Enforcement Through Self-Interest
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As the political dust settled the week after last November’s presidential campaign, the Comfort Global Economic Policy Forum provided a timely opportunity for a host of experts from government, the media, industry, and academia to weigh in on the state of the economy. Peter Orszag, a vice chairman at Citigroup and former director of the Office of Management and Budget under President Obama, gave a keynote speech and Q&A at the event, which was co-sponsored by NYU’s Center for Financial Institutions and the Mitchell Jacobson Leadership Program in Law and Business. Orszag suggested that two aspects of the US economy—the dramatic drop in labor’s share of the national income over 30 years and the deleveraging process occurring in the aftermath of the financial crisis—need to be separated in order to make sense of the current situation. While recent fiscal policy got a lot right over the past few years, he said, a misunderstanding exists about the nature of the recovery because various government macroeconomic models treated the housing bust as “IT Bust 2.0.” In fact, Orszag argued, “The IT losses were highly diversified across broad financial markets, whereas the housing losses were highly concentrated in very leveraged institutions and therefore were propagated and exacerbated in a way that the IT losses were not.” Those calculations affected the stimulus bill significantly and led to a less robust approach to shoring up the housing crisis, he said— to the recovery’s detriment. In addition to the keynote, the forum also included three expert panels. The first, chaired by Max E. Greenberg Professor of Contract Law Clayton Gillette, looked at municipal bankruptcy and state takeovers; the second, led by Distinguished Scholar in Residence and Senior Lecturer Gerald Rosenfeld, examined municipal finance markets, pensions, and budgets; and the third, moderated by Bernard Petrie Professor of Law and Business Barry Adler, discussed sovereign debt.
Examining the Economy
PROCEEDINGS
e l i v e r i ng t h e i n aug u r a l lecture of the Robert A. Kindler Professorship of Law, Alan Sykes, the holder of that chair title, applied economics principles to an analysis of international law in his talk, “When Is International Law Useful?” Sykes, an international law and economics expert who joined the faculty last fall from Stanford Law School, confessed that, as a Yale Law School student, he had considered international law “largely pointless”: “When international law asks
over time (for example, a long-term contract). Both parties, he said, are better off if both honor their agreement, whereas if both sides cheat, then both are worse off. Sykes and Eric Posner formulated an “algorithm” in their book Economic Foundations of International Law, which addresses the ability of international law to orchestrate cooperation in various situations. The algorithm involves identifying the source of gains from international cooperation, asking whether and how those gains can be distributed so that each cooperating state can benefit, and examining whether a particular system can be made to be self-enforcing. Within that last element lie three “subconsiderations,” said Sykes, namely, whether governments are patient enough to forgo cheating, whether the agreement has a fixed endpoint (if it doesn’t, each side is less likely to cheat in its twilight), and whether it is reasonably easy to define what constitutes cooperation and to detect what counts as reneging. After applying his algorithm to GATT and its successor, the World Trade Organization, Sykes considered how the theory might be used in security matters, immigration law, and international human rights law to assess the likely success of multilateral agreements in those areas.
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Sykes, Kindler, Revesz
nations to behave in ways that they would not otherwise, it will fail, I thought, because it lacks t he sort of enforcement mechanism that gives much of domestic law its bite.” He cha nged h is mind when he began working on international trade matters in the early 1980s and recognized striking similarities between domestic and international law, with US t rade stat utes having been amended to reflect negotiated agreements under the multilateral General Agreement on Tariffs and Trade (GATT). “The system appeared to be one in which there were some disputes and some noncompliance,” he said, “but the overwhelming majority of obligations were respected.” Without a central enforcer or formal sanctions, Sykes wondered, how can a system of law succeed? He described the economic theory of repeated games, which governs strategic interaction among institutions or individuals that repeats itself