In this weekend's edition of the Financial Times, it is reported that the EU has concluded that rich nations should give developing nations up to $74 billion per year by 2020. However, it also avoided pledging anything itself, an obvious concession to the former communist states in the bloc who would like some assurances of their own commitment before agreeing to such measures. It could also possibly be seen as a gauntlet thrown down to the US to see if such a pledge is forthcoming from this side of the Atlantic.
However, it could be part of another strategy entirely. In the leadup to climate talks in Copenhagen this December, it just might be a ploy to point to if talks break down at the scheduled meeting. In other words, in planning for failure over a month before the meeting, the EU can point elsewhere (most likely at the US) and not lose face with proponents of progress as it has already put forward a concrete plan for change.
Assuming arguendo that such payments will be necessary for the attainment of any sort of global climate plan, which announcements such as the one at hand seem to do, the EU missed an opportunity to take the lead in an issue it clearly holds as critical. Those at the forefront of climate issues will always have a fight on their hands when dealing with the Chinas and Indias of the world, not to mention Africa, South America, and indeed parts of eastern Europe. Missing opportunities to act as the stimulus of a plan rather than as the focal point for ridicule over pusillanimity is not the path to progress.
Of course, there are concrete examples where x amount of dollars of aid money save x amount of teaching jobs in a certain community, or where a certain influx of grant money sparks a company to hire a certain amount of workers for a project. These are certainly beneficial results, and have been rightly noted by proponents of the plan. However, even in these concrete numbers, there are real concerns. For example, how many of those jobs are permanent, and how many are actually the result of government action as opposed to other factors?
Despite such concerns, the White House has recently released and touted some statistics that paint a rosier picture than some of the numbers we have seen in the past. For example, this Yahoo article discusses today's White House claim that around 650,000 jobs have been 'saved or created' since the package was passed in February. The administration claims that this puts the economy on track to add around 2.8 million jobs over the next year to meet the 3.4 million job goal for the end of 2010 which was set in conjunction with passing the plan. If on point, these would presumably be good signs for the overall health of the economy and should be seen as positive.
However, a few things, particularly in the story picked up on the Nasdaq page, really jumped off the page. One is the number $1.055, as in trillion, or the cost of the bill. The other is $572, as in billion, or the estimated amount that the government will require in additional tax revenues over the next ten or so years to fund the program, even after offsets from program cuts. Two other items which stuck out were exchanges where those without employer-provided insurance could gain coverage, and inclusion of the always controversial public option. Estimates are that the former will insure 30 million Americans who are not insured now, while the latter would cover an additional 6 million. There would also be a large increase in those covered by Medicaid.
There has been, and will continue to be, intelligent and not so intelligent analysis and argument about the bill, what it means for who, and how it will impact the overall health of the people and the economy. It also seems heartless to suggest that some members of our society should not have access to medical attention when necessary.
However, despite the current groundswell of support for regulation in many areas, including the aforementioned financial industry, one area of the economy that I feel should escape the scrutiny of regulators save in very extreme circumstances is the internet.
I have had the privilege since starting this blog a very short time ago to be found by Google search engines, have my page linked to by prominent blog search sites, be cited by a number of blogs and Twitter pages around the world, and consequently be seen as a resource by both friends and complete strangers. This is an incredible phenomenon and outlet for creativity which would not have been viable a relatively short 15 years ago. Yet, this is still not possible under the regulatory regimes of many of the world's nations which stifle creativity and dissent and therefore innovation and progress. Moving even an inch in this direction would, in my opinion, be an incredible, and incredibly difficult to remedy, mistake.
There are of course some areas where I believe that the internet should be regulated for content. For example, child pornography is a serious crime which warrants as much attention from law enforcement in web-based formats as it used to in the VHS format. Additionally, libel can be just as injurious, if not much more so, on a chat page with its availability to millions as a newspaper article or slanderous remark.
However, there are incredible societal and economic benefits that stem from the free-flow of well considered ideas that should not be stifled. I understand that this view may be seen as self serving as my thoughts reach you courtesy of the blogosphere. However, I do not believe that impeaches their validity or absolute truth.
Although it is not apparent that the current administration seeks to change the current state of the internet in any specific ways, its recent battling with cable news stations and braggadocio claims that it controls news flow make the free exchange of ideas all the more important. However, I would like to make it clear that this is not a politicized issued from my perspective. Those who were not particularly happy with the previous eight years would agree that the internet was a beneficial forum for idea sharing when the Bush/Cheney team was in charge of news flow from Pennsylvania Ave.
The subject of the posting gets an 'A' for creativity in my mind, and I wish him Godspeed...
The Mac Lawyer
Though as a fan of many sports, not least among them football, I appreciate Margalit’s analysis and conclusions, as a pragmatist and an amateur economist, I cannot ultimately agree with them. I put forward four main reasons for this; three based on examples, and the final based upon economic theory. The first is simply that one of his case studies actually provides an example of a wildly successful club whose fandom is likely very happy with its results over the past few years, rendering Margalit’s initial assumptions invalid. Secondly, there are practical examples of clubs who have attempted to integrate fans into ownership and management that have failed extraordinarily. Third, there are examples where fans have shown that their voice can be heard by ownership short of an ownership stake, invalidating the conclusion that voice is not possible short of a property interest where loyalty is prevalent. Finally, the economics of modern football are such that highly capitalized owners are almost necessary in order to have success on the pitch, and the type of personality that often accompanies such deep pockets does not often suffer the type of influence Margalit advocates for. However, and probably uniquely for a critique, I debunk these arguments myself. Unfortunately, I still conclude that Margalit’s excellent ideas are unfeasible. This is because the structure of the modern game itself makes universal adoption of them essentially impossible.
Allow me to begin with Margalit’s main example of the problems inherent in modern football; Manchester United F.C. As ‘ManU’ is a globally recognizable club, The Red Devils were a savvy choice to represent some of the problems in modern football. After all, there was uproar from the diehard fans and shareholders of the team when American Malcolm Glazer purchased the team in 2005. However, the facts show that since that time, the club has won 3 Premier League Titles, 2 League Cups and the Champions League among several other lesser trophies. This on the pitch success may be masking issues though, as one of the truer maxims I have come across is that ‘winning cures everything,’ leading to its normally vocal fans giving the ownership some slack (hopefully not to hang themselves with) while the trophies continue to pile up in the Theatre of Dreams. Notably, despite its recent on the pitch success, the club is saddled with a tremendous amount of debt (as is Liverpool, another club with American owners, and whose anthem provides the titular namesake of the article), was forced to sell one of the most popular, widely recognizable and marketable players in the world over the summer (Cristiano Ronaldo, incidentally to one of Margalit’s examples of good ownership structure in Real Madrid), and is perhaps available as a contrary example purely because of its extraordinary pedigree and recent success. Therefore, let’s put aside ManU as an example of why Margalit’s suggestions might not be necessary, at least because the club’s debt may yet prove to be an issue going forward. Additionally, it is almost certain that a future lack of success would cause fans to become more vocal, as they have at Liverpool, a club with as glittering a pedigree as Manchester, but similar debt problems which are unfortunately unaccompanied by recent English or European success.
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So how does a dollar post reach beyond economics and financial analysis and into the area of law and policy? The link below provides a strong example of exactly how the two broad topics become so entangled. A few simple lines discussing the White House stance that the dollar remains strong conflict strongly with the theory of many that the government is actually looking for a slightly weaker dollar. It is not difficult to rectify the two, conflicting though they may seem. On the one hand, and despite recent rumors of broad dissatisfaction with the dollar as the global currency of choice, it remains just that. It is utilized in trade, it is the currency commodities are priced in, and is the currency backing almost inconceivable amounts of US debt held by nations around the world. It is important for the American government to publicly support the dollar and reassure foreign holders of the greenback that it remains a solid investment.
Here are the high - (low?) lights. The Obama administration predicted that over 3.4 million jobs would be created by 12.31.09 due to the stimulus package. According to the numbers below, the economy has actually shed over 2.7 million jobs since the bill was signed. Additionally, this decrease is wide ranging, as 49 of 50 states have experienced job losses.
Although in my initial assessment of the stimulus package I ceded the point that any benefit from the Act itself would likely take longer to be felt than consumers hoped and proponents indicated, I also doubted the likelihood that a positive impact would occur at all. The numbers we are seeing thus far are hopefully proof of the former point and not validation of the latter. However, as of today, it looks like the Keynesian comeback will be short-lived.
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So, which is it? Is the US economy demanding oil, or is it still mired in confusion regarding what the future holds? In my opinion, oil prices are likely impacted by both of those factors, as well as myriad others. Though it is not always viewed this way by economists, for our purposes we can view crude as a both a leading and lagging indicator whose volatility may be a good sign for the economy.
It is well known that businesses are usually able to determine a business cycle trough before consumers. (Whether they anticipate the preceeding downturn is another question entirely of course). Therefore increased corporate demand for oil and other commodities is a good sign. However, consumer demand has not yet picked up, at least based on the recent numbers. This makes sense; the jobless rate is still high, oil consuming activities such as vacationing are down, and there is still a great degree of job-related uncertainty for everyone from landscapers to Wall St. traders. Therefore, oil demand is not likely to really pick up until average people, in addition to the C-suite, believe that the worst of the current downturn is over.
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Any holdout climate change skeptics, perhaps emboldened by a historically chilly 2009 and the specter of October snowfalls in the Midwest and Northeast can still find value in this report however, as it focuses on the economic impact of green development in addtion to the downside environmental factors of the current state of the world. For example, though the report is very realistic about the dollar costs projections of some of its ideas, it also points out the long-term cost savings that would occur if some of its measures were adopted. For example, as it has been noted on these pages previously, it may cost consumers an initial outlay to purchase an automobile with hybrid or electric technology. However, cost savings on gasoline over the long term tend to even these costs out. Additionally, long-sighted supporters of green technology would be able to point to the future potential of electric cars functioning as storage units for excess capacity and the potential for consumers to become suppliers of energy, whether on a net or supplemental basis, releasing their extra energy back into the grid for a cost. With the report’s view toward reducing automobile emissions among all nations, even those developing ones it grants overall Co2 increases to, this type of technology could be pushed to the forefront. So too could more domestic technologies, such as roof top photovoltaic cells, which could afford consumers the same potential to profit on production rather than purely spend on consumption.
Enough table setting however. What is this report all about? Well, the IEA is planning a round of meetings in Copenhagen and the organizer’s stated goal is to gain end up with the participants’ signatures affixed to a comprehensive energy policy agreement. Although ambitious, and perhaps overly optimistic in the face of past failures, there may be enough support politically among developed nation leadership to make the document a reality. Additionally, the natural reduction in consumption over the past year due to the downside of the business cycle has pushed global energy demand a bit lower, and has potentially set the stage for a more realistic discussion based on a lower set of base numbers.
As noted above, one fruitful area of the law in which the tools of law and economics provide use is contract law. From an economic perspective, the focus of contract law is to accomplish the goals of the parties in the most efficient fashion. Mercuro, supra at 138. Contract law is a particularly interesting topic because there are different levels where economic analysis is useful. For example, in the contract formation stage, parties must weigh the costs of contract negotiations and the time inherent in including greater and greater numbers of provisions. Contracting is not costless; this leads to parties structuring contracts in a way that approximates the most efficient outcome by incentivizing value-maximizing conduct. Mercuro, supra at 139. This leaves room for court intervention as parties do not take the time to incorporate every possibility or scenario explicitly into contracts. The transaction costs would simply be too high under the Coasean framework, leading to inefficient results.
Another particularly notable area of contract law lending itself to economic analysis, in this case due to its different treatment under civil and common law systems, is breach of contract. Parties to a contract will not typically breach unless it benefits them in some way, or if it is impossible for them to fulfill its terms. The former situation is the heart of the concept of efficient breach. According to Markesinis et al., “A breach may be regarded as efficient in economic terms if it entails an advantage to the guilty party that is greater than pecuniary detriment to the innocent party. In such a case, compensating the innocent party would still leave the guilty party better off than if the contract were to be fulfilled in specie.” Sir Basil Markesinis, Hannes Unberath & Angus Johnston, The German Law of Contract, A Comparative Treatise 399 (2nd ed., Hart Publishing 2nd ed., 2006). As noted above, it a party is defaulting, it is probably because it is in their interest to do so. Put another way, this means that he expects to lose money by going forward with the contract. Incorporating notions of Kaldor-Hicks efficiency, we would allow the party to default so long as a “bribe” can be paid to the wronged party making them whole. On total, this would make the defaulting party better off, while leaving the wronged party no worse off, producing an overall Pareto optimal result. John H. Barton, The Economic Basis of Damages For Breach of Contract, in Economic Foundations of Private Law, 277,304 (Richard A. Posner & Francesco Parisi eds., Edward Elger Publishing, Inc. 2002).
If it is established that parties may default on contracts, and that it may be economically efficient for them to do so, what is the result for the wronged party? There are two main remedies utilized in both common and civil law jurisdictions, but the frequency of use in each system is instructive. For example, court orders forcing performance, an equitable remedy, are more prevalent in Europe, while awards of legal damages focused on making the wronged party whole dominate common law jurisdictions. Therefore, goals guiding the determination of damages in a breach case are expectation protection (or the common law preference for putting the plaintiff in as good a position as if the contract were not breached) and incentive maintenance, (the civil law approach enforcing contract promises). Barton , supra at 304.
Brousseau rightly argues that based on the use of economic reasoning in the US in particular, contracts have a different legal status than they do in civil law nations. Brousseau, supra at 82. In his decision in Co-operative Insurance Society v. Argyll Stores (Holding) Ltd.,  AC 1 at 11-12, Lord Hoffman summarized the historical differences nicely:
“Specific performance is traditionally regarded in English law as an exceptional remedy…by the 19th century it was orthodox doctrine that the power to decree specific performance was part of the discretionary jurisdiction of the Court of the Chancery to do justice in cases in which the remedies available at common law were inadequate. This is the basis of the general principle that specific performance will not be ordered when damages are an adequate remedy. By contrast, in countries with legal systems based on civil law, such as France, Germany, and Scotland, the plaintiff is prima facie entitled to specific performance.”
Therefore, common law has a presumption of damages tempered by an equitable resolution if it were called for, while civil law has an assumption of specific performance tempered by some consideration for damages in impossibility scenarios. A simple example may help illustrate what differences might arise from this difference in remedies. Suppose Augsburg Auto had a vehicle on sale for €12,000. Now suppose Thomas saw the vehicle, which he valued at €15,000. Believing he had found a deal, he offered Augsburg Auto the €12,000, leaving a deposit to go to the bank to get funds. After Thomas left, Dieter stopped by the auto dealer and saw the same car. After being told that an offer for €12,000 had already been made, Dieter decided to trump it and offered €13,000. Shortly thereafter, forgetting the concept of exchange rates and thinking he has found a deal, Joshua arrived and offered €18,000.
Much of the analysis that can be made based on this scenario depends on how scrupulous Augsburg Auto is. However, let us assume for a moment that the dealer is more interested in profits than scruples, clearly a simplifying assumption. Under a common law regime, a wronged party is made as well off as he would have been if a contract were fulfilled. Therefore, if Augsburg sells to anyone but Thomas, and he had valued the car at €15,000, he would likely sue and receive damages in this amount. So, using the above facts, if Augsburg sells to Dieter for €13,000 but must turn around and pay damages to Thomas, it is inefficient because it breaches its contract AND loses money. However, if Augsburg breaks its contract to sell to Joshua, it has breached its contract efficiently. This is because after paying Thomas damages, it still earns €3,000 on the transaction. As it has been shown, expectation damages act then not only to encourage efficient breaches, but to discourage inefficient breaches, thus serving two related but separate societal benefits. Mercuro, supra at 142.
In a civil law system, Augsburg would be forced to sell the car to Thomas based on the specific, agreed upon terms. Therefore, Augsburg would need to sell the car to Thomas for €12,000. Thus, specific performance, like expectation damages, can help contractors avoid inefficient breaches. However, since the sale to Joshua cannot occur, the most efficient outcome, which is €15,000 in damages to Thomas and €18,000 in sales to Joshua, is taken off the table. Arguably, Joshua could buy from Thomas at the higher price, making those parties better off, but there is still a lower balance of payments, and transaction costs might make multiple transactions prohibitively expensive. Mercuro, supra at 142. Additionally, while third party enforcement is at times unavoidable, it is not necessarily efficient. Essentially, “The process of enforcement whilst enabling the benefit of an external coercion to oblige the recalcitrant party to honor his commitments, can be inefficient.” Markesinis, supra at 399. So, not only are additional transactions expensive, the process of enforcing specific performance adds additional transaction costs.
Therefore, a system where damages are the standard in breach cases will typically lead to the most efficient results. Altering the numbers could lead to situations where specific performance is economically beneficial, and it does go some way toward avoiding inefficient results. However, based on pure Pareto and Kaldor-Hicks principles, it appears that the payment of expectation damages leads to the most efficient outcome. Additionally,
“Even if the work under the contract is not completed, an expectation upon entering the contract that the contract may have to be completed might lead to non-optimality. Hence, courts should be hesitant to place very substantial weight upon a role of “enforcing” contracts. Indeed, one might conclude that the fact that one party wants to get out of a production contract should be reason enough to excuse further performance (although not to excuse payment of damages).” Barton, supra at 336.
Under the common law, damages are the remedy most often resorted to. This system sees damages as adequate when the item in the contract is easily obtainable from other sources. Markesinis, supra at 393. Therefore, only situations where an item is of peculiar and practically unique value to the plaintiff lend themselves to specific performance under common law. It is also notable that specific performance is in all cases discretionary on the part of the judge in common law. This is due to its equitable origins. Markesinis, supra at 392. Perhaps speaking even more to cultural differences in the particular remedies, Markesinis notes that, ”the use of specific performance has traditionally not been regarded as generally desirable because it places a strain on the machinery of law and interferes with the personal freedom of the contractual debtor (or defendant).” Markesinis, supra at 392. In England, specific performance is confined to exceptional cases where the claimant is not afforded sufficient protection by damages. It is clear from the commentary that damages are the much preferred remedy in common law jurisdictions, but the ability of judges to temper this in exceptional circumstances with the equitable remedy of performance ensures that the greatest injustices will not occur.
Meanwhile, under the civil law, the preferred tool of the courts is specific performance. In fact, in most situations, impossibility is the only defense to a claim of breach which allows the breaching party to pay damages rather than uphold her end of the contract. Markesinis, supra at 402. German law, in particular, finds the idea of performance so important that it requires an additional time period after a breach and before damages can be claimed in order for the parties to perform on the contract. Burgerliches Gesetzbuch [BGB] [Civil Code] § 281, ¶ 1. Additionally the right to specific performance is more properly called the Primaranspruch, or primary right, with the secondary right being damages. Burgerliches Gesetzbuch [BGB] [Civil Code] § 241, 1. Therefore, according to Markesinis, “While German law does not completely preclude the idea of an ‘efficient’ breach in relation to certain types of contract such as contract of services, it is clearly hostile towards allowing the promisor to avoid the promise to perform and pay damages instead. Thus, the question whether breaching the contract is appropriate does not arise in the first place.” Markesinis, supra at 399. French law is also particularly hostile to damages, much preferring specific performance as the remedy of first choice. Brousseau supra at 84.
It is clear that in civil law jurisdictions, “cross-fertilization of legal and economic thought does not really exist in respect of contracts.” Brousseau supra at 81. However, interestingly, parties to contracts may be finding efficient solutions on their own as commentators have noted that businessmen, particularly in Germany, prefer to claim damages rather than waste resources trying to get a judgment for specific performance. Markesinis, supra at 399. Therefore, though the judiciary has not been compelled, or allowed, to come to the most efficient results, it is possible they are still being reached when savvy parties are involved. This is also additional proof that damages may be the most efficient manner of dealing with breaches.
Summary of Economic Analysis
What conclusions can be drawn from this analysis? First, the ability of common law judges to use discretion in remedies allows for perhaps a more economically efficient system that does not entirely abandon equitable considerations. Meanwhile, the inability of civil law judges to provide damages except in very specific circumstances may not always be efficient, but it does provide certainty and an arguably more moral solution. Despite this inability, the fact that businessmen do sometimes request their secondary right of damages shows that efficiency can also be fair, and still reached despite the restrictions felt by civil law judges. Some have argued based on this framework that globalization and acceleration of technological change have lead to a need for the writers of civil codes to take under consideration different frameworks for contract law. Brousseau supra at 92. Additionally, “though economic analysis of contract law has occurred under common law premises, the use of economics to evaluate civil codes is promising.” Brousseau supra at 91. Whatever the future of the civil codes may be, however, it is clear that change incorporating efficiency criteria will need to come from legislators rather than the bench as it has occurred in common law jurisdictions.
Though there may be similarities, particularly with the development of constitutional law in many civil law jurisdictions, the overall development of law in the two major legal traditions can be dramatically different. In one particular area, contract breach, long-standing traditions outside the scope of the legal systems themselves lead, at least in part, to how remedies in the legal systems vary. These views, though under assault by globalization, international contracts, etc., are unlikely to shift significantly in the near term to produce what proponents of the predominant Chicago School of Law & Economics would view as an efficient outcome in contract breach cases. If and when they do, it will necessarily be due to a groundswell of legislative support rather than the accumulation of results from the judicial bench.
The most notable examples of this are Articles 4 and 5 which, when read together, seem to allow the state unfettered abilities to control speech, and the chapter on security. Article 4 begins by stating that the freedom and privacy of communications is protected by law. It then explains that the State may infringe this freedom in the name of security. And, Article 5 states that no one may use telecommunications networks to engage in activities that jeopardize State security, public security, or social and public interests. A textual argument could be made based on these two clauses, that 1. Freedom cannot be infringed unless it is for security purposes, 2. However, social and public interests are the equivalent of security issues, and 3. Therefore, if the State believes that one is engaging in conduct that jeopardizes the public interest, their freedom can be infringed. This would not be very concerning on its face. However, one also needs to consider some of the activities that the Chinese government considers to be against the public interest.
Chapter IX, on security matters, contains additional language that will worry those keeping an eye on human rights. For example, in Article 77, it states that Telecom businesses shall voluntarily keep a record of subscriber usage information. But it then mandates that this information shall be kept for a minimum of 60 days, seemingly eliminating any illusion of voluntariness. This is reminiscent of Google’s recent interactions with China. [iv] Additionally, Article 80 forbids users of communications to harm the dignity of the state, oppose fundamental principles of the Constitution, sabotage state religious policy, disturb social stability and insult people. This seems to give the State a very broad range of activities which it can control to the detriment of free speech and expression. This type of language certainly would not withstand judicial scrutiny in the US based on First Amendment freedoms.
One could argue that the US has laws in place that are equally as restrictive, such as the PATRIOT Act. However, there are still due process procedures in place, and First Amendment activities remain protected. This is not the case with China’s draft bill. China is growing tremendously and seems to be moving ever closer to a strong capitalist system. However, it is crucial that its laws keep pace in the area of human rights if it truly wants to be the global superpower it seems destined to be.
[iii] See Chapter II of the Draft
Background on Developing Nation Claims that Private Health Standards are Barriers to Trade in Disguise
‘An alternative and less pessimistic global perspective might emphasize the opportunities provided by the emerging standards and the possibility that certain developing countries could use those opportunities to their competitive advantage. From this viewpoint, many of the emerging public and private standards represent a potential bridge between increasingly demanding consumer requirements and the participation of distant suppliers. Many of these standards provide a common language within the supply chain and raise the confidence of consumers in food product safety.’ [xv]