In the Wall Street Journal yesterday, Harvey Pitt, the 26th chairman of the U.S. Securities and Exchange Commission, commented on the various challenges the SEC will face in the "post-Mary Shapiro era."

When Ms. Schapiro took charge in January 2009, the SEC was in disarray--an institutional piñata, bashed from outside by politicians and the press, and from inside by then-Inspector General David Kotz, whose constant probes following the SEC's failure to uncover Bernie Madoff's massive Ponzi scheme had created a culture of fear. Staff morale was low and the agency was rendered ineffectual, while its slightest missteps garnered elevated visibility and contempt.

That deplorable state of affairs changed with Ms. Schapiro's ascendancy. She replaced senior SEC staff, instilled agency employees with renewed enthusiasm and respect for the agency's mission, reorganized and streamlined decades-old bureaucratic and administrative structures, and fostered a new (and deeper) sense of professionalism at every level.

The results were palpable. The SEC's continued existence ceased ¬being questioned, its responsibilities were significantly expanded by the 2010 Dodd-Frank financial reforms, it brought record numbers of enforcement actions, and it adopted and proposed scores of congressionally mandated rules.

But, as Ms. Schapiro departs the agency she ably led, happy days most assuredly are not here again. The many problems the SEC must deal with are fraught with complexity and irrationality. Danger lurks around every corner.

Harvey Pitt then went on to enumerate and explain some of the pressing challenges the SEC will have to deal with, emphasizing Dodd-Frank. He discussed some of these very issues at a Manhattan Institute conference this fall.

Class action attorneys collected $13 million in a settlement they claimed was worth $180 million. The settlement didn't actually pay any money to the class; it just required Sirius XM to offer its service for $12.95/month until December 31, 2011, and pretended that class members would have paid $14.95/month if not for the settlement. Except Sirius XM customers don't pay $14.95 a month even after December 31, 2011; for example, I just subscribed to Sirius XM for less than $4.17 a month—a rate cheaper than what was available in 2011. If you offer a coupon for a Big Mac for $12.95, how much should you value the coupon when class members can get the Big Mac for a lot cheaper without a coupon? The Center for Class Action Fairness argues that the Class Action Fairness Act requires the settlement to be valued at $0, which would make a $13 million settlement where the attorneys get 100% of the benefit per se unfair, especially given the Bluetooth signs of self-dealing. To boot, the district court's procedures and rulings violated Rules 23(g) and 23(h); CIR and PLF filed amicus briefs on the racial quota arguments of the district court. Defendant Sirius XM, represented by Jones Day, perhaps realizes that the settlement is indefensible on the merits, so thinks outside the box and asks the Court to hold the case "equitably moot," which makes no sense outside of the bankruptcy context, or perhaps even in the bankruptcy context, as our reply brief explains.

• Martin opening brief


• CIR amicus brief


• PLF amicus brief


• Plaintiffs' response brief


• Sirius XM response brief


• Martin reply brief

The Wall Street Journal covered the case earlier, as did Reuters.

(The Center for Class Action Fairness is not affiliated with the Manhattan Institute.)

Jim Copland in the Washington Times, publicizing Trial Lawyers Inc. - Philadelphia:

The effort to rein in lawsuit abuse in the United States is a bit like the old arcade game "Whack-a-Mole." Just when you knock down one abuse, another pops up. This frustrating dynamic is the result of the creativity and political savvy of the class action and mass-tort trial bar -- whom we at the Manhattan Institute call Trial Lawyers, Inc. It's also the product of America's inverted legal federalism, in which the decisions of one state or local jurisdiction can dictate the terms of national commerce. ...

America's system of race-to-the-bottom, lowest-common-denominator legal rules is a clear impediment to our businesses' competitiveness. ... Progress, however, is still possible. Indeed, overall improvements in the American litigation climate over the last decade owe little to federal reforms, save the Class Action Fairness Act of 2005. Tort reformers will have to continue to work, as they have been, state by state -- hitting each mole, in turn, that rears its head.

Chairman Schapiro announced yesterday that she will be stepping down as head of the Securities and Exchange Commission (SEC) in several weeks. Accompanying her announcement, was a nine-page list of her accomplishments during her nearly four-year tenure. Ms. Schapiro took over as SEC Chairman in January 2009, not a great time for the agency or the country. The task she undertook was, by any measure, not easy. Even viewed in the light of the difficulties she faced, the SEC's recent track record is not as impressive as the lengthy accomplishment list would suggest.

The success of trial lawyers in Philadelphia has come at the expense of the Pennsylvania economy. Our own Jim Copland explains in an op-ed and at great detail in Trial Lawyers Inc. - Philadelphia.

There has been a lot of speculation about whether Senator-elect Elizabeth Warren will get a seat on the Senate Banking Committee, a perfect forum to go after the financial industry. If Ms. Warren does get the coveted spot, she may have to reserve some of her ire for the Bureau of Consumer Financial Protection, the regulatory agency she helped create.

In her Congressional seat, Ms. Warren may find the Bureau's lack of accountability to Congress frustrating. The Bureau, as designed by Dodd-Frank, has wide latitude to set its budget and use it to further whatever goals the Bureau's sole director wishes to pursue. If the Bureau proceeds with its proposals to overrule statutory provisions it finds wanting, Congress may not even be able to constrain the Bureau by statute.

Even Ms. Warren's ability to ask questions at Senate hearings could be curbed by the Bureau's unwillingness to answer them. For example, Ms. Warren, representing the Bureau at a Congressional hearing in May 2011, told Subcommittee Chairman McHenry that he was "causing problems" by keeping her longer than the hour she had allotted for the hearing.

Perhaps as long as Mr. Cordray serves as director of the Bureau and Ms. Warren wields informal influence over the Bureau, she will be perfectly content to leave the agency officially unfettered by Congress. She may feel different when a new head of the Bureau--someone who takes an approach to consumer protection divergent from her own and does not take her phone calls--arrives on the scene and turns the Bureau in a direction she does not like. Anticipating such a scenario, Ms. Warren could, once she enters the Senate, join her many colleagues in calling for greater accountability for the Bureau.

Last week, the Commodity Futures Trading Commission voted to appeal a district court decision that temporarily stalled its controversial position limits rule. The CFTC's decision to appeal is a disappointing confirmation of the agency's rash approach to rulemaking under Dodd-Frank.

Although the rule was challenged on multiple grounds, the court's ruling focused on the CFTC's statutory mandate. The court held that the CFTC was wrong to conclude that the Dodd-Frank directive on position limits was clear. The court vacated the rule and remanded it to the CFTC for a fresh look in light of "the fundamental ambiguities in the statute."

The CFTC declined to take a second look. Instead, it chose, over the objection of two commissioners, to appeal the court's ruling. Commissioner Chilton defended the decision to "send a message that the largest speculators on the planet can't litigate regulators to death. We will fight back. Your deep pockets can't protect you from what the law clearly states." His tough stand is characteristically colorful, but, as dissenting Commissioner O'Malia explained, rather than wasting CFTC resources by prolonging litigation, "it would be much more logical for the Commission to go back to the drawing board now to study the markets and to determine whether new position limits are in fact necessary, and only if so then to decide on the most cost-effective way of establishing such limits."

The CFTC's decision to appeal is another lost opportunity for an agency that has consistently rejected calls for deliberate regulation.

From the provocatively entitled Inside the Law School Scam blog, a very interesting posting on Nov. 16:

October LSATs administered

2009 (all-time high): 60,746

2010: 54,345

2011: 45,169

2012: 37,780 (Lowest total since 1999)

In addition, the ratio of applicants to LSAT administrations has declined quite a bit since LSAC started allowing law schools to report only a matriculant's highest LSAT score (another sign of the tail wagging the dog). The result of this has been a big increase in re-taking, as reflected by the following numbers:

2003-04: applicants took the test 1.47 times on average

2010-11: 1.98 times on average

2011-12: 1.92 times on average

If 2012-13 sees the same number of tests per applicant on average, we can expect only 59,200 applicants in this cycle This is a lower number than the total number of people admitted to ABA schools two years ago.

All of this bodes extremely ill for law schools desirous of maintaining the quality of their student body while satisfying their universities' need for income....

A committee led by a judge has suggested potential amendments to various procedural rules to permit Canadian judges to better deal with abuses of the litigation system. [Subcommittee on Global Review (esp. pp. 25-29); Globe and Mail]

Yesterday, the staffs of the Securities and Exchange Commission and the Department of Justice published a 130-page guide about the Foreign Corrupt Practices Act, an anti-bribery statute. The fact that it takes so many pages to explain to companies how to comply with the complicated statute is troubling enough. Even with the lengthy "non-binding, informal, and summary" guide, however, a lot of compliance questions remain.
One example is the question of who constitutes a foreign official for purposes of the statute. The FCPA's reach is not limited to payments made to government officials working at government agencies. The guide includes a list of eleven "non-exclusive factors" for consideration in determining whether a company is a government instrumentality under the statute and thus whether its employees are considered to be foreign officials. Depending on how these factors are applied, normal business practices with a seemingly non-governmental business partner could end up constituting FCPA violations. A company might be considered a government instrumentality even if the government is only a minority shareholder.
The FCPA has generated large settlements for the government and is likely to be an area of continued focus by the SEC and DOJ. Many FCPA cases are not based on bribes, but rather on a failure to maintain proper books and records or internal controls. Even immaterial reporting errors are enough to trigger the FCPA. Some companies find themselves in trouble after they acquire another company that has committed FCPA violations in the past.
The FCPA has become a trap for the unwary. Perhaps this staff guidance will help well-intentioned companies in their compliance efforts, but enforcement actions rooted in the FCPA's many gray areas could be distracting government agencies from pursuing violations of greater societal concern.

Senator Vitter writes on legacy lawsuits, and his successful push to get the state legislature and Governor Jindal to act. Earlier.

I've long taken the position that AT&T Mobility v. Concepcion was pro-consumer because it expanded the range of choices available to consumers in the marketplace: a consumer could pre-commit not to bring a class action, the vendor could pre-commit to providing a cheaper and quicker legal procedure that permitted the vindication of the consumer's rights, and the vendor could split the savings of increased legal certainty with the consumer through lower prices. Win-win, except for the trial bar.

A recent study exploring the parameters of post-Concepcion arbitration clauses by Myriam Gilles—no friend of aggressive arbitration clauses—finds that many vendors have responded to Concepcion to make their arbitration clauses more consumer friendly, though that could just as easily be a response to post-Concepcion decisions distinguishing Concepcion because the challenged arbitration clauses failed to provide the same consumer protection as Concepcion did. (As a matter of legal doctrine, I continue to believe it's a mistake to call such contracts "unconscionable," and believe it makes more sense to phrase their rejection as against public policy on grounds that they are exculpatory.)

Andrew Trask has more commentary.

In the wake of unfair bashing by the media, catalyzed by the trial bar, accusing Toyota vehicles of suffering from sudden acceleration, the Obama administration forced a recall and fined Toyota, Toyota sales plummeted, and the stock price dropped $30 billion of value. So we can safely view a $25.5 million settlement—less than 0.1% of that figure—as a nuisance settlement, albeit one that will likely pay the attorneys millions of dollars (Bernstein Litowitz and other plaintiffs' firms are seeking over $5 million) for bringing a meritless collateral suit over meritless allegations. [Reuters; LA Times; Detroit Free Press]

In AT&T Mobility v. Concepcion, the Supreme Court upheld an arbitration agreement over a California Supreme Court holding that that arbitration agreements with class waivers were inherently unconscionable. An ambiguity in the opinion, however, makes it unclear whether it was doing so because the Federal Arbitration Act overrides any such bars on arbitration, or whether the facts of the case—a district-court finding that the pro-consumer provisions in the particular arbitration agreement made it financially feasible for consumers to bring small-dollar claims without the procedural advantage of potential class litigation—were what was dispositive. The latter position is supported by dicta in Green Tree Fin. Corp. - Alabama v. Randolph, which suggested that an arbitration agreement could not make it financially infeasible to proceed with a legitimate cause of action.

As we previously discussed, the Second Circuit took the more narrow view of the case, holding that the arbitration clause combined with the class-action waiver made it impossible to bring the Sherman Act claims at issue in that case; the interest in civil enforcement of the Sherman Act outweighed the interest in promoting arbitration. On en banc review, the Second Circuit reaffirmed this position over a five-judge dissent by Judge Jacobs, who took the broader view of the case, also raising the public-policy problem that a narrow view of Concepcion would lead to collateral litigation over whether arbitration agreements fit within the Randolph exception, depriving arbitration clauses of the advantage of legal certainty.

The Supreme Court's certiorari grant should resolve this controversy. Unfortunately, the cert petitions talk past one another. Can a party act to make it impossible for a contractual partner to bring a Sherman Act claim against it? The briefs for cert grant don't say. What are the implications of a rule that permits extensive fact-based collateral litigation over the arbitrability of a particular claim? The respondents' brief doesn't say. One hopes the merits briefs more fully address this conflict.

Politically speaking, the business community should be cautious about trying to eke out a 5-4 victory here. The litigation lobby has already beat the bushes to create unfair animus against arbitration clauses. Pressing an interpretation of the Federal Arbitration Act that permits businesses to use arbitration clauses to completely protect themselves from certain types of litigation may be a reasonable expansion of freedom of contract, but leads to the rhetorical parade of horribles that law professors have used to call for abolishing more modest uses of arbitration clauses.

The fact that the Court took up this petition despite the fact that Justice Sotomayor is recused (she sat on one of the earlier Second Circuit panels) suggests that the Court may be inclined to reverse; a 4-4 affirmance would not result in a precedential opinion and would keep any misunderstandings about the scope of Concepcion alive.

The Wall Street Journal reported today that the Securities and Exchange Commission will not charge individuals as a result of J.P. Morgan's allegedly fraudulent sale of mortgage-backed securities. The Journal goes on to reveal that J.P. Morgan "will pay a significant financial penalty." The report is based on leaked details of a settlement between SEC staff and J.P. Morgan. The SEC has yet to vote on the deal.

This incident illustrates why the SEC ought to revive its short-lived practice of requiring staff to come to the Commission for guidance before undertaking settlement negotiations. Otherwise, as appears likely to happen in this case, the politically accountable commissioners will be voting on a fait accompli; the staff will present the settlement to them with every expectation that the Commission will simply rubber stamp it. At this point, it would be awkward for the Commission to turn down the staff-negotiated settlement or insist that individuals be charged. It is time for the Commission to reclaim its decision-making authority from the SEC's enforcement staff and insist that it is entitled to weigh in on settlements before the general public does.

Virginia has always been an at-will employment state, meaning that employers can fire employees for any reason, or for no reason at all, unless of course the employment contract stipulates otherwise. The big exception to at-will employment is the "public policy" exception, whereby an employee fired for reasons that shock Virginia public policy (e.g., race discrimination or resistance to sexual harrassment) may sue for wrongful discharge notwithstanding the at-will rule.

In a decision rendered Nov. 1, in response to a reference from the Fourth Circuit Court of Appeals, the Virginia Supreme Court has expanded this liability further, holding that a NON-employer may be sued for wrongful discharge if he or she was in fact the individual violator of Virginia's public policy.

The suit, filed in federal court by a woman who claimed to have been both the victim of gender discrimination in violation of Title VII of the Civil Rights Act of 1964, and also to have been wrongfully discharged because she would not yield to her supervisor's repeated sexual advances in violation of Virginia public policy. The suit was filed against the woman's supervisor, Dr. Stephen Grubb, who was the owner of the Virginia Limited Liability Corporation that employed her. The District court dismissed the wrongful discharge suit against Dr. Grubb on the grounds that he was not plaintiff's employer. On appeal, the Fourth Circuit referred to the Virginia Supreme Court the question whether a suit for wrongful discharge could be filed against a non-employer.

By a 4-3 decision, the Court answered in the affirmative, ruling that if a non-employer was in fact the violator of public policy he can be sued for wrongful discharge. The majority rejected Grubb's argument that discharge can be performed only by an employer, and therefore that only said employer can be liable for wrongful discharge. The majority emphasized the need to deter wrongful discharge, which need would not be accomplished in cases such as this one without the liability of the "fellow employee." The upshot, of course, is that the plaintiff can pursue the defendant's personal assets, not merely the assets of the corporation.

Noteworthy, however, was the vibrant dissent by Chief Justice Kinser. The Chief Justice emphasized the logical impossibility of a non-employer firing an employee. Though the supervisor's behavior was wrongful, it was NOT in violation of his duty not to discharge an employee for reasons contrary to public policy. That duty can only be violated by an employer, and since breach of duty (not wrongfulness) is necessary for tort liability, the supervisor cannot be liable in tort.

In this very interesting decision, therefore, the majority seems to have waived the need for breach of duty, in favor of wrongfulness, for tort liability.

Angela VanBUREN v. Stephen A. GRUBB. Docket No. 120348.

On Thursday, the Chicago Mercantile Exchange (CME) sued the Commodity Futures Trading Commission (CFTC). This latest rulemaking challenge offers useful insight into the CFTC's undisciplined approach to implementing Dodd-Frank. The CME challenges the CFTC's aggressive reading of its statute, its failure to conduct adequate cost-benefit analysis, and its adoption of rules without adhering to the Administrative Procedure Act.

The CME runs a clearinghouse that stands to benefit from Dodd-Frank's new clearing mandate for OTC derivatives (swaps). It is challenging the CFTC's requirement that clearinghouses report swap transactions they clear to a swap data repository. The CME contends that the CFTC already can get access to the data by going right to the CME; an additional reporting requirement is neither statutorily mandated nor supported by cost-benefit analysis. The CME could cut out the middleman by registering as a swap data repository. The CFTC staff, however, allegedly is conditioning registration on CME's compliance with a requirement contained in a staff guidance document that appears to conflict with the CFTC's own rule. Meanwhile, the staff's temporary dispensation for the CME is set to expire next week.

Regardless of the substantive merits of the suit, it demonstrates how the CFTC's rushed and uncoordinated approach to rulemaking has added an avoidable layer of confusion to Dodd-Frank implementation.

We previously discussed the tactic of attempting to evade Class Action Fairness Act scrutiny of coupon settlements by calling the coupons "gift cards." Briefing is now complete in In re Online DVD Antitrust Lit., No. 12-15705 (9th Cir.), and we can expect oral argument some time in 2013. Wal-Mart recognized that it didn't make sense for them to spend money on defense counsel defending a class action settlement designed to benefit the plaintiffs' attorneys, and did not file a brief.

• Opening Brief
  
• Class Counsel Appellee's Brief
  
• Reply Brief

(The Center for Class Action Fairness is not affiliated with the Manhattan Institute.)

To prove securities fraud, one has to prove reliance upon the allegedly fraudulent statement. This would be a problem in a class action: individual shareholders have relied upon different things in their decision to purchase, and some have never even seen the allegedly fraudulent statement. Under normal circumstances, the individualized nature of this inquiry would prevent class certification.

There is a way around this, though. The efficient market hypothesis propounded by financial economists theorizes that information is automatically reflected within a stock market price. Thus, if fraudulent information was out in the marketplace, it would have artificially inflated the stock price; a stock purchaser who never even saw the fraudulent information could thus be said to have relied upon the fraudulent information—thus, "fraud on the market." We'll leave aside the academic debate over the degree of truth of the efficient market hypothesis. What's important for our purposes today is that the Supreme Court has endorsed the fraud-on-the-market theory in Basic v. Levinson, and billions of dollars have changed hands because of it.

Andrew Trask notes that in the Amgen Supreme Court argument Monday, Justice Scalia mused that perhaps the Supreme Court should reverse Basic. I agree with Trask that this is an unlikely outcome in the short run. But securities lawyers should be aware that a major plaintiffs' firm, Bernstein Litowitz, has successfully argued in a federal district court case that a court can ignore the efficient-market hypothesis, which would imply that Basic v. Levinson is wrongly decided.

You might remember that the Center for Class Action Fairness objected to a $0 settlement in Johnson & Johnson. The objector argued that the settlement provided no benefit to shareholders. Plaintiffs responded by putting forth an expert declaration from former SEC chair Harvey Pitt opining that the minor corporate governance changes would have dramatic benefits for shareholders. In response, CCAF put forward expert reports from Professors Todd Henderson and Kate Litvak noting that Pitt's say-so was not competent expert evidence of shareholder benefit. As the CCAF brief argued, if the settlement created benefit for shareholders, that benefit would be reflected in the price of the stock. But the plaintiffs provided no evidence that the marketplace positively reacted to the changes in corporate governance; indeed, the JNJ stock price declined relative to the rest of the market. In the absence of the market evidence, we argued, plaintiffs failed to carry their burden that the settlement was beneficial to shareholders, and had no claim for $10 million in fees.

The court, at plaintiffs' behest in briefing by Bernstein Litowitz, disagreed: Harvey Pitt was an expert, and if he said there was a benefit, there was a benefit, regardless of what the market said. [In re Johnson & Johnson (D.N.J. Oct. 26, 2012) via Smith @ Reuters]

This is remarkable for several reasons. As an initial matter, if Harvey Pitt's say-so can be conclusive on the question of shareholder value above and beyond what actual market value shows, and a district-court judge has the ability to divine the creation of shareholder value in the absence of empirical evidence, both Pitt and the district court judge are making a huge financial mistake in staying in their current line of work. Both of them should be finding work with hedge funds, and trading stocks based on their power to determine which corporate governance reforms the market is failing to appropriately value.

But more importantly, Bernstein Litowitz has successfully argued to a district court that the efficient market hypothesis is wrong. According to Bernstein Litowitz, the market price of JNJ doesn't reflect all public information about the value of the stock, and there exist people like Pitt and the district court judge, and presumably others, who can divine shareholder value in ways the market cannot. But if that is so, then Basic v. Levinson is wrongly decided, because it means that one can't assume reliance on public information because the price of the stock differs from the underlying value of the corporation. Thus, there is no such thing as fraud on the market. Either the district court decision in Johnson & Johnson is correct, or the Supreme Court decision in Basic v. Levinson is correct, but they cannot both be correct.

I leave to others smarter than me which is the right way to view things. (That Pitt isn't opening a hedge fund suggests which way Pitt actually thinks.) But it would be fascinating if it turned out that, in its effort to defend a requested $10-million fee in an abusive shareholder derivative case, Bernstein Litowitz killed the multi-billion-dollar golden goose—the fraud-on-the-market theory—that permits shareholder fraud class actions at all. If there's a securities defense firm out there that argues judicial estoppel against Bernstein Litowitz based on the Johnson & Johnson decision, please let me know, and I'll post about it.

(The Center for Class Action Fairness is not affiliated with the Manhattan Institute.)

The Commodity Futures Trading Commission held a roundtable yesterday with global derivatives regulators. The meeting comes in response to widespread concern by foreign regulators about the CFTC's aggressive reach in its derivatives rulemaking under Dodd-Frank. Dodd-Frank ambiguously authorizes the CFTC to apply its rules to activities "that have a direct and significant connection with activities in, or effect on, commerce of the United States." Attempting to justify the CFTC's extremely broad reading of this vague statutory authority, at this morning's session, Chairman Gensler explained to his foreign counterparts that entities in their jurisdictions nearly brought down our financial system. Foreign regulators responded that they could make a reciprocal argument; our troubles seeped across the ocean to harm their financial markets too. Yet, they explained, practically speaking, they do not have the resources to regulate US financial markets. Moreover, they have some measure of respect for our national sovereignty, as we ought to have for theirs. The CFTC, which often celebrates its willingness to listen to comments, ought to apply the more pragmatic and deferential approach of the foreign regulators. Otherwise, the breadth of the CFTC's interpretation of its mandate will harm not only markets, but regulators' ability to oversee them.

I was in San Francisco Monday arguing the HP Inkjet appeal before the Ninth Circuit, questioning whether a settlement that paid attorneys $2.1 million when the class received less than $1.5 million in worthless coupons can be considered fair—especially when the defendant put cash on the table that it got to keep at the expense of the class. The oral argument is online, as are the briefs; I'll confess surprise that the definition of "redeemed" in the Class Action Fairness Act was controversial.

(The Center for Class Action Fairness is not affiliated with the Manhattan Institute.)

In a rare display of sanity, California voters rejected Prop 34 (abolishing the death penalty) and Prop 37 (give lawyers a new cause of action worth hundreds of millions of dollars to sue small food vendors over labeling).

• I was right about 47 states (perhaps 48 when Florida makes up its mind), which was better than George Will and Michael Barone, but worse than Nate Silver, who will have at least 49 scalps in his pocket, and can take credit for calling Florida close no matter which way it goes. I thought that the Silver model had a "house effect" that overestimated how well Obama would do on election day, but that it wasn't likely that that house effect would be big enough to overcome how far ahead Obama was doing in the polls the 538 model relied upon. That's perhaps correct—538 appears to have overstated the Obama-Romney margin by 0.5% nationally and 1.7% in Ohio—but that could just be lucky on my part, since 538 also overstated Romney's performance in Virginia by 1.0%. Silver can be proud of his results, and will be handsomely rewarded for his success.
• If exit polls are right, whites were only 72% of the electorate. The difference between that and the 75% prediction I credited is the difference between Silver's predictions and mine. Logistically, the GOP needs to learn from the impressive Obama turnout machine.
• An interesting question is whether the Democrats can repeat that machine in 2016, but they might not need to between demographic changes and the massive change in the relationship between the people and the federal government. Once Obamacare takes effect, a majority of the country is going to be net takers from the government, and will have resistance to any effort to shrink government, even if the spending is unsustainable, even as these programs wreck the economy and create marginal effective tax rates above 100% for middle-class families.
• That the polls were right shows that the country has moved left. The existing coalition isn't going to cut it for Republicans; the demographics are going to be even worse in 2016 and 2020. And if Texas goes blue in 2024, that's the end of things. Conservatives are a minority of the country. They need to expand the big tent if they're ever going to get back to 270. And there's an easy painless way to do that: stop pandering on purely symbolic social issues that have no feasible chance of becoming government policy but permit the Democrats to raise strawmen attacks against Republican candidates.
• The scare tactics on abortion and contraception in this election by the Obama campaign were ridiculous, but, judging by my Facebook feed, they worked: an appalling number of otherwise-intelligent under-40 voters seemed to think that a President Romney was going to outlaw abortion, contraception, and homosexuality. There was no reason for the Republicans to hand Democrats anything that opened the door to the opportunity to create those scare tactics. Abortion is going to be legal in this country even if Roe v. Wade is reversed; demographics of the electorate mean that gay marriage and gay equality are inevitable no matter what the Supreme Court decides to do this term. Even aside from the right and wrong of it, the only thing Republicans are doing by agreeing to make gay marriage and abortion campaign issues is alienating a generation of voters and hurting the brand of the party. Mitch Daniels is correct: the Christian right needs to agree to a truce on social issues if we're ever going to have a chance of restoring the country to fiscal sanity. Even if you think gay marriage and abortion is wrong, it's just stupid to keep costing conservatives votes on purely symbolic things where the president's positions have next to no real-world consequences.
• The messages of the election are not a hopeful sign for fiscal sanity. Bailouts, entitlement sanctity, and other economically illiterate populism won Ohio, and perhaps the nation. The Republicans ran in Virginia on complaining about Democratic cuts to Medicare and education spending and on opposing free trade. Neither campaign was intellectually honest about the unsustainable fiscal problems we face. The only bright side of this national election is that Obama now owns those problems. Force him to accept or reject reasonable compromises, and accept that the 39.6% top tax rate will be back—unless the GOP is willing to trade keeping the Bush tax cuts for a large gasoline tax to avoid even more economically disruptive carbon regulation.
• The most misunderstood Supreme Court decision of the last thirty years, Citizens United, made absolutely no difference in this election. Which is no surprise to anyone who read the case. Let's hope we stop seeing attacks on free speech based on faulty premises.
• Let's hope the Supreme Court justices are healthy over the next four years. The libertarian insistence that there's no difference between the two parties is nicely skewered by Randy Barnett and Richard Epstein, who have each individually done more to promote libertarian ideals than everyone working at Reason magazine combined. That 0.8% of the vote for Gary Johnson didn't make a difference in this election, but could in future elections.
• McCain supported immigration amnesty and lost Hispanics 68-31. Romney moved harder to the right on immigration and lost Hispanics 71-27. Hispanics are voting on economic issues, not on immigration, and that isn't going to shift to Republican ideals any time soon. Any political gains the Republicans can make by yielding on immigration are going to be more than offset by the adverse effect on the economy for the lower middle class and the increased number of Democratic voters.
• One bright light in the election was the victory of Ted Cruz in Texas. He'll make a great Supreme Court justice some day. The Republicans need to find more people like him, and do more to promote their candidacies. Far too many resources were wasted ensuring that Cruz won a primary over a party hack with no long-term future.
• A dark spot in the election was the degree to which the media promoted the Obama campaign's talking points, especially with the veneer of fact-checking. I leave to others how to counteract that, but in an election this close, it made a difference.

• I'm amused at the cynical pundits who think voting doesn't make a difference, but their op-eds do.

In what appears to be an attempt to scare wavering voters into supporting the president, New York Times columnist Paul Krugman argues that if Hurricane Sandy had arrived under a Romney administration, the victims would have been left without any government assistance. And by "government," Krugman means the federal government because, of course, only the federal government can respond to emergencies.

After discussing past Republican attempts to devolve disaster relief to the states, Krugman concludes "if Mr. Romney had been president these past four years the federal response to disasters of all kinds would have been far weaker than it was." And to prove the virtue of federal intervention, Krugman evokes "the scene in flooded Hoboken, with the National Guard moving in the day after the storm struck to deliver food and water and rescue stranded residents."

There's just one problem: the National Guard is a unit of state government, not the federal government. Indeed, it is the successor to the state militias. Krugman might have taken a moment to consult the Pentagon's own website discussing post-Sandy relief: "The National Guard takes its missions from the governor, and they're supporting the first responders," reports the DoD, quoting Army General Frank Grass.

Governor Christie called up the New Jersey Guard; Governor Cuomo, the New York Guard. It appears that FEMA played a role in getting other states to contribute guardsmen to the relief effort, but it is preposterous to think that such cooperation would not have occurred without Uncle Sam.

The Constitution empowers the president to summon the state militias "to execute the laws of the union, suppress insurrections, and repel invasions." But none of those conditions applies at present and (to my knowledge) President Obama has not asserted the power to call up the National Guard for post-Sandy relief. But when there are cheap political points to be scored, Krugman is not one to be distracted by the Constitution -- or the facts.

A followup to my earlier post:

• Nate Silver's column today has two throwaway sentences that reminds me of one more reason I'm cautiously skeptical of the polls:

  Some of the consistency in these results may reflect a tendency of polls to converge or "herd" around the polling average close to Election Day. This may occur because some polling firms alter their turnout models or other aspects of the polls so as not to produce outliers -- a dubious practice if the goal is to provide an objective take on the race.

  In other words, it's not the case that there are two dozen pollsters that are each deciding independently that Obama is ahead in Ohio. What we're seeing is the most self-confident handful of pollsters standing by their decisions, and less confident pollsters succumbing to peer pressure rather than produce outliers. To have faith in averaging (or even weightedly averaging) these results, one has to believe that the most self-confident pollsters who don't shift their results are also the most accurate and statistically unbiased pollsters. The Dunning-Kruger effect suggests that there is a good chance this might not be so. Thus, all it would take is a handful of obstinate pollsters with statistically-biased likely-voter models to produce a systemic statistical bias in the polls. It's not necessarily the case: the polls that fudge at the end of the cycle might be reducing, rather than introducing, error. But we're not seeing the wisdom of crowds here; the Bayesian probability that there's a systemic bias in the polls is substantially higher than if the pollsters were producing results independent of one another.

• Josh Marshall responds to me and correctly points out that we're working with very very few data points. But that should just reduce our confidence that we know what's going on. Do the 1972 polls tells us anything about the 2012 polls? What about 1992 or 2000?

• Silver looks at recent instances of state polls and finds they got the winner right the overwhelming majority of the time. Of course, as Silver recognizes quietly, that's not the correct question. How often were the polls 3 points off? One has to do the counting oneself, but it was nine times out of 29 in 2008 (albeit less often in closer state races).

• Colby Cosh has the best short piece on the Nate Silver phemonenon I've seen yet.

• Separately, thanks to Nate Silver for a generous tweet. He has a much larger platform than me, and is facing much more prominent critics than me with much stupider arguments; it would have been very easy for him to pretend I didn't exist and simply shoot fish in a barrel, and it's to his credit that he lent his twitter feed to promote my thoughts.

The long lines and shortages we're seeing at New York and New Jersey gas stations in the aftermath of Hurricane Sandy are a direct effect of anti-gouging laws that preclude gas stations from charging prices that reflect the disparity between supply and demand. If retailers could charge $12/gallon, people who don't absolutely have to have gasoline would be willing to defer purchases to when supply was back to normal; everyone would buy only what they need; suppliers would be willing to incur exceptional costs to bring in more supply after the storm; suppliers would have an incentive to stock up before the storm and make post-storm shortages less likely; and people would be more likely to carpool, thus reducing congestion on the highways and bridges and reducing enforcement time on the three-per-car rule. Instead, Governor Christie is calling for rationing.

Even if you're concerned about windfall profits to gasoline retailers, then just split it with the government: take advantage of the Pigouvian opportunity and add a $3/gallon tax for post-hurricane emergencies.

More at Reason. Earlier: 2006 Republican posturing; Spitzer overenforcement.

(h/t to J.M. and A.G. for additional advantages of expensive gas)

72 hours from election day! Who's going to win?

Nate Silver says that "For Romney to Win, State Polls Must Be Statistically Biased." I think this is correct. Silver's model has Obama at a 83.7% favorite, and that is likely to turn into a 90-95% favorite by election day the way his model works. Silver's argument for Obama being a favorite: he's ahead in Ohio, and if he's ahead in Ohio, he's substantially more likely to reach 270 electoral votes. This is also correct.

That said, I do believe that there is a substantial chance that the state polls are a biased prediction of where election day results turn out. Because the 538 (and Princeton) model rely so heavily on the assumption that the state polls are unbiased, if the state polls are biased, then the 538 and Princeton models will also be biased. (Note that "bias" is a neutral statistical term; it does not mean that the pollsters are conspiring to favor Obama, just that their likely-voter model is producing results that overestimate his standing.)

1) Polls have historically had a bias against Republicans relative to how election day turns out. Silver disputes this; I've explained why his analysis on that question might be wrong before. On the other hand, the 2012 polls may have fixed this problem.

2) Polls have historically had a bias overestimating the performance of sitting presidential incumbents. There's certainly a counterargument against this. On the other hand, perhaps Kerry's failure of a 2004 bounce reflects the offsetting bias against Republicans. On the other other other hand, perhaps the 1980 and 1996 collapses by Democratic incumbents from their polling positions reflect the distortion caused by a relatively strong third-party candidate, plus Clinton's 1996 decline might simply reflect a reversion to the mean. But if undecideds break 75-25 against Obama, that's a 1- or 2- point shift relative to the polls.

3) The state poll toplines, which is all that the 538 and Princeton models use in their calculations, show enormous advantages for Democratic turnout in state races, advantages greater than even Obama realized in 2008. I think that this is very likely an error that, if corrected for, will show material change. There are many many reasons to think that the Democratic advantage of 2008 will be weaker or nonexistent in 2012, when Obama won 53-46 nationally (and Ohio by 4.6 points).

(a) Obama leads Obama voters only 84-13. Now, some 2008 McCain voters have died or won't vote for Romney; some 2012 Obama voters will be new voters; some 2012 Obama voters will be 2008 McCain voters; that 84-13 may well turn into 90-10 on election day. But it's hard to see where the improvement in D turnout is going to come from when so many Obama voters are disaffected.

(b) Independents overwhelmingly favor Romney, by 20 points in some polls. It's implausible that independents have swung so wildly, yet Democrats are more enthused and more likely to turn out than Republicans. Some, such as Josh Marshall, have posited that the makeup of independents has been changed because disaffected Perot/Tea-Party/Paulite conservatives have left the Republican party. Dan McLaughlin's counter-argument strikes me as stronger. Even under Josh Marshall's calculation of voter ID, D+7 among "all adults" should not translate into a 2012 that is better than 2008 for Democrats: Republicans are more likely to vote; Republicans are more likely to vote for Romney than Democrats for Obama (especially given the shift in Catholic opinion since 2008); and Marshall necessarily concedes that the independent vote will be less pro-Obama than in 2008. And I don't believe Josh Marshall's claim that the current makeup of all adults is D+7.

(c) McCain intentionally hamstrung his campaign in 2008 with unilaterally disarming self-abnegating campaign-finance limitations, next to no on-the-ground spending for get-out-the-vote efforts ("GOTV"), and wasting money on such tactics as a national ad congratulating Obama on winning the nomination. This undoubtedly made McCain feel better about himself, but meant that the GOP had a historically unprecedented disadvantage in GOTV. Even with the supposed 2012 Obama advantage in field offices (which neglects the fact that GOP turnout efforts are largely volunteer), Romney is doing comparatively better in 2012 than McCain did in 2008, which is the relevant comparison for whether the state polls are accurately predicting that Democratic turnout advantage will be higher in 2012 than in 2008.

(d) Some polls show Republicans more excited about this election than Democrats; others show the excitement level about even. But even taking the latter polls as an accurate metric, the relevant comparison is again versus 2008, where the Democrats had a huge excitement advantage. If the Democrats are going to outperform 2008, which they have to achieve the slim lead they achieved in 2008 given the shift in independents, they need to be more relatively excited than in 2008. They're not.

(e) The Obama campaign is assuming turnout will be 72% white; polls are assuming turnout will be 74% white. But there's a strong argument that turnout will be more like 75% white. Whites favor Romney by about 61-39; non-whites Obama about 80-20. This would be a shift of 0.8% relative to the polls.

(f) Reports about early voting are mixed, with National Review and Battleground Watch reporting relative advantages for Romney versus 2008, and Democrats claiming otherwise. This election will likely have a record percentage of early voters, and it's hard to say to what extent that reflects cannibalization or improved turnout. We'll disregard this as ambiguous.

The Princeton model takes the state polls at face value; Nate Silver has made a decision to have the 538 model disregard each of these factors and assume that the polls are as likely to be biased for Obama as for Romney. Thus, there is a substantial chance that the 538 and Princeton models are reflecting a house effect. GIGO: garbage in, garbage out. McLaughlin's post on the subject is a must-read; so is Kevin Holtsberry on Ohio; Michael Barone makes the aggressive case for Romney.

All that said, if I had a gun to my head the morning of November 3, I would rate Obama a slight favorite, with about 60% to 40% chances, a movement from the tossup I suggested on Twitter. (I'm not going to succumb to the fake precision of Nate Silver's model and suggest I can forecast with three significant digits.) Why?

(1) Each of the effects I mention above are overlapping to some extent. You can't add them up to say that the polls are biased by seven points. And Obama has some lead in the state polls, plus has more favorable electoral-college scenarios than Romney in a close election: the so-called "firewall." Thus, I could be right about three, four, or even all seven of those points about state-poll bias, and it still might not add up to enough of an effect to put Romney over the top.

(2) I have to recognize that there's some chance that I'm suffering from confirmation bias, looking only at the data that favors my preferred result, and that I'm wrong. Nate Silver is spending a lot more time thinking about the election and polls than I am, and it's more likely that he's seeing things that I'm not than I'm seeing things he's not; maybe if I were to try to duplicate his efforts, I would end up with a model that was closer to his than my current thoughts are. I thus have to discount my thinking that Romney is doing better than Silver thinks. I think partisans on both sides have been silly about Silver, with some Democrats treating him as infallible to the point that a challenge of Silver is a challenge of scientific truth, and some on the right being simply innumerate in their attacks on Silver. Still, occasionally Silver lets the mask slip and makes a statement that's pretty close to mine about the unpredictability of the election and the chances his model is wrong.

(3) There are pollsters who do take the effects I mention into consideration somewhat; in particular, Rasmussen is very aggressive in doing so. But even Rasmussen shows an election that is close to a tossup, with Obama having more "outs" in the electoral college than Romney. And I think there is a reasonable argument that Rasmussen is too aggressive in its likely-voter model.

(4) A certain number of intangible factors favor Obama. Hurricane Sandy changed news coverage dramatically in the last week of the election: a disaster brings Americans together, lets a president seem presidential, and, in this particular case, provides a conscious or subconscious reminder of Bush administration incompetence. Moreover, every minute spent on dramatic Sandy stories is a minute the news isn't spending on Obama administration failures in the economy, in energy policy, in deficit reduction, in Libya. It's hard to think that the double-standard of "fact-checking" that more harshly (and often incorrectly) scrutinizes Romney claims than Obama claims doesn't have some effect on undecided voters.

(5) What am I supposed to think about Romney throwing $12 million into Pennsylvania at the last minute? Pennsylvania has consistently voted more Democratic than the rest of the nation. It's hard to imagine a scenario where Romney wins Pennsylvania but doesn't win Ohio and/or 270 non-Pennsylvania electoral college votes. The Pennsylvania U.S. Senate race doesn't seem particularly close. There are four possibilities: (a) the Romney campaign sees a real "undertow" election, and legitimately thinks it can get meaningful coattails in Pennsylvania; (b) the Romney campaign is panicking, and throwing a Hail-Mary in Pennsylvania because it doesn't think it can get to 270 without it; (c) the Romney campaign has more money than it can spend efficiently, and is throwing money at Pennsylvania as an expensive feint to divert Obama campaign resources; (d) the Romney campaign doesn't know what it is doing or inefficiently hoarded money. If one assigns Bayesian probabilities to each of those scenarios, that doesn't look good for Romney.

(6) Finally, the way that Romney (and American Crossroads) are running campaigns suggests some problems as well. The Romney campaign feels that it has to play defense on things where Republicans are correct (such as the Lilly Ledbetter Act); it is affirmatively trumpeting protectionism instead of defending free markets. American Crossroads is blanketing Virginia with advertising attacking Democrats from the left for Medicare and education spending cuts. Romney hasn't made the Supreme Court an issue at all in the campaign. I'm clearly not the swing voter who is being targeted by these ads, and perhaps they reflect an attempt to dampen Democratic turnout. But it's hard not to think that Romney doesn't think he can win the election by selling conservative and free-market ideas. That has longer-term consequences even beyond what it says about the 2012 election.

We'll find out on Tuesday night or late Wednesday morning. That said, it's important to realize that this election is only one data point, and in the absence of an unexpected 55-45 landslide one direction or the other, the election will not be proof or disproof of any particular model of forecasting elections.

My swing-state predictions:
Likely Romney: FL, NC
Lean Romney: CO, VA
Too close to call, slight lean Obama if I have to choose: OH
Lean Obama: IA, WI
Likely Obama: MI, NH, NV, PA
Solid Romney: The other McCain 2008 states, IN, Nebraska 2nd District
Solid Obama: The other Obama 2008 states

Thus: Either 281-257 Obama or 275-263 Romney. Note, though, that the electoral-college scenarios generally favor Obama. Obama can lose WI or IA if he wins OH; if Obama wins IA and WI, he only has to win one out of CO, OH, and VA to get to 270. Note further the small chance of a Romney popular victory and Obama electoral college victory, especially if New York/New Jersey turnout is depressed.

Because of this electoral-college firewall, if the leaning states were really independent toss-ups, Obama would have a much better than a 50-50 or 60-40 chance of winning. In fact the errors are going to be correlated, it's unlikely that Obama wins Virginia and Colorado but loses Wisconsin and Ohio, and my 60-40 estimate reflects a certain chance that Silver/Wang is completely right, a certain chance that I'm right or partially right, a small chance that Rasmussen is completely right and I'm being overconservative, and a very small chance that the state polls are completely wrong and we're seeing an undertow election like Barone and Domenech think.

(Updated to add links, fix typos, and add specific swing-state predictions.)

Update, November 4: One more reason to be a bit more skeptical of the polls.