The Emergency Economic Stabilization Act of 2008, more commonly referred to as the “bailout plan,” has caused significant debate, suspicion, and anger among the American people.  As giant companies cried out for help in the face of imminent collapse, Congress wrote a $700 billion check ostensibly to rescue the economy from the alleged devastation that would otherwise have occurred.  The economy, however, continues to struggle.  The New York Times reports today that unemployment in the United States has reached a 14-year high, rising to 6.5 percent.  The stock market continues to bounce uncontrollably, which does nothing to help restore consumer confidence.  It has been widely reported that the bailout money is not being used to restore the economy, but rather, for executive bonuses.  Time magazine reported that executives of those firms receiving bailout funds can expect to earn bonuses worth about “15 times the income of the average American household.”  The American people, watching prices rise, job opportunities fall, and their retirement funds slip away, are asking themselves what went wrong.

One of the main arguments in favor of the bailout package was that the collapse of some companies, notably AIG, would have too much of a negative impact on the economy.  American citizens were cautioned that the economy would crumble if these companies weren’t propped up.  Perhaps that is true.  The question, however, is: Why were these companies allowed to become so singularly powerful in our economy? If a company has too much power in its own market, the government intervenes through antitrust law to rein it back from excessive power.  There is a vital, relevant market that appears to have been neglected by the antitrust movement:  The Public Market.

The United States government is familiar with protecting Americans from unfair and corrupt business practices, largely through antitrust law.  Antitrust law, initiated by the Sherman Act in 1890, protects American consumers and competitive firms from the harm that arises out of anti-competitive activities, such as price fixing, cartels, and predatory pricing.  The Act was supplemented by the 1914 Clayton Antitrust Act, which granted the government the authority to intervene earlier to prevent such illegal behavior. The spirit of the Sherman and Clayton Acts is rooted in the fact that consumers are often coerced into paying higher prices and competitive firms generally struggle to stay in business when monopolies exist.  The Antitrust Division of the U.S. Attorney General’s Office and the Federal Trade Commission (FTC) are responsible for monitoring signs and symptoms of anti-competition in the market.  One of the ways in which the Attorney General and the FTC have measured unfair business practices since 1985 is through a market share analysis:  If a company has too high a percentage of the relevant market, the Department of Justice is responsible for investigating its excessive power and punishing the company for it.

It is time for the United States government to enact similar legislation with its eye towards the Public Market, which we shall define as any market with significant public involvement.  Significant public involvement can be established in the following ways:  (1) significant financial investment by individuals, (2) significant repercussions to individual financial investment in the event of collapse, and/or (3) significant ties to other firms that have significant investment by individuals.  Significance should be understood as an unreasonably risky level.  The legislature should establish a threshold, past which significant public involvement is deemed unacceptable and must be hedged in.  If and when the FTC and Attorney General report significant public involvement, the accused firm must post bond to insure the public against any negative repercussions as it corrects itself.  An index, similar to the one used in antitrust law, must be established as a function of significant public involvement.  The index will be a function of the firm’s aggregate public involvement as a fraction of United States Gross Domestic Product.  The bond required for those firms with significant public involvement will be a function of each firm’s involvement.  The bonds will only be reimbursed if the firm reduces its public involvement without damage to the economy.  Through such legislature, the United States government would achieve both short-term and long-term goals necessary to revitalize the economy:

(1) Improve consumer confidence;

(2) Increase transparency;

(3) Increase firm responsibility for harming consumers; and

(4) Minimize the need for a similar bailout in the future.

Of course, there is some responsibility on the part of consumers for the economic crisis in which we find ourselves.  To minimize the future risk of poor individual credit decisions, we recommend Credit Licenses, similar to drivers’ licenses:  If a consumer wants a loan or a credit card, she must take a class and, later, a government-administered exam to demonstrate her competence at making significant financial decisions.  In particular, each consumer must be able to comprehend the details of any consumer credit agreement and must be able to calculate the financial effect of revolving credit.  If the consumer credit agreements are excessively complicated such that a consumer with a high school diploma cannot comprehend them, the government must enact regulation to improve transparency.

Financial analysts, politicians, and reporters have described the current crisis in such a complicated, complex fashion that American consumers may understandably feel disempowered.  It is important to remember, however, that the complexity of an industry must not protect it from inquisition.  Consider the case of the physician:  If a physician makes a mistake on a patient – no matter how technical or complex the procedure – he may be sued for malpractice and may pay damages.  In the case of the current economic crisis, there were, simply put, traders and analysts lacking the competency and wisdom to understand the repercussions of their mistakes.  When the economy was doing well, those mistakes were accepted or ignored.  But when the economy began to slip, the lacking abilities turned devastating.  The financial institutions have a responsibility to their shareholders and consumers to make appropriate staffing decisions.  At the end of the day, regardless of whether the financial institutions could accurately predict the damage they would cause the economy, economists and lawyers will be prepared to estimate the damages now.

This article was written by Dr. Sebastien Gay and Nadia Nasser-Ghodsi.  Nadia is a 2011 J.D. Candidate at the University of Chicago Law School.

Too many people do not recycle.  It is not particularly difficult to put aside the paper or cardboard boxes in one bag, the cans in another one, and the rest of the waste in the trash can.  So why do people decide not to recycle?

The reason, I believe, is that they are not given enough incentives to do so.  Of course, we all want a healthy planet for our children’s children to inherit, but the fact remains that the results of our small recycling acts as individuals are hard to see.  Even if I diligently recycle for years, I will not notice a tangible effect on the atmosphere.  Given this problem, we need to use additional motivators beyond our love for Mother Nature to protect the environment.  For example, when the price of gasoline increases, drivers turn to public transportation more often.  When the price of organic food declines, shoppers are more inclined to buy these environmentally-friendly products.  Similar ideas can be applied to recycling to make a positive impact on the environment.

In simplest terms, when people do not recycle, they put recyclable products (milk cartons, newspapers) in the trash where they do not belong.  Most of us are guilty of participating in this overproduction of trash and, in doing so, are creating a market failure.  A market failure means that there currently exists an allocation of resources, in this case, trash, on the market is not socially optimal:  Real trash should be in the trash can; recyclable items should be in the recycling bin, but we lump them together and, in doing so, create much more trash than necessary.

To resolve the trash market failure, I offer two possible solutions:  (1) a trash (non-recycling) tax or (2) a trash (non-recycling) system of permits.  A trash tax would be put on those people who decide not to recycle.  For example, each city could start picking up only one bag of trash per household each week.  Recycling bins would be available free-of-charge for residents to put their recyclable items.  Extra trash bags would be available at a cost (this cost represents the tax).

Another solution is to create a set of “trash permits” that people would receive from the city.  Every household would be given a set amount of trash bags per month (based on the number of people in the household).  These official bags would be the only ones picked up by the waste management company.  People could then trade between each other to try to find the best allocation of trash bags they would need for a given week.  It would create a socially-efficient allocation of trash and recycling.

A small town in Massachusetts, Hamilton, has already implemented a plan similar to the trash tax I recommended.  On March 12, 2008, the residents of Hamilton implemented a plan under which they are allowed one bag of trash per household each week. Additional bags of trash must be put in a “town bag” for a price of $1.75 per 32-gallon bag; however, recycling bins are free and unlimited.  According to the Hamilton-Wenham Recycling Committee that advocated for the new plan, studies of similar programs in Massachusetts and across the United States demonstrate trash reductions between 25 and 45% in the first year.  Though it is too soon to release the first year results in Hamilton, when residents drive through the town these days, they can see more recycling bins at the end of driveways than trash cans.  Hamilton residents have told me stories about children being scolded by their parents for putting recyclable items in the trash.  A little less than $2 might sound like a small tax, but it is already having an effect.

It may be frustrating to realize (or embarrassing to admit) that people appear to be more driven by small taxes on trash bags than they are by an inherent respect and appreciation for our planet.  It is important, however, to remember that it can be discouraging for one person who puts effort into recycling to watch her neighbors, local businesses, and even local government neglect to do so.  Through the types of plans I outlined above, we can correct for trash market failures by aligning incentives to recycle.