Investment Treaties, Offshore Finance, and the Resource Curse

Questions of how best to understand offshore financial centers (“OFCs”)—countries that have low or zero tax rates, strong banking secrecy regulation, and easy-to-form legal entities—and what, if anything, the international community should do about them remain fixed on the agenda of national and international discourse. This Essay seeks to provide a new theoretical perspective on tax havens and applies this perspective to the cross-border legal regimes that govern international investment. This new analytical framework sees offshore financial centers as countries that are victims of the “resource curse,” as that term is described in economic development literature. Often physically small, isolated islands with scant natural resources, OFCs lack any true commodity to exchange in the global marketplace. As a result, OFCs have transformed their legal systems into a resource, “selling” their favorable laws to businesses and individuals in exchange for corporate registration costs and money management fees as a means of gaining revenue for the state and its inhabitants. Applying this framework to international investment law yields new insights into why countries enter into bilateral investment treaties and how the true social costs of international investment should be understood

The cost of reducing utility S02 emissions : not as low as you might think

A common assertion in public policy discussions is that the cost of achieving the SO2 emissions reductions under the acid rain provisions of the Clean Air Act ("Title IV") has been only one-tenth or less of what Title IV was originally expected to cost. Initial cost estimates are cited in the range of $1000 to$2000 per ton of SO2 reduction and contrasted to SO2 allowance prices of about $100 per ton. Unfortunately, these are "apples-to-oranges" comparisons, leading to erroneous conclusions that greatly overstate the true divergence of actual costs from initial cost estimates. When the facts are viewed in a conceptually appropriate, "apples-to-apples" context, one finds that actual costs for SO2 reductions have been and are likely to remain near the low end of the initial range of estimates.We all must learn to recognize conceptual pitfalls in these assessments of the SO2 program, to avoid unrealistic expectations of major new regulatory initiatives. For example, many regulatory advocates are now using the erroneous characterization of Title IV costs being one-tenth or less of their originally projected levels to argue that the new market-based regulatory approaches render ex ante cost estimates meaningless or at least much too high. This fundamentally incorrect line of reasoning already has been used to dismiss concern over cost estimates for new regulations, such as the PM2.5 and ozone air quality standards. These and other major policy initiatives deserve to be debated in light of appropriate and realistic assessments of their likely costs. This requires correcting the current misunderstandings about the actual costs of the Title IV SO2 emissions allowance market.The following paper leads the reader through an interpretation of the facts regarding the estimated and actual costs of the SO2 program. Some of the key points include: (1) Initial cost estimates for the Title IV SO2 program were not over$1000 per ton. (2) Initial cost estimates for a fully-implemented Phase II cap ranged from $225-500 per ton, and costs were projected to be lower than this until the Phase II cap would be fully achieved, about ten years from now. (3) Much confusion has arisen from comparing different cost and price concepts that become important in an allowance trading system, such as average and marginal cost, and the price of an allowance. (4) When a market has a temporary oversupply (which has been true of the SO2 allowance market), spot market allowance prices will fail to reflect the capital cost portion of control costs, which can be a large part of the total costs. (5) The allowance price may reflect future control costs, but regulatory uncertainty may cause future costs to be highly discounted.The average control cost actually experienced in Phase I has been about$200 per ton. This is within the range that was initially projected. Today's most up-to-date estimates for Phase II (future) average costs are about $185 to$220 per ton. This is at the low end of the initial range of estimates. Allowance prices have been much lower, but we explain how they are consistent with actual average costs of $200 per ton.Partially supported by John Kinsman and Edison Electric Institute

Crises: Principles and Policies: With an Application to the Eurozone Crisis

Economies around the world have faced repeated crises — more frequently over the past thirty years. The fact that they have become more frequent and pervasive at the same time that we believe we have learned more about the management of the economy and as markets have seemingly improved poses a puzzle: shouldn't rational markets avoid these catastrophes, the costs of which outweigh, by an enormous amount, any benefit that might have accrued to the economy from the actions prior to the crisis that might have contributed to it? This is especially true of the large fraction of crises that can be called “debt crises,” precipitated by a country’s difficulty in repaying what it owes. The benefits of income smoothing (arising from the difference in the marginal utility of income in periods when income is low and when income is high) are overwhelmed by the social and economic costs of the ensuing crisis

A Comment on Metzger and Zaring: The Quicksilver Problem

The low exit costs that characterize financial markets are significantly responsible for the strange version of administrative law that applies to financial regulation. I do not intend to assert any deterministic thesis. History and path dependency clearly matter. It is unquestionably true, for example, that historical decisions such as that to include regional presidents of the Fed banks on the FOMC have had a lasting effect on the emergence of what appears to be a bizarre regulatory body. Nevertheless, the distinction between industries characterized by high versus low exit costs has considerable explanatory power, and can help explain not only why financial regulation includes so many exceptions to ordinary precepts of administrative law, but also why financial regulation suffers from a general deficit of accountability and transparency. The concept of exit costs may have broader explanatory implications as well. It can help explain the demise of railroad-rate regulation and the significant deregulation in other transportation industries, because the development of competitive alternatives dramatically lowered the exit costs to consumers in these industries. It can also help explain the demise of labor unions in manufacturing, given the reduced costs of exit from domestic manufacturing production associated with globalized trade. Attention to exit costs also reveals that process-intensive administrative law may be possible, even in industries whose technologies otherwise are characterized by low exit costs, provided that the government has other ways to control entrance in and exit from a market. In the end, however, I would not bet against the ingenuity of the finance industry in figuring out how to work around these kinds of efforts to corral financial assets

Broadband Openness Rules Are Fully Justified by Economic Research

This paper responds to arguments made in filings in the FCC’s broadband openness proceeding (GN Dkt. 09-191) and incorporates data made available since my January 14th filing in that proceeding. Newly available data confirm that there is limited competition in the broadband access marketplace. Contrary to some others’ arguments, wireless broadband access services are unlikely to act as effective economic substitutes for wireline broadband access services (whether offered by telephone companies or cable operators) and instead are likely to act as a complement. Nor will competition in the Internet backbone marketplace constrain broadband providers’ behavior in providing “last mile” broadband access services. The last mile, concentrated market structure, combined with high switching costs, provides last mile broadband network providers with the ability to engage in practices that will reduce social welfare in the absence of open broadband rules. Furthermore, the effect of open broadband rules on broadband provider revenues is likely to be small and can be either positive or negative. Unfortunately, various filings have misstated or mischaracterized the results on the economics of two-sided markets. Contrary to what some have argued, allowing broadband providers to charge third party content providers will not necessarily result in lower prices being charged to residential Internet subscribers. This is true under a robust set of assumptions. Despite some parties’ mischaracterization of the economic literature, price discrimination by broadband providers against third party applications and content providers will reduce societal welfare for numerous reasons. This reduction in societal welfare is especially acute when price discrimination is taken to the extreme of exclusive dealing between broadband providers and content providers. Antitrust and consumer protection laws are insufficient to protect societal welfare in the absence of open broadband rules.Network Neutrality, Internet, Discrimination, Prioritization, Two-Sided Market, Market Power, Termination Fee, Broadband

Broadband Openness Rules Are Fully Justified by Economic Research

This paper responds to arguments made in filings in the FCC’s broadband openness proceeding (GN Dkt. 09-191) and incorporates data made available since my January 14th filing in that proceeding. Newly available data confirm that there is limited competition in the broadband access marketplace. Contrary to some others’ arguments, wireless broadband access services are unlikely to act as effective economic substitutes for wireline broadband access services (whether offered by telephone companies or cable operators) and instead are likely to act as a complement. Nor will competition in the Internet backbone marketplace constrain broadband providers’ behavior in providing “last mile” broadband access services. The last mile, concentrated market structure, combined with high switching costs, provides last mile broadband network providers with the ability to engage in practices that will reduce social welfare in the absence of open broadband rules. Furthermore, the effect of open broadband rules on broadband provider revenues is likely to be small and can be either positive or negative. Unfortunately, various filings have misstated or mischaracterized the results on the economics of two-sided markets. Contrary to what some have argued, allowing broadband providers to charge third party content providers will not necessarily result in lower prices being charged to residential Internet subscribers. This is true under a robust set of assumptions. Despite some parties’ mischaracterization of the economic literature, price discrimination by broadband providers against third party applications and content providers will reduce societal welfare for numerous reasons. This reduction in societal welfare is especially acute when price discrimination is taken to the extreme of exclusive dealing between broadband providers and content providers. Antitrust and consumer protection laws are insufficient to protect societal welfare in the absence of open broadband rules.

Policy Meltdown: How Climate Change Is Driving Excessive Nuclear Energy Investment

The United States is currently experiencing what some have labeled a nuclear energy renaissance. This so-called renaissance responds in part to growing concerns about global warming and the need to reduce the greenhouse gas emissions associated with electricity production. A growing number of policymakers and scholars view nuclear energy development as one of the most promising means of slowing climate change because nuclear energy does not produce greenhouse gas emissions. They are increasingly advocating that nuclear energy receive policy treatment at least as favorable as that afforded to renewable energy strategies such as wind and solar energy. Some state governments are also citing global warming as a primary reason for investing millions to extend the lives of aging nuclear power plants and to keep these plants operational and cost-competitive in an era of low-cost natural gas. Unfortunately, in their zeal to save nuclear energy plants and promote additional nuclear energy development as a means of combatting global warming, policymakers are underestimating the true costs associated with nuclear power in ways that could adversely impact humankind for centuries to come. This Article applies familiar principles of microeconomics and behavioral economics to analyze the nation\u27s recent flirtation with nuclear energy as a primary response to global warming. Among other things, policymakers and the public seem to increasingly allow excessive optimism, myopia, path dependence problems, or intergenerational externality problems resulting in their under-consideration of the full social costs of nuclear energy. This Article ultimately argues that, when one considers all the societal costs of nuclear energy, renewable energy strategies such as wind and solar development are afar more cost-justifiable means of responding to global warming