The Volokh Conspiracy

Nobel Prize-winning economist James Buchanan passed away today. Buchanan was one of the founders of public choice economics, which seeks to apply economic analysis to politics. Closely related was his important work applying economic analysis to constitutions, most notably in his classic work The Calculus of Consent, coauthored with Gordon Tullock. The burgeoning field of constitutional political economy was in large part his creation. Buchanan also did path-breaking research on federalism, public finance, and the theory of externalities and public goods.

Buchanan was a giant of twentieth century economics, and his work has had a wide influence on scholars in many disciplines, including law. My own work on federalism and constitutional theory is indebted to him. Buchanan’s approach to public choice was also an important contribution to libertarian thought, since it undercut the view that government – including democratic government- can be depended on to promote the public interest and correct market failures. As Buchanan helped demonstrate, once we use the same economic tools to analyze government action as were previously applied to private sector activity, government failure often turns out to be worse than the market failure that government action was supposedly intended to cure. But Buchanan’s influence also extended to many liberal and conservative scholars, as well as libertarian ones. For example, John Rawls drew on his work extensively in his Theory of Justice, probably the most important work of left-liberal political philosophy of the last fifty years.

For a helpful concise summary of some of Buchanan’s most important contributions, see here.

“Congress, apparently, couldn’t end the year without showering billions on a handful of interest groups, some of which you probably didn’t even know existed,” the Washington Post editorializes. the final bill incorporated a Senate measure that extended various corporate tax breaks and a farm bill extension. More from Brad Plumer and Matt Stoller have more and Tim Carney details how this happened.

Whether or not you believe the PPACA has been or will be good for the American people, it has certainly been good for the lobbyists and legislative staffers who wrote it, as Tim Carney explains. Glenn Greenwald comments further:

This is precisely the behavior which, quite rationally, makes the citizenry so jaded about Washington. It’s what ensures that the interests of the same permanent power factions are served regardless of election outcomes.

Adds Carney, this is “a good reminder of what Obamanomics and Bushonomics have in common.”

Sheila Burgess, the Massachusetts Highway Safety Division Director with a horrible driving record and no qualifications for the job, has resigned. I blogged about Burgess here.

The resignation was almost certainly caused by recent revelations about her driving record and the fact that she got the job through political connections without having any real qualifications for it. In that sense, one could conclude that the political process worked well. A compromised and unqualified official was ultimately forced to quit. On the other hand, Burgess held this position for over five years before anyone in state government noticed (or at least cared) that she might not quite be the right person for the job. That may be good enough for government work, but it’s not actually all that good.

UPDATE: It looks like Burgess was already scheduled to leave the highway safety director position. The resignation is from her position as a state employee. Given this situation, it is possible and even likely that the resignation was not the result of the revelations about her driving record, as I suggested above. I apologize for the mistake, (which, however, I caught within 30 minutes of putting up the initial post). It is, however, still the case that Burgess held this position for several years before there was any effort to force her out.

It sounds like something from a bad libertarian parody of government. But it turns out that the Director of the Massachusetts state highway safety agency has a long record of traffic accidents and moving violations. She apparently got the job through political connections, even though she had no relevant expert qualifications for the job. But perhaps her appointment could be justified on “takes a thief to catch a thief” grounds:

Her driving record includes seven ­accidents, four speeding violations, two failures to stop for a police officer, one failure to stay in her lane, one driving without registration or license in possession, and one driving without wearing a seat belt....

There are 34 entries on her driving record, dating back to 1982.

Yet Sheila Burgess is director of the Massachusetts Highway Safety Division. Her mission is to reduce accidents by promoting good driving practices.....

Burgess’s most recent crash occurred on Aug. 24, as she was driving a state vehicle during work hours. At 1:16 on a sunny summer afternoon, her car veered off the road in the Blue Hills Reservation in Milton and slammed into a rock outcropping, a State Police report says.

Burgess was appointed to her $87,000-a-year position in July 2007, without any background in public safety, transportation, or government administration. Her experience was in Democratic Party politics. For almost two decades as a paid consultant and congressional aide, she had raised money and ­advised candidates for public office, including — according to her resume — Lieutenant Governor Timothy Murray, who had taken office six months earlier as part of the new Patrick administration....

A spokesman for Governor Deval Patrick and Murray said late Friday that Burgess was hired, in part, based on the recommendation of US Representative James McGovern, for whom Burgess once worked as a consultant. Brendan Ryan, the spokesman, said he could not address why Burgess was hired into the administration as head of traffic safety despite her record of driving violations.

When it’s pushed by the Republican leadership, is located in a politically important state, and is carefully written to avoid the official definition of an “earmark.” (HT: Instapundit)

Manhattan Institute scholar Nicole Gelinas has an interesting column about a massive financially dubious parking lot at Yankee Stadium, which Bronx Borough President Ruben Diaz, Jr. claims requires a government bailout to prevent a local financial crisis:

If the Zuccotti kids want to protest Wall Street bailouts, they should go occupy the Yankees’ luxury parking garages in The Bronx. Borough President Ruben Diaz Jr. wants to give the garages’ private investors a fat-cat rescue at the expense of Gotham’s Main Street mice.

Four years ago, the Yankees wanted a souped-up parking “system” for their new ballpark, and Mayor Bloomberg obliged. City Hall helped a previously unknown outfit, the Bronx Parking Development Co., borrow $238 million to build and run a $300 million parking paradise on city land under a long-term lease. (The state supplied the balance of the cash.)

ut the mayor didn’t put the city’s credit on the line. Instead, the city’s Industrial Development Agency — which is not guaranteed by city taxpayers — sold the debt to bondholders.

No one ever said so outright, but bondholders were plainly supposed to assume that, because Bronx Parking’s board is stacked with city officials and city officials talked up the bonds, that the city was there should the deal run into trouble.

It sure didn’t make sense on the merits. The old parking lots generated $7 million a year, but the new lots were supposed to pay twice that in annual debt costs. And Bronx Parking can’t just raise prices to fill the gap. Not many folks will pay $35 to park when there’s a new Metro North station right there.

Reality has caught up. Last week, Bronx Parking made its payment to bondholders only by tapping an emergency fund. The firm must make two more payments by next October — and it doesn’t have the cash.

There’s no mystery about what should happen: The bondholders should take their losses.

But not if Diaz gets his way. Last month, the beep issued a call to build a “world-class” hotel and conference center where one of the garages stands. The hotel would pay Bronx Parking for the space — “stabiliz[ing] the financial situation we face so that we can ultimately meet our obligations to the bondholders,” the company said....

Diaz’s proposal relies on fear of a bond-market panic, which would force another 2008-style bailout of sophisticated investors. Apparently, such bailouts are OK as long as they come in the form of useful goodies, like the promise of taxpayer-subsidized construction jobs for Bronx voters.

But bondholders need to be taught a lesson. It’s bad enough national taxpayers have too-big-to-fail banks. Local taxpayers don’t need too-big-to-fail parking lots.

If the bailout does happen, it will add to the already record-breaking figure of over $1 billion in government subsidies for the construction of the new Yankee Stadium and related facilities.

Fortunately, there is an easier solution. Yankees’ co-owner Hank Steinbrenner has recently denounced “socialism” in baseball in very strong terms. It’s clear that he doesn’t want his business dealings tainted by even the slightest whiff of socialistic subsidies.

The parking lot situation gives the Steinbrenners an opportunity to live up to their own principles. They can take some of the $1 billion they got in public subsidies for the stadium and use it to bail out the parking lot project, which, as Gelinas notes, the Yankees helped instigate in the first place. That would obviate the need for further “socialistic” subsidies for the lot and also remove some of the taint created by the original government subsidies for Yankee Stadium.

Hank Steinbrenner, a lonely parking lot turns its eyes to you!

In a recent post, I cited evidence suggesting that the new Egyptian government is degenerating into a military dictatorship at least as bad as the Mubarak regime that was overthrown earlier this year. Jeff Jacoby compiles some additional relevant points:

[T]he “spirit of Tahrir Square’’ has ushered in neither liberal democracy nor a rebirth of tolerance for Egypt’s ancient but beleaguered Christian minority.

One of the country’s leading liberal reformers, Ayman Nour, said Monday that with the latest bloodshed, the military has lost whatever goodwill it accrued last spring. The ruling Supreme Council of the Armed Forces almost surely doesn’t care. In the eight months since Mubarak’s ouster, the military has tried and convicted some 12,000 Egyptian civilians in military tribunals, often after using torture to extract confessions. The country’s hated emergency laws, which allow suspects to be detained without charge, not only remain in force, but have been expanded to cover offenses as vague as “spreading rumors’’ or “blocking traffic.’’ And just as Mubarak did, the generals insist that government repression is all that stands between Egypt and social chaos.

As for Egypt’s Coptic Christians, their plight has gone from bad to worse. Post-Mubarak Egypt has seen “an explosion of violence against the Coptic Christian community,’’ the international news channel France 24 was reporting as far back as May. “Anger has flared up into deadly riots, and houses, shops, and churches have been set ablaze.’’

With Islamist hardliners growing increasingly influential, hate crimes against Christians routinely go unpunished. Copts, who represent a tenth of Egypt’s population, are subjected to appalling humiliations.

As Jacoby notes, the violence against the Coptic minority appears to enjoy substantial public support. That reality reinforces my longstanding concern that prospects for liberal democracy in Egypt are undercut by the intolerant nature of majority opinion in that country, as well as the superior ruthlessness and organization of antiliberal forces.

When the revolution that eventually overthrew Egyptian dictator Hosni Mubarak began, I warned that the end result could easily be a government as bad or worse than Mubarak’s was. In a revolutionary situation, liberal democratic forces often get outmaneuvered by more ruthless and better-organized opponents – even if majority public opinion would prefer a liberal regime. In Egypt, I pointed out, the establishment of a repressive regime is made more likely by the fact that public opinion is in may ways extremely illiberal. Unfortunately, this fear has so far been justified by events. As Thanassis Cambanis explains in the Atlantic, the new Egyptian government is well on its way to becoming a military dictatorship in some ways more repressive than Mubarak’s regime:

It’s hard to escape the feeling that Egypt’s January 25 Revolution is being eaten alive. It’s too soon to write it off, and too soon to predict that a full-fledged military dictatorship will rule the country for the foreseeable future; but that grisly outcome now is a solid possibility, perhaps as likely an outcome as a liberal, civilian Egypt or an authoritarian republic.

Eight months after a euphoric wave of people power stunned Egypt’s complacent and abusive elite, it’s possible to see the clear outlines of the players competing to take over from Mubarak and his circle, and to assess the likely outcomes. The scorecard is distasteful. The uprising — it can’t yet be fairly termed a revolution — forced the regime to jettison its CEO, Hosni Mubarak, in order to preserve its own prerogatives.

In the last two months, that regime has made clear how strong it feels. In September, in quick succession the military extended the hated state of emergency for another year, effectively rendering any notion of rule of law in Egypt meaningless; unilaterally published election rules that favor wealthy incumbents and remnants of the old regime, and that disadvantage new, post-Mubarak competitors; indefinitely postponed presidential elections, and refused any timetable for handing over authority to a civilian; reinstated full media censorship, threatening television stations and imposing a gag order on all reporting about the military; and the country’s authoritarian ruler, Field Marshal Mohammed Hussein Tantawi, unleashed a personal public relations campaign on state television odiously reminiscent of Mubarak’s image-making. Furthermore, the government advanced its investigation of “illegal NGOs” that allegedly took foreign money, including virtually every important and independent dissident organization.

Taken together, these moves show a military junta fully confident that it can impose measures of control as harsh — or, in the case of widespread military trials for civilians, harsher — than those employed by Mubarak.

As Cambanis recognizes, the new military rulers have not yet fully consolidated their power. So a more liberal outcome is still possible. But its likelihood is gradually diminishing. Moreover, many of the military government’s opponents are far from being liberal democrats themselves. Some of them are radical Islamists who, if they prevail, would establish a significantly more oppressive government than the generals – especially with respect to women and religious minorities.

Some dictatorships are so bad that their overthrow will almost always be a net positive. The new regime can hardly avoid being a lesser evil than the old when the latter is a totalitarian state and/or engaging in mass murder. Consider such cases as Adolf Hitler or Pol Pot. Mubarak, however, was basically a run of the mill despot who repressed political opponents but was not a totalitarian and did not commit mass murder. The overthrow of that kind of regime often leads to the establishment of a worse one. Such an outcome is also a real danger in Libya, where radical Islamists are among the leaders of the victorious anti-Gadhafi rebels.

The debt deal passed today does not go as far in cutting spending as I would like. But it does nonetheless enact substantial cuts without any tax increases, with a significant likelihood of more cuts in the future. If the bipartisan commission created by the new legislation fails to come up with a spending cut plan or Congress fails to enact the plan, there will be additional automatic cuts in both civilian and military spending.

If nothing else, the deal provides additional evidence in support of the proposition that divided government reduces the growth of the state, and makes deregulation and spending cuts more likely. Certainly, it is inconceivable that any such deal would have been made had the Democrats retained control of Congress in 2010. One can argue that the Republicans would have enacted bigger cuts had they controlled the Senate and the White House as well as the House of Representatives. But it should not be forgotten that the GOP presided over massive increases in spending and regulation when they controlled all three under George W. Bush. The government-restraining effects of divided government are demonstrated not only by the last decade, but by previous historical experience.

The evidence on the effects of divided government undercuts Democrats’ claims that they can be trusted to get spending under control on their own. But it should also give pause to conservatives who believe that our fiscal problems will be solved if only the GOP can make a clean sweep in 2012.

Today is the Ides of March, the anniversary of Julius Caesar’s assassination. Economist David Henderson asks a question that people have been debating for over 2000 years: Should Caesar have been killed? Obviously, this issue divided Romans at the time, and later generations haven’t agreed on it either.

If the issue comes down to whether Caesar deserved to die, I’d say the answer is yes. He killed or enslaved hundreds of thousands of innocent people during his wars in Gaul and elsewhere. Nor is this merely a critique based on modern values that ancient Romans didn’t share. Some of Caesar’s contemporary critics, such as Cato the Younger, also attacked him on the same basis. The ancient Romans were far from humanitarian when it came to war and slavery, but even some of them were appalled by the scale of Caesar’s atrocities. Unless you believe that killing is never justified, it’s hard to deny that Caesar got what he deserved. We should bury Caesar, not praise him.

If, on the other hand, the issue is whether the assassination did more harm than good, the answer is less clear. Caesar’s death led to several additional rounds of civil war that caused enormous death and destruction. In the end, the Roman Republic was still superseded by a monarchy led by Caesar’s heir Augustus. Had the assassins failed, maybe the same result could have been “achieved” with less bloodshed. We may never know.

As I discuss in this post, the late Roman Republic suffered from structural weaknesses that made it likely that some ambitious general would overthrow it soon or later. That may be one of the reasons why Caesar’s assassins ultimately failed to restore republican government. Other generals, such as Mark Antony, were waiting in the wings ready to follow Caesar’s example. Caesar himself, of course, was not the first Roman general to turn his army against the state. Marius and Sulla had done the same thing several decades earlier (and won). If this analysis is correct, Caesar was actually a lot less important than we usually assume. The Republic’s days were probably numbered even if he had never chosen to cross the Rubicon.

I don’t have any brilliant suggestions for how President Obama should handle the situation in Egypt. But history and economic theory do give us some insight on why the revolt against the government started so suddenly and unexpectedly. They also highlight the danger that any regime that replaces incumbent dictator Hosni Mubarak might turn out to be much worse than he is.

I. Why the Revolt was Such a Surprise.

It seems likely that the revolt against Mubarak came as a surprise to him, and also to Western intelligence agencies, including the Israelis, who are renowned for their capabilities in this field and have obvious incentives to keep close tabs on events in Egypt. Why was everyone so surprised?

A key reason is that citizens of oppressive regimes have strong incentives to keep anti-government opinions to themselves. As a result, many who oppose the government might hesitate to say to to pollsters, foreign journalists, and anyone else who might potentially reveal their views to the authorities. As I have previously emphasized here, here, and here, this makes it very hard to gauge the true level of opposition to the government. Indeed, even the regime itself might underestimate the true extent of its own unpopularity, which may be one reason why Mubarak was caught flatfooted.

As economist Timur Kuran showed in a brilliant 1995 book on this kind of “preference falsification,” regimes that rely on repression to inhibit expression of opposition opinion can rapidly collapse if the public perceives that the reins have been loosened. Once a few people start protesting openly and the government does not react as forcefully and effectively as everyone expects, protests can quickly snowball and spread, as more and more people begin to believe that it’s safe to express antigovernment opinions openly. This is what happened in Eastern Europe and the USSR in 1989-91, in Tunisia a couple weeks ago. It may also account for current events in Egypt, as protests rapidly grew once police and security forces failed to suppress their initial manifestations a few days ago. By their very nature, such occurrences are difficult to predict, since they rely on a combination of random events and relatively modest relaxation of vigilance on the part of the regime.

II. Why the New Regime Might be Worse than the Old.

There is a long history of revolutions against repressive governments resulting in takeovers by groups that are even more oppressive. Czar Nicholas II, who slaughtered thousands and significantly repressed opposition movements, was overthrown only to be supplanted by the communists, who slaughtered millions and permitted no opposition at all. Batista, the run of the mill Cuban dictator, was replaced by the mass murdering Fidel Castro, who both killed many more people and made Cuba far more economically backward than before. The repressive Shah of Iran was replaced by the even more repressive Ayatollah Khomeini.

What these cases have in common is that the illiberal forces were much better organized and prepared to seize power than their liberal democratic rivals. A secondary factor was the illiberal strain in Russian, Cuban, and Iranian public opinion, which gave the new regime broader support than it might have had otherwise (though, contrary to popular mythology, the vast majority of Russians did not support the Bolsheviks in 1917). Under oppressive governments, rational political ignorance and irrationality are even more of a problem than in democracies, since the regime inhibits the free flow of information. This makes people even more susceptible to dangerously irrational ideologies than they would be otherwise.

Both of these danger signs are very much present in Egypt. As political scientist Barry Rubin, an expert on Arab politics, points out, the best-organized opposition in group in Egypt is the radical Islamist Muslim Brotherhood. If they manage to seize power, the resulting regime is likely to be even more repressive than Mubarak’s, especially when it comes to women, non-Muslims, and liberals. Rubin also notes that Egyptian public opinion is far from liberal:

[W]hat do Egyptians really think? According to a recent Pew poll, they are extremely radical even in comparison to Jordan or Lebanon. When asked whether they preferred “Islamists” or “modernizers,” the score was 59% to 27% in favor of the Islamists. In addition, 20 percent said they liked al-Qaeda; 30 percent, Hezbollah; 49 percent, Hamas. And this was at a time that their government daily propagandized against these groups.

How about religious views? Egyptian Muslims said the following: 82 percent want adulterers punished with stoning; 77 percent want robbers to be whipped and have their hands amputated; 84 percent favor the death penalty for any Muslim who changes his religion.

The Pew poll Rubin cites is this one. He does misinterpret one question. The 59% who said they preferred fundamentalists to “modernizers” is not 59% of the entire sample, but merely of the 31% who say they perceive a conflict between these two groups in Egypt. We don’t know what the other 69% of Egyptian Muslims believe on this issue. Nonetheless, the overall picture of Egyptian public opinion is a disturbing one. In addition to the points cited by Rubin, it’s also worth noting that 54% of Egyptians say they favor legally mandated sex segregation in the workplace, and that the survey might underestimate the extent of sympathy for Al Qaeda, Hezbollah, and Hamas. Some Egyptians might have been reluctant to express such views so long as Mubarak seemed firmly in control, since all three groups were enemies of his regime.

None of this definitively proves that radical Islamist forces will soon take over Egypt. The Mubarak regime might yet survive, perhaps sans Mubarak himself. Even if it does not, it’s possible that more liberal forces will somehow prevail. But it does suggest that an Islamist takeover is a serious threat, and that repressive forces are better positioned to seize power than their rivals for much the same reasons as in 1917 Russia and 1979 Iran.

It is reasonable to point out that this sad state of affairs is in part the result of longstanding US support for the Mubarak regime, which has repressed liberal opposition and allowed radical Islamists to pose as the only viable alternative. Of course this critique of US policy assumes that there was a viable liberal alternative to Mubarak that we could have supported instead, which is far from clear. Mubarak might have been the lesser of the available evils. But even if US policy does deserve a share of blame for Mubarak’s repression, that only makes it all the more imperative that we do what we can to forestall the rise of an even worse government.

UPDATE: It seems like most of the commenters are focusing on the very brief discussion of US foreign policy in my last paragraph and using it as an occasion to rehash well-worn debates about the history of US policy in the Middle East (e.g. – whether the US was wrong to ally with various Arab dictators, and whether doing so helped cause the 9/11 attacks). I’m not going to delete comments on these issues. But it seems to me that it would be better for readers to focus on the main points I make in the post rather than rehash arguments that have already been debated ad nauseum elsewhere.

The Manhattan Institute’s EJ McMahon argues for alternatives to state bankruptcy in the Wall Street Journal today.  The article is not framed as an argument for the sustainability of the state debt obligations – i.e., raise taxes to the level necessary to cover the promises made – but instead argues that governors and state legislatures have the tools necessary to deal with the public employee unions.  Perhaps most tellingly, it asks why a state would voluntarily enter into bankruptcy if it already lacked the political will to deal with the public employee unions.

For constitutional reasons, any federal law enabling state bankruptcy would have to be voluntary, meaning states would have to invite federal judges to play tough with their unions. But if Gov. Jerry Brown and the California legislature are unwilling to rewrite their collective bargaining rules—signed into law by Mr. Brown himself, 33 years ago—why assume they would plead with a federal judge to do it for them?

It’s more likely that a state like California would pursue bankruptcy if powerful unions and other budget-dependent interest groups saw this as a way to deflect some of the pain to bondholders. California is one of the states that constitutionally guarantees its general obligation debt, and whose bondholders are now seemingly untouchable. That could change with a bankruptcy option.

It’s a good piece, and worth reading closely, although I think it is somewhat arguing past Skeel’s argument.  It’s even better read in conjunction with historian Fred Siegel’s account of how New York’s mayor Robert F. Wagner first saw the opportunity presented by public employee unions, and how politicians and the unions found the way to collude to internalize benefits to themselves and externalize costs onto taxpayers.  It is a textbook example of public choice theory in operation, and Siegel gives the historical context.

Liberals were once skeptical of public-sector unionism. In the 1930s, New York Mayor Fiorello LaGuardia warned against it as an infringement on democratic freedoms that threatened the ability of government to represent the broad needs of the citizenry. And in a 1937 letter to the head of an organization of federal workers, FDR noted that “a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable.”

Private-sector union leaders were also divided. George Meany, the president of the AFL-CIO from 1955-1979 who came out of the building trades, argued that it was “impossible to bargain collectively with the government.” Private unionists more generally worried that rather than winning a greater share of profits, public-sector labor would be extracting taxes from a public that included their own workers. But in the late 1950s, with the failure of the labor movement’s organizing campaign in the South, Meany’s own executive council insisted on the necessity of winning the right to organize public employees.

The first to seize on the political potential of government workers was New York City Mayor Robert F. Wagner .... Running for re-election in 1961, Mayor Wagner was opposed by the old-line party bosses of all five boroughs. He turned to a new force, the public-sector unions, as his political machine ...  Ten weeks after Wagner’s victory, Kennedy looked to mobilize public-sector workers as a new source of Democratic Party political support. In mid-January 1962, he issued Executive Order 10988, which gave federal workers the right to organize in unions.

Siegel then traces through the political organizing down through the 1970s and 80s.  He is not arguing for state bankruptcy, but instead for reversing the source of the public choice conundrum, going back to FDR’s original concern.  I share Siegel’s view of the underlying problem.

Bankruptcy law professor David Skeel, whose new book The New Financial Deal is one I admire a great deal, has a new op-ed in the Wall Street Journal today urging a bankruptcy regime for the states.  Among his most important points is that bankruptcy for states offers the most likely means that states can address the arguably most important long-term problem – the deals set with public employee unions for retirement benefits that are already crowding out the provision of services to the public.  States cannot afford to maintain current staff – teachers or whatever job category – given the obligations to retired employees, even if one assumes that those services, requiring whatever levels of staffing, at whatever levels of current pay, are prudent.  As he says:

[S]tate bankruptcy could even permit a restructuring of the Cadillac pension benefits that states have promised to public employees. These are often “vested” under state law, and in some states, like California, are protected by the state constitution. Under state law, little can be done to adjust them to more reasonable amounts.

Although the law is somewhat murky, there is a strong argument that bankruptcy could provide for an adjustment of these obligations. Unless the state’s “guarantees” were construed as a property right protected by the Takings Clause of the Constitution (which is doubtful if there is no collateral or other indicia of a property right), the federal bankruptcy law would trump contrary state law under the Constitution’s Supremacy Clause.

A central feature of these promises in many states and municipalities is the capture of both sides of the bargaining table by public employee unions.  It is a classic process described by public choice theory, through which the campaign contributions of a highly motivated subset of voters capture the political offices that negotiate economic terms with that same set of voters-as-employees.  I have sometimes wondered whether a legal theory – far fetched in court, of course, but not so very far from the situation in economic terms – of fraudulent conveyance could be raised against these kinds of negotiations, as a basis for being overturned in bankruptcy.

But of course Skeel’s basic point is that you don’t need recourse to a legal rationale like this if you have an explicit bankruptcy-for-states regime.  Conceptually, though not as a doctrinal legal matter, I think that capture of both sides of the bargaining table is pretty well described as conceptually fraudulent conveyance.  Skeel, to be clear, is not making anything like this argument and as a bona fide bankruptcy expert might easily say it is not even plausible as pure concept.

But for my part, query whether the US needs to evolve legal doctrines that would address the problem of the capture of political office by representatives of those who will ostensibly bargain at arms length.  Of course, the simplest answer would be to get public employee unions out of the campaign contributions business, if not out of the striking business and, perhaps, go all the back to FDR’s original, negative view of public employee unions being established at all.

Update: A last question, to Co-Conspirator Todd or other bankruptcy law specialists ... does the Anna Nicole Smith case have any bearing on this?  Not my field, so I wouldn’t venture a guess (well, venturing one anyway, probably not), but am curious after reading the post below.

Particularly since the European sovereign debt crisis put the question of sovereign debt ratings squarely on the table, and even more in the last few days since the rating agencies have downgraded Greek debt to junk status, I have to wonder what insulates Moody’s, Standard & Poors, and Fitch against pressures direct and indirect, subtle and not so subtle, by interested sovereigns.  The New York Times business pages ran a story on Friday (January 14, 2011, Graham Bowley) reporting that Moody’s and the S&P warned the United States that its outlook might conceivably put its AAA status at risk.  In Europe, it’s not just Greek bonds that are finally in question, it’s the debt of much bigger states as well – and the fact that the rating of sovereign debt even of Greece matters quite a lot to Germany or France for many reasons, not the least of which is that so much of it is held by their banks.

Standard public choice theory seeks to account for the essentially political forces that “supply” law and regulation to its economic “consumers” (voluntary or not!) in the marketplace.  It fills in a crucial gap in the account of law and economics, which tends to start with the laws and regulations and their creation as a given for structuring the incentives and disincentives of markets.  It connects law and markets, politics and markets, politicians and market-makers.  Sovereign debt, for its part, is a commodity in the markets that depends in very special ways on political and governmental forces, in part acting as market players, but in part acting as rule-creating sovereigns.  All of which is a roundabout way of saying that sovereign issuers of sovereign debt have large incentives to use their rule-influencing, regulatory, and law-creating powers, their political will, to influence market outcomes.  Rating agencies, one would have thought, would be particularly susceptible.

The model of rating agencies is built around private actors assessing other private actors.  Regulators act to ensure that the agencies not fraudulently sell their ratings for other private actors.  But we all know the ways in which that model departs from the ideal, starting with who pays for the rating, and all the other ways in which rating agencies failed to deliver objective, reliable assessments.  Government, in seeking to reform financial regulation, has many reasons to investigate, reform the rules, and perhaps hold agencies accountable for departures from the rules in the past.  But that, of course, presents many opportunities for governments to pressure rating agency behavior down the road, with respect to a given government’s sovereign debt.

That’s just one example; one could look to others.  US regulations still mandate in various ways that ratings from the established agencies be used for many purposes; a lively debate has ensued over whether those requirements are prudent, whether they cartelize the agencies and reduce competition or – as David Skeel notes in his new book, The New Financial Deal – can create competition among rating agencies leading to a “race to the bottom.”  Those regulations provide both a great deal of automatic business to the rating agencies and protection against competition.  They are therefore a potential source of pressure on the rating agencies for other purposes of sovereign borrowers.

Curiously, I have not so far seen evidence that leading sovereigns are putting political pressure on the rating agencies.  (If I have missed something about this, please advise in the comments; I’m interested in the US as well as other leading sovereigns in Europe and elsewhere.)  Standard public choice theory would say, however, that especially in an economic activity so crucial to the state, and where the private actor is already part of regulatory structures for other reasons, the internal wall that separate sovereign politics from the sovereign as mere market actor has to come under pressure, at least as the political pressures rise.  And surely the political pressures are rising.

Is that happening now and I have missed something?  If not now, why not?  Why would this not happen as standard incentives theory would predict?  What form is it likely to take in the future?  Does it matter?

(PS.  Steve Schwarcz has written extensively about rating agencies; see his faculty bibliography page for various articles.  I would also be curious as to what my colleague Anna Gelpern and her occasional co-author Mitu Gulati, both leading academic experts on sovereign debt, would say – is this an issue in the larger world of sovereign debt?)