,and other vital goods and services.” Last Ichecked, schooling was dominated by gov-ernment ownership and provision, munici-palities are served by government-ownedsecurity monopolies (police departments),and government intervention in marketsfor health care, food, housing, and all sortsof other “keys to survival” is extensive. Per-haps the free market would do a poor job ofproviding those goods, but it can certainlybe argued in many cases that governmentdoesn’t do a particularly good job.

I’m also less sanguine about the ideathat redistribution will lead to meaningfulchanges in the dynamics of class and status.Gregory Clark’s 2014 book The Son Also Risesshows how we see similar patterns of socialmobility across institutional types and timeperiods. (See “Do Good Names Bring GreatRiches?”Spring2015.)There’sanotherprob-lem that F.A. Hayek pointed out: dynasticwealthmightbetheleast-badwayforparentstotransfer totheirheirs. Ifweget ridof trans-mitted privilege via financial inheritance,people will look for other ways to securepower and influence for their kids, perhapsby over-investing in or competing wastefullyto get into influential social networks.

In this respect, Andrews’s rhetoric some-times gets the best of him. For instance, hewrites, “The sin of the Right, from a left-libertarian point of view, is that the pov-erty and underdevelopment of some is seenas the necessary price for the wealth andfreedom of others.” I don’t know anyonewho actually believes that. “Trickle-down”economics is a caricature. He criticizestextbook models of competitive marketsby invoking textbook models of incompleteinformation, monopoly, and monopsony,and he doesn’t grapple with the fact that

in all sorts of markets (like health insur-ance) people are rebelling against efficiencyenhancements on the grounds that insur-ance companies know too much about us.

He writes of the “unavoidable brutalityand unfairness of private enterprise econo-mies,” but I think there’s a lot of evidenceto suggest that private enterprise econo-mies are the best solution we’ve found tothe “unavoidable brutality and unfairness”of a fallen world constrained by limitedknowledge and bound by scarcity. And yetI say “Amen!” when he writes, “A capitalistroad to economic justice is readily availableto the Left once we get over our aversion tomarkets in general, and find a way aroundthe problems with the labor market,” and“Private property is … an essential precon-dition for the existence of substantive lib-erty because it provides each person withthe means to carry out their plans.”

Conclusion / This is a captivating and attimes frustrating book, hence the embar-rassingly long gap between its release andwhen I submitted this review. It is captivat-ing because it sets aside too-simple ideo-logical narratives. It is frustrating in someof the ways Andrews gets carried away rhe-torically. (I’ve been guilty of that myself andas a result of reading Andrews I’ve beenlooking for the planks in my own eyes.)

In broad outline, I’m onboard with aproject like this, but I think the constitu-tional details are crucial. However, the pointof the Routledge Focus series, of which thisbook is a volume, is not to present exhaus-tive accounts of every nuanced detail, butto summarize and provoke. The Vision of aReal Free Market Society does exactly that.As welfare reform proposals go, Andrews’svision of a real free market society deservesa place at the public policy table.

Government FixationIs the Problem✒ REVIEW BY PIERRE LEMIEUX

It is easy to attack quantitative analysis in general and statisticalmethods in particular. It is also easy to call “tyranny” anythingthat appears to have an exaggerated and unfavorable influence.

Such hyperbole is part of Jerry Muller’s The Tyranny of Metrics. Speak-ing of finance, the Catholic University of America historian criticizes

PIER R E LEMIEUX is an economist affiliated with theDepartment of Management Sciences of the Université duQuébec en Outaouais. His latest book is What’s Wrong withProtectionism? Answering Common Objections to Free Trade(Mercatus Center, 2018).

the idea that “numerical acumen (pre-mised upon probability formulas ratherthan empirical research) can substitute forpractical knowledge about the underlyingassets.” But how can “probability formu-las” be excluded from empirical research?How can portfolios of complex, diversi-fied, and abstract assets be evaluated with-out numbers and statistical analysis?

Muller’s case is not boosted by Oxfordhistorian Niall Ferguson’s line that “thosewhom the gods want to destroy they first

teach math.” Mathematics and probabil-ity theory are certainly among the tastierfruits of the Tree of Knowledge.

Yet The Tyranny of Metrics is not an attackon quantitative methods. Altogether, it is amoderate book. It only criticizes inappro-priate use of metrics, metrics being definedas “numerical indicators of comparativeperformance based upon standardizeddata.” They become problematic onlywhen “the marginal costs of assemblingand analyzing the metrics exceed the mar-ginal benefits.” Muller reminds us of thecontinuous importance of local knowledgeà la Hayek and individual judgment.

Muller’s main argument is that inap-


propriate metrics corrupt the goals of pub-lic policy and incite individuals to gamethe system. He documents many examplesof “metric fixation.” For instance, policedepartments classify serious crimes asminor ones in order to show better num-bers on the reports they must submit tofederal officials. Schools “teach to thetest” in order to increase thestudent scores on which gov-ernment largesse depends.Under then–secretary ofdefense Robert McNamaraduring the Vietnam War,body count proved largelyuseless as a metric of per-formance. Another perverseincentive is “creaming,” anexample of which is surgeonsdeclining to operate on dif-ficult cases for fear of reduc-ing their performance scores.And so forth.

An important aspect ofMuller’s criticism relates topay-for-performance systemsin schools, hospitals, andeven private companies. These systemsoften do not succeed in improving per-formance, he argues. Another aspect ofmetric fixation lies in the publication ofsuch metrics in the name of transparency.The measurement of performance failswhen its costs—including the opportunitycost of collecting and tabulating data—aregreater than its benefits. Individuals workto increase their scores, not to do the jobsthey have been hired to do.

The market and government / Muller usestheoretical insights and evidence fromseveral fields, including economics. Hiscommand of economics is often surpris-ing for a non-economist.

For example, he shows how the fixa-tion on metrics can be seen as an instanceof the principal–agent problem. In caseof a listed corporation, the principal—theshareholders—need to make sure that theagents— the executives—maximize profits.One way to align incentives is to tie theexecutives’ remuneration to the metric of

stock prices. The danger is that the execu-tives will take maximizing short-run stockprices as their goal instead of the firm’slong-run discounted profits. But note howthe stock market still tends to reflect thelong-term value of thefirm, because it is ineach investor’s interest to buy a stock onlyif its price is lower than its expected dis-

counted return. Market pricesare not arbitrary metrics.

The problem is very differ-ent in the public sector, a dif-ference that Muller tends tooverlook. Consider a simplemarket—say, the market forhaircuts. The barber wantsto earn as much as he can inorder to buy the consumptiongoods and services he likes.He does this by satisfying hiscustomers. The happier theyare, the more he can chargethem if he offers a differenti-ated service, or the more cus-tomers he will get. He may—especially if he employs manypeople or owns a haircut

chain—use metrics to measure his perfor-mance, but the real and ultimate measurelies in his profit. Moreover, he may be moreentrepreneurial and rely on his intuition.At any rate, his metrics are likely to be ofthe sort that Muller wouldfind reasonable.

Now consider government. If it suppliesonly what the market cannot efficiently sup-ply—what economists call “public goods”—then the link between profits and consumersatisfaction is broken. People may be veryhappy with the national defense they get,but a large number of consumers will notvoluntarily pay for it, by the very natureof a public good. Once national defense isprovided, everybody can consume it equally.In this case, some metrics are required to(imperfectly) measure if taxpayers get morevalue than what they are forced to pay intaxes. Moreover, the process through whichdefense expenditures are determined andallocated must be transparent for the veryreason that taxpayers are forced to financethem. Muller’s arguments against metricsand transparency become moot. As far as

public goods are concerned, governmentinputs and outputs must be measured andtransparent.

Perhaps one underlying problem inMuller’s economics is that he does notseem to believe in, or understand, consumersovereignty. He blames “the ideology ofconsumer choice,” stating that “in somedomains choice is particularly fraught.” Buthow can we assume that politicians andbureaucrats choose better? Will they haveto use imperfect metrics to do this?

Government metrics / The problem is thatgovernment supplies or subsidizes a lotof services that are not public goods or, atleast, not pure public goods. Instead, gov-ernments spend on education and healthcare, not to mention electricity, publictransportation, and garbage collection. Infact, the largest part of government expen-ditures goes to redistribution. But the tax-payers are still forced to pay for all of this.

It is easy to understand that those tax-payers want at least to know what is spentand what the spending achieves. In theseconditions, the proliferation of metrics isnot surprising because it is a direct func-tion of the extent of government interven-tion. This, and not metrics per se, is theproblem. Shouldn’t these considerationsinfluence Muller’s conclusions?

A related problem involves governmentagents, who—as James Madison noted inFederalist 51—are not angels. They willbe tempted to loot the public treasury,legally or not. Even virtuous motivationsare dangerous in the case of governmentagents because they may impose on peopletheir own conception of the good. Govern-ment bureaucrats and politicians are paidwith, and redistribute, taxpayers’ money, sothey should indeed be submitted to perfor-mance metrics. Their activities should beas transparent as feasible, and they shouldbe held accountable for what they do.

In brief, it can be argued that govern-ments should be subject to metrics, trans-parency constraints, and accountabilitystandards—and the more of them, thebetter—while people should be free to runtheir private activities as they want. It is

The Tyranny of Metrics

By Jerry Z. Muller



I N R E V I E W

Working Papers ✒ BY PETER VAN DOREN AND IKE BRANNONA SUMMARY OF RECENT PAPERS THAT MAY BE OF INTEREST TO REGULATION’S READERS.

PETER VA N DOR EN is editor of Regulation and a senior fellow at the Cato Institute.IKE BR A NNON is president of Capitol Policy Analytics, a consulting firm in Washington, DC.

true, as Muller conclusively demonstrates,that government-devised metrics tend tobe especially inefficient, but this is in directproportion to what the government shouldnot be doing. He provides us with somekeys to these conclusions.

Mounting regulation and metrics / Thereis yet another problem of governmentactivities outside the field of public goods:mounting regulations carry benefits forsome individuals and impose costs onothers. One can argue that an attempt tomeasure these costs and benefits must bemade, however difficult it is both in theoryand practice. (See “The War on ConsumerSurplus,” Spring 2017.) Voters must haveat least the possibility of evaluating whattheir agents are doing. To the extent thata tyranny of metrics does exist, it is mainlycaused by government interventionism,which brings us back to the real meaningof “tyranny.”

Last decade’s recession provides a goodexample of regulation and metrics gonewild, but Muller does not see this clearly.He blames the financial crisis on thequantification and abstraction of finance,strangely ignoring the role of government.

Mortgage-based securities were pioneeredin 1970 by Ginnie Mae, a federal govern-ment agency, in order to encourage the saleof residential mortgages. The CommunityReinvestment Act of 1977, reinforced in the1990s, established ratings to force banksinto offering more loans and mortgagesto the poor. Before the recession, financialinstitutions were probably the most metric-regulated businesses in America. The reces-sion was in large part, if not ultimately, aconsequence of these government-imposedrequirements and metrics. (See my bookSomebody in Charge: A Solution to Recessions?Palgrave Macmillan, 2011.)

Muller criticizes “short-termism” in busi-nessmanagement, suggestingthat it ispartlythe result of the use of performance mea-sures in quarterly reports. But the SecuritiesExchangeActof1934forces listedcompaniesto produce those reports. The criminaliza-tion of insider trading (using one’s privateinformation to trade on exchanges) furtherencourages the use of public and transpar-ent metrics. Government promotes short-termism in business decisions.

Nothing’s perfect, but… / Nothing is per-fect of course, but government dirigisme

is certainly not the least imperfect phe-nomenon under the sun. Muller’s casestudies include the production of cultureand the transmission of knowledge, fromK–12 schools to colleges and universities.He rightly notes that “it is an impover-ished conception of college education thatregards it purely in terms of its ability toenhance earnings.”

He observes how government-imposedperformance metrics damage education:“Among the stronghold of metrics in theUnited States has been the Departmentof Education, under a succession of presi-dents, Republican and Democratic.” Suchobservations should raise alerts about gov-ernment’s subsidization and regulation ofeducation.

The Tyranny of Metrics could have betteranalyzed the role of unbridled governmentin what the author calls “metricsfixation.”The problem is not metrics per se, but thefact that they are imposed by governmentsthat should not be doing what they aredoing. Governmentfixation is the problem.Yet Muller’s book remains an interestingone: short, unpretentious, scholarly, andfull of insights. And it provokes the readerinto asking further questions.

Conservation Easements“Charitable Contributions of Conservation Easements,” by Adam

Looney. Economic Studies at Brookings, May 2017.

In Michael Lewis’s 1998 book Losers about the 1996 Repub-lican presidential primary, he remarks that upon hearingcandidate and orator par excellence Alan Keyes speak for the

first time, he was torn between being outraged by Keyes’ messageand feeling compelled by Keyes’ arguments to quit his job andwork for Keyes’ campaign.

Likewise, the treatise on conservation tax easements by AdamLooney—a fellow at the Brookings Institution and a former econo-mist for the Council of Economic Advisers—filled me in equal mea-sures with anger over the existence of a costly and unproductive

tax break and visions of exploiting the break to bilk the Treasuryand make millions for my family.

A conservation tax easement essentially awards property own-ers a tax benefit in exchange for the owners permanently extin-guishing the right to develop a property. The intent of the deduc-tion is to provide an incentive for landholders to preserve pristineland that they might acquire. For instance, the hills surroundingthe childhood home and presidential library of Calvin Coolidge inrural Vermont all have conservation easements applied to them,precluding future development and maintaining the area just asit was in the late 19th century.

However, an easement can also be granted to a golf courseor a backyard, which illustrates the rub with this tax provision:most of the time it is used to stop development in places wheredevelopment was unlikely to ever occur.

For instance, many homes in Georgetown have been granted a


type of conservation easement that precludes owners from alteringor removing the façades of their houses. The easement affords theowner a charitable deduction—ostensibly worth the reduced value ofthe home that results from the easement—of as much as $100,000,which represents a substantial savings for the homeowner.

Of course, the notion that someone who owns a statelytownhome in this wealthy enclave could ever get the local AreaNeighborhood Council, city government, housing commission,and pitchfork mobs to allow any sort of change to its façadeis laughable. It’s unlikely that asingle façade was “preserved” bythis conservation easement. Isuppose it can be argued that theeasement is just compensation forall these political bodies usurpingthe development right, but mostif not all affected property ownerswere aware that the developmentright was lost long before they purchased their properties.

In the case of the conservation easement Looney describes, theproperty owner must donate the right to develop the land to anonprofit. Many of these properties are small: backyards insteadof open land.

The conservation easement is not terribly common: only about2,000 taxpayers claimed it in 2016, Looney determined. But it isbecoming increasingly costly: the Treasury lost $5–$7 billion toit in 2016.

Looney reached the latter estimate by going through InternalRevenue Service forms 8283 and 990, although the latter docu-ments—a standard for all nonprofits—were not terribly useful forthis purpose. Of the top 21 organizations in terms of the amountof easements received, only six actually bothered to report them ontheir 990s. He suggests that this omission may obscure the fact thatsome of these charities are not, in fact, charities in any real sense ofthe word but instead act more or less as private foundations, andthat closer scrutiny by the IRS would force them to conclude asmuch. This is now among the IRS’s most litigated tax issues, despitethe low number of taxpayers who claim the deduction.

This lack of transparency may persist indefinitely, Looneylaments. An entity called Partners for Conservation lobbies toprevent any sort of mandated disclosure of such transactions. Aprovision that would prevent such reporting was included in adraft of an appropriations bill in 2016.

Greater transparency on such transactions is importantbecause the tax revenue losses from conservation easementshave been accelerating over the last few years. What’s more, sucheasements occur most often in a few select geographic areas, mostnotably Georgia. Looney attributes this mainly to the fact that asmall legal community there has figured out how to game thesystem, rather than any surfeit of land in need of conservation inthe Peach State. In contrast, the states we commonly think of asbeing leaders in acres conserved—Wyoming, New Mexico, Maine,

Montana, New Hampshire, Washington, and Arizona—have virtu-ally no conservation tax easements.

These benefits from the easement are also highly concentrated.The top 2% of all transactions amounted to 43% of the cost ofall easement tax breaks, and the top 10% amounted to fully 70%of the cost. The valuation of the land in these easements rangedfrom $10,000 an acre to over $100,000. Prospectuses published bylawyers hoping to earn fees for creating new easements suggest aninvestor can obtain $6–$9 of tax deductions for every $1 invested

in an easement.Our tax code has many such

dubious tax breaks ostensiblydesigned to promote conserva-tion of some sort that accom-plishes little in this regard. Forinstance, a great number of sum-mer lake homes in Wisconsincome attached to relatively large

lots, the preponderance of which are just over 17 acres. This isbecause 17 acres once was the minimum size for a property tobe considered a tree farm in the state. Being a “tree farmer” wasa great tax dodge because tree farmers had to show a profit fromthe activity only once every 17 years, instead of every three yearsfor other businesses. The thousands of “tree farmers” in the statecould deduct a variety of expenses related to the upkeep of theircabins, and every so often they would have someone harvest a fewtrees that paid them enough to show a profit for the year.

Wisconsin now has a Managed Forest Law that was crafted toavoid the abuses of the tree farm law. The new law greatly reducesthe property tax on land that’s at least 40 acres, available forrecreation, and undeveloped. But, unsurprisingly, there are easyways to still put a house on the land, deny access to hunters andhikers, and get the low tax rate just the same.

Many people still have a perception that giving a tax break toinduce behavior is somehow inherently different and less expen-sive than a government expenditure. However, the distinctionis meaningless, and when most of a tax break fails to affect anysalutary behavior at all while costing the publicfisc billions a year,it is an abomination. We should all be outraged by the results ofLooney’s research. —Ike Brannon

Investment Advice“The Misguided Beliefs of Financial Advisors,” by Juhani T. Linnain-

maa, Brian T. Melzer, and Allessandro Previtero. December 2017.

SSRN #3101426.

In 1934 Congress created the Securities and Exchange Commis-sion, which regulated brokers who bought and sold stocks andbonds for investors. In 1940 Congress enacted the Investment

Advisers Act, which implemented different legal standards forthose who provided financial advice for a fee but do not sell finan-

It can be argued the easements arejust compensation for lost developmentrights, but the property owners knowthose rights were lost long ago.


I N R E V I E W

cial products. Interestingly, the 1940 law holds financial advisersto a stricter fiduciary standard, requiring them to recommend the“best” financial product to clients, while brokers under the 1934law are only required to recommend “suitable” financial productsif their advice is “solely incidental” to their service as a broker.

This has produced a legal and political wrestling match over thedifferent regulatory treatment of brokers and financial advisers.The perception is that brokers operating under the looser standardhave incentives to steer clients to purchase investments that yieldfees and commissions for the brokers rather than investmentswhose net returns to the brokers’ customers would be higher, andthat regulation is required to eliminate those incentives and theresulting financial malpractice.

After the 2008 financial crisis, the original Senate version offinancial reform legislation authored by Sen. Chris Dodd wouldhave eliminated the broker exemption from the fiduciary stan-dard. But as enacted, the Dodd–Frank Wall Street Reform andConsumer Protection Act of 2010 only requires the SEC to studythe issue and report to Congress on the problems created by thedifferential regulatory treatment offinancial advisers and brokers.

Given congressional inaction, President Barack Obama

instructed the Department of Labor to impose the stricter fidu-ciary rule on Individual Retirement Account advisers using theDOL’s regulatory authority over company-provided retirementplans under the Employee Retirement Income Security Act of1974 (better known as ERISA). The DOL did so in 2016, butadvisers have not had to comply with this requirement thanks inpart to the Trump administration pushing back the compliancedeadline to July 1, 2019. This past March, the Fifth Circuit Courtof Appeals vacated the Fiduciary Rule, stating that the DOL hadoverstepped its statutory authority.

The authors of this paper argue that the “conflict-of-interest”view of financial advice that is the rationale for the fiduciary ruleis not consistent with the data studied in the paper. The authorshad access to trading and portfolio information on more than4,000 advisers and almost 500,000 clients between 1999 and2013 provided by two large Canadianfinancial institutions. Theseadvisers were not subject tofiduciary duty under Canadian law. Acomparison of advisers’ trades for their own accounts and theirclients would reveal any systematic differences. If the conflict-of-interest theory is right, advisers’ personal accounts would holdlower-cost, more diversified investments.

The authors conclude that misguided beliefs are the problem

rather than conflicts of interest. The advisers trade more, have lessdiversified portfolios, and pay more in fees for their own accountsrelative to their clients’ accounts. And both have net returns thatare about 3% less than the market.

The authors present four additional types of evidence to sup-port their argument. First, advisers continue to trade similarlyafter they quit the industry. Second, the correlation betweentheir behavior and their clients’ increases with the size of theadvisers’ personal portfolios. Third, advisers would have beenbetter off had they held exact copies of their clients’ portfolios.Finally, advisers’ trading behavior is stable over their career.

—Peter Van Doren

Environmental Regulation“Is Pollution Value-Maximizing? The DuPont Case,” by Roy Shapira

and Luigi Zingales. September 2017. NBER #23866.

Gary Becker introduced the economic conception of crimedeterrence in 1968. According to Becker, prospectivecriminals compare the expected costs and benefits of

crime. That is, they compare the benefits of the criminal conductto the probability of being caught multiplied by the monetizedcost of conviction. If the expected costs of the crime are greaterthan the benefits, then the crime is deterred. If the expected costsare less than the expected benefits, then the crime occurs.

This paper explores rational deterrence in the context of envi-ronmental law. DuPont emitted C8, a precursor to Teflon, intothe environment even though it knew as early as 1984 that thesubstance is toxic. DuPont had the option to incinerate the C8and thus avoid the emissions, but the firm chose not to. In fact,production doubled after 1984.

The option of abating C8 was relatively cheap and could haveprevented the health damages as well as the legal ($617 millionin 2017) and reputational damages paid by DuPont. Why did thecompany choose the option that seems worse for the companyand certainly worse for society?

By comparing the present value of DuPont’s actual legal liabili-ties with the present value of the abatement costs, the authorsestimate that it was value-maximizing to pollute if the probabilityof getting caught was less than 19%. According to the authors:

For decades only DuPont and other chemical companies knewthe adverse effects of C8 emissions. Yet, DuPont had powerfulincentives to hide that information, or selectively release partsof it to the outside world. By controlling information, DuPontwas able to co-opt regulators, delay enforcement, and limit theability of academics or journalists to chime in.

Because DuPont controlled the information that would haveincreased the expected costs of pollution, it was reasonable forDuPont’s executives to take the risk. In other words, the decisionto pollute was ex-ante optimal for DuPont’s shareholders. —P.V.D.

The investment advisers traded more,had less diversified portfolios, and paidmore in fees for their own accountsrelative to their clients’ accounts.


Market Power“Is Aggregate Market Power Increasing? Production Trends Using

Financial Statements,” by James Traina. February 2018. SSRN

#3120849.

Concerns about corporate power and antitrust policy rem-edies are once again in the news and the pages of Regula-tion. (See “Debunking the ‘Network Effects’ Bogeyman,”

Winter 2017–2018, “The Return of Antitrust?” Spring 2018.)This paper examines the specific question of whether businessmarkups above the marginal costs of production are also increas-ing over time.

Traina argues that in 1950 markups were about 15% overmarginal cost. Over the next 30 years, they decreased approxi-mately linearly, falling to just under 10% over marginal cost atthe beginning of the 1980s. From then until today, however,they have increased approximately linearly, returning to the1950 level.

His estimates of this markup differ from others becauseof two methodological differences. First, public firms makeup only about a third of U.S. sales and employment. Becausethese firms are often larger than private firms, markup esti-mates using only public-firm data bias an aggregate estimateupward. Second, neglecting indirect costs of production suchas marketing and management, which are an increasing shareof variable costs for firms, overstates both the level and growthin markups. As a share of variable costs for firms, these com-ponents have increased from roughly 12% in 1950 to 22%today. A significant part of the incorrect markup estimation ismisattribution of selling and general administrative expensesto markups rather than variable costs, and this omission hasincreased over time. —P.V.D.

Employer Credit Checks“The Unintended Consequences of Employer Credit Check Bans on

Labor and Credit Markets,” by Kristle Cortes, Andrew Glover, and

Murat Tasci. January 2018. SSRN #3103294.

Regulations are often enacted with the best of intentions,but they sometimes produce counterintuitive results.

In my Fall 2016 Working Papers column, I describedlaws that “ban the box,” prohibiting employers from askingabout criminal history on initial job applications. The intentof such policies is to increase employment among black males,who have disproportionately more criminal convictions thanother applicant groups. Most black men, however, do not havecriminal convictions. Under ban-the-box policies, they are notallowed to signal that fact to employers. As a result, they losework opportunities because employers, deprived of the crimi-

nal history information, become less likely to hire black men.Something similar appears to be happening with credit his-

tory information. In the aftermath of the Great Recession, manypeople lost their jobs and fell behind on their debts. When thesepeople subsequently applied for jobs, some were denied employ-ment when prospective employers became aware of the applicants’low credit scores. Legislators responded by describing this situa-tion as a “poverty trap” because the applicants need employmentin order to repair their credit scores, but they need better creditscores in order to gain employment. In response, 11 states bannedemployer credit checks as of January 2018.

This paper compares employment vacancy creation in statesthat enacted bans relative to states that did not and relative toexempt occupations in which credit score checks were still allowed(e.g., jobs involving handling cash or access to payroll and SocialSecurity information). When a state bans employer credit checks,the average county experiences a 12% reduction in vacancy creationrelative to trend. This decline in job creation is likely caused bythe bans because vacancies are unaffected in occupations in whichcredit checks are still allowed. —P.V.D.

Disability Insurance“Intergenerational Spillovers in Disability Insurance,” by Gordon B.

Dahl and Anne C. Gielen. February 2018. NBER #24296.

University of California, San Diego economist GordonDahl has devoted much of his career to examining theefficiency and distributional effects of social welfare

policies. In my Summer 2014 Working Papers column, I sum-marized his analysis of expansion of maternal leave benefits inNorway. Dahl and his co-authors concluded that the programhad no effect on a wide variety of desired outcomes and insteadredistributed income to the affluent.

This paper evaluates the long-term effects of reductions in dis-ability benefits in the Netherlands between 1993 and 1996. Thereductions applied to younger cohorts, while older cohorts wereexempted from the new rules. Younger workers who were pushedout of disability insurance or had their benefits reduced are now,a generation later, 11% less likely to receive disability benefitsthan their parents’ generation (with no increased use of othergovernment safety net programs). Further, they earn 2% more inthe labor market as adults.

The combination of reduced government transfers andincreased tax revenue from lower use of disability benefits resultedin a fiscal gain of €5,900 per treated parent from child spilloversby 2014. Moreover, children of treated parents complete an extra0.12 years of schooling on average, an investment consistent withan anticipated future with less reliance on disability insurance.Ignoring the beneficial parent-to-child spillovers understates thelong-run benefits of the Dutch reform by 21%–40% in presentdiscounted value terms. —P.V.D.

Siding with the Nerds voters. But even if a few more people didpull the lever for Trump because of Face-book, so what? Sometimes an umpire’sbad call affects the game. But the outcomeis a lot more complex than one bang-bangplay at the plate. In the final analysis, any-one with an imagination vivid enough tobelieve that immigrants are harvestingthe organs of school children for use insatanic rituals is probably not going tovote for someone as technocratically bor-ing as Hillary Clinton in the first place.

Far more worrisome is the possibilitythat our voting machines could be physi-cally hacked. Naturally, that is the partof the equation that virtually everyonedismisses.

Privacy, meanwhile, is the imaginarylife preserver that people like to fall backon when they are doing things they oughtnot. The right to privacy is not explicitlyguaranteed by the Constitution, though alot of the important things we want cov-ered by it are: speech, assembly, religion,and protection from willy-nilly govern-ment searches, wiretaps, and the like. Butwe hardly need to plumb the depths ofthe Ninth and Tenth Amendments toremember that the Constitution is aboutrestraining government, not something anerd whipped up in his dorm room.

Andwhat,exactly,aboutFacebookcanbeconsidered intrusive? Social media is a guestwehave invitedintoourhomes.Sowhatpartof“social”dofederal lawmakershavetroubleunderstanding? It’s like we’re caught doingsomethingembarrassingonthesubwayandwe get angry that people noticed.

Anytime electrons are flying throughthe air, we should simply assume that theyare subject to being netted by someone forwhom they are not necessarily intended.And conversely, we must assume thatwhat we see incoming on our screens isnot always going to be as it appears.

We expect a bank to take ample precau-tions against playing fast and loose withour data. But Facebook? Please. On socialmedia, we have no guaranteed right ofprivacy. But we do—or we should in thisincreasingly digital age—have the right notto be stupid.


FINAL WORD ✒ BY TIM ROWLAND

T IM ROW L A ND is a columnistfor the (Hagerstown, MD)Herald-Mail newspaper andauthor of the books Strange andObscure Stories of Washington, DCand Strange and Obscure Stories ofNew York City.

Like millions of other Americansthis spring, I received a notifica-tion that a “friend” had loggedinto Facebook using an app that

funneled data to Cambridge Analytica,a digital Rumpelstiltskin that managedto spin gold from the bottomless chumbucket of social media.

Facebook, bless its heart, recommendedthat I go into “settings” and perform a seriesof occult maneuvers that would ensure,I guess, that Russian hackers could neveraccess my account and discover that I havetwo exceedingly handsome dogs namedAddie and Pete.

I didn’t do it. Instead, I treated thenotice the same way I treat the mes-sage that my computer is likely to go allnuclear-fission because I didn’t eject myflash drive properly.

Not so congressional Luddites who,feeding off American outrage as if it wereketchup on a well-done steak, hauled poorFacebook chief Mark Zuckerberg into theCapitol’s hallowed halls to grill him overmatters involving what they called “theFacebook.”

Predictably, grizzled lawmakers whowouldn’t know a hard drive from a hard-boiled egg embarrassed themselves bystumbling over the words “device” and“tablet” and by asking how Facebookmakes money if it doesn’t charge its cus-tomers—which is like asking how CBSmakes money on March Madness if itdoesn’t charge the players.

For thefirst time in my life I sided witha computer nerd. Zucker-berg took the “mistakeswere made” approach,

but I wish he hadn’t even done that. I wishhe’d looked them right in the eye and said:“Newsflash: Facebook is social media. Notthe Encyclopedia Britannica, social media.It’s a commercial entertainment site thatpeople visit voluntarily, and of course it’sgoing to be used for manipulation, justlike Febreze uses television to suggest youneed its product even if you don’t smellanything, because you’ve obviously gone‘nose blind.’”

Two issues, rivaling each other for sil-liness, are being tossed about in the GreatFacebook Debacle of ’18. One is that theRussians used social media to drive ourmalleable, child-like public into electingDonald Trump. The second is that Face-book has compromised our God-givenright to privacy.

As to the first, who knows the truth?Maybe Russian memes did push that lasthandful of people in that last handful ofstates into voting for Trump. Or, morelikely, maybe the messages just furtherginned up already virulently anti-Hillary

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