Showing papers by "Eric A. Posner published in 2015"

Climate Change Justice

Abstract: Climate change and justice are so closely associated that many people take it for granted that a global climate treaty should--indeed, must--directly address both issues together. But, in fact, this would be a serious mistake, one that, by dooming effective international limits on greenhouse gases, would actually make the world's poor and developing nations far worse off. This is the provocative and original argument of Climate Change Justice. Eric Posner and David Weisbach strongly favor both a climate change agreement and efforts to improve economic justice. But they make a powerful case that the best--and possibly only--way to get an effective climate treaty is to exclude measures designed to redistribute wealth or address historical wrongs against underdeveloped countries. In clear language, Climate Change Justice proposes four basic principles for designing the only kind of climate treaty that will work--a forward-looking agreement that requires every country to make greenhouse--gas reductions but still makes every country better off in its own view. This kind of treaty has the best chance of actually controlling climate change and improving the welfare of people around the world.

Cost-Benefit Analysis of Financial Regulations: A Response to Criticisms

Abstract: Financial regulators should use cost-benefit analysis (CBA) to evaluate financial regulations. Finance is an ideal domain for CBA because the direct costs and benefits of financial activity can be easily monetized, and a huge amount of data exists for calculating the relevant valuations. John Coates and others have argued that in fact the valuations are too difficult to determine because of unique features of financial markets that distinguish them from other types of markets where CBA is used. We respond that these features are present in other markets, and that financial valuations are difficult to determine at present only because academic research on them is at an early stage. In two recent articles, we urged financial regulators to use cost-benefit analysis (CBA) to evaluate financial regulations.2 John Coates has emerged as a leading critic of this view.3 Doubts can also be found in a recent paper by Jeffrey Gordon.4 In this Essay, we survey their objections and respond to them. We make several points. First, Coates conflates two separate issues: the advisability of CBA and the uncertainty of valuations. He argues that because scholars have so far disagreed about relevant valuations, regulators should not engage in CBA. However, he exaggerates the difficulty of determining valuations. The current level of uncertainty justifies greater investment in academic research, not abandonment of CBA. Second, Coates makes a series of theoretical arguments that valuation difficulties do not arise merely from the paucity of academic research but from the nature of financial markets. He argues that financial markets are “central,” “social,” and “non-stationary” in a way that other markets are not, and this explains why valuation problems cannot be surmounted. Gordon makes a similar argument that CBA of financial regulations cannot work because financial markets are “constructed” or artificial. We argue the opposite: that because financial markets generate a huge amount of data, and because most of the relevant valuations are monetary in nature, financial 1 Kirkland & Ellis Distinguished Service Professor, University of Chicago Law School; Assistant Professor, Department of Economics, University of Chicago. Thanks to Cass Sunstein for comments, and to Jullia Park for research assistance. 2 Eric A. Posner & E. Glen Weyl, Benefit-Cost Analysis for Financial Regulation, 103 AM. ECON. REV (PAPERS & PROC.) 393 (2013), available at http://ssrn.com/abstract=2188990; Eric A. Posner & E. Glen Weyl, Benefit-Cost Paradigms in Financial Regulation, J. LEGAL STUD. (forthcoming, 2014), available at http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1647&context=law_and_economics. 3 John C. Coates, IV, Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications (Harvard Law Sch. Eur. Corp. Governance Inst. Law Working Paper No. 234, 2014 ), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2375396. 4 Jeffrey N. Gordon, The Empty Call for Benefit-Cost Analysis in Financial Regulation (Colum. Law & Econ. Working Paper No. 464, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2378562.

An Empirical Study of Political Bias in Legal Scholarship

Abstract: Law professors routinely accuse each other of making politically biased arguments in their scholarship. They have also helped produce a large empirical literature on judicial behavior that has found that judicial opinions sometimes reflect the ideological biases of the judges who join them. Yet no one has used statistical methods to test the parallel hypothesis that legal scholarship reflects the political biases of law professors. This paper provides the results of such a test. We find that, at a statistically significant level, law professors at elite law schools who make donations to Democratic political candidates write liberal scholarship, and law professors who make donations to Republican political candidates write conservative scholarship. These findings raise questions about standards of objectivity in legal scholarship.

Toward a Pigovian State

Abstract: Most economists believe that the government should impose Pigovian taxes on firms that produce negative externalities like pollution, yet regulatory agencies hardly ever use their authority to create Pigovian taxes. Instead, they issue command-and-control regulations. Our major point is that, contrary to the conventional wisdom, regulators typically have legal authority to create Pigovian taxes—they just do not use it. While regulators may hesitate to impose Pigovian taxes for a range of political and symbolic reasons, we argue that these reasons do not justify this massive failure of regulatory efficiency. It is time for the regulatory state to take a Pigovian turn.

The Influence of History on States’ Compliance with Human Rights Obligations

Abstract: There is considerable variation in countries’ respect for human rights. Scholars have tried to explain this variation on the basis of current conditions in countries—such as democracy and civil war—and events from the recent past, such as ratification of human rights treaties. This literature has ignored the influence that geographic factors and historical events may have on human rights performance. Drawing on the literature on economic development, which has shown that institutions, events, and conditions from the distant past heavily influence the rate of economic growth across countries today, we argue that scholars should study whether the same factors have influenced modern human rights performance. Our exploratory look at the data suggests that respect for human rights today may be related to the geographic location of affected populations centuries ago, the nature of the institutions that emerged at that time, and cultural traits that have been passed down from generation to generation. These preliminary results suggest that human rights scholars could make substantial progress by building on the work of development economics.

Institutional Flip-Flops

Abstract: Many people vigorously defend particular institutional judgments on such issues as the filibuster, recess appointments, executive privilege, federalism, and the role of the courts. These judgments are defended publicly with great intensity and conviction, but some of them turn out to be exceedingly fragile, in the sense that their advocates are prepared to change their positions as soon as their ideological commitments cut in the other direction. For example, institutional flip-flops can be found when Democratic officials, fiercely protective of the filibuster when the President is a Republican, end up rejecting the filibuster when the President is a Democrat. Other flip-flops seem to occur when Supreme Court justices, generally insistent on the need for deference to the political process, show no such deference in particular contexts. Our primary explanation is that many institutional flip-flops are a product of “merits bias,” a form of motivated reasoning through which short-term political commitments make complex and controversial institutional judgments seem self-evident (thus rendering those judgments vulnerable when short-term political commitments cut the other way). We offer evidence to support the claim that merits bias plays a significant role. At the same time, many institutional judgments are essentially opportunistic and rhetorical, and others are a product of the need for compromise within multimember groups (including courts). Judges might join opinions with which they do not entirely agree, and the consequence can be a degree of institutional flip-flopping. Importantly, some apparent flip-flops are a result of learning, as, for example, when a period of experience with a powerful president, or a powerful Supreme Court, leads people to favor constraints. In principle, institutional flip-flops should be reduced or prevented through the adoption of some kind of veil of ignorance. But in the relevant contexts, the idea of a veil runs into severe normative, conceptual, and empirical problems, in part because the veil might deprive agents of indispensable information about the likely effects of institutional arrangements. We explore how these problems might be overcome.

Supreme Court Justices’ Loyalty to the President

Abstract: A statistical analysis of voting by Supreme Court justices from 1937-2014 provides evidence of a “loyalty effect” — justices more frequently vote for the government when the president who appointed them is in office than when subsequent presidents lead the government. This effect exists even when subsequent presidents are of the same party as the justices in question. However, the loyalty effect is much stronger for Democratic justices than for Republican justices. This may be because Republican presidents are more ideologically committed than Democratic justices are, leaving less room for demonstrations of loyalty.

Voting Squared: Quadratic Voting in Democratic Politics

Abstract: Conventional democratic institutions aggregate preferences poorly. The norm of one-person-one-vote with majority rule treats people fairly by giving everyone an equal chance to influence outcomes but fails to give proportional weight to people whose interests in a social outcome are stronger than those of other people. This problem leads to the familiar phenomenon of tyranny of the majority. Various institutions that have been tried or proposed over the years to correct this problem-including supermajority rule, weighted voting, cumulative voting, "mixed constitutions," executive discretion, and judicially protected rights-all badly misfire in various ways, for example, by creating gridlock or corruption. This Article proposes a new form of political decisionmaking based on the theory of quadratic voting. It explains how quadratic voting solves the preference-aggregation problem by giving proper weight to preferences of varying intensity, how it can be incorporated into political institutions, and why it should improve equity.I. INTRODUCTIONGroups frequently make collective decisions through majority rule. Legislators pass bills by majority; shareholders make most corporate decisions by (share-weighted) majority rule, as do the directors they elect; clubs, university faculties, and civic associations typically use majority rule as well. The reason that they do so is not entirely clear. Majority rule seems fair-and certainly is fairer than rule by one (dictatorship) or a minority. But majority rule is not obviously fairer than rule by unanimity or consensus, or rule by a supermajority like two-thirds. Majority rule has some useful properties, but it often fails to advance the good of the group.The basic problem with majority rule is well-known: majorities can disregard the legitimate interests of minorities. Imagine, for example, that a community is trying to decide whether to devote funds collected from taxes to build a park. A large minority, including elderly people and families with young children, would benefit greatly from a park; a bare majority does not have strong views but, on balance, does not want to spend the money. The majority can block the park even if the minority gains more from the park than the majority loses: there is no mechanism for ensuring that the majority takes into account the minority's disproportionate interests. For example, if the minority consists of 10,000 people who value the park at $100 each, and the majority consists of 11,000 people who disvalue the park at $2 each, the majority prevails even though the park would generate a net social product of $978,000. More troublesome examples are easy to imagine and occur throughout history. In politics, majority rule, when unrestricted by constitutional protections, permits the majority to expropriate the property of the minority, throw them in jail, and deprive them of franchise rights. Even when the majority respects basic rights, it may deprive minorities of benefits and privileges that are available to others. The most prominent example from recent years, which we discuss in some numerical detail below, is the claim that the majority of Americans in various states unfairly deny the legal benefits of marriage to same-sex couples.1The possibility that the majority may disregard the interests of the minority has a well-known label: "tyranny of the majority."2 But what is wrong with tyranny of the majority? One could argue that tyranny of the majority is just a negative label for "democracy," a label wielded by special interests, privileged groups, and others who fear majority rule. If all citizens are equal, what could be fairer than allowing the majority of them to determine policy, either directly or through representatives?3But there are good reasons to be worried about tyranny of the majority. The first reason is that majority rule, unless constrained to prevent tyranny of the majority, will not necessarily advance the public good. …

Toward a Pigouvian State

Abstract: Most economists believe that the government should impose Pigouvian taxes on firms that produce negative externalities like pollution, yet regulatory agencies hardly ever use their authority to create Pigouvian taxes. Instead, they issue command-and-control regulations. Our major point is that, contrary to the conventional wisdom, regulators typically have legal authority to create Pigouvian taxes — they just do not use it. While regulators may hesitate to impose Pigouvian taxes for a range of political and symbolic reasons, we argue that these reasons do not justify this massive failure of regulatory efficiency. It is time for the regulatory state to take a Pigouvian turn.

A Framework for Bailout Regulation

Abstract: During the height of the financial crisis in 2008 and 2009, the government bailed out numerous corporations, including banks, investment banks, and automobile manufacturers. While the bailouts helped end the financial crisis, they were intensely controversial at the time, and were marred by the ad hoc, politicized quality of the government intervention. We examine the bailouts from the financial crisis as well as earlier bailouts to determine what policy considerations best justify them, and how they are best designed. The major considerations in bailing out and structuring the bailout of a firm are the macroeconomic impact of failure; the moral hazard effect of the bailout; the discriminatory effect of the bailout; and procedural fairness. Future bailouts should be guided by principles that ensure that the decisionmaker properly takes into account these factors. INTRODUCTION Since the financial crisis of 2008, the word "bailout" has become a term of abuse in our political lexicon. The bailouts of numerous financial institutions and two automobile manufacturers were extremely controversial. (1) Congress sought in the Dodd-Frank Act to ensure that bailouts would never take place again, going so far as to write into the preamble that one purpose of the Act was "to protect the American taxpayer by ending bailouts." (2) President Barack Obama agreed that "because of this law, the American people will never again be asked to foot the bill for Wall Street's mistakes." (3) But after his former Treasury Secretary admitted that Dodd-Frank would not end bailouts, Republicans in the House of Representatives issued a scathing report entitled Failing to End "Too Big to Fail": An Assessment of the Dodd-Frank Act Four Years Later A The political unpopularity of bailouts is matched in the academic literature, where the traditional view is that bailouts are almost always unwise, and usually result from political failure. (5) But the word "bailout" is used in different ways, and it is sometimes hard to understand what people are complaining about. A bailout is, essentially, a transfer of money or other resources from the government to a private agent (or sometimes to another government). Such transfers occur every day and hardly ever cause anyone to lift an eyebrow. The government transfers money or other valuable consideration to solar panel manufacturers, daily farmers, poor people, and research universities. While many people disagree about the wisdom of these transfers, they do not regard them as illegitimate in the same way that they often regard bailouts. We can make some progress by observing that in common parlance the word bailout refers to a subset of transfers where the transfer is intended to rescue an agent who cannot meet its financial obligations. Even here, however, the source of complaint is obscure. If the government is willing to subsidize a manufacturer of solar power panels by giving it money, making loans to it, or guaranteeing its debt (as it often is), then what's wrong with a policy of paying off an unpaid debt if otherwise it would default? The effect of all these policies is the same: to lower the cost of capital for the beneficiary. The policy justification is also the same: to encourage people to invest in solar power. Indeed, the government routinely helps agents who are about to default on debts. The Federal Deposit Insurance Corporation (FDIC), for example, insures people against loss of their deposits up to $250,000.6 If a bank fails, the FDIC transfers money to depositors, in this way paying the bank's debts (or some of them) for it. Similarly, if a natural disaster strikes, the government frequently assists victims by supplying them with loan guarantees and other benefits that make it easier for them to pay off their debts while they are rebuilding their lives. (7) FDIC payments are not called "bailouts"; why not? One reason is that the payouts are part of a regulatory program that puts burdens on banks and depositors. …

Toward a Pigouvian State

Abstract: Most economists believe that the government should impose Pigouvian taxes on firms that produce negative externalities like pollution, yet regulatory agencies hardly ever use their authority to create Pigouvian taxes. Instead, they issue command-and-control regulations. Our major point is that, contrary to the conventional wisdom, regulators typically have legal authority to create Pigouvian taxes—they just do not use it. While regulators may hesitate to impose Pigouvian taxes for a range of political and symbolic reasons, we argue that these reasons do not justify this massive failure of regulatory efficiency. It is time for the regulatory state to take a Pigouvian turn.

An Empirical Study of Political Bias in Legal Scholarship

Abstract: Law professors routinely accuse each other of making politically biased arguments in their scholarship. They have also helped produce a large empirical literature on judicial behavior that finds that judicial opinions sometimes reflect the ideological biases of the judges who join them. Yet no one has used statistical methods to test the parallel hypothesis that legal scholarship reflects the political biases of law professors. This paper provides the results of such a test. We find that, at a statistically significant level, law professors at elite law schools who make donations to Democratic political candidates write liberal scholarship and law professors who make donations to Republican political candidates write conservative scholarship. These findings raise questions about standards of objectivity in legal scholarship.

Unquantified Benefits and Bayesian Cost-Benefit Analysis

Abstract: As the last act of its 2014-2015 Term, the Supreme Court struck down a major EPA regulation limiting mercury emissions from electrical power plants.1 The formal legal reason was EPA’s failure to consider the costs of regulating mercury before deciding that it must be regulated.2 But the costs of the regulation—$9.6 billion—would not have attracted such attention if they had not seemed so disproportionate to the regulatory benefits. The only mercury-related benefits that EPA could measure and include in its analysis related to the possibility that mercury exposure would slightly reduce the IQ of the children born to women who consumed fish high in mercury while pregnant.3 Against $9.6 billion in costs, EPA calculated only $5 million in benefits—a ratio of 1,920 to 1.4 The imbalance in this ratio had a significant impact upon the court. As Justice Scalia wrote for the majority in Michigan v. EPA, “One would not say that it is even rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.”5

The Law, Economics, and Psychology of Manipulation

Abstract: This comment on Cass Sunstein’s paper, Fifty Shades of Manipulation, argues that “manipulation” — “controlling or playing upon someone by artful, unfair, or insidious means especially to one’s own advantage” — has always been regarded as wrongful, an indirect form of fraud, by common law courts and government regulators. The manipulator perceives that the victim brings incorrect assumptions to a transaction and does not correct them, or else anticipates and takes advantage of people’s propensity to make incorrect inferences. Thus, the manipulator is able to effect a transfer from the victim to himself without resorting to explicit fraudulent statements or coercion. Within the various standard constraints like problems of proof, the government should and does try to restrict manipulation for standard efficiency and welfarist reasons. The law does not provide a remedy to fraud when it causes no harm, and similarly it should not for manipulation. Analogously, I argue that when government uses manipulation to advance the public good, it should be evaluated on welfarist grounds.

Unquantified Benefits and the Problem of Regulation Under Uncertainty

Abstract: Regulatory agencies are required to perform cost-benefit analysis of major rules. However, in many cases regulators refuse to report a monetized value for the benefits of a rule that they issue. Sometimes, they report no monetized value; at other times, they report a monetized value but also state that not all benefits have been quantified. On occasion, regulators also refuse to monetize or fully monetize costs. These practices raise a puzzle. If a regulator chooses not to monetize all the benefits or all the costs, it is not doing cost-benefit analysis. If it is not doing cost-benefit analysis, what is it doing? To investigate this question, we compiled a data set consisting of all major regulations issued by agencies from 2010 to 2013. We come to three conclusions. First, there are countless examples where agencies fail to fully monetize the benefits and costs of regulations. Second, in most cases, agencies could easily monetize or partially monetize those benefits and costs. Third, even where monetization would be difficult, the agencies could and should have made explicit the implicit valuations they relied on and supported those valuations as much as possible with empirical evidence. We then proceed to explain how agencies could engage in cost-benefit analysis even when they do not have a reliable basis for estimating valuations. Even where they lack complete data, agency regulators may be able to make reasonable guesses about the harms or benefits from regulations. In many cases, these guesses will be based on the experience and latent knowledge of the agency staff. These preliminary guesses constitute Bayesian prior probabilities. While agencies should be permitted to “guess” — that is, supply a subjective prior probability — they must also be required to update their estimates as they gain new information.

A Framework for Bailout Regulation

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

The Role of Competence in Promotions from the Lower Federal Courts

Abstract: The judicial behavior literature typically assumes that politicians nominate judges on the basis of their ideology. That assumption helps explain studies that show a statistical correlation between the party of the nominating president and the ideological direction of the votes of judges. However, the assumption is too simple. Casual empiricism suggests that politicians, interest groups, and the public care not only about the ideology of judges. They may also care about their competence and political loyalty and about ensuring that the judicial system is diverse. We focus on the role of competence in judicial promotions. We find, however, that presidents do not take much account of competence when promoting judges—despite the fact that there is some, albeit mixed, evidence that the most competent appellate judges were highly competent district judges.

How Do Bank Regulators Determine Capital Adequacy Requirements

Abstract: Regulators require banks to maintain capital above a certain level in order to correct the incentives to make excessively risky loans. However, it has never been clear how regulators determine how high or low the minimum capital–asset ratio should be. An examination of US regulators’ justifications for five regulations issued over more than thirty years reveals that regulators have never performed a serious economic analysis that would justify the levels that they have chosen. Instead, regulators appear to have followed a practice of incremental change designed to weed out a handful of outlier banks. This approach resulted in significant regulatory failures leading up to the financial crisis of 2007–2008.

Climate Change Justice

Abstract: Climate change and justice are so closely associated that many people take it for granted that a global climate treaty should--indeed, must--directly address both issues together. But, in fact, this would be a serious mistake, one that, by dooming effective international limits on greenhouse gases, would actually make the world's poor and developing nations far worse off. This is the provocative and original argument of Climate Change Justice. Eric Posner and David Weisbach strongly favor both a climate change agreement and efforts to improve economic justice. But they make a powerful case that the best--and possibly only--way to get an effective climate treaty is to exclude measures designed to redistribute wealth or address historical wrongs against underdeveloped countries. In clear language, Climate Change Justice proposes four basic principles for designing the only kind of climate treaty that will work--a forward-looking agreement that requires every country to make greenhouse--gas reductions but still makes every country better off in its own view. This kind of treaty has the best chance of actually controlling climate change and improving the welfare of people around the world.

The Influence of History on States’ Compliance with Human Rights Obligations

Abstract: There is considerable variation in countries’ respect for human rights. Scholars have tried to explain this variation on the basis of current conditions in countries—such as democracy and civil war—and events from the recent past, such as ratification of human rights treaties. This literature has ignored the influence that geographic factors and historical events may have on human rights performance. Drawing on the literature on economic development, which has shown that institutions, events, and conditions from the distant past heavily influence the rate of economic growth across countries today, we study whether the same factors have influenced modern human rights performance. Our look at the data suggests that respect for human rights today may be related to the geographic location of affected populations centuries ago, the nature of the institutions that emerged at that time, and cultural traits that have been passed down from generation to generation. These results may help explain why human rights rarely improve in countries that ratify human rights treaties. * Assistant Professor of Law, University of Chicago Law School. † Kirkland & Ellis Distinguished Service Professor, University of Chicago Law School. We thank participants at a conference on human rights at The University of Chicago Law School and at a workshop at Tufts, for helpful comments; and Justin Cook, Christopher Fariss, Louis Putterman, Enrico Spolaore, and Romain Wacziarg for sharing their data with us. We also thank Katie Bass and Paulina Wu for research assistance.

Should Human Rights Law Play a Role in Development

Abstract: Many human rights advocates believe that development agencies — agencies that define their mission as providing economic and technical aid to impoverished countries — should be required to respect and promote human rights law. This style of human rights imperialism should be resisted. While development agencies should obviously comply with domestic law and try to promote good rather than bad outcomes, there is no benefit in holding them to human rights law. Human rights law was designed for states, not for NGOs, and how it would be applied to NGOs is far from obvious. Because of the ambiguity and vast scope of human rights law, the practical effect of these proposals would be to add another layer of bureaucracy to development projects while subjecting those projects to scrutiny by lawyers with little to guide them but their intuitive notions of right and wrong.

Presidential Leadership and the Separation of Powers

Abstract: The presidents who routinely are judged the greatest leaders are also the most heavily criticized by legal scholars. The reason is that the greatest presidents succeeded by overcoming the barriers erected by Madison’s system of separation of powers, but the legal mind sees such actions as breaches of constitutional norms that presidents are supposed to uphold. With the erosion of Madisonian checks and balances, what stops presidents from abusing their powers? The answer lies in the complex nature of presidential leadership. The president is simultaneously leader of the country, a party, and the executive branch. The conflicts between these leadership roles put heavy constraints on his power.