Economist Channel

Roll up your shirtsleeves, financial economists. As reported by Elizabeth Dexheimer at Bloomberg, Rep. Jeb Hensarling is “interested in working on a 2.0 version,”  of his financial choice act, the blueprint for reforming Dodd-Frank. “Advice and counsel is welcome."

The core of the choice act is simple. Large banks must fund themselves with more capital and less debt. It strives for a very simple measure of capital adequacy in place of complex Basel rules, by using a simple leverage ratio. And it has a clever carrot in place of the stick. Banks with enough capital are exempt from a swath of Dodd-Frank regulation.

Market based alternatives to a leverage ratio

The most important question, I think, is how, and whether, to improve on the leverage ratio with simple, transparent  measure of capital adequacy. Keep in mind, the purpose is not to determine a minimum capital level at which a bank is resolved, closed down, bailed out, etc. The purpose is a minimal capital ratio at which a bank is so systemically safe that it can be exempt from a lot of regulation.

The "right" answer remains, in my view, the pure one: 100% equity plus long term debt to fund risky investments, and short term liabilities entirely backed by treasuries or reserves (various essays here). But, though I still think it's eminently practical, it's not on the current agenda, and our task is to come up with something better than a leverage ratio for the time being.

Here are my thoughts. This post is an invitation to critique and improve.

Market values. First, we should use the market value of equity and other assets, not the book value. Risk weights are complicated and open to games, and no asset-by-asset system captures correlations between assets. Value at risk does, but people trust the correlations in those models even less than they trust risk weights. Accounting values pretend assets are worth more than they really are, except when accounting values force marks to market that are illiquid or "temporarily impaired."

Market values solve these problems neatly. If the assets are unfairly marked to market, equity analysts know that and assign a higher value to the equity. If assets are negatively correlated so the sum is worth more than the parts, equity analysts now that and assign a higher value to the equity.


Liabilities not assets. Second, we should use the ratios of liability values,  not ratios to asset values.   Rather than measure a ratio of equity to (accounting) asset values, look at the ratio of equity to the debt that the bank issues. Here, I would divide market value of equity by the face value of debt, and especially debt under one year. We want to know, can the bank pay off its creditors or will there be a run.

In principle, the value of assets = the value of liabilities so it shouldn't matter. Accountant and regulator assets are not the same as liabilities, which raises the important question -- if you want to measure asset values rather than (much simpler) liability values, then why are your asset values not the same as my liability values?

So far, then, I think the ratio of market value of equity to (equity + face value of debt) is both better and much simpler than the leverage ratio, book value of equity to complex book value of assets.

One can do better on ratios. (Equity + 1/2 market value of long-term unsecured debt ) / market value    of short term debt is attractive, as the main danger is a run on short-term debt.

Use option prices for tails. Market value of equity / face value of debt is, I think, an improvement on leverage ratios all around. But both measures have a common problem,  and I think we can do better.

A leverage (equity/assets) ratio doesn't distinguish between the riskiness of the assets. A bank facing a leverage constraint has an incentive to take on more risk. For example, you can buy a stock which costs $100, or a call option which costs $10, each having the same risk -- when the stock market moves 1%, each gains or loses $1 of value. But at a 10% leverage the stock needs $10 of capital and the call option only $1.

The main motivation of risk-weights is to try to measure assets' risk -- not the current value, but the chance of a big loss in value -- and make sure there is enough equity around for all but the worst risks. So let's try to do this with market prices.

A simple idea: So, you're worried that the same value of equity corresponds to a riskier portfolio? Fine: use option prices to measure the banks' riskiness. If bank A has bought stock worth $100, but bank B has 10 times riskier call options worth the same $100, then bank B's option prices will be much larger -- more precisely, the implied volatility of its options will be larger.

So, bottom line: Use the implied volatility of bank options to measure the riskiness of the bank's assets. As a very simple example, suppose a bank has $10 market value of equity, $90 market value of debt, and 25% implied volatility of equity. The 25% implied volatility of equity means 2.5% implied volatility of total assets, so (very roughly) the bank is four standard deviations away from wiping out its equity. Yes, this is a simplistic example, and the refinements are pretty obvious.

(For non-finance people: An option gives you the right to buy or sell a stock at a given price. The more volatile the stock, the more valuable the option. The right to sell for $80 a stock currently going at $100 is worth more, the more likely the stock is to fall below $80, i.e. the more volatile the stock. So option prices tell you the market's best guess of the chance that stocks can take a big fall.  You can recover from option prices the "implied volatility," a measure of the standard deviation of stock returns.)

We might be able to simplify even further. As a bank issues more equity and less debt, the equity gets safer and safer, and stock volatility goes down, and the implied volatility of options goes down. Perhaps it is enough to say "the implied volatility of your at the money options shall be no more than 10%."

Here's the prettiest rule I can think of. A put option is the right to sell stock at a given price. Assemble the minimum cost of put options that give the bank the right to issue stock sufficient to cover its short-term debt. For example, if the bank has $1,000 of short-term debt, then we could look at the value of 10 put options, each giving the bank the right to sell its stock at $100. If the market value of equity is greater than the cost of this set of put options, then the bank is ok.

(It would be better still if banks actually bought these put options, so they always had sitting there the right to issue equity in bad times. But then you might complain about liquidity and counterparty risk, so let's just use this as a measurement device.)

That's probably too fancy, but one should always start with the ideal before compromising. (Back to 100% equity.... )

In summary, I think we could improve a lot on the current leverage ratio by 1) using market values of equity 2) using ratios of liabilities, not accounting asset values at all and 3) using option prices to measure risk.

I left out the use of bond yields or credit default swaps to measure risk. The greater a chance of default, the higher interest rate that markets charge for debt, so one could in principle use that measure. It has been proposed as a trigger for contingent bonds or for regulatory intervention. I'm leery of it for lots of reasons. First, we're here to measure capital adequacy, so let's measure capital. Second, credit markets don't provide good measures of whether you're three or four standard deviations from default. Third, credit markets include not just the chance of default, but also the guess about recovery in default, and thus a guess about how big the bailout will be. But there is no reason in principle not to include bond information in the general picture -- so long as we can keep to the rule simple and transparent .

Our first step is to get our regulators to trust the basics: 1) stock markets provide good measures of total value -- at least better than regulators 2) option markets provide good measures of risk -- at least better than regulators.

Why not? I think our regulators and especially banks don't trust market values. They prefer the central-planning hubris that accountants and regulators can figure out what the market value and risk are better than the actual market.

If so, let's put this on the table in the open and discuss it. If the answer is "your proposal to use market value of equity and options is perfect in theory but we trust regulators to get values right a lot more than markets," then at least we have made 90% progress, and we can start examining the central question whether regulators and accountants do, in fact, outperform market measures. The question is not perfection or clairvoyance, it's whether markets or regulatory rules do a less bad job. Markets were way ahead of regulators in the last crisis.

What if market gyrations drive down the value of a bank's stock? Well, this is an important signal that bank management and regulators should take seriously by gum! Banks should have issued a lot more equity to start with to make sure this doesn't happen; banks should have issued cocos or bought put options if they think raising equity is hard. And when a bank's equity takes a tumble that is a great time to send the regulators in to see what happened. The choice act very nicely sets the equity ratio up as the point where we exempt banks from regulation, not a cliff where they get shut down.

Let's also remember, when you read the details, the leverage ratio is not all that simple or transparent either. Here is a good summary.

... the regulation known as the leverage ratio has caused a distortionary reduction in the incentives for banks to intermediate markets for safe assets, especially the government securities repo market, without apparent financial stability benefits....I will suggest adjustments to the leverage ratio rule that would improve the liquidity of government securities markets and other low-risk high-importance markets, without sacrificing financial stability.

The natural response is to start risk-weighting lite. The Bank of England recently exempted government securities from their leverage ratio.  The natural response to the response is, once we start making exceptions, the lobbyists swarm in for more. You can see in Duffie's writing that an exemption for repo lending collateralized by Treasuries will come next. Given the fraction of people who understand how that works, the case for resisting more exemptions will be weak.

The poster child for the ills of risk-weighted asset regulation: Greek sovereign debt still carries no risk weight in Europe. Basel here we come.

Interestingly, Duffie does not see banks currently shifting to riskier investing, the other major concern, though that may be because the Volker rule, Basel risk weights and other constraints also apply. So perhaps I should state the market-based measures not as alternatives to the leverage rule, but as measures to add to the leverage rule, in place of the other constraints on too much risk.

But how much damage is really done by asking capital for safe investments? Recall the Modigliani-Miller theorem after all. If a bank issues equity to fund riskfree investments, the equity is pretty darn risk free too, and carries a low cost of capital.  Yes, MM doesn't hold for banks, but that's in large part because of subsidies and guarantees for debt, and it's closer to true than to totally false -- the expected return on equity does depend on that equity's risk -- and the social MM theorem is a lot closer to holding and that's what matters for policy.

And even if funneling money to safe investments costs, say, an extra percent, does that really justify the whole Dodd-Frank mess?

In the end, it is not written in stone that large, systemic, too big to fail banks must provide intermediation to safe investments. A money market fund can take your deposits and turn them in to reserves, needing no equity at all. A bank could sponsor such a fund, run your deposits through that fund, and you'd never notice the difference until the moment the bank goes under... and your fund is intact.

Duffle again:

These resiliency reforms, particularly bank capital regulations, have caused some reduction in secondary market liquidity. While bid-ask spreads and most other standard liquidity metrics suggest that markets are about as liquid for small trades as they have been for a long time, liquidity is worse for block-sized trade demands. As a trade-off for significantly greater financial stability, this is a cost well worth bearing. Meanwhile, markets are continuing to slowly adapt to the reduction of balance sheet space being made available for market-making by bank-affiliated dealers. [my emphasis] Even more stringent minimum requirements for capital relative to risk-weighted assets would, in my view, offer additional net social benefits. 

I emphasized the important sentence here. There are many other ways to funnel risk free money to risk free lending activities. The usual mistake in financial policy is to presume that the current big banks must always remain, and must always keep the same scope of their current activities -- and that new banks, or new institutions, cannot arise when profitable businesses like intermediation open up.

So, in the worst case that a liquidity ratio makes it too expensive for banks to funnel deposits to reserves, to fund market-making or repo lending, then all of those activities can move outside of big banks.

More Choice act

The Choice act has some additional very interesting characteristics.

Most of all, it offers a carrot instead of a stick: Banks with sufficient equity are exempt from a swath of regulation.

That carrot is very clever. We don't have to repeal and replace Dodd-Frank it its entirety, and we don't have to force the big banks to utterly restructure things overnight. Want to go on hugely leveraged? The regulators will be back in Monday morning. Would you rather be free to do things as you see fit and not spend all week filling out forms? Then stop whining, issue some equity or cut dividends for a while.

More deeply, it offers a path for new financial institutions to enter and compete. Compliance costs and a compliance department are not only a drag on existing businesses, they are a huge barrier to entry. Are markets illiquid? Are there people who can't get loans? The answer, usually forgotten in policy, is not to prod existing businesses but to allow new ones to enter. A new pathway -- lots of capital in return for less asset-risk regulation -- will allow that to happen.

Both politically and economically, it is much easier to let Dodd-Frank die on the vine than to uproot and replant it.

In the department of finish sanding, I would also suggest a good deal more than 10% equity.   I also would prefer a stairstep -- 10% buys exemption from x (maybe SIFI), 20% buys you exemption from y, and so forth, until at maybe 80% equity + long term debt you're not even a "bank" any more.

Remember, the issue is runs, not failure. Banks should fail, equity wiped out, and long-term debt becomes equity. The point of regulation is not to make sure banks are "safe" and "don't fail." The point of regulation is to stop runs and crises. So ratios that emphasize short term debt are the most important ones.

Duffle (above) also comes down on the side of more capital still. The "Minneapolis plan" spearheaded by Minneapolis Fed President Neel Kashkari (Speech, report by James Pethokoukis at AEI) envisions even more capital, up to 38%.

I'll be part of "Central Bank Governance and Oversight Reform: A Panel Discussion" at the Hoover Institution Washington DC offices, Tuesday Dec 6, 2016 10:00-12:00. The panelists will be  Michael Bordo, John Cochrane, Charles Plosser, John Taylor, and Kevin Warsh.

The occasion will be in honor of the book (cover at left), though knowing this panel I doubt we will keep to the subject and instead enjoy a thorough debate on central bank and monetary policy issues. The format will be very short presentations, followed by lively Q&A and discussion.

If you're interested in attending, follow this link to rsvp.


Update
Discussion now available online, embed below, link here

For Thanksgiving, I offer a rumination.

Last month, the Hoover Institution's fall retreat was organized around the theme of American Exceptionalism. See here for podcasts of talks from the stars -- really good. I talked about the nexus between economics, rule of law, regulation, and exceptionalism.

This was before the election, but two themes strike me as especially important still.

First: America needs rule of law, regular order, a partisan truce, even more than it needs my particular free-market policy preferences.

If Republicans overturn Obamacare in their first 100 days, with no Democratic votes; if President Trump picks up his phone and pen, undoes 8 years of Obama in the first day, and starts writing his own; and sends the agencies after his critics and enemies, we are headed for disaster.  Future president Elizabeth Warren, or President Malia Obama with Vice President Chelsea Clinton, will just do the same. There is an anectdotal story of early 20th century Chicago mayors, who alternated between German and Irish. Each one's first act in office would be to overturn the ban on whiskey (beer), and impose a ban on beer (whiskey). (Too good a story to check the facts!) Let's not do that.

Second, we must not become a country where you can't afford to lose an election. The criminalization of politics has already gone too far. If you can't afford to lose an election -- if losing or supporting the losing party or speaking out on policy issues that lose gains you the tender attentions of the FBI, the IRS, the DOJ, the NLRB, and the EPA, if you lose your job and your business -- then people in power will fight to the end not to lose that power. Though I'm no fan of the Clinton foundation shenanigans, the noises coming out of the Trump transition not to push that issue are hopeful. Losing an election, a 95% reduction in speaking fees, and the public attention that investigative journalists can bring are enough. Putin can't retire and stay out of jail -- or alive.

A last thought for Thanksgiving. The Pilgrims were all illegal immigrants -- violating their charter from the English King, and the natives' longstanding ban on white settlement. Thank the Wampanoag's tolerant attitude for your turkey.



To be a conservative — or, in my case an empirical, pax-americana, rule-of-law, constitutionalist conservative libertarian — is pretty much by definition to believe that America is “exceptional” — and that she is perpetually in danger of losing that precious characteristic. Exceptionalism is not natural or inborn, but must be understood, cherished, maintained, and renewed each generation — and her garden is always perilously unattended.


Like every word describing beliefs, however, “exceptionalism” is a slippery concept. America’s detractors often use the same word pejoratively and derisively. To them, exceptionalism means a parochial and ignorant moral superiority. We are not the first or only society to see itself as exceptional, different, or somehow better than everyone else.

The promise

So why is America exceptional, in the good sense? Here, I think, economics provides a crucial answer. The ideas that American exceptionalism propounds have led to the most dramatic improvement in widely-shared human well being, shared widely,  in human history. That improvement is not just material, but health, lifespan, peace and any measure of human prosperity. Yes, despite the horrors we read from the world’s war zones and some of our own cities, violence remains on a steady decline.

Aesop tells of a hungry wolf, who meets and admires a well-fed dog. But the wolf sees the dog’s collar, he says, no thanks, and walks off. Fortunately, we do not face the wolf’s conundrum. We do not have to argue for a moral superiority of freedom, and ask for material sacrifice. The wolf is both well-fed and free.

Despite the promises of monarchs, autocrats, dictators, commissars, central planners, socialists, industrial policy-makers, progressive nudgers and assorted dirigistes, it is liberty and rule of law that has led to this enormous progress. To the Chinese argument, say, that their ancient culture demands authoritarianism, a simple reply suffices: You, $7,000 per capita GDP, and filthy air. Us: $52,000 per capita and a clean environment.

I do not think this outcome was intentional. Neither our founders, nor those that built the British institutions which the founders improved, had any idea of the material progress their invention would  father, nor that the US would rise to lead the world to a 70 year pax Americana. Jefferson envisioned a bucolic agrarian society. Washington warned against foreign entaglements. A system designed only to defend individual liberty unintentionally unleashed unimaginable material and international benefits.

Of course, the foundations of this prosperity, in rule of law, security of property, internal peace, are not ours alone. America was built on British institutions, and the industrial revolution started there. Other countries have adopted many of these institutions, and joined in prosperity to the extent that they do so.

Without this economic success, I doubt that anyone would call America exceptional. Imagine that China were 7 times as productive per capita as we are, rather than the other way around. Or, imagine that great natural experiment, North Korea vs. South Korea. North Korea also claims to be exceptional. The rest of the world regards it as an exceptional basket case.

Of course, the foundations of this prosperity, in rule of law, security of property, internal peace, are not ours alone. America was built on British institutions. Other countries have adopted many of our institutions, and joined in our prosperity to the extent that they do so.

In fact, the core of exceptionalist faith describes its own undoing. If American values are indeed universal, if America’s exceptional role is to bring these ideas to the world, then when the world does adopt those ideas, America must become somewhat less exceptional.

America is already less unusual than it was at its founding, and through the eras of monarchies, of great dictators, and of soviet communism, when America’s detractors insisted she would be just one more short-lived republic.

But the process is far from over. The U.S. remains the essential, exceptional, nation

All the great ideas for the next advances in human well-being are being made here. Computers and the internet, biotech, genetics, the microbiome. Most importantly, the great ideas are being implemented here - the new companies are American.

More darkly, any hope for resolving the world’s gathering storm clouds reside in the U.S. If we don’t get our act together and revive our exceptionalism, and pretty darn soon, the consequences are truly terrifying.

Chaos in the middle east, more swarms of refugees. Russian and Chinese forcible expansion. Nuclear weapons going off here and there.  Pandemics of people, animals, or crops, which often follow waves of globalization.

The troops in the first Iraq war wore T-shirts saying “who you gonna call? 001.” It’s still the only number.

Enough self-congratulation. It’s time to move on to the second item of a conservative’s faith, that it’s all in danger of falling apart. And it is, more than ever.

The rule of law

I locate the core source of America’s exceptional nature in our legal system — the nexus of constitutional government, artfully created with checks and balances, and rule of law that guides our affairs. And that is also where I locate the greatest danger at the moment.

Lawyers? Government? You chuckle. That you may laugh just tells us how endangered this precious flower is. Without rule of law, any American character for innovation is quickly squashed.

Rule of law means the rights of the accused to know charges against them, to see evidence, to confront witnesses; the right of free speech and especially unwelcome political speech; the separation of prosecution and judges; grand juries to weigh evidence, and warrants for searches; the right to property, what that right means, and courts that will defend it (Fracking developed in the US pretty much because property rights include subsoil minerals, which are retained by the government in most other countries.); the delicate constitutional checks and balances that keep majorities from running amok, and delay awful ideas until enthusiasm passes; a free press, that can expose corruption. And so on ad infinitum.

Even democracy only lives on top of rule of law. We are a republic, not a democracy, and for good reasons. Democracy is a fundamentally a check on tyranny, not a good way to run day to day public affairs. Democracy without rule of law produces neither prosperity nor freedom. Even countries like Venezuela and Russia go through the motions of elections, but you can’t get a building permit without connections or speak out against the government without losing your job. Rule of law without democracy can function for a time and  tends to produce democracy. America lived for 150 years under rule of law while still a monarchy.

And without rule of law, democracy is soon subverted. Those in government are always tempted to use the government’s power to silence opposition and cement their hold on power, and ruin the economy in the process. That’s our danger. If speaking out for a candidate, a policy question such as climate change, or working on behalf of a losing party earns you the tender attentions of the SEC, IRS, EPA, CFPB, NLRB, and increasingly the DOJ and FBI, it does not matter who votes.

Erosion of rule of law

The erosion of rule of law is all around us. I see it most strongly in the explosion of the administrative, regulatory state. Most of the “laws” we face are not, in fact, laws, written by a legislature and signed by an executive as we are taught in school. They are regulations, promulgated by agencies.


This made sense, initially. For example, it does not make sense for Congress to write the criteria for maintaining an airliner. But now that system has spiraled out of control. The ACA and Dodd-Frank acts are poster children. Their enabling acts go on for thousands of pages. The subsidiary regulations go on for tens of thousands. The letters and statements of interpretation and guidance, now essentially laws of their own, go on for more.

Were these even rules that one can read and comply with, it wouldn’t be so bad. But the real problem is that rules are so vague and complex that nobody knows what they really mean.

Companies can’t just read the rules. They must ask for regulator approval ahead of time, which can take years, and gives arbitrary results.

Hence, the “rules” really just mean discretion for the regulators to do what they want — or to coerce behavior they wish out of companies by the threat of an arbitrary and adverse decision. Anyone can be found guilty at any time — if the regulator chooses to single them out, as an EPA administrator once said, for “crucifixion.”

Richard Epstein calls the system “government by waiver.” The law and regulations are impossible to comply with. So business after business asks for waivers. Which are granted, mostly. But you’d be out of your head to object too loudly to the actions of the agency or the administration it serves if you want a waiver.

On top of laws, rules, and judicial interpretations, now agencies write “guidance” letters to state their interpretation of a rule, which become laws of their own.

Like laws, new regulations are supposed to follow a procedure. They are supposed to respect and implement Congress’ authorizing legislation, incorporate public comment, serious cost benefit analysis, and so forth. But even these weak constraints are less and less binding.

Obamacare subsides. FTC internet regulation. The EPA taking on carbon and closing down coal. Keystone. The education department war on private colleges. All of these step far outside the established limits. (My point is not the merits of any of these, which may be fine regulations. My point is the lack of rule-of-law process in how they were promulgated)

The basic rights that citizens are supposed to have in face of the law are also vanishing in the regulatory state. The agency is prosecutor, judge, jury, appeal court, executioner, and recipient of fine money all rolled in to one.  You do not have conventional rights to see evidence and calculations, discover information, and challenge witnesses. Agencies change their interpretation of the law, and come after their victims ex post.

Retroactive decisions are common, never mind the constitutional prohibition on bills of attainder. When the DOJ and CFPB went after auto lenders, based on a statistical analysis of last names of people who had received auto loans, the computer program was obviously not announced ahead of time, so businesses had any idea if they were following the law. The CFPB went after PHH, a mortgage lender, issuing a novel interpretation of the law, charging the PHH ex-post with violation of that new interpretation, and increasing its own administrative Judge’s $6 million dollar fine to $109 million.

The expansion of the regulatory state, and disappearance of rule of law in its operation is already having its economic impact. The long-term growth rate of the US economy has been cut in half, driven largely by anemic investment.

I fear even more the political impact. The point of rule of law is to keep government from using law for political purposes. As we lose rule of law in the regulatory state, its politicization is inevitable. IRS and Lois Lerner. Campaign finance law and Gov. Scott Walker.

The drive towards criminalized regulatory witch hunts and going after the executives means one thing: those executives had better make sure their organizations stay in line.

ITT tech got closed down as part of the Administration’s war on for-profit education. Laureate International Universities, the for-profit college that coincidentally paid Bill Clinton $17.6 million as “honorary chancellor,” did not.

The SEC is piling on ambitious state attorney generals drive to sue Exxon, under securities law, for insufficient piety over climate change.

Big “settlements” with banks, are leading to millions of dollars channeled to left-wing and Democratic party political advocacy groups.

The classic analysis of regulation says it leads to capture: the industry captures the regulator, they get cozy, and regulation ends up being used to stifle competition in the industry. Capture is now going the other way. Health insurers, banks, energy companies are slowly being captured by the politicized regulators. Yes, they still get protection, but they must do the regulator and administration’s political bidding. And a constant stream of CEO show trials and criminal investigations keeps them in line. With calls for more. Just imagine what they could do with lists of donors to out-of-power party PAC and nonprofits.

Campaign finance law is precisely about regulating speech, and the government taking over who can support whom in an election. Corporations will be forced to disclose contributions. Unions will not.

In the classic story, industry captures the regulator, they get cozy, and regulation ends up being used to stifle competition in the industry. Capture is now going the other way. Industries are slowly being captured by the politicized regulators. Yes, they still get protection, but they must do the regulator and administration’s political bidding. And a constant stream of CEO show trials and criminal investigations keeps them in line.

The key attribute that makes America exceptional — and prosperous — is that you can afford to lose an election.  Grumble, sit back, regroup and try again next time. You won’t lose your job, or your business. You won’t suddenly find trouble getting permits and approvals. You won’t have alphabet soup agents at your door. You won’t have prosecutions of your political associations.

In many countries, people can’t afford to lose elections. Those in power do not give it up easily. Those out of power are reduced to violence.

We are losing that attribute. American exceptionalism does not mean that all the bad things that happen elsewhere in the world cannot happen here.

Perhaps I am guilty of nostalgia, but I sense that once upon a time, those in American public life believed that their first duty was to keep alive the beautiful structure of American government, and the policy passion of the day came second and within that constraint.

We are suffering now a devotion to outcome, to winning the momentary battle at any cost. Legislation that passes by one vote? Fine. Regulations written far past enabling authority? Go for it. Executive order in place of law or regulation? Do it. Just write a letter of interpretation to tell them what to do. Shove it down their throats. But when policies are adopted without at least grudging consensus that the battle was fairly won, you can’t afford to lose an election.

Since the Nixon impeachment, and with the spread of campaign finance law and regulation, we are seeing a greater and greater “criminalization of politics.” It’s part of using any tool to win. But it adds to America’s central exception to human affairs, that you can afford to lose an election.

Our public life depends on voluntary cooperation. Administrations follow the law, even when they don’t really have to. They defer to court and supreme court decisions which they could ignore. The president does have a pen and a phone — and the number at DOJ and FBI and IRS. The rule of law depends on him or her not using it.  We do not ask the question too deeply “so what are you going to do about it?” We are losing that respect for the system.

The idea of rule of law, the reverence for process over outcome seems to be disappearing. Few college seniors will have any idea what we’re talking about. Even basic civics courses are passé. And we see so much on both sides of the partisan divide that ignores it. Our many foreign-policy misadventures have a common theme, forgetting that all societies need rule-of-law foundations not just the superficial exercise of voting.

Rule of law, then, depends on a culture that respects it, not just the written word. And that culture depends on people to some extent understanding how it works. Like medieval peasants, having lost the recipe, looking up in marvel at Roman concrete structures, I fear our children will wonder just how the architecture of a broken system once worked its marvels. And the Romans lasted 1000 years. Pax Americana seems to be running out of steam at a mere 250.

Egalitarianism and the pursuit of happiness.

Our government’s purpose is set forth in the Declaration of Independence: to secure Life, Liberty, and the pursuit of Happiness, period. Government does not exist to lead us to some grander purpose: the advancement of the Christian faith, or the restoration of the Caliphate; the spread of communism on earth; the greatness of our kultur, or the glorious American Nation. When Kennedy said “ask not what your country can do for you — ask what you can do for your country” he had it precisely wrong.

Yes, American Exceptionalists wish to spread their ideas to the world, but not to subjugate those people to some greater cause — merely to allow them to pursue Life, Liberty and Happiness as those people see it.

A central article of exceptionalist faith is that American institutions are universal. We deny that they are specific to a culture or (heavens) race. People everywhere want freedom, and can learn to use American institutions to get it as quickly as they can learn to use an American iPhone to order American Pizza. (Sorry Italy!)

Most of all, government does not exist to further the ethnic or religious identity of a people. Throughout the world, governments parcel up the spoils of power along ethnic and religious lines. Each losing ethnic or religious group then needs its own government to defend its simple economic and expressive rights. Multi-cultural and multi-ethnic empires existed before. But by and large they were empires of tolerance, not right, and extracted resources from citizens equally rather than served them equally.

In the US, the children of Serbians and Croatians, of Indians and Pakistanis, of Catholics and Protestants and Muslims and Jews, live side by side and intermarry. None imagine that they needed a government run by one of their own ethnic group or religion for basics like getting a business permit. The idea that government serves to foster their ethnic or religious identity becomes quickly foreign. Yes, this melting pot ideal has never been perfect, but it holds much more than in any other country.

But how quaint this melting pot view seems now!

Interestingly, that ideal it disappeared first from our foreign policy. For a hundred years, the U.S. has stood behind ethnic or religious governments, happily playing one against the other, and not once saying “you know, we have a better idea for managing this, one where you won’t be at each other’s throats for another century or so.”

But that exceptional ideal is now vanishing domestically as well. Our government requires us to fill out forms with fine racial categorizations. The core principle, that to be treated fairly by the law, you  do not need to be represented by a police officer, mayor, congressman, senator, or president of your own particular racial, ethnic or religious identity is not not only fading away, but its opposite is enshrined in law.

It is true that these measures stemmed from the overturning of the even more egregious violation of American principles in laws governing African Americans, not only in the Jim Crow south but the segregated north as well. But at least we paid lip service to the principle.

A country that believes, and enshrines in law, the principle — opposed to everything in American exceptionalism — that you cannot be treated fairly by a government unless the officials of that government share your exact racial, ethnic, religious, and soon gender identity, will soon fracture.

Similarly, exceptional America does not recognize the concept of “class.” Our disavowal of aristocracy and titles set us distinctly apart from Britain in the 19th century. And yet we now use that language all the time — “middle class” or “working class” especially. Economic law, regulation, and policy, increasingly treats income as a permanent class designator, as fine and permanent as Indian castes, and treats its citizens on that basis every bit as much as monarchic England treated peasant differently from nobility. We decry the reduction in mixing in America, yet when housing, food, medicine and so on are distributed based on income, income becomes a permanent class marker.

Opportunity is a key part of the egalitarian credo. But a society divvied up by formal categories of class, race, and income quickly loses that opportunity. As with economic regulation though, each such division is a client usefully exploited for political advantage. Exceptional America foreswore the opportunistic politics of such divisions.

Don't get me wrong. Identity is important. Contemporary America is one of the most tolerant societies on earth, and if people want to use their liberty to explore their national, enthic, gender, religious, class or other identities, more power to them. But eventually, once the egregious persecutions of law have passed, we must aim to keep identity out of politics, especially presidential politics, and especially the ethnic and religious identities that are the organizing principle for conflict around the globe, and into culture and religious and community organizations where it belongs.

Fixing it

The third article in exceptionalist faith, however, is optimism; that despite the ever-gathering clouds, America will once again face the challenge and reform. There is a reason that lovers of liberty tend to be Chicago Cubs fans. (And, as a member of both tribes, I take hope from one for the other!)

Healing is not something we should take for granted, however. There is no automatic self-correcting force. Every scrape with disaster is a scrape with disaster. It can happen here. Hope is not a strategy.

The recipe is straightforward. Rather than just demand “less regulation” even louder, we need to bring rule-of-law process and protections to the regulatory state, and revive them in our legal procedures as well. It’s time to pay attention to the structure of government rather than on its outcome.

Congress should re-structure the law surrounding regulation. Stop writing 1000 page page bills. Strengthen the Administrative procedures act describing how regulations are written and implemented. Require serious, and retrospective, cost benefit analysis. Put in “shot clocks,” time limits for regulatory decisions. Give people more avenues to challenge regulation in a timely manner.

Good news: people on both sides of the partisan divide recognize this fact. The “better way” Ryan plan contains just this kind of radical restructuring of the regulatory process. It goes so far as to require that Congress must approve new major regulations — a large change in the balance of power back to Congress and away from Administration and Agencies.  The Obama administration tried to strengthen the OIRA (office of information and regulatory affairs)  its office of regulatory affairs, to regulation. The effort failed, but it signals a bipartisan realization that the regulatory state is broken and taught some useful lessons.

The court system plays a crucial role..  Fix the court system so you’re not bankrupt and dead by the time you win. The litmus test for new judges should be their willingness to sustain rule-of-law restrictions on the regulatory state, not to re-fight social issues. Let the litmus test be Wickard v. Filburn, which declared a man may not grow wheat in his own yard to make his own bread without a Federal Wheat Marketing Order,  not Roe v. Wade.

A small comment on foreign policy

I have focused on economics, but nowhere is the decline of American exceptionalism more evident than in foreign policy. Post world war II pax Americana has been the most peaceful and prosperous period in all human history. But its development and success has been one narrow scrape after another, and any of them could have gone wrong. The next one may.

What country can look at the experience of Ukraine — to which the United States guaranteed territorial integrity in exchange for giving up nuclear weapons — North Korea, India, Pakistan, Libya, and Iran and not conclude that getting nuclear weapons and rattling them is a darn good idea?

Teddy Roosevelt said to speak softly and to carry a big stick. America these days speaks loudly, aimed at the daily polls, doesn’t mean it, and announces ahead of time that it won’t use its stick. Eisenhower did not tell Hitler ahead of time how many troops he was going to put in at Normandy, and how quickly he would take them out. The answer was, enough to win, period.

The Bush administration gave the project of bringing democracy to the world a bad name, in part by misunderstanding just how much rule of law must underpin democracy, and in part by misundnerstanding just how much the world still needs the idea and culture of rule of law.
For a messianic, universalist, religion, we do precious little missionary work these days.

A small thought for those anxious for America to retreat from its "exceptional"  leadership role and allies to pay more and be more active: He who picks up the check gets to pick the restaurant.

Hope

It is common to bemoan the state of American politics. But we should be optimistic. The major parties are blowing up. We are in a once-in-a-generation major realignment and redefinition. Only a big realignment can produce the rule-of-law and free-market coalition that I describe here. Power may shift from the once imperial presidency to an emboldened Congress. Only a time of big change offers big opportunity.

Finally, ideas matter. An exceptional — and functional — America must understand how she is supposed to work. We are a democracy, and if voters don’t respond with elemental understanding of their rights, and outrage when those rights are violated, as the founders did, we can’t expect miracle politicians to save us.

How do we expect our children to understand the machinery if we don’t tell them? The schools and universities don’t do that any more. But others institutions do!

You’re sitting in an exceptionally American institution, a reservoir of, as our banner says “ideas defining freedom.” Sometimes that reservoir is an ark, keeping ideas alive in a dark age. Sometimes it is a fountain, ready to bring those ideas to the world when it’s ready. But you, me, and the institutions we form — another brilliantly exceptional American habit — are crucial to her renewal.

830am - 850am: Registration

850am Welcome

9am to 10.40am: Behavioural Science and Policy Case Studies (Chair: Mark McGovern)

Katja Fells (RWI) "Behavioral Economics and Energy Conservation – A Systematic Review of Innovative Interventions and their Causal Effects”.
Nicole Andelic (QUB) "Debt advice is better delivered face-to-face than via telephone".
Thomas Conway (NUIG): "Investigating the effects of the Great Recession on the mental health of Irish third-level students."
Mark McGovern (QUB) "Disparities in Early Life Investments and Children’s Time Use".
Cathal FitzGerald (DCU) "Surprisingly Rational? The Case of 100% Mortgages in Ireland in 2005".

10.40am to 11am: Coffee

11am to 1pm:  Measurement, Method, and Behavioural Science (Chair: Pete Lunn)

Carla Prentice (QUB): "Time Discounting as a Mediator of the Relationship between Financial Stress and Health".
Seda Erdem (Stirling): "Do front-of-pack nutrition labels nudge healthier food choices? A choice experiment application".
Aine Ni Choisdealbha (ESRI) "Harnessing habitual behaviour in the laboratory: an experiment on how busy consumers respond to environmental information".
Robert Murphy (Stirling/Irish Department of Health): "QALY measurement: The influence of providing patient information on the general population’s valuation of ill-health".
Marek Bohacek (ESRI) "Investigating a central mechanism of economic decision making: the ability to trade-off incommensurate attributes".
Danny Campbell (Stirling): "Discrete Choice Experiments and Behavioural Economics".

1pm to 140pm: Lunch

140pm to 320 pm: Regulation, Policy, and Behavioural Science (Chair: Liam Delaney)

Clare Delargy (BIT): "Behavioural Insights and Public Policy".
Michael Daly (Stirling): "Self-control, health, and public policy".
Maureen Maloney and Alma McCarthy (NUIG): "Automatic enrolment and employee risk:  An analysis using a bounded rationality framework".
Leonhard Lades (Stirling) "Self-control, well-being, and normative measures of welfare".
Karl Purcell and Laura Watts (IGEES). "Behavioural Economics and Irish policy".

320pm to 330pm: Coffee

330pm to 415pm: Keynote Speaker 1: Professor Muireann Quigley (Newcastle Law School) "Libertarian Paternalism & Nudging: On Alluring Concepts Public Policy".

415pm to 5pm: Keynote Speaker 2: Professor Michelle Baddeley (UCL) "Experts in a Policy World: Behavioural economic insights for improving expert advice to policy-makers and regulators".

From Chris Kirkham in today's Wall Street Journal, department of you can't make this stuff up:

Nearly two-thirds of Los Angeles voters last week approved a citywide affordable-housing requirement.... 

The rule requires that up to 25% of units in rental properties and up to 40% in for-sale projects meet affordability guidelines. Alternatively, developers can pay a fee to the city.
New York City and Seattle passed similar requirements earlier this year. 

The Los Angeles initiative goes a step further, however. It also sets wage standards for the projects. 

Developers must pay construction wages on par with those required for public-works projects, hire 30% of the workforce from within city limits, set aside 10% of jobs for certain disadvantaged workers living within 5 miles of the project and ensure 60% of workers have experience on par with graduates of a union apprenticeship program. 

The mandates could double the hourly wage for some construction trades compared with state median wages. The pay for a carpenter, for example, could rise to $55.77 an hour from $26.16, according to an economic analysis sponsored by opponents of the initiative.

I wonder what that will do to the cost of housing? Notice also that by restricting who can do construction jobs and forcing up wages, there will be lots of new unemployment among lower-skilled or new entrants to construction, often a first step up the ladder for less educated people.

... some developers will be less affected by the change. Those who build primarily affordable housing, using government subsidies, already must pay higher wages. Developers of large high-rise projects, meantime, often use union work crews.

The measure was backed in part by the Los Angeles County Federation of Labor, a union group,

A union group delighted to eliminate low-wage competition. Let them eat tacos?

“There’s a huge shortage of housing in L.A., and a huge shortage of low-income housing,” he [Shawn Evenhaim, chief executive of Los Angeles developer California Home Builders] said. “They took that problem and made it worse.”

Left out of the article, and a big question I have if anyone knows the answer: who gets "affordable" or "below market rate" housing. Rather obviously more people want subsidized housing than can get it. So who wins the lottery?

"Affordable" housing is parceled out by income limits. So what happens if you get a better job? Are you kicked out of your house? That sounds like a great recipe for perpetuating income inequality. What happens if you get a job offer somewhere far away? Can you trade one "affordable" house for another? I bet not. One more nail in the coffin of advancement.

More deeply, if these things work the way I suspect, there is a long waiting list and a lottery. Once in, you're in so long as you don't get more income. Thus, they entrench and benefit people who have been in one place a long time. And the people really hurt by "affordable" housing -- which restricts supply and raises costs of all other housing -- are newcomers, especially low-income newcomers who would like to come for better jobs. And new businesses who would like to hire ambitious low-income newcomers and give them better incomes.

So the effects are not just to raise house prices -- they are to increase inequality, reduce opportunity, especially for low skill and low income people, and reduce the economic vitality of the region.

Matt Yglesias (HT Marginal Revolution) writes well of the danger facing America in the era of the regulatory state.

Those who support the regime will receive favorable treatment from regulators, and those who oppose it will not. Because businesses do business with each other, the network becomes self-reinforcing. Regime-friendly banks receive a light regulatory touch while their rivals are crushed. In exchange, they offer friendly lending terms to regime-friendly businesses while choking capital to rivals. Such a system, once in place, is extremely difficult to dislodge precisely because, unlike a fascist or communist regime, it is glued together by no ideology beyond basic human greed, insecurity, and love of family.

He's talking about the Trump administration.  Matt, where have you been these last 8 years? Well, better late then ever, but wow those partisan glasses make the mirror hard to see. (I might add that this is exactly how fascist and communist regimes work in reality. Ideology is easy to find.)

Update for Fire Man (I try not to endlessly push my previous work.) The Rule of Law in the Regulatory State

Update 2. A little less snarky. Still, the danger is real. Will Republicans, now in power, say thank you very much, pick up the phone and pen, and do unto D like D did unto R? Or will they be the ones to undo tit-for-tat, shove-it-down-their-throats policy, and reestablish executive restraint at least by custom if not by statute? That will take losing or delaying some policy fights, and foregoing the delicious irony of revenge. President elect Trump did threaten to use the IRS against political enemies. Let us hope that like much else was campaign rhetoric. Will the repeal and replace Obamacare happen strictly along party lines in 100 days -- and then be overturned itself by President Warren or Chelsea Clinton? Or will they take the time and effort to get a significant Democratic buy in? Time will tell.

I did not mean to say that the worry is unfounded, only that it goes back a ways in US politics,  and the  fight would now be oh so easier if people like Yglesias had kept true to principle while their policy priorities were being shoved down people's throats, and their political antagonists were the victims of the politicized regulatory state.

Good commentary from Glenn Greenwald on the Inspector-Renault quality of this outrage.

Boyce CJ, Wood AM, Daly M & Sedikides C (2015) Personality change following unemployment, Journal of Applied Psychology, 100 (4), pp. 991-1011. DOI: http://dx.doi.org/10.1037/a0038647

[Media coverage of this paper in the Daily Mail, www.managers.co.uk, STV News, Science Daily, Business Insider]

Boyce, C. J., & Wood, A., M., & Brown, G. D. A. (2010). The dark side of conscientiousness: Conscientious people experience greater drops in life satisfaction following unemployment. Journal of Research in Personality, 44, 535-539.

[Media coverage of this paper at Psychology Today ]

Egan, M., Daly, M., Delaney, L. (2016). Adolescent psychological distress, unemployment, and the Great Recession: evidence from the National Longitudinal Study of Youth 1997. Social Science & Medicine, Volume 156, May 2016, Pages 98–105

[Media coverage of this paper on PsychCentral ,Herald Scotland, Psychological Science, Medical Daily]

Daly, M., Delaney., L., Egan., M., & Baumeister, R. (2015). Childhood self-control and unemployment throughout the life span: evidence from two British cohort studies. Psychological Science, 26(6):709-23.

[Media coverage of this paper in the Independent and at Science Daily]

Daly, M., Delaney., L and Egan., M. (2015). Childhood psychological distress and adult unemployment: evidence from two British cohort studies. Social Science and Medicine, Volume 124, January 2015, Pages 11–17.

[Feature on this paper on UK Data Service, Fair Play for Children]

Daly, M., & Delaney, L. (2013). The scarring effect of unemployment throughout adulthood on psychological distress at age 50: Estimates controlling for early adulthood distress and childhood psychological factors. Social Science and Medicine, Volume 80, 19-23.

Egdell V & McQuaid R (2016) Supporting disadvantaged young people into work: insights from the Capability Approach, Social Policy and Administration, 50 (1), pp. 1-18.

Bilfulco, Egdell, McQuaid, Berthet, Simon, Monteleone, Mozzana, Rosenstein, Dif-Pradalier, Bonvin, Hollywood, Rosendal Jensen, Christrup Kjeldsen, Sztandar-Sztanderska, Zieleńska, Haidinger, Kasper, Düker, Ley, Bergström (2015). Capabilities for Voice, Work and Education: Critical Analysis of Programmes for Disadvantaged Young People in Europe. Facing Trajectories from School to Work. Springer.

McQuaid (2015). How to beat the hidden discrimination at the heart of the job hunt. The Conversation.

McQuaid (2014). Youth unemployment produces multiple scarring effects. LSE Blog.

Graham H & McQuaid R (2014) Exploring the impacts of the UK government’s welfare reforms on lone parents moving into work. Glasgow Centre for Population Health. Glasgow Centre for Population Health.

Fuertes V & McQuaid R (2013) The Work Programme: a new public governance policy or a continuation of new public management? . EVeP, 20. Fondazione Volontariato e Partecipazione.

Hollywood E, Egdell V & McQuaid R (2012) Youth unemployment initiatives and the impact on disadvantaged youth. The Skills Development Scotland Co Ltd. Spotlight article: Labour Market Focus.

Hollywood E, Egdell V & McQuaid R (2012) Addressing the issue of disadvantaged youth seeking work, Social Work and Society, 10 (1).
Egdell V, Hollywood E & McQuaid R (2015) 11.2.4 Addressing the Issue of Unemployment among Disadvantaged Youth in Scotland: Developing the Capability for Work. In: Otto H-U, Atzmüller R, Berthet T, Bifulco L, Bonvin J-M, Chiappero-Martinetti E, Egdell V, Halleröd B, Kjeldsen CC, Kwiek M, Schröer R, Vero J, Zielenska M (ed.). Facing Trajectories from School to Work: Towards a Capability-Friendly Youth Policy in Europe. Technical and Vocational Education and Training: Issues, Concerns and Prospects, 20, Dordrecht: Springer, pp. 248-256.

Hollywood E, Egdell V, McQuaid R & Michel-Schertges D (2012) Methodological issues in operationalising the capability approach in empirical research: An example of cross-country research on youth unemployment in the EU, Social Work and Society, 10 (1).

Bown, Neary, Vittal Katikireddi, Thomson, McQuaid, Leyland, Frank, Leavons, de Pellette, Kiran, Macdonald (2015). Protocol for a mixed-methods longitudinal study to identify factors influencing return to work in the over 50s participating in the UK Work Programme: Supporting Older People into Employment (SOPIE). BMJ Open 2015;5:e010525.

Gilmartin M & Korobilis D (2012) On Regional Unemployment: An Empirical Examination of the Determinants of Geographical Differentials in the UK, Scottish Journal of Political Economy, 59 (2), pp. 179-195.

Allan G, Swales JK, Gilmartin M & McGregor PG (2012) Report on the evidence for net job creation from policy support for energy efficiency and renewable energy: An appraisal of multi-sectoral modelling techniques. UK Energy Research Centre (UKERC).

Bell & Blanchflower

Publications

Bell, D.N.F. and Blanchflower, D.G. (2015). Youth unemployment in Greece: measuring the challenge. IZA Journal of European Labor Studies, December 2015, 4:1.

Blanchflower, D.G (2015). As good as it gets? The UK labour market in recession and recovery. National Institute Economic Review, 231, Feb 2015.

Bell, D.N.F. and Blanchflower, D.G. (2014). Labor Market Slack in the United Kingdom. Peterson Institute for International Economics Working Paper No. 14-2.

Bell, D.N.F. and Blanchflower, D.G. (2014). The Happiness Trade-Off between Unemployment and Inflation. Journal of Money, Credit and Banking, Volume 46, Issue S2, pages 117–141, October 2014.

Bell, D.N.F. and Blanchflower, D.G. (2013). Underemployment in the UK Revisited. National Institute Economic Review May 2013 vol. 224 no. 1 F8-F22

Blanchflower & Oswald (2013). The Danger of High Home Ownership:Greater Unemployment. The CAGE-Chatham House Series, No. 10, October 2013

Bell, D.N.F. and Blanchflower, D.G. (2011) “Young People and the “Great Recession”, Oxford Review of Economic Policy 2011 27: pp. 241-267

Bell, D.N.F. and Blanchflower, D.G. (2011). ‘Youth Unemployment in Europe and theUnited States’, Nordic Economic Policy Review No 2

Bell, D.N.F. and Blanchflower, D.G. (2011). ‘Underemployment in the Great Recession’, National Institute Economic Review, 215, January, R23-R33

Bell, D.N.F., and Blanchflower, D.G. (2011) ‘The Crisis, Policy Reactions and Jobs’in ‘Making Globalization Socially Sustainable’, World Trade Organisation/International Labour Organisation

Bell, D.N.F. and Blanchflower, D.G. (2010). ‘The UK Labour Market in the GreatRecession’, National Institute Economic Review, 214, October, R3-R25

Bell, D.N.F and Blanchflower D.G. (2010). ‘Recession and Unemployment in the OECD’, CESifo Forum, Issue 1, March, pp.14-21

Bell D & Blanchflower D (2010) Youth Unemployment: Deja Vu?. Stirling Economics Discussion Paper, 2010-04.

Bell D & Blanchflower D (2009) What should be done about rising unemployment in the UK?. Stirling Economics Discussion Paper, 2009-06.

Mentions of Bell and Blanchflower work on youth unemployment in Hansard:

Hansard House of Commons Debates, 6th July 2009, Volume No. 495, Part No. 106, column 724: http://www.publications.parliament.uk/pa/cm200809/cmhansrd/cm090706/debtext/90706-0008.htm

Hansard House of Commons Debates, 13th July 2011, Volume No. 531, Part No. 187, Column 352: http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm110713/debtext/110713-0002.htm

Hansard House of Commons Debates, 26th March 2009, Volume No. 490, Part No. 54, Column 440: http://www.publications.parliament.uk/pa/cm200809/cmhansrd/cm090326/debtext/90326-0002.htm

Youth Unemployment and the Future Jobs Fund - Work and Pensions Committee, Written Evidence ordered by the House of Commons to be printed 13 December 2010. Written evidence submitted by the Confederation of British Industry (CBI): http://www.publications.parliament.uk/pa/cm201011/cmselect/cmworpen/472/472we03.htm

Examples of press and blog reports of Bell and Blanchflower work on youth unemployment.

Jan 2016. The walled world of work. The Economist.

Blanchflower (2015). David Blanchflower: Young people are suffering from austerity in the UK as well as in Greece. Independent.

Blanchflower (2014). David Blanchflower: Reasons to be concerned by the rise of self-employment. Independent.

McFall, John (2009). The Road to Recovery. The Guardian, 22nd March. Available at: http://www.guardian.co.uk/politics/2009/mar/23/john-mcfall-uk-economy

Delaney, Liam (2009). Bell and Blanchflower - Unemployment in the OECD. The Irish Economy (Blog entry, 4th October). Available at:http://www.irisheconomy.ie/index.php/2009/10/04/bell-and-blanchflower-unemployment-in-the-oecd

Centre for Analysis of Youth Transitions (2011). Growth Seminar, Institute for Fiscal Studies. Summary available at:http://www.ifs.org.uk/docs/cayt_10081

Dear President-Elect Trump:

The media and punditocracy are full of speculation about your "100 day" program. It sounds like you and your team might actually be preparing for one. Don't do it. Please.

I know, every new president wants to repeat Franklin Roosevelt’s hundred days: a flurry of new legislation, executive orders and agencies, dramatically changing the country (for better or worse) and cementing his (or her, someday) place in history.

It's not the time, and you're not that president. You can only achieve a similar place in history with the opposite course.

It’s not 1932. We’re not in a national political and economic emergency. Our country does not need a massive dose of new laws, new regulations, new policies, and new agencies. It has lots of laws, regulations, and agencies that aren’t working.  

The task for our time is to fix the dysfunction, soothe the polarization, get the sensible compromises passed, and clean up the administration of government. Tax reform.  Regulatory reform. Entitlement reform. Immigration reform. Criminal-justice reform.  Fix health insurance. Fix Dodd-Frank. There are straightforward, bipartisan workable if not perfect answers to most of these long-standing messes that have been torpedoed by absolutists on one side or another.  Read the Paul Ryan "better way" plan, detailed and prepackaged. If you really think you can do better, work from that basis. You don't have to write a word of new proposals yourself. The more something is someone else's idea, the easier it is to get it passed.

Find a deal. Get it done. Quietly, behind the scenes. Let your opponents in both parties have a face-saving way to help you. Don't try to shove things down people's throats, either legislators or voters. That’s what great politicians do.

Source: Wall Street Journal

No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming...

Keep reading here, the Wall Street Journal Oped. I'll post the whole thing in 30 days as usual.

Somehow the WSJ thinks anyone is interested in growth and serious policy on the eve of the election. Or maybe they were just tired of Trump vs. Clinton and needed to fill space.  At any rate, it might give you a little reprieve from the election coverage.

I will use this post to gather readings and resources in the area of behavioural science and law. Below just a starter. As often the case with these posts, I am aiming to give a wide overview of the different streams of thought - these are not posted as endorsements of any of the papers. The overlap between law and behavioural science will be a big feature of our new Dublin research and teaching programme, and we are also in the process of organising further workshops in this area (see a related post and workshop details on the topic of ethics and behavioural science policy).Aaken (2014). Behavioral International Law and Economics. Harvard International Law Journal, 55 (2).


Whereas the rational choice approach to international law has been widely accepted in legal scholarship and international relations theory, challenges to the rational choice paradigm in economic analysis of international law have hitherto not been systematically explored. Nevertheless, behavioral law, economics and psychology have been successfully applied to national law constellations. Behavioral economic insights have furthermore been used in international relations scholarship under the heading of “political psychology,” but international norms are neglected. Building on all those insights, this Article explores the potential and challenges of extending the behavioral law and economics approach to public international law and thus to further refine our understanding of international law. It looks specifically at treaty design problems and compliance questions. This ties in with increased use of empirical research in international law, a clear desideratum for evidence-based international law.

Aaken (2015). Judge the Nudge: In Search of the Legal Limits of Paternalistic Nudging in the EU. Alberto Alemanno and Anne Lise Sibony (eds.), Nudging and the Law. What Can EU Law Learn from Behavioural Sciences? (Oxford: Hart Publishing) 2015, Forthcoming U. of St. Gallen Law & Economics Working Paper No. 2015-01

Nudges having paternalistic purposes (paternalistic nudges) pose special legal problems in liberal States. Surprisingly, the discussion on regulation-by-nudging has not focused on the constitutional limits to nudging. Although the property rights of firms potentially infringed by nudging measures are dealt with in more detail in the literature as well as by national and international courts and tribunals, the potential infringement of the rights of those being nudged is neglected. But judges may at one point be confronted with a nudge regulation challenged by the individuals being nudged; and even before reaching a court, the legality of nudging should be scrutinised by legislators.

I explore the legal limits of paternalistic nudging under the European Convention of Human Rights and the EU Charter of Fundamental Rights, judging different types of nudges by the proportionality principle. At issue is the question of how much paternalistic nudging and what types of paternalistic nudges the fundamental rights protection in the EU permits. Before the EU uses paternalistic regulation-by-nudging, we need to “judge the nudge.”

Alemanno & Sibony (2015). Nudge and the Law: A European Perspective (Modern Studies in European Law). Hart Publishing.

Behavioral sciences help refine our understanding of human decision-making. Their insights are immensely relevant for policy-making, since public intervention works much better when it targets real people rather than imaginary beings assumed to be perfectly rational.

Increasingly, governments around the world are keen to rely on those insights for reshaping public interventions in a wide range of policy areas, such as energy, health, financial services, and data protection. When policy-making meets behavioral sciences, effective and low-cost regulations can emerge in the form of default rules, smart disclosure, and simplification requirements.

While behaviorally-informed intervention has a huge potential for policymaking, it also attracts legitimacy and practicability concerns. This book takes a European perspective on those issues and explores the legal implications of the emergent phenomenon of behavioral regulation by focusing on the challenges and opportunities it may offer to EU policy-making and beyond.

It will be a fascinating read for academics and practitioners working in the field of European law and consumer law, as well as for policymakers.

Alemanno & Spina (2014) Nudging legally: On the checks and balances of behavioral regulation. Int J Constitutional Law (2014) 12 (2): 429-456.
doi: 10.1093/icon/mou033

As behavioral sciences are unearthing the complex cognitive framework in which people make decisions, policymakers seem increasingly ready to design behaviorally informed regulations to induce behavior change in the interests of the individual and society. After discussing what behavioral sciences have to offer to administrative law, this article explores the extent to which administrative law may accommodate their findings into the regulatory process. After presenting the main regulatory tools capable of operationalizing behavioral insights, it builds a case for integrating them into public policymaking. In particular, it identifies the need to develop a legal framework capable of ensuring that behavioral considerations may inform the regulatory process while at the same time guaranteeing citizens’ constitutional rights and freedoms vis-à-vis the regulatory state.

Amir & Lobel (2008). Stumble, Predict, Nudge: How Behavioral Economics Informs Law and Policy. Columbia Law Review, Vol. 108, No. 8 (Dec., 2008), pp. 2098-2137.

Beales (2015). Behavioral economics and credit regulation. 11 J.L. Econ. & Pol'y 349 (2015).

Bubb & Pildes (2014). How Behavioral Economics Trims Its Sails and Why. Harvard Law Review, Vol. 127, 2014, NYU Law and Economics Research Paper No. 13-29.

The preference of behavioral law and economics (BLE) for regulatory approaches that preserve “freedom of choice” has led to incomplete policy analysis and inefficient policies. BLE has been broadly regarded as among the most promising new developments in public policymaking theory and practice. As social science, BLE offers hope that better understanding of human behavior will provide a sounder foundation for policy design. As politics, BLE offers a possible political consensus built around minimalist forms of government action — “nudges” — that preserve freedom of choice. These two seductive dimensions of BLE are, however, in deep tension. Put simply, it would be surprising if the evidence documenting the failure of individual choice implied a turn toward regulatory tools that preserve individual choice.


Developing BLE fully along its social-scientific dimension would reveal two categories of recurring limitations in BLE. First, BLE often artificially excludes traditional regulatory tools, such as direct mandates, from its analysis of policy options. However, BLE’s preferred nudges are, in important cases, not likely to be effective — ironically, for reasons BLE itself identifies. BLE has also neglected the ways in which behavioral failures interact with traditional market failures and the implications of this interaction for policy design. A more complete framework generates policy recommendations beyond both nudges and neoclassical economic prescriptions.

Second, BLE does not properly evaluate, at times, how its own regulatory tools actually function. Many of these seemingly choice-preserving tools are not nearly as light touch as advertised. The default rules so central to BLE are often better viewed as preserving the formality of choice while, for many individuals, functioning as effective mandates. The view that people can always rationally opt out has led policymakers to set these powerful defaults at the wrong levels, resulting in counterproductive policies.

We illustrate the costs of BLE’s commitment to freedom of choice by analyzing three of the most important areas for current policy: retirement savings, consumer credit, and environmental protection.

Cardi et al (2012). Does Tort Law Deter Individuals? A Behavioral Science Study. Journal of Empirical Legal Studies, Volume 9, Issue 3, September 2012, Pages 567–603.

For nearly four decades, economic analysis has dominated academic discussion of tort law. Courts also have paid increasing attention to the potential deterrent effects of their tort decisions. But at the center of each economic model and projection of cost and benefit lies a widely accepted but grossly undertested assumption that tort liability in fact deters tortious conduct. This article reports the results of a behavioral science study that tests this assumption as it applies to individual conduct. Surveying over 700 first-year law students, the study presented a series of vignettes, asking subjects to rate the likelihood that they would engage in a variety of potentially tortious behaviors under different legal conditions. Students were randomly assigned one of four surveys, which differed only in the legal rules applicable to the vignettes. In summary, the study found that although the threat of potential criminal sanctions had a large and statistically significant effect on subjects' stated willingness to engage in risky behavior, the threat of potential tort liability did not. These findings call into question widely accepted notions about the very foundations of tort law.

Cooper, J.C. & Kovacic, W.E. Behavioral economics: implications for regulatory behavior. J Regul Econ (2012) 41: 41. doi:10.1007/s11149-011-9180-1

Behavioral economics (BE) examines the implications for decision-making when actors suffer from biases documented in the psychological literature. This article considers how such biases affect regulatory decisions. The article posits a simple model of a regulator who serves as an agent to a political overseer. The regulator chooses a policy that accounts for the rewards she receives from the political overseer—whose optimal policy is assumed to maximize short-run outputs that garner political support, rather than long-term welfare outcomes—and the weight the regulator puts on the optimal long run policy. Flawed heuristics and myopia are likely to lead regulators to adopt policies closer to the preferences of political overseers than they would otherwise. The incentive structure for regulators is likely to reward those who adopt politically expedient policies, either intentionally (due to a desire to please the political overseer) or accidentally (due to bounded rationality). The article urges that careful thought be given to calls for greater state intervention, especially when those calls seek to correct firm biases. The article proposes measures that focus rewards to regulators on outcomes rather than outputs as a way to help ameliorate regulatory biases.

Engel (2013). Behavioral Law and Economics: Empirical Methods. MPI Collective Goods Preprint, No. 2013/1

Originally, behavioral law and economics was an exercise in exploring the implications of key findings from behavioral economics (and psychology) for the analysis and reform of legal institutions. Yet as the new discipline matures, it increasingly replaces foreign evidence by fresh evidence, directly targeted to the legal research question. This chapter surveys the key methods: field evidence, survey data, vignette and lab experiment, discusses their pros and cons, illustrates them with key publications, and concludes with methodological paths for future development. It quantifies statements with descriptive statistics about the 77 behavioral papers that have been published in the Journal of Empirical Legal Studies since its foundation until the end of 2012.


Faure & Luth (2011). Behavioural Economics in Unfair Contract Terms: Cautions and Considerations. Journal of Consumer Policy, September 2011, Volume 34, Issue 3, pp 337–358.