Canons of Interpretation and Economics

In interpreting statutes, courts, both federal and state, often use canons of interpretation. Simply put, a canon of interpretation is a rule of thumb that enables a court to divine the "correct" statutory interpretation.

Generally, these canons fall into two categories: non-substantive canons and substantive canons. The primary difference between the two is that the former is policy-neutral and the latter is not. For example, non-substantive canons often deal with grammatical or textual intricacies like interpreting a statutory provision to avoid surplusage. Opposed to that, substantive canons express a policy objective, like interpreting ambiguities in a punitive statute in favor of the defendant (called the rule of lenity).

I'm interested to know what you guys think about the use of a substantive canon to make sure that the court gets to the correct result economically. In other words, in the face of a statutory ambiguity, the court should interpret the statute in the manner that best enhances welfare. Let's put aside the question of whether anyone can determine what enhances welfare. So, assuming arguendo that that determination can be made, is it acceptable for a court to do this? This is a question answered in the affirmative by the law and economics crowd.

As an example, consider this hypothetical (I based this on the case Sturges v. Bridgman (1877) often used to illustrate the Coase Theorem, but changed a few of the facts):

Two businesses exist side by side. One business is a confectioner and uses a loud mortar in the preliminary stages of candy-making. The other business is a doctor's office that has a regular flow of patients. The doctor's office is disturbed by the noise of the large mortar and sues for nuisance, requesting an injunction against the use of the mortar. Assume for purposes of this hypothetical that: (1) the doctor's office is more profitable than the candyman's business; and (2) the statute governing nuisance is ambiguous on whether the mortar is a nuisance, i.e., it could reasonably be read either way.

The big questions: In this circumstance, should the court find for the doctor's office and issue an injunction on the basis of welfare enhancement, i.e., the doctor's office is more profitable? Should the existence of a social good (healing people as opposed to creating cavities) be factored into determining which activity better enhances welfare?

The Myth of Timeless Growth

I just finished reading an address given to the British Trades Union Congress (TUC) by Rowan Williams, the Archbishop of Canterbury. He argues for a more holistic understanding of economics as housekeeping for our society. I'm largely sympathetic to his argument, but I imagine that at least one other author on this blog would dismiss him as idealistic, if not naive. Consider what he says about economic growth.

Practically speaking, this means that both at the individual and the national level we have to question what we mean by 'growth'. The ability to produce more and more consumer goods (not to mention financial products) is in itself an entirely mechanical measure of wealth. It sets up the vicious cycle in which it is necessary all the time to create new demand for goods and thus new demands on a limited material environment for energy sources and raw materials. By the hectic inflation of demand it creates personal anxiety and rivalry. By systematically depleting the resources of the planet, it systematically destroys the basis for long-term well-being. In a nutshell, it is investing in the wrong things.

A fairly standard rebuttal to Williams’ critique of growth is that the growth he criticizes lifts people out of poverty, raises overall GDP, etc. Yet his criticism still stands, because the economic growth currently promoted is simply unsustainable. Can you imagine what would happen if per capita consumption in China and India approached America’s?

Another response would be that the market prices in scarcity, so that as natural resources are used up, prices go up, and people consume less. Although in principle this may be true, this argument strikes me as hollow on two fronts. First, I seriously doubt the market’s ability to price in externalities – the market seems to be myopically focused on the production and consumption of goods, with no thought for secondary or long term consequences. Second, I am even more skeptical of the market’s ability to operate without growth as the driving factor. I doubt that a politician could last long while saying things like, “I’m sorry, we just have to recognize that our consumption is unsustainable. You, the American people, must shop less. Our GDP must go down.” That’s a political third rail. Think about current proposals for green technology. They’re suffused with the language of job-creation, new market opportunities, etc. They present this as an opportunity for growth when in fact our growth patterns are unsustainable.

I’ll close with a few questions. Does our current economic system have the internal capacity for becoming a system that is sustainable? In other words, can factoring in externalities and changing tastes and preferences really create a more sustainable global economy? Or are we going to continue barreling along our pattern of growth until scarcity forces prices to increase to unacceptable levels, and we either reduce our consumption patterns or go to war over natural resources? Finally, do we as a society have the moral resources necessary to change our consumption patterns? The deck seems stacked against this change.

I look forward to your comments, and I apologize for a rather unfocused and depressing first post.

Data Links

Sharing a couple of links that allow for quick visualization of some economic indicators:

1. The New York Times has created a tool that graphs the unemployment rate in the United States from January 2007 to September 2009 by different demographic segments (Thanks for the pointer Brett). Care to guess what the highest line on the graph is? Lowest?
2. Google has used the World Bank's API to chart 17 World Development Indicators by country over time. Here are some examples: US GDP and French GDP, Turkish and Iranian Per Capita GNI, and Japanese Population Growth
   

Intro to Market Efficiency

Market efficiency is an interesting theoretical topic that is approachable from a variety of backgrounds. In order to get some discussion going, let me provide some background and my personal thoughts. In the early 1960s, Eugene Fama developed the Efficient Market Hypothesis (EMH), which asserts that assets instantly price in all available news. Consequently, it is impossible to achieve superior risk-adjusted returns to the market, since no amount of research and active management can generate an edge.

As a portfolio manager, this is somewhat disheartening. The EMH implies that I can't beat the market no matter how hard I work. The irony in this argument, however, is that the market would no longer be efficient if all the analysts and portfolio managers closed up shop. This is hardly a stable equilibrium. Companies only hire analysts if they believe the markets are inefficient, and the EMH can only hold true if the analysts are doing as much research as possible.

The data doesn't exactly support the EMH either. Stocks with low price-to-earnings ratios, price-to-book ratios, and price-to-cash flow ratios all beat the market on average. Nevertheless, virtually every academic institution preaches the merits of the EMH, on the basis that mutual funds don't beat the market on average. I clearly have my doubts regrading the EMH. Anyone else have any thoughts?

Malthus on Healthcare - Background and Questions

I'm currently reading Heilbroner's The Worldly Philosophers and I just finished a chapter detailing the lives and thought of Thomas Malthus and David Ricardo (who, I'm ashamed to admit not knowing but surprised to learn, were contemporaries and good friends). Having studied math and economics, I was exposed to Malthus's theories regarding population growth and its consequences in more than one sphere.

For those who may not be familiar, Malthus pointed out that the human population grows exponentially while sources of food grow linearly, as a function of land. Thus, population will grow until it outstrips food production, at which point famine will ensue and bring the population back in line with its sustenance. What kept famine at bay were: war, plagues, disease, poverty, and all other vices by which nature might keep mankind's demand for food short of its own supply. As Heilbroner eloquently puts it,

The troubled Reverend was driven to the conclusion that the incorrigible and irreconcilable divergence between mouths and food could have only one result: the larger portion of mankind would forever be subjected to some kind of misery or other. (90)

Thankfully, due to technological advancements in the production of food, particularly the Green Revolution, and increased use of birth control, Malthus's dismal forecast for the future has not yet been realized. However, in Malthus's time, some were so convinced of this seeming inevitability, they justified the destruction wrought by poverty by removing legislation for their assistance (Heilbroner specifically cites William Pitt, the Prime Minister, removing a poor relief bill). Malthus reasoned that famine was the the worst thing the population could succumb to and alternative to reducing population, regardless of its severity, was preferable to it.

That brings me to this question - all questions of the class distribution of healthcare aside - would the Malthus of 1820, at the publishing of his Principles of Political Economy, be for moving the percentage of Americans who have access to health insurance from 83% to 96%, as the bill which just passed the House suggests, or against it? Would he think it should be the opposite, that the best thing the government can do for its constituents is pass legislation that will lower the number of individuals with access to healthcare? If Malthus were alive in 2009, with the knowledge that birth control has become more widespread and food production has become more sophisticated behind him, would his answers be the same?

I'll venture a post with my hypotheses at a later time.

Inaugural Post

As the blog title indicates, the authors of this blog intend for it to serve as a sounding board between them for the theory and application of economics. All of the authors met in college and want to use the blog as a medium by which we might expound on and critique one another's economic ideas. It will be an exercise in exposing one another to different ideas as well as learning to be gadfly's in the search for optimal solutions to the ideas considered. Gradually, we would hope to see an increased number of individuals participate in the search for optimal solutions with us, but that would be a positive externality that isn't anticipated immediately.

All of the authors are students of the economy in one fashion or another, and while some of us are pursuing advanced degrees, none are currently doing it in the field of economics. Consider this a footnote to all future posts - we are not experts and we don't know everything. That's ok with us - hopefully it will make our thoughts more approachable. Further, this blog will likely never be in real time. That's ok with us as well - we want our competitive advantage to be the thoughtfulness and clarity of our analyses and ideas, a pursuit which almost necessarily cannot be accomplished in real time

That said, two questions remain: 1) Who are the authors? and 2) What are "economic ideas"?

1) Who are the authors? There will be six authors, listed below in alphabetical order:

• Tyler Bandy - undergraduate degrees in mathematics-economics and accounting, currently working as a portfolio manager and completing the CFA exams. His interests as a student of economics lie in the efficiency of the market and the functioning of the capital markets.
• Pete DeMarco - undergraduate degree in political science, Masters degree from the University of Ghana, currently living in a homeless shelter & starting a non-profit temp agency in Charleston, SC. His interests as a student of economics lie in examining the political economy and economic development.
• Matt Kuhn - undergraduate degrees in political science and economics, currently pursuing a JD from Columbia University. His interests as a student of economics also lie in the political economy, specifically as the justice system impacts it.
• Brett McCarty - undergraduate degrees in mathematics-economics and religion, currently pursuing a Masters of Divinity at Duke University. His interests as a student of economics lie in the ethics of the market.
• Chad Miller - undergraduate degrees in mathematics-economics and philosophy, currently working as an analyst at an advertising agency. His interests as a student of economics lie in macroeconomics, economic development, and in optimally aligning incentives in the private sector.
• Derek Snook - undergraduate degree in history, currently living in a homeless shelter & starting a non-profit temp agency in Charleston, SC (working with Pete). His interests as a student of economics lie in simply seeing the working homeless break their cycle of homelessness.

2) What are economic ideas?

While it's tempting to pigeonhole ourselves by providing a firm definition of economic ideas, that would be a mistake. Adam Smith's invisible hand is an economic idea. Minimum wage is an economic idea. Providing foreign aid to countries in the form of loans rather than grants is an economic idea. Cash For Clunkers is an economic idea. A Founder's Award is an economic idea.

We want to discuss and expound upon the implications of ideas like these and others.

-Chad