Streetwise Professor

October 9, 2010

Law is Dying–So Become a Lawyer

Filed under: Uncategorized — The Professor @ 12:09 pm

HHS Czarina–I mean Secretary–Kathleen Sebelius has deigned to grant waivers from Obamacare mandates to big companies like McDonalds and Jack in the Box, and some big unions.  Get ready for this Brave New World, and not just in health care.

2010’s legislative monstrosities, notably Frank-n-Dodd and Obamacare, delegate massive discretionary powers to Federal departments and agencies.  As massive as these bills are, they will shrink into insignificance as compared to the torrents of paper that will cascade from government offices.  Order upon order, decision upon decision, interpretation upon interpretation will engulf us once the bureaucratic presses begin cranking away in earnest.

The effects of this will be entirely deleterious, and contrary to founding principles.  In the terms of the economics literature, Obamacare, Frank-n-Dodd, etc., are incomplete contracts that do not specify actions in all eventualities.  Instead, they largely create governance mechanisms and delegate residual control rights.  In the event, the rights of control are delegated to political appointees and staffers at Federal cabinet departments and agencies.

These control rights determine bargaining power.  And what that means is that in health care and finance–meaning, in just about every economic activity, because virtually every business intersects these sectors–virtually everything will be a negotiation between the government and those in its thrall–meaning the rest of us.  (The word thrall in its noun form, by the way, is a synonym for” serf.”)  These control rights also determine the allocation of the bargaining surplus–who gets the goodies, and who gets screwed.

This vast grant of control rights to bureaucrats will favor, in the first instance, large, concentrated, and organized interests at the expense of diffuse individuals and small firms; Czarina Kathleen I’s grant of a feudal privilege to large companies and unions is just an early example of that.  It will encourage politicization and corruption, as the legal tender in these transactions will be political support and obeisance.  It will move the US further towards corporatism.  It will stifle innovation and creative destruction, as the small and the upstart are at a comparative disadvantage in negotiating in such a system.  It will, in short, lead to the kind of sclerosis that Mancur Olson described, and the kind of ossification that Schumpeter predicted would signal the death of vibrant capitalism.

You can get a taste of what’s in store by looking at some historical examples.  In the last week I read some law review articles about futures regulation in the 1970s-1990s.  Under the Commodity Exchange Act, all contracts for “future delivery” had to be traded on exchanges regulated by the government.  This requirement, an absurdity when it was adopted starting with the Grain Futures Act of 1922, was beyond absurdity in the 1970s when financial innovations unthought of when Grannie was doing the Charleston were being developed (in part, due to the government policy-driven economic uncertainty prevalent at the time).  So the agency with the responsibility to enforce the CEA, the CFTC, acted in an ad hoc, political fashion in interpreting and implementing the law.  In response to new innovations and new issues it issued new interpretations that were wildly inconsistent with those issued not long before.  By the end of the 1980s, a thicket of completely confusing and contrary policy statements, interpretations, and no-action letters had made the “law” on the subject an incomprehensible mess.  This created legal uncertainty, distorted incentives, warped innovation and change–and created a cottage industry for lawyers.

Ironically, the demonized Commodity Futures Modernization Act of 2000 (which, even more ironically, Gary Gensler was actively involved in advancing) was a response to this situation.  It was an attempt to impose a more coherent, predictable, and consistent framework for regulation in these markets.  (And it did it in a mere 262 pages–pikers.)

We are not going back to that future.  We are going to something far worse, far more intrusive and extreme.  Look at all the discretionary power the CFTC has under Frank-n-Dodd to interpret myriad ambiguous terms, definitions, and mandates.  Think of the potential for bargaining, and the inevitable unprincipled and incoherent results of that bargaining, as those affected by the law and its interpretation exert influence on the agency and its Congressional overseers in order to achieve favorable outcomes.

And, of course, it will not just be CFTC, but the SEC, the OCC, the Fed in finance, and HHS and a host of other agencies and departments you’ve probably never heard of in health care.  It will take a forklift to carry the Federal Register.

It’s not all bad news though–if you’re a lawyer.  It is cruelly ironic.  Policies and legislation that undermine law as it should be redound to the benefit of lawyers who specialize in negotiating transactions in such a system.*

The Hayekian distinction between law and legislation is quite apposite here.  The legislation of 2010, and the regulations that will be used to implement it, are directly contrary to law as a system of well articulated, stable, and passably coherent rules applied in a non-discriminatory way.  No, law in reality has never been close to the Hayekian ideal, but what we are witnessing is a giant step in the wrong direction.

This corporatist, highly personalized, transactional system (all words that describe the current Russian government, by the way), will condemn the US to years of stagnation.  They will be a drag on growth, and provide an incentive for able individuals to devote their talents to negotiating for rents with their governmental overlords, rather than thinking of and implementing new ways to create things that people value.

(Thanks to Ed at Pickerhead for the inspiration and the nudge.)

* I am reminded of something I read on a visit to the Kentucky State Historical Museum in Frankfort.  It was a letter from the early-19th century remarking at how many lawyers there were in the state, in contrast to their (relative) scarcity just across the Ohio River in Ohio.  The reason was that whereas in Ohio the New England system of defining property rights by survey prevailed, in Kentucky deeds would define the boundaries of a piece of property by this tree and that rock, or somesuch.  As a result, property lines in Kentucky were extremely imprecise, and there were huge amounts of litigation and negotiation to resolve property disputes.  This gave lawyers–and judges–tremendous power.  But nothing that will compare to that wielded by lawyers, judges, and bureaucrats in the Age of Obama.

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  1. Uncertainty in property rights will stultify economic growth, just ask the Greeks who have no title system to speak of.

    But, I am less persuaded by your healthcare example. The US have embarked upon a scheme of making the costs of health care transparent in the belief that consumer choice will bring some sanity to the crazy insurance driven prices. I don’t know if that is going to work, but it is not surprising that many people’s existing healthcare programs will have to substantially changed by 2014 – the mini med exemption that McDondald’s got is for one year. This is a reasonable exercise of discretion.

    Comment by michael webster — October 9, 2010 @ 4:02 pm

  2. I read an article a couple of days ago that discussed how some some bureaucrat at the Department of transportation decided that NYC needed to to spend $27 million to replace 250,000 street signs that had the street name spelled in all capital letters with signs that had only the first letetr of the street name capitalized. It was explained, “These new and updated standards will help make our nation’s roads and bridges safer for drivers, construction workers and pedestrians alike.” The article made me cringe at the realization that this same bureaucratic mentality os about to run our healthcare system.

    Oh, and as I read Michael’s comment above, I asked myself, if it is reasonable for McDonald’s to get a waiver of part of the Obamacare mandate, why didn’t the administration also grant the same consideration to small and midsized employers? Why is the Obama administration granting special consideration to large corporations and not offering the same “level playing field” to the rest of us? My only guess is because the administration is, once again, employing political considerations to pick economic winners and losers. This is no way to run an economy unless where you intend to run it is right into the ground.

    Comment by Charles — October 10, 2010 @ 10:50 am

  3. What a fantastic blog piece. Wish a regulator could understand what the heck you are talking about.

    Comment by Jeffrey Carter — October 12, 2010 @ 7:04 am

  4. […] once you have digested that, go over to the Streetwise Professor‘s blog and read his piece on regulation.  He illustrates how capricious regulation can be in […]

    Pingback by Regulation and Business Uncertainty Points and Figures — October 12, 2010 @ 7:48 am

  5. Thanks, Jeff. They do understand, but not at an intellectual level. They understand it in the way that termites understand where the wood is and what to do with it.

    The ProfessorComment by The Professor — October 12, 2010 @ 3:20 pm

  6. @Charles – loved the example about changing the streets signs! On the waivers, most medium size to small business’s won’t need a waiver because they when their mini med programs don’t have a lot of administrative cost. McDonald’s will have a relatively large administrative cost for their mini med programs for the crews.

    Comment by michael webster — October 14, 2010 @ 9:49 pm

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