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A Wager of Law!

posted by Adam Levitin

Apparently I've been challenged to a duel wager.  I say apparently, because this challenge was never delivered to me.  Instead, it was posted to a website almost a month ago, which is a little odd for a serious bet.  

So what is this about?  Slips readers will be familiar with (or exhausted by) my back-and-forth with David Evans and Joshua Wright on the Consumer Financial Protection Agency (CFPA).  Briefly, Evans and Wright wrote a paper, funded by the American Bankers Association, that argued that the CFPA would be a disaster.  I wrote a critique that took issue with some statistics they cooked up about the impact of the CFPA (the rest of the paper was familiar anti-regulatory boilerplate).  I said that the methodology by which they produced their numbers were bs, they defended some of their numbers, and I disagreed, but noted that they weren't able to respond to the most damning part of my critique--that some of their numbers were simply plucked out of the air.   

Wright responded with a challenge of a wager.  Wright's George Mason colleague Todd Zywicki provided color commentary at Volokh Conspiracy.

The challenge to a wager is very nice and gentlemanly, but it is a distraction from the real issue:  the severely flawed methodology Wright and his co-author David Evans use to manufacture evidence for their arguments against a CFPA. 

A wager has no more bearing on the propriety of Evans and Wrights' methodology than the other infamous type of wager--a wager of law or compurgation, a medieval common law defense to an informal covenant (contract), which involved having 11 people (compurgators) swear an oath on their eternal soul that you were telling the truth, irrespective of whether they had any knowledge of the case.  The outcome of a wager would have nothing to do with Wright's methodology.  If he were to win, the result would not vindicate his methodology any more than it would be discredited if I were to win; it would be basically a matter of luck.  Why stop at a wager?  Why not draw lots or use the dunking pond?  Or how about trial by combat?  

The question of the impact of the CFPA on the cost and availability of credit is an important question.  But I don't think we'll ever have an answer.  There is too much noise for an event study.  A CFPA would not be the only regulatory change occurring, it's major impact would not be from the regulatory reorganization per se, but from the substantive regulation that would flow later and not all at once, and with potentially cross-cutting effects, and we are already in a situation of market instability and self-reformation.  Accordingly, I do not believe it would be possible to tease out the CFPA-specific impact, positive or negative.  

More critically, I don't think anything can be said about the cost of the CFPA itself.  The CFPA Act does not enact any new substantive regulations of credit.  It is a regulatory reorganization bill.  Presumably a CFPA, if created, would enact substantive regulations, but those should be analyzed on their own merits individually.  Impact studies on credit regulation are a mixed lot (something that Evans and Wright ignore), and that points to a need to understand the specific nature of the regulation and market at hand, rather than to make sweeping assumptions about the impact of regulation. 

There will be plenty of time to debate the cost-benefits of specific substantive regulations, but arguments against a CFPA in general aren't really cost-benefit arguments; they are arguments against regulation in general because they are predicated on the assumption that the costs of substantive regulation always outweigh the benefits.  Absent such an assumption, there's really no reason to think that the costs of the regulatory reorganization will outweigh its benefits.  (I am always puzzled by this regulation=bad thinking, because without regulation there are no markets because there is no contract enforcement, and there is no contract enforcement without taxation to fund it.)  The variation on this is the "unintended consequences" argument, but as Kathleen Keest has observed, we also need to talk about the unintended consequences of the free market and of lack of regulation, or else we would have to conclude that the current economic situation is the intended consequence of the free market and deregulation.  

So let me respond to Wright with a gentlemanly counteroffer:  come up with a serious and implementable methodology for measuring the impact of a CFPA on the cost or availability of credit.  If you're concerned about advancing the discussion on a CFPA, that's the way to do it.  Succeed, and I'll gladly eat crow (figuratively) here on the Slips and on your blog.  


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