07 Oct 2010

Volokh Conspiracy Throws Brad DeLong Into the Briar Patch

Economics, Financial Economics No Comments

Ah, yet another missed opportunity in the geeconosphere. Today during my lunch and dinner breaks–I drove to Auburn for the Supporters Summit starting tomorrow–I read a string of blog posts initiated by a link from Arnold Kling.

At first I was very excited. Continuing his war of choice against Todd Henderson–a U of C law professor who has a high income but doesn’t feel he is “rich” and so shouldn’t pay higher taxes–DeLong really stepped in it. His post was so over-the-top that, handled properly, I actually think even some of DeLong’s faithful would have questioned the Dear Leader’s magnanimity and evenhandedness.

But alas, “our side” managed to snatch defeat from the jaws of victory. This will be a bit cumbersome for me to convey to you folks, but picture me as George Washington explaining why we’re all freezing our butts off in Valley Forge. This is important stuff–and maybe I’ll inspire one of you to write, “These are the times that try bloggers’ fingers…”

OK, so let’s start at the beginning. Brad DeLong gave a list of nine points about Todd Henderson that causes him to “marvel.” DeLong’s ninth point was, “I genuinely do not understand why Henderson has his job.”

So what’s DeLong’s beef? Well, you need to know that Henderson was (until recently) a blogger at “Truth on the Market.” Whether because of the controversy caused by his woe-is-me-I-only-make-$450k-a-year stuff or not, Henderson has recently hung up the keyboard and called it quits.

In a going-away tribute, Henderson’s fellow blogger J.W. Verret wrote:

I am saddened that our co-blogger Todd Henderson is putting up his blogging hat. He leaves us with an academic reputation that is unsurpassed, unfortunately I can’t say that the reputation of everyone involved has held up very well in light of the very personal nature of attacks…. I do think, however, that this is a good opportunity to focus the world on the wide range of scholarly work from Professor Henderson…. Here are a few papers of his on ssrn worth reading (this certainly won’t be the last time we link to his work at TOTM [Truth on the Market]):

In “Insider Trading and CEO Pay,” Prof. Henderson examines the effectiveness of insider trading as a compensation device using a study of 10b5-1 trading plans. His findings are in line with Henry Manne’s original thesis from nearly 40 years ago that insider trading didn’t diminish firm market value on net and may serve a useful purpose as an executive compensation device to motivate managers to maximize the value of the firm…

OK, stay with me kids–like I said, this is important. (Not because of the content of the disagreement, but because of the poorly executed attack.)

After quoting the above farewell from Verret, DeLong says (and I reproduce it in its entirety):

To which my first reaction is simply: Huh?!

And my second reaction is: No! No! No! Ten-thousand times no! That is simply wrong.

Giving firm managers the freedom to use information they privately have as a result of their jobs to decide when to buy and sell shares of stock does not motivate managers to manage the firm in the interest of shareholders.

If managers free to engage in insider trading know that the next piece of news to be released will cause the stock price to rise, they will buy. If they know that the next piece of news to be released will cause the stock price to fall, they will sell and then buy back later. They don’t care whether the news is good or bad–either way they will profit, and either way they will profit equally.

What the ability to engage in insider trading does is that it gives managers an incentive to make the price of the stock vary–they don’t care which way. Thus it cannot “serve a useful purpose as an executive compensation device” and cannot “motivate managers to maximize the value of the firm” to shareholders.

Insider trading makes executives’ portfolios’ long not the company but long the volatility of the company. And shareholders don’t want executives making decisions that make the value of companies they own more volatile: stock market investments are risky enough as it is without giving executives reasons to boost the volatility pot.

This claim that freedom to engage in insider trading aligns executives’ interests with those of shareholders is so basically wrong, so obviously erroneous, so simply stupid that–well, words fail me.

OK. Well. Clearly here, DeLong has overstepped. He is dismissing an entire literature as stupid–in fact so stupid, that someone who writes a paper within this literature ought to be fired.

So far, so good. I am not the only one who can see DeLong has just wound up and punched the tar baby square in the jaw. Jonathan Adler at the Volokh Conspiracy goes in for the kill, in a post featuring the fabulous title, “Why Oh Why Can’t We Have Better EconProf Bloggers?”:

Would you consider it sound for one academic to attack a paper written by another, calling it (among other things) “obviously erroneous” and “simply stupid,” based upon a third-party representation of what it says? And would you consider it responsible to use the third-party representation of said paper as Exhibit A for questioning why the author has a tenured job at a prestigious academic institution? You would if you were University of California at Berkeley economics professor J. Bradford DeLong, who has continued his series of attacks against University of Chicago law professor M. Todd Henderson. “I genuinely do not understand why Henderson has his job,” writes DeLong, pointing not to anything Henderson himself wrote but instead to what another academic blogger wrote about Henderson’s scholarship. [Yes, this is the same Professor DeLong who repeats baseless accusations against other academics and then, when asked to substantiate his charges, selectively edits his comment threads and then dissembles about said editing when called on it.]

According to University of Illinois law professor Larry Ribstein, DeLong’s attack on Henderson’s scholarship is quite off base:

the most remarkable thing about DeLong’s post is that it accuses Todd of being “stupid” and unfit for law teaching because of an argument Todd didn’t make!

If DeLong had bothered to look even at the abstract of Todd’s article, perhaps he would have noticed that the article’s not about alignment of incentives, but about whether boards bargain with insiders over their gains. Todd finds evidence consistent with the hypothesis that “boards pay executives in a way that reflects the profits they are expected to earn from informed trades.” . . .

I will leave it to the reader to decide what we should make of a Professor of Economics at U.C Berkeley, Chair of Berkeley’s Political Economy major and former Deputy Assistant Secretary of the Treasury who is willing, in print, to accuse somebody of being “simply stupid” for a position he does not take expressed in a blog post he didn’t write. [Bold added.]

Eek! Sorry guys, you just threw DeLong into the briar patch.

You guys were going great up until that last point. Yes, DeLong was being a jerk. Yes, he was being incredibly sloppy in dismissing an entire literature while shooting from the hip, especially given that it was his reason for questioning someone’s academic position.

But you guys went too far when you tried to argue, “And not only is DeLong wrong for criticizing that point, it’s not even in Henderson’s paper! In fact, all DeLong had to do was READ THE ABSTRACT to see that’s not what the paper was about!!!”

That sort of response would have been fantastic if (a) it were true and (b) the allegedly incorrect summary of Henderson’s paper had been written by, say, Paul Krugman. In that case, it would have been perfectly appropriate to bust DeLong on relying on the sloppy summary by an enemy of his target.

But no, in this case, what fellow Truth on the Market blogger Ribstein was saying is this: “DeLong should be ashamed of himself for thinking that Henderson’s paper made that argument, even though my fellow Truth on the Market blogger Verret thought that’s the conclusion that the paper supported when he was praising Henderson for writing it.”

In other words, if Ribstein is right, then that means Verret was either dumb or lazy himself. (Verret himself rolled with the punches and thanked Ribstein for pointing out the ambiguity in his original post. Nice attempt at damage control, Verret, but your teammates still turned the ball over.) We can hardly work up moral outrage against DeLong for taking Henderson’s fellow blogger’s praise as an accurate representation of Henderson’s position.

Because of this confusion, DeLong had an easy escape hatch. He simply quoted the paper’s abstract, and argued that it was consistent with Verret’s initial description, meaning that DeLong was perfectly fair in using that as the springboard of his criticism.

So now, instead of us being able to focus on DeLong dismissing a whole body of work with some quick syllogisms–and using that procedure to question a guy’s job–we are bogged down in trying to figure out who said what when. Someone who initially thought DeLong was right, would have no reason to spend 20 minutes getting to the bottom of this complicated mess.

* * *

One final point: Here’s the real travesty. It’s not as if DeLong didn’t exhibit any other weaknesses in his post. But because Adler and Ribstein thought they had the coup de grace, they missed the exposed jugular when DeLong wrote:

Henderson’s ignorance about American government policy. He talks about “the vast expansion of government [Barack Obama] is planning…” But if you look at the laws that Barack Obama has lobbied for and gotten Congress to pass, in the long run they don’t expand but shrink the government relative to what it would otherwise be. Quantitatively, the biggest legislative initiative by Obama so far has been very large long-run cuts in Medicare spending. Henderson is either so ignorant that he does not know this, or so mendacious that he doesn’t want his readers to know this. I bet on ignorance.

Just look at the part I put in bold, and marvel at what a slippery fellow this DeLong is.

But OK fine, let’s play by DeLong’s rigged rules. Even if we just look at the health care legislation, is it really true that it shrinks government? I am not going to bother looking it up, but I seem to recall that the reason ObamaCare was supposed to reduce the deficit was that it–and I’m making these numbers up–would increase spending by only $950 billion over 10 years, while it would increase revenues by $1 trillion.

So is DeLong right, even on the narrow terms that he wants to use in the above quote? Is it really true, say, that the CBO projections of total government spending through 2050 were higher in October 2008, than they are now? I find that hard to believe, but then again I am ignorant and mendacious.

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