Fannie and Freddie
“Stealing Fannie and Freddie,” by Jonathan Macey and Logan Beirne. April 2014. SSRN #2429974.
“The Fannie and Freddie Bailouts through the Corporate Lens,” by Adam B. Badawi and Anthony J. Casey. March 2014. SSRN #2410887.
Fannie Mae and Freddie Mac have been under government conservatorship since 2008. The government purchased preferred shares of the two government-sponsored mortgage lending firms that were severely damaged in the financial crisis, and shored them up by injecting $189.5 billion. In 2012, the U.S. government revised the terms of the conservatorship so that it now takes all positive cash flows from Fannie and Freddie, leaving nothing for the firms’ shareholders. As of early 2014, the flow back to the Treasury had exceeded the $189.5 billion advanced.
Academics are divided in their reaction to the 2012 changes and a subsequent lawsuit by shareholders against the government. Some, including Yale Law School’s Jonathan Macey and Logan Beirne, the authors of the first paper reviewed here, argue that the federal conservatorship has acted only on behalf of the interest of taxpayers rather than all Fannie and Freddie creditors, including shareholders, and is eroding the rule of law concerning the treatment of the owners of assets.
Adam Badawi of Washington University School of Law and Anthony Casey of the University of Chicago Law School, the authors of the second paper, hold the opposing view. They argue that in the third quarter of 2012, when the federal government changed the financial arrangements to take all future positive cash flows, the value of shareholder equity in Freddie alone was –$68 billion. That is, for the shareholders to earn anything, Freddie would first have to earn $68 billion, which was more than Freddie had earned in the 19 years prior to its financial difficulties (1988–2006). But if Freddie lost only $4 billion more (which is the amount of losses per week in 2008–2009), the senior preferred Treasury shares would be worthless. The data for Fannie were even worse: it would have to earn $114 billion before common shareholders would earn anything, which is more than it had earned in the 27 years prior to the financial crisis. The authors argue that when equity’s real value is negative, the directors’ duty to maximize the value of the firm is the practical equivalent of a duty to creditors and not shareholders. The authors argue that the government’s actions are consistent with what we would expect from a private creditor and do not violate shareholder rights.
Regional Development
“Are Cities the New Growth Escalator?” by Enrico Moretti. May 2014. SSRN #2439702.
Cities with differing percentages of college graduates appear to be in different universes with regard to wages. High school graduates in cities with many college graduates make more than college graduates in cities with relatively few college graduates. High school graduates in Boston average $62,000 per year, or 44 percent more than college graduates ($44,000) in Flint, Mich. The economic disparities across cities are larger than the disparities across education levels.
Why do employers in expensive cities put up with high labor costs? University of California, Berkeley economist Enrico Moretti argues that expensive cities have higher labor productivity because of thick labor markets, thick markets for specialized services, and knowledge spillovers.
Thick labor markets benefit workers because they have more firms bidding for their skills and less risk. Firms also benefit because they find more productive and specialized workers. And thick labor markets solve the “two-worker problem”: both spouses can find jobs easily only in thick labor markets. Thick markets for specialized services allow firms to concentrate on their core competency but not compromise on important services including advertising, the law, and engineering.
Knowledge spillovers come from interaction with the well educated. High school workers in cities with more college graduates earn more even in panel studies that presumably do not have the selection effects that might contaminate the comparisons across cities. (The better-skilled high school graduates may migrate to the cities with more college graduates.) Patent data and academic publication also seem to be heavily affected by proximity.
Do these stylized facts justify place-based policies that subsidize development? The track record of industrial location subsidies is not good (with Taiwan being a notable exception). The original semiconductor “big push” worked. The Tennessee Valley Authority, with its cheap electricity, succeeded in transforming Tennessee from agricultural to manufacturing. But that transformation did not alter wages because the increased supply of labor (people moving to the region) offset the increase in demand. Other efforts had even less success. Moretti thinks that picking winners today is much more difficult than in the 1930s when industrial development was so low in the Tennessee Valley that any manufacturing would have succeeded.
Moretti argues that none of the current U. S. geographic successes are the result of policy, including Silicon Valley, San Diego, Austin, and Seattle. Many believe universities are the key to high-tech development and good jobs, but Yale, Cornell, and Washington University in St. Louis are world-class schools that have attracted little high-tech spillover.
Intellectual Property
“IP in a World without Scarcity,” by Mark A. Lemley. March 2014. SSRN #2413974.
The transformation of music and art to digital electronic form dramatically altered the economics of copying and distributing content by reducing entry barriers to dissemination to almost zero. Stanford law professor Mark Lemley argues that 3‑D printers, synthetic genes, and robots will have a similar effect, decentralizing and reducing the cost of production and thus reducing scarcity.
According to conventional wisdom, intellectual property (IP) law would be especially important in that future world. IP law is intended to increase the cost of copying so that it equals or exceeds the cost of creation, which supposedly is vital to incentivize artists and entrepreneurs to continue creating.
But has IP law proven vital in the music industry? IP law responded to rampant piracy with thousands of lawsuits. Those suits did not slow piracy; copyright infringement remains rampant on the Internet, yet many artists continue to create and distribute content—often explicitly for free. And some people must still be paying for content because total revenue from music is rising.
For Lemley, the creativity sky is not falling. For this, he draws on three lessons from recent events: First, IP owners will fight to retain scarcity. Second, IP owners will lose that fight because decentralized production is too difficult to control. Third, the world will not end as a result. Using the analogy of the transition from agriculture to the current service economy, Lemley asks what happened when the 70 percent of humanity that worked in food production two centuries ago declined to less than 2 percent today? The answer is that the supposedly displaced farm workers have found work doing things that no one imagined in 1800. Lemley believes that in the future people will find work doing things that no one imagines in 2014, even though IP and many other things will not be scarce.
Online Retail Firms and the Sales Tax
“Is Sales Tax Avoidance a Competitive Advantage?” by Jeffrey L. Hoopes, Jacob R. Thornock, and Braden M. Williams. March 2014. SSRN #2403952.
Many believe that online retailers engage in unfair competition with brick-and-mortar retailers because of the nonpayment of sales taxes by consumers of the online retailers. Congress has considered legislation that would allow states to ask online retailers to collect sales tax from customers even though the merchant does not have a physical presence in the taxing state.
The authors conduct a stock market event study on the largest publicly held conventional and electronic retailers. The former were defined as retailers having a physical presence in more than one state, while e‑retailers had no physical retail presence at all or presence in only one state. The authors compare the stock market reaction of firms during eight event windows that surrounded congressional consideration of the legislation. Online retailers that have relatively few warehouse locations, such as Amazon and Overstock.com, had –0.7 percent return relative to the market. Brick-and-mortar competitors, such as Staples, that have physical outlets in most states and thus already collect sales taxes from their Internet sales had no reaction to the legislation. Those findings suggest that online retailers’ losses are not brick-and-mortar stores’ gains and that online and brick-and-mortar retailers are not substitutes for each other.
