Friday, 29 August 2014

The Role of Law in Thomas Piketty's Capital in the 21st Century

There is not a lot of law discussed in Thomas Piketty's book Capital in the Twenty-first Century. Piketty drops a few hints here and there about what laws he thinks likely contributes to widening wealth inequality (the advent of dynastic trusts, the lowering of marginal rates for the highest personal income tax brackets, which contribute to executive "super-salaries"), but his basic policy prescription is a small global wealth tax.

I would not oppose such a tax. There is something elegant about such a tax, if the international tax haven problem can be solved. But in my review of the book, I suggest that some examination of the legal order is in order. Legal rules and institutions contribute to wealth inequality indirectly. In Piketty's world, wealth inequality increases when the rate of return on private capital is greater than the rate of economic growth, or r > g in his vernacular. My review examines several areas of law in which legal rules and institutions drive up rates of return on private capital (r in Piketty-speak) without doing much to increase overall economic growth. These areas are financial regulation, antitrust law, oil and gas tax policy, electric utilities regulation, and the generic practice of grandfathering. In my view, a rather simplistic faith in trickle-down economics has caused policy-makers to support any policy in which Δg > 0, however speculatively, and if Δr >> 0, well then, God Bless. Of course, Δg is very often not greater than zero.

Thursday, 14 August 2014

Regulating Greenhouse Gases Under the Clean Air Act, Version 0.0

There has been so much clamor about the Environmental Protection Agency's introduction of a proposed rule for regulating greenhouse gas emissions from power plants, it's hard to shout above it all. And yet, not much has really been added to the conversation from a policy point of view, and not much can be said. The rule sets an emissions reduction target for each state, but is very vague (or, in EPA's words, "flexible") about how states can achieve those targets. There has been so much sky-is-falling nonsense that one loses sight of the fact that the rule doesn't actually do all that much. The rule provides neither much guidance nor much admonition. Under this part of the Clean Air Act, states will be required to submit for EPA approval State Implementation Plans that set out a regulatory scheme by which they intend to carry out the broader mandates set out by EPA. The required emissions reductions are the product of complicated formulas, but have their ultimate root in emissions rate standards for coal-fired power plants, which were then adjusted for a number of political factors, like individual state efforts to reduce emissions before this rule. The vagueness is intentional. Former EPA general counsel Roger Martella characterizes EPA's posture towards states as "any way you want to reduce greenhouse gas emissions, we'll find a way to make it work." EPA is bending over backwards to let states do whatever they want to do, at the price of perhaps accomplishing too little. Charles Komanoff of the Carbon Tax Center estimates that the implicit price of emitting carbon dioxide under these targets is about $2.15 a ton. That's trivial.

My friends at Element IV, a consulting group founded by a former oil executive and a former Sierra Club lobbyist (!), are not optimistic about the survival about this much-ado-about-not-much rule. They cite legal challenges that were filed within moments of the publication of the rule. 

Despite the disappointment with the ambition of the rule, this rule is important for several reasons. Although Bailey and Bookbinder minimize the significance of what this rule can accomplish -- "give the President something concrete to say at the Paris climate talks next year," and "claim a political legacy beyond that" -- there is real game-theoretic significance to being able to say something "concrete." I noted a few years ago that international climate negotiations are extremely fragile, and that signals of cooperation were very important in preventing the unraveling of agreements. This greenhouse gas rule does allow leaders from other countries, if they are so inclined, to be able to say to skeptical constituents that the United States has done something. Not much, but something. So the facile dismissal that we should do nothing because anything we do will be canceled out by the fact that "China" -- whatever they mean about a nation of 1.3 billion people -- will do nothing, is far too simplistic. Like it or not, the nature of climate negotiations is going to have to be the taking of unilateral steps that are necessary, but not sufficient conditions for international agreement to take place. 

I would like to see a carbon tax, too, but little steps will have to do for now.

Monday, 23 June 2014

The Canadian Government Approves the Northern Gateway Pipeline

Last week, the Canadian government approved the construction of the Northern Gateway pipeline that is intended to ship crude oil produced from the oil sands of Northern Alberta to Kitimat, a small port city on the West Coast in British Columbia. The approval comes with 209 conditions, an unusually high number for the legally parsimonious Canadians, but this is a very controversial project. The Canadian Prime Minister, Stephen Harper is from Alberta, and is desperate to make sure Canadian oil sands crude has an export outlet. Harper is many things, but he is not stupid; he wants to sell oil before greenhouse gas regulations start to gain currency worldwide and the demand for crude starts to ebb. An outlet to the West, and a shipping lane to China, a country that is likely to be one of the last to embrace fossil fuel curtailment, would be a great alternative to Keystone XL, or even the patched-together pipeline route to the East. 

However, Northern Gateway faces intense opposition from the 70 some-odd distinct aboriginal groups in the pipeline's path. The 209 conditions are not likely to be a big deal as far as the federal government is involved, as long as Stephen Harper is Prime Minister. The question is whether the Canadian Supreme Court will uphold aboriginal challenges to the pipeline that are almost certain to arise from at least some of the groups. What must be very alarming, from the perspective of the pipeline proponent, Enbridge, is that aboriginal groups in British Columbia have already accepted a natural gas pipeline that will pass through much of the same territory. In particular, the Haisla Nation, which holds territorial rights around Kitimat, accepts the gas pipeline but vigorously opposed the crude oil pipeline. This suggests that aboriginal groups such as the Haisla are fine with natural gas, but not oil. It will be hard to characterize that legally as unreasonable, as oil pipelines always pose the risk of spills, while gas pipelines are much less onerous to keep clean. I have always found it hard to guess at what the Canadian Supreme Court will do, but past cases such as Haida v. BC Ministry of Forests signal that the Court will expect some pretty sincere efforts to accommodate aboriginal claims and interests.

There is a larger economic question for the whole country of Canada. In the past, large parts of the Canadian economy have centered upon timber, fish, and minerals, and Canada's possession of the second-largest reserve of oil in the world seems to consign Canada to staying that way for a while. I do not believe that crude imposes a traditional resource curse on Canadian exports -- there are many other political factors that render Canada uncompetitive other than a strong petroloonie -- but I do worry that the political economy of Canada will tether Canada's education and commerce infrastructure towards resource extraction. A 2012 paper by Elena Suslova and Natalya Volchikova suggests that a second kind of resource curse is the diversion of public monies towards resource development rather than the development of a more diverse base of human capital, like say, high technology. The pipeline really could create some path-dependencies for the Canadian economy. In that sense, the natural gas pipeline really may not be much better than the Northern Gateway oil pipeline.

Friday, 13 June 2014

Farms Versus Developers

The New York Times ran an article a couple of weeks ago on a new kind of retirement community: not just a sprawling collection houses only for old people, but mixed-use and mixed-age communities with special resources for older people. The visionary developer credited with leading the way of this new, more enlightened model of retirement living was Del E. Webb, whose first retirement community was Sun City, near Phoenix. First-year law students should remember that name. Del Webb developed Sun City, which grew and grew and grew, towards a feedlot owned by Spur Industries, a cattle feedlot. The feedlot had been there since 1956, farming in the area since 1911, and Sun City since 1960. Sun City literally grew toward the feedlot, and when Webb started having trouble selling houses, he sued Spur on the grounds that the feedlot was a nuisance. Most students think it wrong that the late-comer Webb should be able to sue the feedlot, which was already there. The chutzpah!

But as we learn in Property class, why should there be a first-in-time, first-in-right rule? Why should a feedlot essentially foreclose residential development by virtue of being there first? Back when Phoenix was a growing city and residential development was a valuable activity (let's not talk about the water usage for now), why should a feedlot stay there just because it was there? The Arizona court held in Spur Industries v. Del E. Webb that it shouldn't, and sided with Del Webb -- to an extent. Spur had to move its feedlot, but Webb had to pay the move. My students generally like that result, as land moves to its most valuable use (let's not talk about the water usage for now), and the feedlot is made whole. The "coming to the nuisance" defense is not an absolute defense, but merely a factor.

But that case did not sit well with farmers. In every single state plus Puerto Rico, some form of a "Right-to-Farm" law was passed. RTF statutes provide farms with a defense to nuisance claims by plaintiffs that migrate toward (or "come to") any allegedly nuisance-creating farm. RTF statutes commonly set out some definition of the agricultural operations that can raise the defense, a list of permitted operational changes that can be undertaken without losing the defense, and some time limit that serves as an effective statute of limitations on any claims of nuisance against a farm.

So now the coming to the nuisance defense *is* (to varying degrees and subject to lots of qualifications) an absolute defense. Are we happy?

The usual justification of Right-to-farm laws of protecting farms from encroaching residential development rings hollow in light of modern developments in agricultural operations. For example, in Parker v. Obert's Legacy Dairy, an Indiana court upheld a fairly long-standing interpretation of Indiana's Right-to-Farm law as protecting a farm that expanded operations from about 100 cows to almost 1000, holding that such a change was not a "significant change" in the type of agricultural operation, and could therefore not be the subject of a nuisance lawsuit brought by neighbors.

But this is not about the right to farm anymore. The plaintiff's property in Parker was also a farm, albeit a small-scale farm. As between the plaintiff's farm and the defendant's farm, the Right-to-Farm law acts as a subsidy for the defendant's large-scale farm. While economies of scale accrue to larger, more intensive agricultural operations, a variety of environmental and land use laws provide a check on the uncontrolled growth of such farms, ensuring that the negative externalities of such farms are at least commensurate with the economic benefits of efficient large-scale farming. Right-to-Farm laws upset this balance, providing incentives to intensify agricultural operations and enlarge capital investments. The result is a skewing of the distribution of farms toward the larger, the more intensive, and the greater polluting operations.

Tuesday, 10 June 2014

Why Has Thomas Piketty Hit Such a Nerve?

Thomas Piketty has attained a public figure status in the United States dwarfing his celebrity in his native France, and it isn't just because of the now-tired debate about the "one percent" and the "ninety-nine percent." Yes, there is wealth concentration in the United States. It is unprecedented in the United States, but not Old Europe. Piketty makes much of the Belle Epoque, the Gilded Age, a bright period of optimism and joie de vivre, but also extreme French aristocracy and wealth concentration. But in modern America, optimism is still slumping, and the wealth gap is increasing. Piketty proposes a progressive wealth tax; ideally, a global one.

But it isn't just wealth concentration that haunts Americans. Wealth concentration just focuses a unease about the extent to which we control our futures and that of our children. We have handed over much of our lives to singular entities, private or not, consciously or not, voluntarily or not, and it is never clear if we are better off for it. Whether it be due to economies of scale, or some other reason that things are concentrating in the hands of a few, our diminishing lack of choice is disquieting. So much of our day-to-day experiences as Americans are impacted by extremely concentrated industries. The Hachette Book Group has gotten into a dispute with Amazon, through which about 44% of all books sales are made, in which Amazon is reportedly delaying shipments of Hachette books as retaliation for its refusal to agree to ebook rates. This is putatively for our own benefit as bookbuyers, but as a publisher or a writer, are we better off with one widespread, brutally efficient distributor? What are our choices of cable providers? And how do you feel when you get off of a flight on the one of now-three major airlines that you are forced to patronize? [nb: you can always file air travel complaints with the FAA consumer complaint site, which I did after an American Airlines gate agent in Miami slammed a boarding door in my panting, sweating face, sneering "sorry, flight's closed."] [nb2: airlines, it has to be said, are not making money hand-over-fist like the other concentrated industries]. Yesterday, the President announced an executive order that will cap student loan repayments at ten percent of income. That, too, seems aimed at an American malaise about access to success. It gets couched by the President as making sure everyone gets a "fair shot" at success, but what he really means is that success and material wealth should not be concentrated. Piketty himself focuses much of his reform proposals around access to higher education.

This brings me to my earlier post about climate change being a national security threat. Piketty is finds it "terrifying" that the wealth gap could increase back up to Belle Epoque levels. Why? Well, what happens when there are vast wealth inequalities, and a decreasingly small fraction of people that own an increasingly large part of the pie? Can you imagine what it feels like to be one of the 0.1%? Vast inequalities of wealth, concentrated in a vanishingly small few, creates a comparative advantage for violence on the part of the dispossessed. It could be that even expensive, sophisticated security systems, while offering an absolute advantage in violence, suffer a comparative disadvantage when faced with swarms of angry crowds with little opportunity cost of violence. That is the kind of calculus confronting oppressive governments when facing frustrated and hungry mobs with little to lose from violence. This may sound fantastic in modern America, but it is not solely a dystopian, futuristic Hollywood sci-fi risk, as evidenced from the many modern-day political upheavals. Moreover, the problem with this risk is that it is a potential spiral. Once a police state -- private or public -- is erected, it becomes difficult to reverse. Marx warned that class struggles would come; Durkheim warned that they may result in violent upheaval.

I'd pay a wealth tax.

Thursday, 5 June 2014

New York City's Soda Law Will Fizzle

The New York State Court of Appeals, the state's top court, heard oral argument yesterday on New York City's "Portion Cap Rule," which seeks to limit the sales of sugary drinks to containers less than or equal to 16 ounces. This particular case has much less meaning than the media attention would appear to signify, and the outcome is not in doubt. The City will lose.

The legal issue is fairly clear. It is not about the City protecting public health, which it can do administratively (without the City Council) for certain emergencies, like quarantines to stem the outbreak of cholera, but cannot do for slow-burning problems like obesity from soda consumption. Cities can no doubt regulate consumption for health reasons, and only the most egregious rules will run afoul of some sort of a dormant commerce clause challenge. But in general, they must do so legislatively. New York City's Charter, while unique, requires it. If this is such an emergency, then limiting soda sizes to 16 ounces won't do the trick, and exempting grocery stores and convenience stores speaks to the non-emergency nature of the problem. So the New York Times is way off in reporting that it is closely watched by cities all over the country, and that the case is interesting. The case will be narrowly decided on the grounds that the Mayoral Administration of Michael Bloomberg, which initiated the Rule, exceeded its powers in enacting this rule without going through the City Council.

This case is a shame in two ways. First, obesity due to soda consumption is significantly higher in communities of color in New York City, most notably African-American and Hispanic communities. It is thus a shame that New York State NAACP president Hazel Dukes came out against the Rule, and the City's Public Advocate, Letitia James, argued against the Rule. Their view: we don't need no stinkin' protection from soda. The Rule infringes our liberty of palate. It is a fact-free, analysis-free, emotional view grounded in ignorance, and exhibiting a stunning disregard for reality. Shame on us for conferring authority on such ignoramuses.

The second shame is the Portion Cap Rule itself. Because Mayor Bloomberg did not want to go through the City Council, he was reduced to this half-baked attempt to do *something* about soda consumption and obesity. A paper I wrote discusses this link, and estimates benefit-cost ratios of at least six to one, and perhaps as high as thirteen to one. Had the former Mayor been able to work with the City Council, he could, without legal controversy, have imposed a small tax on sugary drinks that would have been much more effective, easier to administer, and would truly have been a test case for what cities can do to protect public health. That is a case New York City would have won, and set a precedent for a variety of locally-grown public health measures.

Monday, 2 June 2014

By the way, on greenhouse gas limits, Canada already did this....

To much fanfare, controversy, and promises to sue, litigate, and sue and litigate some more, the EPA unveiled its much-anticipated rule for greenhouse gas emissions from new and existing power plants. United Mine Workers of America say they feel they've been "kicked to the curb," and UMW president Cecil Roberts ominously warned, "we will not go quietly," and "you will hear from us." Tim Phillips, head of the Koch-funded Americans for Prosperity promised a "substantial effort" to defeat the rules.

This is so controversial, such a lightning rod, and ... it's been done already, and not in tree-hugging Europe, but right here, a miles north of Seattle and Buffalo, in Canada. The Canadian federal government -- the Conservative Party-led Canadian federal government, headed up by the almost comically unloved Prime Minister Stephen Harper, introduced roughly the same rule as early as 2011, and finalized it in 2012. The rule, like EPA's announced rule yesterday, sets a rate standard for power plants that is easy for natural gas-fired power plants to meet, impossible for coal-fired power plants to meet, unless a heretofore non-existent carbon capture and storage technology is deployed. The Canadian rule was quite realistic (and unambitious) in requiring that the CCS technology achieve a 30% emissions reduction rate.
No one who has had any experience with Environment Canada, the Canadian version of something like the EPA, believes that Environmental Canada, much less one under the government of Stephen Harper, was capable of forming such a rule (the Canadian rule was also not 645 pages like the EPA rule was). There is a 100% chance that the Canadian rule was developed with considerable EPA input. The Canadian rule also grandfathers up to the end of the "useful life" of a power plant -- 45 years. Sensible to some, but I've argued against grandfathering, as have many.

I can appreciate timing considerations, but remain puzzled. I can see the Obama Administration wishing to avoid rolling it out right before the 2012 re-election bid, but why wait until now? There is no margin for error if the President truly wants this in place by the time he leaves office. If that was his wish, he squandered 18 months getting this rolled out. And all the time, Bob and Doug Mackenzie had already set the precedent.