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Thursday, April 14, 2005

Law & Economics for Originalists

The jurisprudence of Judge Posner is, to a large extent, the kind of pragmatism that originalists abhor. Engaging in the sort of cost/benefit analysis that Posner loves so much necessarily avoids the question of original intent and the text of a statute. Hopefully this doesn't come to a surprise to conservatives that there is much dissent among the flock about the role of the judge.

Judge Ginsburg's talk didn't address this much, was mostly about the rise of economics in regulation. But my issue with Law & Economics is not its value in regulation or in the crafting of statutes, but when a judge should employ this type of Posnerian economic analysis. At the end of his talk, Ginsburg provided a good answer. He noted that perhaps the best use for law & economics for judges is the ability to spot economic loss, to understand marginal costs as the important ones. This "applied common sense" is the best use for judges.

I think he's right; the more informal uses of law & economics seem the most appropriate for me.

I wonder, however, whether another possible context for appropriate economic analysis could be a default rule in the face of an impossibly unclear statute. The example that comes to mind is a bankruptcy case--United Savings Assn. v. Timbers of Inwood Forest. The issue was whether undersecured creditors should earn interest on their collateral after a bankruptcy petition had been filed by the debtor. The statute spoke to oversecured creditors, that they are entitled to post-petition interest, but for undersecured creditors only that they should receive "adequate protection."

Justice Scalia's opinion takes a very textualist approach to the statute that says nothing about the issue at hand. His result is that the statute should not give post-petition interest, and that "adequate protection" only applies when the value of the collateral is depreciating.

Law & Economics scholars criticize the opinion as sub-optimal since the debtor has access to free capital, which could be better used by the creditors. The result is unnecessary economic loss. The debtors don't have incentives to get out of bankruptcy because they have free capital. The creditors should be able to give the money to profitable businesses that can better use the capital.

Others applaud the opinion because it protects debtors--a major purpose of the bankruptcy code. If debtors had to pay interest on their loans, the process of bankruptcy rehabilitating worthy, but struggling businesses, would be severely impaired.

But Justice Scalia's opinion doesn't rely on either of these reasons. Instead he searches through the text for the answer when it is plainly not there.

My question, then, is why shouldn't "efficiency" be a default rule in this case? You do your best job with the statute that you're given, but at some point you realize that it doesn't answer the question at hand. The judge has to provide some of the meaning.

This "federal common law of efficiency" would just be a default rule, subject to reversal by Congress. But I don't see any problem here for originalists. There has to be some answer, and Congress hasn't given one, so why should we try to drag it out of a statute that hasn't considered it?

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