In Review

dent assistants. Most newspaper accounts focus on anecdotes and particular cases The Power of Special Interests related to lobbying; this study offers enough data on interest groups to support Reviewed by John Samples valid conclusions. Surprisingly, about 40 percent of the regulated industries would control their advocates were government officials. Some LOBBYING AND POLICY CHANGE: regulators. Gordon Tullock and later ana - officials may decide who wins the policy Who Wins, Who Loses, and Why lysts in the Virginia School proposed that struggle, but others are clearly part of the By Frank R. Baumgartner, Jeffrey M. interest group efforts wasted resources by game. Citizens groups “or organizations rep - Berry, Marie Hojnacki, David C. Kimball, creating monopolies sanctioned by the resenting an issue or cause without any and Beth L. Leech state. Lobbying itself wasted resources in direct connection to a business or profession” 360 pages; University of Chicago Press, the struggle over rents. In general, the econ - composed about a quarter of the sample 2009 omists’ critique of interest groups sug - for this study. Such groups were often major gested government failure might be more players on issues. Trade associations and THE CASE FOR GRIDLOCK: pervasive than market failure. individual businesses account - Democracy, Organized Power, Political scientists have ed for just over one-third, while and the Legal Foundations of been more divided about trade unions made up six per - American Government interest groups than econo - cent of the sample. By Marcus E. Ethridge mists. Pluralists saw politics Most Washington stories 223 pages; Lexington Books, 2010 as a struggle among groups; emphasize the victories of the winner wrote laws legiti - individual groups or indus - nterest groups have not always been as mated by government. Plural - tries. Baumgartner and his American as apple pie. James Madi - ists tended to approve of colleagues find that coalitions Ison’s Federalist No. 10 focused on fac - groups as a way to represent matter a lot; interests “rarely tions, “a number of citizens, whether citizens and control govern - lobby alone.” The urge to amounting to a majority or a minority of ment. Others argued that lob - association arises from the the whole, who are united and actuated by byists provided members of nature of things: policies have some common impulse of passion, or of Congress with information multiple consequences for interest, adverse to the rights of other cit - vital to their re-election efforts. diverse constituencies. These izens, or to the permanent and aggregate Some critics of pluralism coalitions comprise strange interests of the community.” Surely such a pointed out that not all inter - bedfellows in search of com - group should be suppressed. But no; Madi - ests — especially the poor — mon outcomes. Businesses son believed the costs of suppression in lib - were represented in the group and citizens groups are not erty would outweigh any benefits. He struggle. The struggle among always on opposite sides of argued the size of the new nation and com - groups obscured the reality of an issue. Although businesses petition among groups would preclude elite rule. Others argued that have more resources than cit - the dangers of a majority faction. Madison pluralism had replaced the izens groups, they oppose believed majorities would vote down any rule of law made by legislatures with each other depending on the issue. Business malign proposals by minority factions. groups competing for the favor of admin - is not an interest group or a unified force. The public and some scholars have dis - istrative agencies. Baumgartner and his group are not agreed with Madison on the latter point. naïve. Business groups in these data do Surveys indicate the public believes “special Empirical analysis In Lobbying and Policy have more resources in money and lobby - interests” have too much influence in Change , Frank Baumgartner and his co- ists. Yet their analyses find these resources Washington. Economists have offered authors offer new information about these have little relation to policy outcomes, either sophisticated analyses supporting a similar old debates. They randomly selected 98 for individual groups or for coalitions. They normative conclusion. Mancur Olson issues in which interest groups were consider several measures of financial argued that the economics of organiza - involved and followed them from 1999 to power, including campaign contributions tion foster policies that favor particularis - 2002. The authors then identified the and lobbying outlays. This finding counters tic groups over the larger public. The Chica - “sides” on each issue; a side was “a set of the expectations of most people, but cam - go School emphasized the likelihood that actors sharing a policy goal.” For the 98 paign finance scholars have long found lit - issues, they found 214 sides comprising tle relation between donations and con - John Samples is director of Cato’s Center for Representative Government and adjunct professor 2,221 advocates. The data collection gressional actions. Baumgartner’s group of political science at Johns Hopkins University. involved the authors and dozens of stu - offers the broadest and best support for

48 REGULATION FALL 2010 that established literature. They do note politics often bemoan the gridlock Baum - humanly possible. Baumgartner’s analysis that while money does not lead to victory or gartner sees as endemic to American pol - supports Ethridge’s conclusion. Baum - even offer much influence, it does assure a itics. Baumgartner offers no normative gartner’s picture of gridlock suggests the place in the Washington game. The issues evaluation of the power of the status quo. constraints on powerful interests imposed of the poor, they argue, are absent from the The book’s analysis indicates that com - by divided government. congressional agenda. plexity and multidimensionality of issues, Yet Baumgartner’s rather benign view combined with limited knowledge, pre - of interest groups contravenes Ethridge’s Power of the status quo Baumgartner et clude most change in policies. emphasis on rent seeking. The two may be al. found for most of these issues that not talking about two different arenas of pol - much happened during the time period Constitution vs. Progressivism In The Case itics. Baumgartner’s sample of interest they observed. If lobbyists are supposed to for Gridlock , Marcus Ethridge describes groups focused on Congress, although foster change, “they are a surprisingly inef - other virtues of this stasis. Ethridge con - perhaps half of their issues involved an fectual lot.” The power of the status quo trasts American constitutionalism with agency official. Ethridge emphasizes the informs almost every page of Lobbying and its Progressive critics. The former made it damage done in administrative venues. Policy Change . Groups that defend the pol - difficult to legislate as a way to control Certainly more data-intensive research icy status quo usually have an easy time. government. The latter denounced grid - should be done on administrative venues. Often they need not even mobilize in lock and looked for ways to circumvent the Perhaps such arenas do not attract the response to active challenges. constitutional design. Progressives hoped broad “sides” in struggle that Baumgart - The status quo persists for ner found. If not, and if power - several reasons. Policymakers ful groups dominate agencies, have limited attention and hear Baumgartner’s rather benign view Ethridge’s call for a return to many arguments favoring of interest groups contravenes the Constitutional Principle changes. Demand for change (and gridlock) looks all the quickly outstrips supply. Many Ethridge’s emphasis on rent seeking. more convincing. issues have been fought over These books have different for many years; the sides in strengths. Baumgartner and his these struggles are familiar with all the for a politics of expertise in which men of colleagues have collected more and better arguments on all sides, creating a grid - science molded society from Washington data on interest groups than we have had lock of advocacy as well as lobbying. bureaus. The rule of experts would be in before. This foundation lends credibility to Defenders of the status quo do well by service to the public good, where gridlock their analysis and conclusions. Ethridge arguing change will bring uncertain results was said to advance only selfish interests. offers a good analysis of an overlooked largely because losses loom larger than Ethridge argues, in contrast, that topic — administrative law — and its gains to policymakers. Policymakers in interest groups have more influence over importance for public policy. Both books this study seem to accord the current order policies made in administrative agencies. persuasively challenge what most people a presumption of continuity absent over - Organization counts, and the general believe about politics. For that reason, whelming evidence of the need for change. public is unorganized. Inevitably, interest both deserve readers concerned about the Yet, when the status quo falters, it is groups seek and obtain privileges from origins and consequences of regulation “not uncommon for a significant change to agencies staffed with Progressive expert - in the United States. R sweep aside years of equilibrium.” For exam - ise. The Progressive effort to circumvent Readings ple, the sulfur content allowed in gasoline gridlock to attain the common good n “Economic Models of Interest Groups: An changed little over many years. Clinton’s actually serves special interests. Progres - Introductory Survey,” by William C. Mitchell Environmental Protection Agency then sives realized the gap between their aspi - and Michael C. Munger. American Journal of reduced the standard by 90 percent, requir - rations and reality and sought succes - Political Science , Vol. 35, No. 2 (May 1991). ing new refinery equipment that bank - sive reforms in administrative law and n Gaining Access: Congress and the Farm Lobby rupted many small refineries in the West. procedures to mend this failure of repre - 1919-1981 , by John Mark Hansen. University Older theories suggested the cognitive lim - sentation. Ethridge shows how these of Chicago Press, 1991. its of policymakers fostered incremental reforms have failed. n Mobilizing Interest Groups in America: Patrons, change. Those theories do not explain what Professions, and Social Movements , by Jack L. Walker. University of Michigan Press, 1991. Baumgartner found: pervasive stasis and Interest group focus For Ethridge, the occasional large changes. The catastrophic Framers designed the U.S. Constitution to n The End of Liberalism: The Second Republic of the United States , second ed., by Theodore J. possibilities of the latter encourage busi - foster struggle within Congress and Lowi. W.W. Norton, 1979. nesses to keep their lobbying operations between the branches of government. This n The Rise and Decline of Nations: Economic going even after years of gridlock. design fosters gridlock as Progressives Growth, Stagflation, and Social Rigidities , by Baumgartner’s book does not support believed, but gridlock becomes virtue by Mancur Olson. Yale University Press, 1982. popular prejudices. It finds few special complicating rent-seeking. Power divided n “The Welfare Costs of Tariffs, Monopolies, interest demons perverting politics for among factions, not unified in expert and Theft,” by Gordon Tullock. Western their narrow ends. Most people who follow hands, serves the public good as well as is Economic Journal , Vol. 5, No. 3 (1967).

REGULATION FALL 2010 49 IN REVIEW he does not appreciate that this skepticism should extend to many of his arguments in Who Failed? Whose Crisis? the book. He presents a long list of valid criti - Reviewed by Richard L. Gordon cisms of regulation. However, worse than ignoring the inherent problems of infor - tutions was a rational response to loose mation, Posner keeps calling for better A FAILURE OF CAPITALISM: money and inadequate regulatory con - information. In parallel, he combines con - The Crisis of ’08 and the Descent trols. Only scattered, inadequately devel - cerns about the drawbacks of creating new into Depression oped sentences note the role of home own - organizations with proposals for adding By Richard A. Posner ership–promoting government policies. more government agencies. This shift of 346 pages; Harvard University Press, 2009 What dominates is the revival of ques - policymaking to agencies was discredited in tionable macroeconomic theories and a the 1970s energy debates in which I was THE CRISIS OF CAPITALIST muddled argument about tightening involved. Back then, the solution to the DEMOCRACY financial regulation. nation’s energy woes was said to lie in the By Richard A. Posner Given the poor effort of the 2009 creation of a new department, complete 402 pages; Harvard University Press, 2010 book, it is not surprising that Posner with an “independent” data-gathering would make a second attempt a year later. agency. It proved worse than nothing. or over four decades, Richard Pos - A Crisis of Capitalist Democracy is better In Failure , Posner observes, “The very ner has made major contributions developed but ultimately existence of warring schools Fto the case for limited government, more unsatisfactory. The old within [macroeconomics] is a particularly in the regulatory realm. He is Posner is present in it, but in clue that the field is weak, one of the most economically literate unresolved conflict with the however brilliant its practi - lawyers in the law-and-economics move - new. Over half of Crisis is tioners.” Yet he ignores that ment. However, the financial shocks since devoted to a revised and warning sign, and in both 2007 have produced in him a crisis of con - updated review of the crisis. books dabbles in macroeco - fidence — and, apparently, a decline in his The rest consists of rumina - nomics, presenting contro - economic acuity. tions on related topics, such versial macroeconomic posi - He therefore did his usual thing: he as the Obama administra - tions as clearly valid, and wrote (two books and apparently much tion’s financial regulatory arguing vigorously for inter - else) on the subject. The books adopt the reforms (which Posner right - ventionist countercyclical pol - contagion theory pushed by one of his fully deems misguided), an icy. His discussions neglect arch villains, Federal Reserve chairman explanation of the crisis that the several schools of macro - Ben Bernanke. Unfortunately, Posner’s is entitled “The Fragility of economics that stress the efforts display every possible inconsisten - Finance,” a rambling effort inherent limitations of cy — with prior writings and between the to revive Keynes’ reputation, a knowledge, and their corol - two books, and even within the 2009 book similarly problematic review lary skepticism of govern - itself. In short, both books are uncharac - of uncertainty, another attack ment’s ability to anticipate teristic and unworthy of him. on macroeconomics, Posner’s and counteract fluctuations. alternative “Reforms You Can Crisis does criticize the Feder - Overview The first book, A Failure of Cap - Believe In” (some of which, al Reserve for bad action, but italism , is a hastily written, short effort he concedes, he does not fully never recognizes that this padded by small pages, large type, and believe in), and the implications of glob - may be an inherent fault that supposedly wide line-spacing. The result is mainly a alization. He also writes of his concern better policymakers could not correct. recitation of pro-intervention arguments that the Obama administration’s ambi - Posner does not help his discussions by that were used to defend government- tious program will produce unmanage - claiming that economists who support bailout actions that were then being able strains on the nation’s economy. countercyclical policies do so because they implemented. are “liberals,” while other economists who The book is confusing about the cause Playing economist In Crisis , Posner poor - oppose such policies do so because they of the crisis. On p. xii, a sentence asserting ly develops two of his own insights. The first are “conservative.” The other two possi - a market failure is inserted into a para - is one that brought him fame: that because bilities are at least as plausible — the posi - graph devoted to government errors. The of both inherent limitations of government tion defines the ideology or the appraisal book stresses the role of loose Federal and political pressures, regulation and other of instability determines ideology. Reserve policy and asserts that supposed - interventions are questionable exercises. His review of macroeconomics worsens ly excessive risk-taking by financial insti - Finally, on p. 173, he digresses to apply his the situation. He botches treatment of

Richard L. Gordon is professor emeritus of mineral skepticism to the Obama administration’s comments given him by Robert Lucas, economics at Pennsylvania State University. financial regulatory reform proposals, but who won the Nobel Prize in Economics for

50 REGULATION FALL 2010 his work on the implication to macroeco - have to choose which of those views is cor - However, no effort is usually made to dis - nomics of the assumption of rationality. rect, and what policies would be appro - tinguish between “ordinary” recessions Posner joins the crowd in misunder - priate and effective. The anti-intervention and depressions, or to characterize explic - standing Lucas’s point that no pure theory case is that politicians lack the information itly when the upturn in any sense is “suf - can ever capture the complexities and mis - and motivation to select correctly. ficient.” Thus, Posner was free to develop understandings that occur in practice. Particularly in Failure , Posner spins a criteria for what constitutes a depression. Thus, a curious situation prevails in which largely mythical tale of deregulation as the In Failure , he is content with a single con - Lucas and similar writers thought that chief cause of the financial crisis. The fac - cept: an anxiety-producing downturn; in they were strengthening the case for Mil - tually valid part of his story is that Depres - Crisis , he argues that “depression” is prefer - ton Friedman’s call for reliance on auto - sion-era limitations on specific practices of able to “recession” as a term because matic rules, but even Friedman thought financial institutions were lifted. He omits “recession” is a euphemism; in a footnote, they were exaggerating rationality. Exag - that these restrictions were unwise and, as he reiterates 10 justifications for this view gerated rationality, in fact, is the crux of usually occurs, had already been circum - that he had published in previous work. coherent economic theory. Only empirical vented by the time they were withdrawn. This seems a way to justify his hasty use of analysis can handle the complexities in Thus, in a case mentioned by Posner, “depression” in Failure . He undermines practice. Friedman, who preferred incre - restrictions on interest-paying bank his case by the silly analogy that the wars mental changes, called for preserving cen - accounts inspired the mutual fund indus - in Korea and Vietnam were called “fights.” tral banks but wanted them to follow rigid try to develop money-market funds with The correct euphemism was “conflict,” rules on monetary policy. Friedrich Hayek check-writing privileges, a close substitute and even that was not widely used. advocated allowing competitive money for interest-paying bank accounts. Lifting Such little lapses are too frequent. For issue by private banks, so that success that restriction was appropriate. The other example, he twice mentions the U.S. adop - would depend on providing money of part of the charge, right from Obama’s tion of tariffs on tires from China and, in dependable value. Others call for the spe - campaign rhetoric, was that the supposed the second discussion, claims they were cific monetary rules of the gold standard. free-market outlook of the Bush adminis - based on “a heretofore unused law” on A related problem is that Posner adopts tration produced increased laxness in reg - which, in fact, an extensive literature exists and runs with another dubious Bernanke ulation. Yet Posner (and President Obama) because of the law’s frequent misuse. concern: deflation. Economies can adapt does not consider the alternative that reg - to predictable changes in price levels, but ulators are inherently incapable of recog - Politics and Posner His worst is near the the concern is that individual wages and nizing and alleviating dangers. end of Crisis . He gratuitously attacks the prices will respond too slowly to unex - Moreover, it is not until p. 254 of Crisis belief of “right-wing extremism” that pected price changes, resulting in reduced that Posner discusses direct government Keynes was a fascist. As Posner observes, output and employment. Deflationo - influence on the mortgage debacle — a these attacks on Keynes are based on one phobes like Posner rarely distinguish topic the he ignored in Failure . He starts sentence in the foreword to the German edi - between the price drop itself and the pos - with an unnecessary disparaging remark: tion of the General Theory observing totali - sible resulting impacts. “[I]t is at this point that the political right tarian states were better positioned to swings into action.” (In both books, Pos - implement Keynes’ ideas. This clearly was Government to the rescue Posner in both ner tends to use “conservative” and “right meant as a statement of fact, not of books adopts the positions that capitalist wing” to describe advocates of limited approval. Regardless, Posner’s concern is economies are unstable; crises are conta - government, whom he consistently dis - irrelevant. It alternatively may be a means gious and must be stopped before the parages.) He finds mortgage intervention subtly to discredit the free-market econo - economy collapses; and, with proper guid - unwise, but not a key factor. This is incon - mists whom he cites and their rejection of ance, governments can and will adopt sistent even with what he presents, let Keynes. However, these economists have sound corrective policies. His skepticism alone what others have concluded. nothing to do with terming Keynes a fascist. about macroeconomics and intervention In both books, Posner’s dedication to Few of these truly extremist Keynes bashers should have inspired more caution. calling the downturn a “depression” aggra - are professional economists — the chief Crisis more clearly expresses the position vates misunderstanding of established exception being the notoriously extreme that officials such as long-time Federal procedures. The National Bureau of Eco - Murray Rothbard. By reviewing this, Posner Reserve chairman Alan Greenspan and nomic Research produces a chronology comes perilously close to using the same academic economists are the true culprits. of economic turning points — the start tactic on free-market economics. While the attack on government is cor - and end of downturns. As Posner eventu - The more fundamental problem is that rect but too narrow, Posner’s scapegoating ally notes ( Crisis , p. 218), the dating of Posner attacks fringe hysteria about Keynes of the economics profession conflicts with recessions is based on informed appraisal while evading essential problems. The Gen - his recognition of the diversity of academ - by an nber committee of prominent eral Theory is notorious for its rambling, ic views. Over the past decade, those views economists of critical economic data, unsystematic approach. Observers have have ranged from calls for more vigorous rather than a mechanical rule. The nber seized on parts of the arguments as par - stimulative measures to warnings of a and other observers measure the severity as ticularly essential and, depending upon housing bubble. Politicians would thus well as the duration of these downturns. their inclinations (which often are not

REGULATION FALL 2010 51 IN REVIEW always ideological), decided that this justi - better than feasible government interven - opened markets, but with different rules — fies either praising or damning Keynes. tion is summarily rejected. As noted, no all ferc -approved — for how prices are Posner, for example, likes Keynes’ advoca - attention is given to arguments about the set, sales are made, and capacity costs are cy of active countercyclical policy and the impossibility of successful active manage - covered. ferc and congressional attempts stresses on psychology and its shifts. ment and the desirability of stable, auto - to bring uniformity to this disparate Posner puts himself in an uncomfort - matic policies. In a throwaway line in Cri - process have been blocked, likely by local able balancing position. He fears the insta - sis , he notes his views “are not definitive.” regulators and utilities that do not want to bility of free markets. He also has deep While true, it is totally inconsistent with cede their political turf. concerns about the reliability and compe - the bulk of both books. tence of government and about a White The two books, then, are botched It don’t come easy One might think open - House that systematically rejects such wor - efforts by Posner to adjust his outlook, ing electricity markets would be simple; I ries. He inadequately treats the long-term unjustified by either the events treated or certainly did when I first began to look at problems of the expectational and finan - his exposition of them. The vigorous inter - the grid after having studied telecom - cial implications of the intervention. The ventionists whom he criticizes simply munications. Nothing is less differentiat - apparent, but underdeveloped, argument assume away poor performance. Advo - ed than the electrons flowing through a is that economic instability is so great cates of limited government then validly wire. Its use seems no more complicated that even defective governments can and counter that this ignores the inherent than flipping a switch so the light or TV should intervene in a crisis. He recognizes drawbacks. Posner is attempting to rec - can come on. the unrealism of those confident in the oncile such skepticism with a desire for So why has opening electricity mar - effectiveness of government. The strong action. If this is not an impossible task, kets been so difficult? Fundamentally, it is argument that market adjustment works Posner has not proved otherwise. R because electricity uniquely combines three attributes: First, it is crucial; even a minimally developed economy cannot function without it. Second, it is fragile; Uniqueness Squared? because storage in meaningful quantities is prohibitively expensive, supply has to be Reviewed by Timothy J. Brennan kept exactly equal to demand essentially continuously. Third, avoiding this fragili - California debacle in ty by making the grid reli - ELECTRICITY RESTRUCTURING: 2000–2001. Buyer reluctance able is a public good. Trans - The Texas Story has been particularly pro - mission networks that Edited by L. Lynne Kiesling and nounced in the third of the deliver power are intercon - Andrew N. Kleit market that is residential. In nected to improve the overall 244 pages; AEI Press, 2009 my home state of Maryland, efficiency of the system, but which nominally has open unlike telephone traffic, it is he movement to deregulate prices, retail markets, only about 7.6 somewhere between costly invite entry, and let markets bal - percent of residential electric - and impossible to route high Tance supply and demand that ity was supplied by entrants voltage current over specific began in the late 1970s has been both in April 2010, compared to lines. As a consequence, elec - politically and economically successful to 92.5 percent of the electricity tricity takes multiple paths the point that it came, for a while, to seem used by large commercial and industrial to get from generators to customers, mak - inexorable. Benefits to consumers and the users. And a good bit of that 7.6 percent ing the grid, even if parts are operated economy from opening markets in trans - was likely supplied by affiliates of incum - separately, essentially a single big energy portation, communications, oil and nat - bent electricity or gas utilities. system. If one supplier fails to meet its ural gas, and (leaving aside recent ques - The wholesale market, where genera - customers’ demands because of unantici - tions about investment banking) finance tors sell electricity to distribution utilities pated surges, inadequate capacity, or have been substantial. or, in open states, their competitors, has equipment failures, not only are its cus - The glaring exception has been elec - avoided disaster for the most part, leaving tomers blacked out, but everyone is. tricity. At the retail level, efforts across the aside the August 2003 blackout that took The tension between central control to country to allow buyers to get electricity down most of the Northeast. However, protect this reliability and the entrepre - from new competitors to traditional util - despite operating under Federal Energy neurial independence needed to realize ities more or less ground to a halt after the Regulatory Commission regulations going the promise of competition is exacerbated back to 1996 to open transmission grids to by natural monopoly characteristics of Tim Brennan is professor of public policy and independent generators, the nation as a the wires. Laying multiple local distribu - economics at the University of Maryland, Baltimore County and senior fellow for Resources for the Future. whole has not opened bulk power markets. tion grids to get power to all but the largest

Brennan provided commentary on some of the work Some regions of the country retain the old users would be wasteful; one grid can do in this book at an AEI symposium in early 2008. vertical monopoly structure. Others have the job. As just mentioned, interconnect -

52 REGULATION FALL 2010 ed transmission grids are essentially single it no more thought beyond paying the by revenues from sales of the products. But entities. Fostering competition on the gen - monthly bill, undoubtedly plays a role. in electricity, as mentioned above, capaci - eration and sale of electricity requires that Policies to hold down incumbent prices as ty markets are commonly used because the interface be managed to ensure access part of political bargains to open markets of the view that electricity rates cannot to the wires on reasonable, non-discrimi - surely have not helped, leading to low res - be allowed to go high enough to cover natory terms. But the separation of gen - idential adoption rates in most of the the costs of peaking units. Some in Texas eration ownership from control over trans - states that bothered to open markets at all. wanted to go that route but, as Eric Schu - mission and distribution lines may itself Moreover, electricity prices have risen dur - bert, Shmuel Oren, and Parviz Adib inhibit efficient grid operation. Peter Van ing the last 10 to 15 years, during the open describe in the most thought-provoking Doren and Jerry Taylor of the Cato Insti - market era. The degree to which this is just chapter in the volume, by the time capac - tute have suggested that the costs of sep - a correlation — other energy prices have ity markets could be implemented, ercot aration are less than the benefits, con - risen dramatically as well — or whether had been working on an interim basis cluding that deregulation of wholesale higher prices encouraged open markets, or with energy-only cost recovery, and similar markets should be reversed if transmission vice versa, remains hotly debated. markets in Australia and Alberta had been and distribution cannot or will not be working well for some time. deregulated as well. Don’t mess with Texas By and large, many Market power mitigation remains a con - states are not opening markets, and some cern. Kleit notes that, at peak demand peri - Dynamic prices, static consumers Elec - that did in the 1990s are reversing course. ods when generation capacity is at its limit, tricity markets are further complicated by But as co-editors Lynne Kiesling and an electricity generation company with a rel - the enormous variance in wholesale prices Andrew Kleit say in the introduction to Elec - atively small market share might neverthe - over time. Because capacity has to be in tricity Restructuring , “No state, that is, except less be able to raise price by withholding place to meet demand at any time, some Texas.” The subject of their important book output. He also suggests that other nomi - capacity is used only during a few critical is why Texas appears to have succeeded nally independent wholesale market oper - hours a year, e.g., to power air conditioners where the rest of the country has failed. ators may help energy suppliers suppress on the hottest, most humid summer after - Texas stands out from other states for competition. Caps on prices are projected to noons. It is not uncommon to find that 10 numerous reasons. When it comes to elec - rise in 2011 to $3,000 per megawatt hour or to 15 percent of capacity may come into tricity, far and away its most distinguishing $3 per kilowatt-hour, roughly 27 times the service less than 1 percent of the time. Cov - feature is that it is the only state in the con - current average retail electricity price, with ering the cost of that capacity implies that tinental United States that is essentially not some adjustments if annual returns exceed - at those critical hours, the wholesale cost of under the jurisdiction of the federal gov - ed an estimate of revenues needed to cover electricity can easily be 50 to100 times the ernment. Unlike the other lower-48 states, capacity costs. Kleit describes a specific off-peak price. But when capacity is tight, the Texas grid, under the control of the episode in which TXU, the largest supplier, individual generators could find it prof - Electricity Reliability Council of Texas operated a “rational bidding strategy” that itable to reduce supply, especially when the (ercot ), is essentially not connected to included fixed cost recovery. He suggests absence of effective meters and monitors the rest of the United States. David Spence that this practice would trouble econo - offers no incentive to users to cut demand. and Darren Bush note in their chapter that mists, but I would add that it should both - If regulators limit wholesale prices out of the history is minimally more complicated er only those who do not think prices fear of market power, as they have, there because of two “asynchronous connections” should be high enough to cover long-run might not be enough money to cover the between transmission lines in Texas and average costs as well. cost of critical peak generation. A typical Oklahoma, but as Jess Totten notes in his A last question is why Texas bucked response has been to set up “capacity mar - chapter, these connections avoid the multi - the trends against legislative adoption and kets” to provide revenues to cover genera - ple-path effect that justifies treating con - consumer acceptance of retail entry. For - tion costs that peak prices cannot. nected transmission grids as single entities. mer Texas Public Utility Commission chair This is not all. The homogeneity of The result is that Texas’s transmission grid Pat Wood and co-author Gürcan Gülen of electrons that should make competition and wholesale markets are regulated by the the University of Texas portray the politi - simple also makes it difficult for new same entity that sets its distribution policies. cal development consistent with the view entrants to come up with ways to per - This has helped to avoid jurisdictional dis - that Texas’s culture was a prime contrib - suade consumers to switch away from putes regarding authority over market utor. Co-editor Lynne Kiesling finds that incumbent utilities. This is especially so for design and access — even if the ercot grid despite extensive consumer education and residential consumers, for whom a rela - operates under rules similar to those ferc a decision of the incumbent utilities to tively small savings on monthly electricity applies nationwide, as Totten also describes. keep retail prices high — even after the bills may not be enough to make it worth - The most substantive innovation in price of natural gas, the marginal fuel, while to evaluate the merits of different Texas is that it covers generation costs had fallen — only 40 percent of residential offerings from suppliers they may never through an “energy-only” market. That customers had switched. The importance have heard of. this is innovative should be puzzling to of this should not be exaggerated. Overall, Consumer resistance to shopping for those familiar with markets for anything only about 35 to 40 percent of load is res - electricity, after decades of having to give else, in which production costs are covered idential, and much if not most of the ben -

REGULATION FALL 2010 53 IN REVIEW efits of open markets go to large com - electricity markets. Impediments to open - of the present, driven largely by climate mercial and industrial buyers, for whom it ing electricity markets go beyond bureau - policy. These include obligations to use pays to shop and sellers want to compete. cratic rent extraction, special interest pro - non–fossil fuel generation such as solar Opening electricity markets can be suc - tection, and naïve aversion to markets. and — as T. Boone Pickens reminds us in cessful even if most of the public is From some of the chapters, readers might his television commercials — wind. Many unaware that it has happened. get some sense of the legitimate complex - states are looking at measures to improve ities in balancing efficient coordination energy efficiency, often predicated on Inside baseball Informative as this book and entrepreneurial independence or price beliefs that consumers systematically make is on these important topics, it is often flexibility and mitigating market power, “wrong” choices. The book also does not limited to those in the know, with regard but there is no overview of the issues to discuss what Texas is doing regarding a to both authors and audience. Having provide context to the less informed read - “smart grid” that would allow time-vary - insider insights from such people as the er. Leaving the book’s audience to pre - ing prices, reduce the need to construct Texas Public Utility Commission’s past sume that deregulation ought to work peaking plants used only a few hours a and present chairs, market monitor, direc - undercuts its central message of just how year, and facilitate the use of renewable tor of its Competitive Markets Division, special Texas is. The book also lacks a energy sources that tend to have highly and leader of its wholesale market design short description of the Texas market itself variable output. proceedings, along with a former com - — e.g., which suppliers sell in which area, The tale thus has no final chapter in missioner and senior policy adviser, make market shares, wholesale and retail pricing sight. The question for the next few years the book useful and frequently entertain - over time — to give readers their own sense is not whether Texas can continue to build ing. More outside academic assessments, of what is working. on its successes, but how it copes with along the lines of Steven Puller’s chapter Finally, the book shares a flaw these added pressures. Kiesling and Kleit on competition in wholesale markets, inevitable in any review of electricity mar - have assembled a clear and significant would complement the insider perspec - kets (one I know well, having co-authored introduction to how Texas got to where it tives. Moreover, in a sector as complex as a couple of them): it can be only, in Kies - is. It will be a useful guide as the story this, as evidenced by the distinctiveness of ling’s apt phrase, a “current snapshot.” develops in Texas and, whether in con - the Texas experience, there must have been The book does not cover the leading issues trast or lockstep, across the country. R dissenters who would put different spins on the institutional developments and evidence supporting the generally favor - able assessments in this volume. Reality-Based Optimism One missed opportunity was to revisit the debate in Texas between paying for trans - Reviewed by David R. Henderson mission at rates set for traversing a relative - ly small number of geographic zones or and even dirt-poor countries. charging prices at every node in the net - THE RATIONAL OPTIMIST: Simon was cut down by a heart attack work. Although nodal pricing sounds much How Prosperity Evolves at age 65. Fortunately, Indur M. Goklany more complicated, it has received the lion’s by Matt Ridley added to the Simon-style literature with share of academic support, allows more 438 pages; HarperCollins, 2010 his 2007 book, The Improving State of the efficient management of congestion in the World . And now comes Matt Ridley with grid, and proved workable in other whole - ne of the strongest voices for rea - his book, The Rational Optimist , in which he sale markets. Texas initially adopted a sim - son and optimism in a congeni - adds greatly to the evidence that things are pler zonal system, which Eric Shubert and Otally pessimistic world was the getting better virtually worldwide. Parviz Adib report was on the advice of the late economist Julian Simon. In his mag - Why read Ridley if you have already read Texas Public Utility Commission’s Market num opus, The Ultimate Resource 2 (Prince - and absorbed Simon and Goklany? There Oversight Division, chaired by Shmuel Oren ton University Press, 1998), he made a are at least four reasons. First, Ridley is an of Berkeley, one of the leading electricity powerful case that the world is getting incredible writer who keeps you turning economists. This approach was later reject - better in almost (he probably would have the page to find out what happens next. ed in favor of the nodal approach, but in the cut the “almost”) every way. Not just the Second, he gives a lot of evidence and fas - following chapter on supply reliability, Oren world of the billion or so people living in cinating stories that were not in the earlier (with co-authors Shubert and Adib) passes developed countries, but also the world of books. Third, the book is a numerate on the opportunity to let readers know the the remaining billions who live in poor delight. His calculations at key points in the basis for his unorthodox view. argument show just how “ungreen” some David R. Henderson is a research fellow with the This “zonal vs. nodal” debate repre - Hoover Institution and an associate professor of supposedly environmental policies are, par - sents another insider bias. The editors economics at the Graduate School of Business and ticularly organic farming and renewable implicitly assume that readers will be Public Policy at the Naval Postgraduate School in energy. Fourth, Ridley shows, hilariously Monterey, CA. He is the editor of The Concise familiar with the fundamental issues asso - Encyclopedia of Economics (Liberty Fund, 2008). He at times, that pessimism not only is the ciated with opening wholesale and retail blogs at www.econlog.econlib.org. dominant attitude of today’s intellectual

54 REGULATION FALL 2010 class and much of society generally, but worth of reading light.” That is progress. statement in The Wealth of Nations that five also was the dominant attitude in the last Ridley points out that the internal years do not go by in which someone does few centuries. I do have some quibbles — combustion engine was a huge factor in not publish a book or pamphlet “pretend - more on those later — but the book’s the growth of food production. How so? ing to demonstrate that the wealth of the strengths more than make up for them. America’s horse population in 1915 was 21 nation was fast declining, that the country million, and those horses ate a lot. Thus, was depopulated, agriculture neglected, Progress Ridley starts by dealing a body about one-third of all agricultural land manufactures decaying, and trade undone.” blow to the idyllic view that so many writ - at the time was devoted to growing food In 1830, British poet Robert Southey ers have had of England before the Indus - for horses. Once the car came along, the claimed that people were worse off than trial Revolution. He paints the clichéd horses were not needed, freeing up a huge even a thousand years earlier. Fortunately, scene of the family around the hearth amount of land to grow food for humans. England had its 1830 version of Ridley in enjoying each other’s company, unen - Intensive farming, which is due, notes the poet and essayist Thomas Babington cumbered by the hassles and luxuries of Ridley, to genetic engineering and heavy Macaulay. Macaulay wrote: modern life. Then, with a thud, he makes use of fertilizer, frees up a huge percent of As to the effect of the manufacturing sys - the family’s life painfully realistic. “Oh land for other uses. Today, he writes, people tem on the bodily health, we must beg please!” he writes and then takes apart farm 38 percent of the earth’s land area. If leave to estimate it by a standard far too the idyllic scene frame by frame. Here is a yields from land were at their 1961 levels, low and vulgar for a mind so imaginative small sample: before much of this progress, a as that of Mr. Southey, the proportion of births and deaths. Though this is one of the whopping 82 percent of the better-off families in the vil - earth’s land would need to be Macaulay went on to point to the enor - lage, father’s Scripture read - farmed to feed today’s popu - mous progress by 1830 that no one in ing is interrupted by a bron - lation. Of course, with those 1720 would have imagined. chitic cough that presages lower yields, the price of wheat the pneumonia that will kill would be much higher and we Exchange and progress One of the most him at age 53 — not helped would not have today’s popu - upsetting parts of Ridley’s book is his men - by the wood smoke of the lation. Were we to replace all tion of President Obama’s science adviser, fire. (He is lucky: life expectancy even in England the industrial nitrogen fertil - John Holdren, and his proposal to “de- was less than 40 in 1800.) izer with manure, as many develop the United States.” Maybe that The baby will die of the believers in organic farming explains the president’s economic policies. smallpox that is now causing him to cry; advocate, we would need an extra seven bil - Seriously, though, why has the world his sister will soon be the chattel of a lion cattle on an extra 47 million square worked out so well, and why does Ridley drunken husband. The water the son is miles of land to produce that manure. That think it is likely to get even better? A major pouring tastes of the cows that drink is just five million square miles less than the part of his theory is the powerful role of from the brook…. Candles cost too much, so firelight is all there is to see by. Nobody total land area of the six habitable conti - trade. Trade allows people to produce a in the family has ever seen a play, painted nents. But we are already farming 22 mil - good or service in which they have a com - a picture or heard a piano…. Father’s jack - lion square miles of land. In other words, we parative advantage. Princeton economist et cost him a month’s wages but is now could not switch to organic farming and Paul Krugman, in his clearer-thinking days, infested with lice. still feed the current world’s population. As referred to this principle as early 19th-cen - Ridley then jumps to some astonishing for keeping nature preserves, jungles, and tury economist David Ricardo’s “difficult data that show how much better off peo - national parks, fugetaboutit . idea,” one that very few non-economist ple are in today’s low-income countries What about renewable energy? To sup - intellectuals understand. The more exten - as compared to the best-off who lived in ply the current U.S. population with the sive the trade, the finer and more produc - the most advanced countries of just a few same amount of power we use today, tive is the degree of specialization. Also decades ago: writes Ridley, would require “solar panels important, writes Ridley, is the role of ideas The average Mexican lives longer now the size of Spain” or “wind farms the size and technology. In his provocative phrasing, than the average Briton did in 1955. The of Kazakhstan” or “woodland the size of “ideas have sex.” Translation: when people average Botswanan earns more than the India or Pakistan.” Moreover, wind tur - have ideas, they often combine those ideas average Finn did in 1955. Infant mortality bines are a Cuisinart for birds. Writes Rid - into something better. The telephone, for is lower today in Nepal than it was in Italy ley: “Just one wind farm at Altamont in example, “had sex with the computer and in 1951. California kills 24 golden eagles every year; spawned the internet.” The capsule endo - Back to that family in 1800 that could if an oil firm did that it would be in court.” scope, commonly known as the camera not afford candles: Ridley also reports Yale He quotes environmentalist Jesse Ausubel: pill, developed out of “a conversation economist William Nordhaus’s ingenious “Renewables are not green.” between a gastroenterologist and a guided- way of measuring real wages: by using light. missile designer.” With the lower cost of An hour of work in 1800, he notes, would Doom and gloom One thing I found inter - transportation and communication, itself have bought you only 10 minutes of reading esting is that the pessimists seemed promi - due to technology, there are more people light. Today, that hour would buy “300 days’ nent in all eras. Ridley quotes Adam Smith’s with ideas who can get together more eas -

REGULATION FALL 2010 55 IN REVIEW ily and “mate” their ideas. Thus, trade is under 3,000 pages. And a book that “only” that “only” offsets the dreary, people-hat - important even in the realm of technology. shows us how economic freedom makes ing pessimism that is all around us and is (Disclosure: I am slightly biased here most Americans and many people in other now even in the mind of the White House because Ridley quotes from Paul Romer’s countries wealthier in important respects science adviser? That is not worth a lot? article on economic growth in my Concise than John D. Rockefeller, a book that Psshaw. But I will end by letting Ridley Encyclopedia of Economics . Romer’s article “only” shows that we can have somewhat answer. He writes: has become a modern classic.) higher population and higher living stan - It is precisely because there is still far Given the important role of trade in dards for most of the world, a book that more suffering and scarcity in the world than I or anybody else with a heart would Ridley’s theory, and given his obvious “only” tells us how to have both more wish that ambitious optimism is understanding of trade, it is surprising food and more land for wilderness, a book morally mandatory. R that he makes a jarring misstatement: “For barter to work,” he writes, “two indi - viduals do not need to offer things of IN REVIEW equal value. Trade is often unequal, but still benefits both sides.” The correct state - WORKING PAPERS ment is: “For barter or trade to work, indi - Below are summaries of some recent papers that may be of interest to Regulation ’s readers. viduals must offer things of unequal value.” If I valued what I give up the same as what By Peter Van Doren I get in return, there would be no point in Cato Institute trading. Trading is always an exchange of unequal values. CALIFORNIA’S FISCAL SHELL GAME spending by upping sales taxes, adopting Proponents of limited government have new fees, establishing new service district Easterly’s criticisms In his New York Times long advocated “starve the beast” policies assessments, and taking on more debt. review of The Rational Optimist , foreign-aid — limiting taxes as a means of limiting The authors conclude that the result is critic William Easterly, who I would have government. But do these strategies work? larger and less accountable government in expected to like the book, was extremely At the federal level, empirical studies by the Sunshine State. critical. Why our different reactions? East - Cato’s own William Niskanen and by erly jumped on Ridley’s theory of the inter - Christina and David Romer of the Uni - ETHANOL MANDATES AND FOOD PRICES action between trade and technology. I versity of California, Berkeley have found Federal law requires that a growing took Ridley to be suggesting this rather that cutting taxes does not lead to reduced amount of ethanol be blended with U.S. than saying it was the final word on the spending. Uncle Sam can make up for the gasoline each year. The mandate is for 11 subject, although I grant that at times lost revenue by selling treasuries. billion gallons this year; under current law, Ridley does go overboard. Easterly seemed But what about at the state and local it will top out at 36 billion gallons by 2022. to get his hackles up because of Ridley’s levels, where governments have less abili - Meeting this year’s mandate requires the over-certainty. ty to augment revenue by borrowing? In a fermentation of about 4.2 billion bushels of But that is not all. Easterly gets upset at new paper, the son-and-father team of corn, which is roughly one-third of U.S. Ridley for using “the word ‘even’ when he Colin and Matthew McCubbins study tax production (and 5 percent of the world’s mentions Africa.” For example, writes Rid - limitations and their effects in California, caloric production in 2007). As is well ley: “[E]ven Nigerians are twice as rich” as the birthplace of the tax limitation effort. known, corn is a major part of the U.S. diet they were half a century earlier. Directly In 1978, California voters approved Propo - and a growing part of the world’s diet. So after criticizing Ridley for this — I am still sition 13, which rolled back property what is the price effect on food from having not sure why — Easterly discloses, “Ridley assessments to 1975 levels, limited annu - so much of the crop diverted to energy? approvingly cites my own work on aid to al increases in property assessments to Using new supply and demand elas - Africa.” Note to self: make sure you do two percent, and required supermajority ticity estimates, Michael Roberts of North not cite Easterly’s work approvingly. legislative votes in order to increase some Carolina State University and Wolfram A related problem Easterly has with other state and local taxes. Schlenker of Columbia University calcu - the book is that Ridley fails to address So did these measures work — did they late that the U.S. ethanol mandate increas - inequality. Well, yes. But it seems odd to keep total California taxes low and slow es world food prices between 20 and 30 criticize a book demonstrating that — I’ll the expansion of state government? The percent. These price increases, in turn, say it — even Nigerians are getting wealth - McCubbins find that, though tax bills result in more conversion of forest into ier, for not noting that Americans’ wealth initially fell, real total taxes per capita cropland, which reduces any carbon emis - is growing even more quickly. Easterly reached and exceeded their 1978 level by sion reduction benefits from biofuels. wants a book, he writes, that “confronts the late 1980s. Meanwhile, state expendi - honestly all the doubts about the ‘free tures in real dollars never fell. California’s INTEL ANTITRUST market.’” Really? All the doubts? I do not state and local governments funded the As this issue of Regulation heads to press, know if such a book could be written with there is news that computer chip manu - Peter Van Doren is editor of Regulation and senior the requisite amount of evidence and have fellow at the Cato Institute. facturer Intel has agreed to a settlement

56 REGULATION FALL 2010 with the Federal Trade Commission con - In another recent working paper, Uni - decreased volatility from 1984 until 2007 cerning some of Intel’s marketing prac - versity of Michigan law professor Dan — a period that has come to be known as tices. The ftc charged that the practices, Crane examines the same case but makes the Great Moderation. Why did it occur? which include bundling and loyalty dis - a different argument: the complaint Conventional wisdom credits Paul Vol - counts, violate federal antitrust laws against Intel would require the chip maker cker and his successors at the Federal because they are intended to keep com - to include some of its fixed research and Reserve with better monetary policy that peting chip makers like Advanced Micro development costs in the prices it charges controlled inflation and supplied stimulus Devices from achieving sufficient for every processor. This would reverse (and applied the brakes) as needed. How - economies of scale. decades of antitrust law that uses pricing ever, some economists now argue that the In 1984, University of Chicago law pro - below marginal cost as a necessary condi - Great Moderation was more the result of fessor (and later a federal judge) Frank East - tion for predation. And it would convert good luck than good Fed policymaking erbrook published a highly influential the computer chip industry into a quasi- (and the 1970s were more the result of bad paper concerning such antitrust cases. public utility in which average-cost recov - luck than bad policy). An early paper in These cases require courts to determine ery is guaranteed and innovation and risk this literature, by Christopher A. Sims and whether or not the disputed marketing taking are retarded. Tao Zha, appeared in the March 2006 arrangement ultimately enhances con - American Economic Review. A more recent sumer welfare. Easterbrook noted that, as FDIC SURCHARGES working paper by Jesús Fernández- with most decisions, judges in these cases Since the Great Depression, the Federal Villaverde, Pablo A. Guerrón-Quintana, are susceptible to making both Type I (false Deposit Insurance Corporation has guar - and Juan Rubio-Ramírez goes so far as to positive) and Type II (false negative) errors. anteed the safety of deposits at member claim that “our reading of monetary pol - A Type I error occurs when the court incor - banks. In exchange for the mandated icy during the Greenspan years is that it rectly determines that consumers are being insurance, the banks pay fees to the fdic was not too different from the policy in harmed by the practice. A Type II error that are then placed in the Deposit Insur - the Burns-Miller era; it just faced much occurs when the court incorrectly deter - ance Fund, which is used to cover liabilities better shocks.” mines that no harm is occurring. Easter - in the event of bank failures. brook argued that Type I errors are more The recent financial crisis depleted the BMI OVER TIME costly than Type II errors. Dynamic markets fund, prompting the fdic in September Conventional wisdom holds that Amer - and innovation offset false negative errors 2009 to collect a special assessment of 5 icans have grown more obese over the — if a permitted practice gives a firm an basis points on each insured institution’s last 25 years, in part because we eat too unfair advantage, competing firms will con - assets minus Tier 1 capital (comprised much restaurant food. Michael Ander - tinue to search for ways to offset that advan - mainly of common stock and retained earn - son and David A. Matsa critique the lat - tage. But nothing offsets the overreach of ings). For the first time, the fdic assess - ter part of that narrative elsewhere in government and the judiciary in false pos - ment was a percentage of total assets rather this issue (see “Restaurants, Regulation, itive errors — once a pro-consumer practice than just insured deposits. Because larger and the Supersizing of America,” p. 40). is deemed illegal, it is off the table (unless a banks tend to raise funds from sources Critiques of the former part start with subsequent court reverses the decision). other than consumer deposits, the sur - the work of Jeffery Friedman, a molecu - Easterbrook concluded that judges should charge appeared to be an attempt to charge lar genetics professor at Rockefeller Uni - consult the economic facts and literature larger banks for the “too-big-to-fail” pro - versity. Friedman is well known for dis - very carefully about the suspect market tection that the federal government extend - covering leptin, the hormone that arrangements and declare a violation only ed them during the financial crisis. regulates food intake in humans. when all the evidence is unambiguous. However, this extra charge was limited. Friedman argues that, though there Consider the ftc ’s charges against Intel The fdic capped the surcharge so that it has been a dramatic change over the last in light of Easterbrook’s paper. Intel’s dis - could not exceed 10 basis points of insured 25 years in the number of Americans clas - counts started in 1999; so how has amd deposits. Thus the cap was operative if sified as “obese,” there has not been near - fared since then? In a new working paper, insured deposits were less than 50 per - ly as dramatic a change in the typical per - George Mason University law professor cent of a bank’s liabilities. In a recent work - son’s weight. A person is considered obese, Joshua Wright argues that amd ’s and ing paper, Scott Hein of Texas Tech and he notes, if that person’s body mass index Intel’s market shares have not really coauthors calculate that, of the largest 19 (bmi ) is greater than 30. ( bmi is comput - changed since then, and that Intel’s cumu - banks that underwent the Treasury ed by dividing a person’s weight in kilo - lative abnormal returns since then are Department’s 2009 stress testing, nine grams by the square of the person’s height slightly negative. He goes on to say that saved $609 million from the cap. Citi - in meters.) Friedman notes that, in 1991, these facts, combined with the cumulative group alone saved $204 million. the average American had a bmi of 26.7 — evidence in the literature that loyalty dis - not very far from the threshold for being counts are pro-consumer, would suggest GOOD MONETARY POLICY OR LUCK? considered obese. A small or no change in that there is no basis for the ftc case After the agonizing stagflation that the average weight of most people, cou - within the error-correction framework plagued the U.S. economy in the 1970s, pled with much larger changes in the proposed by Easterbrook. many macroeconomic data exhibited weight of very heavy people, resulted in a

REGULATION FALL 2010 57 IN REVIEW dramatic increase in the percentage of Readings the population considered obese. Regulation n “A War on Obesity, Not the Obese,” by Friedman’s argument is supported by a Jeffrey M. Friedman. Science , February 7, EDITOR Peter Van Doren new working paper by John Komlos of the 2003. University of Munich and Marek Brabec of MANAGING EDITOR n “An Antitrust Analysis of the Federal Trade Thomas A. Firey the Czech Academy of Sciences. Komlos Commission’s Complaint against Intel,” by DESIGN AND LAYOUT and Brabec analyze the U.S. bmi data by Joshua D. Wright. June 2010. Available at David Herbick Design birth cohort from 1882 to 1986, breaking http://papers.ssrn.com/sol3/papers.cfm?abst ARTISTS Morgan Ballard and Kevin Tuma each cohort into 10 centile groups (lightest ract_id=1624943. CIRCULATION MANAGER 10 percent, next-lightest, and so on up to the n “Do Tax Cuts Starve the Beast? The Effect Alan Peterson of Tax Changes on Government Spending,” heaviest 10 percent). They argue that bmi EDITORIAL ADVISORY BOARD has been gradually increasing for the last 100 by Christina D. Romer and David H. Romer. Chairman years. In addition, the weight gains across Brookings Papers On Economic Activity , Spring William A. Niskanen, Chairman Emeritus, 2009. Cato Institute centiles of the distribution are not uniform. William A. Fischel, Professor of Economics, For 50-year-old U.S.-born white men, the n “Identifying Supply and Demand Dartmouth College lightest 20 percent have had no increase in Elasticities of Agriculture Commodities: H.E. Frech III, Professor of Economics, Implications for the U.S. Ethanol Mandate,” University of California, Santa Barbara bmi in the last 55 years. There have been by Michael J. Roberts and Wolfram Richard L. Gordon, Professor Emeritus of Mineral modest increases in the middle 50 percent, Schlenker. NBER Working Paper No. 15921, Economics, Pennsylvania State University and much larger increases in the top 30 April 2010. Robert W. Hahn, Senior Visiting Fellow, percent. The data on the rate of increase in Smith School, University of Oxford n “Limiting Government: The Failure of Scott E. Harrington, Alan B. Miller Professor, bmi (the first derivative) are even more right- ‘Starve the Beast’,” by William A. Niskanen, Wharton School, University of Pennsylvania skewed. The rate of increase in bmi for Cato Journal , Vol. 26, No. 3 (Fall 2006). James J. Heckman, Henry Schultz Distinguished Service Professor of Economics, University of Chicago native-born white men has been decreasing n “On Large Bank Subsidies from the Federal for the bottom 70 percent of the distribu - Joseph P. Kalt, Ford Foundation Professor of Deposit Insurance Corporation,” by Scott E. International Political Economy, John F. Kennedy tion since 1975, but has been increasing for Hein, Timothy W. Koch, and Chrislain School of Government, Harvard University the top 30 percent. Nounamo. April 2010. Available at http:// Michael C. Munger, Professor of Political Science, papers.ssrn.com/sol3/papers.cfm?abstract_id Duke University =1597822. Robert H. Nelson, Professor of Public Affairs, CREDIT CARDS VS. MERCHANTS University of Maryland n “Predation Analysis and the FTC’s Case Merchants pay fees to banks and Visa and Sam Peltzman, Ralph and Dorothy Keller MasterCard for the processing of credit against Intel,” by Daniel A. Crane. May 2010. Distinguished Service Professor Emeritus of Economics, Available at http://papers.ssrn.com/sol3/ University of Chicago card and debit card payments. Many of papers.cfm?abstract_id=1617364. George L. Priest, John M. Olin Professor of Law and these merchants argue that the fees are Economics, Yale Law School n “Proposition 13 and the California Fiscal onerous, and the merchants have organ - Paul H. Rubin, Professor of Economics and Law, Shell Game,” by Colin H. McCubbins and ized politically to resist. Their efforts bore Emory University Matthew D. McCubbins. December 2009. Jane S. Shaw, Executive Vice President, John William fruit in the recently passed financial Available at http://papers.ssrn.com/sol3/ Pope Center for Higher Education Policy reform bill, which contains a provision papers.cfm?abstract_id=1548024. S. Fred Singer, President, Science and instructing the Federal Reserve to issue Environmental Policy Project n “Reading the Recent Monetary History of rules that regulate the fees associated with the U.S., 1959–2007,” by Jesús Fernández- Fred Smith Jr., President, Competitive Enterprise Institute debit cards. Villaverde, Pablo A. Guerrón-Quintana, and Pablo T. Spiller, Joe Shoong Professor of But are merchants, in fact, overcharged? Juan Rubio-Ramírez. NBER Working Paper International Business, University of California, In a new working paper, George Mason No. 15929, April 2010. Berkeley Richard L. Stroup, Professor Emeritus of Economics, n “The Economics of Payment Card University law professor Todd Zywicki Montana State University y Interchange Fees and the Limits of documents that in the pre–credit card W. Kip Viscusi, University Distinguished world of the late 1960s, when stores ran Regulation,” by Todd J. Zywicki. June 2010. Professor of Law, Economics, and Management, Available at http://papers.ssrn.com/sol3/ Vanderbilt University their own layaway and credit card systems, papers.cfm?abstract_id=1624002. Richard Wilson, Mallinckrodt Professor of Physics, stores had an average loss on credit sales of Harvard University n “The Limits of Antitrust,” by Frank H. 3.4 percent. In contrast, in 2008 merchants Clifford Winston, Senior Fellow in Economic Easterbrook. Texas Law Review , Vol. 63, No. 1 paid $27.5 billion in fees to Visa and Mas - Studies, The Brookings Institution (1984). Benjamin Zycher, Senior Fellow, terCard, while charge-offs were $50 bil - Pacific Research Institute n “The Trend of BMI Values by Centiles of lion. That is, by outsourcing the credit U.S. Adults, Birth Cohorts 1882–1986,” by PUBLISHER function to banks, merchants sold $50 John Komlos and Marek Brabec. July 2010. Edward H. Crane, President, Cato Institute billion in goods to purchasers who did Available at http://papers.ssrn.com/sol3/ Regulation was first published in July 1977 not repay the bank, but the merchants papers.cfm?abstract_id=1649363. “because the extension of regulation is piecemeal, the sources and targets diverse, the language com - only had to pay $27.5 billion for that pro - n “Were There Regime Switches in U.S. tection. In the pre-Visa system, the entire Monetary Policy?” by Christopher A. Sims plex and often opaque, and the volume overwhelm - ing.” Regulation is devoted to analyzing the $50 billion loss would have been borne and Tao Zha. American Economic Review , Vol. implications of government regulatory policy and entirely by the merchants. R 96, No. 1 (March 2006). its effects on our public and private endeavors.

58 REGULATION FALL 2010