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Net Neutrality Rules Represent a Giant Step Backwards

Brent Skorup — Thu, 26 Feb 2015 13:30:36 -0500

Expert Commentary

The Federal Communications Commission today voted, 3-2, that the Internet will be subject to many of the Title II regulatory provisions of the 1934 Communications Act. Applying Title II laws to broadband means regulating the Internet as a common carrier, akin to the telephone network, and gives significant control of the Internet to the FCC, lobbyists, and industry players.

The Title II order and new net neutrality rules have not been released yet, but the thrust of the regulations is clear from commissioners’ statements and media reports. In short, the FCC’s rules represent a giant step backwards to the days of command-and-control of markets.

The FCC’s actions derive in part from the myth that the Internet is neutral. In the evolving online world, the Internet gets less neutral—and better for consumers—every day. Through a hands-off approach from policymakers, the U.S. communications and technology sector has thrived as a supplier of innovation, but Title II rules effectively throw sand in the gears.

If the FCC’s rules are not overturned by the courts, the days of permissionless innovation online come to a close. The application of Title II means new broadband services must receive approval from this federal agency. Companies in Silicon Valley will therefore rely increasingly on their regulatory compliance officers, not their engineers and designers.

If courts do strike down the FCC’s net neutrality rules for a third time, the FCC should abandon its campaign to regulate the Internet. Instead the Commission should focus on increasing broadband competition across the nation, thereby reducing prices and increasing the availability of new broadband services. There is plenty of work to be done on this front, but pursuing Title II net neutrality rules distract the Commission and Congress from spearheading a pro-consumer innovation agenda.

No, Mr. Tarullo, We're Not All Macroprudentialists Now

Hester Peirce — Thu, 26 Feb 2015 12:58:02 -0500

Expert Commentary

Federal Reserve Governor Daniel Tarullo began a speech last month by saying, "Standing in front of this audience I feel secure in observing that we are all macroprudentialists now." Having been a member of that audience, I can assure Mr. Tarullo that his statement was inaccurate. Macroprudentialists' intensifying focus on the asset management industry offers the latest glimpse into how such an approach could undermine financial stability.

Mr. Tarullo explained that the macroprudential approach to regulation "focuses on the financial system as a whole, and not just the well-being of individual firms." Regulators are central to the macroprudential approach; only they have the breadth of vision to know how and when-for the good of the collective-to override careful decisions made by individual firms.

The focus of Mr. Tarullo and other macroprudentialists has turned most recently to the asset management industry. Asset managers include the investment advisers and mutual fund companies that manage the investment portfolios of institutions and households. Asset managers control a lot of money-$63 trillion according to a recent speech by Mary Jo White, chair of the Securities and Exchange Commission, which oversees the asset management industry.

Ms. White's colleagues on the Financial Stability Oversight Council-a collection of top financial regulators-are not confident that SEC oversight is adequate. The FSOC and its international cousin-the Financial Stability Board-are on the lookout for particular asset managers and asset management activities that might put the financial system at risk. Dodd-Frank gives the FSOC authority to make recommendations to the SEC about how it should regulate the asset management industry. The FSOC also can designate asset managers for regulation by the Federal Reserve.

The FSOC is soliciting input on a document that runs through worst-case scenarios in asset management. What if asset managers don't manage their funds "in a way that prevents or fully mitigates the risks to the investment vehicle and the broader financial system"? What if asset managers are forced to conduct fire sales, which could drive asset prices down? What if a key industry service provider goes out of business?

The risks the FSOC described pale in comparison to the risks it could create by adding a new macroprudential regulatory layer to asset management. Attempts to centrally mitigate risk likely would create new risks by narrowing the differences in the way assets are managed. There are thousands of asset managers and mutual funds. Even very large mutual fund complexes employ many managers, each of whom takes her own approach to investing. More prescriptive regulation will eat away at that system-strengthening diversity.

Mr. Tarullo envisions a macroprudential regime that "builds on the traditional investor protection and market functioning aims of securities regulation by incorporating a system-wide perspective." Asset managers will have the impossible task of balancing their fiduciary duties to their own funds and investors with regulatory obligations to do what's best for their competitors and the rest of the financial system.

Using tools like stress tests and liquidity requirements, regulators would corral asset managers into similar strategies, assets, and risk management techniques. If regulators make bad choices, the entire industry will be affected. But even if regulators make good choices, making asset managers follow a single formula makes it more likely that the actions of one manager-such as asset sales to meet redemptions-would reverberate throughout the industry.

Moreover, as bank regulators play an increasingly central role in regulating asset managers, the differences that distinguish the banking industry from the asset management industry will start to disappear. Shocks will more easily transmit across the entire financial sector. Imagine the scene as banks and asset managers all fight during a crisis for the safe assets that their common regulatory frameworks permit. When problems arise, taxpayer money will flow to all macroprudentially regulated corners as regulators seek to mask their mistakes.

Regulators are not wrong to think about the stability of the whole financial system. They are wrong, however, to assume that centralized risk management will foster systemic stability. Instead, it will introduce new vulnerabilities into the financial system. These vulnerabilities likely will manifest themselves when the financial system is already under stress. Rather than seeking to extend macroprudential regulation, regulators should emphasize microprudential responsibility. Asset managers, governed by their legal responsibilities to their clients, need to plan for bad events. This is not a task that can be outsourced to government regulators.

The Official Unemployment Rate Isn’t the Complete Picture

Veronique de Rugy, Jason J. Fichtner — Tue, 24 Feb 2015 17:27:43 -0500

Publication

This week’s chart is an updated comparison of the different measurements of the unemployment rate from the Bureau of Labor Statistics (BLS). It includes new data on the official and alternative unemployment measurements for January 2015. The widely reported official unemployment rate, which remains the primary measure of labor market performance, is not the most realistic representation of the current state of the economy, because it fails to capture, among other things, individuals who have simply stopped looking for work. The limited perspective on the labor market offered by the official unemployment rate is readily apparent when compared to alternative measures of unemployment.

The chart displays the official unemployment rate, or U3 unemployment rate, alongside various alternative measures from 2005 to the most recent data in January 2015.

The most commonly reported unemployment rate—5.7 percent in January 2015—is defined as the number of people without jobs who are available to work and are actively seeking work in the four weeks preceding the survey as a percentage of the labor force (the sum of employed and unemployed persons in the economy). At first glimpse, the 5.7 percent official US unemployment rate appears to be good news. Indeed, the early data show that the economy did add 257,000 jobs in January.

However, the official U3 number, represented as the blue area on the chart above, can be compared to the number of workers who are “officially” unemployed plus those categorized as “discouraged workers,” known as U4 unemployment. This is represented by the light blue portion of the graph. Discouraged workers are people who are able to work but cease searching for employment because they believe that no job opportunities exist for them. As of January 2015, the U4 unemployment rate was 6.1 percent, increasing by 0.1 percentage points from December 2014, the same increase as the official U3 unemployment rate. We would expect the U4 unemployment rate to decrease in healthy economic times as more workers have faith that they can find gainful employment. The U4 unemployment rate has not significantly decreased relative to the official U3 rate since the onset of the recent recession, suggesting persistent structural barriers to employment.

Next, we can consider marginally attached workers with the U5 unemployment rate, represented as the orange portion on the graph. The BLS defines this group as persons who want and are available for work but who are not counted as unemployed under the official U3 measurement because they had not actively searched for work in the four weeks preceding the BLS survey. The U5 rate adds marginally attached workers to their measures of officially unemployed and discouraged workers. In December 2014, the U5 unemployment rate was 7.0 percent, rising by 0.1 percentage points from the month before.

Finally, it is important to consider workers who are “underemployed.” This is represented by a final alternative measurement called the U6 unemployment rate, which adds part-time workers for economic reasons. Shown as the red portion on the graph above and totaling 11.3 percent in January 2015, it is considerably higher than the official unemployment rate and has risen by 0.1 from December 2014. This final measure provides the broadest picture of the current labor situation. At twice the official U3 unemployment rate, it has slightly declined since the onset of the recession but is still significantly higher than pre-recession range of 8–9.3 percent from 2005 to 2007.

Much of the decrease in the U3 unemployment rate is due to a decrease in the labor force participation rate—that is, fewer people of working age working or looking for work. If the labor force participation rate in January 2015 were the same as that in January 2014, the official U3 unemployment rate would be 5.8 percent. Adding in the alternative unemployment measures provides even less cause for optimism.

This chart shows that many workers who do not fit the narrow criteria of the official unemployment measurement have struggled to find employment for years with limited success. It is important to remember these critical labor demographics in assessing the complete unemployment picture in the United States and in beginning a broader discussion about the institutional and other barriers to creating jobs.

Comprehensive Regulatory Impact Analysis: The Cornerstone of Regulatory Reform

Jerry Ellig — Wed, 25 Feb 2015 10:56:45 -0500

Publication

Good morning Chairman Johnson, Ranking Member Carper, and members of the committee. Thank you for inviting me to testify today.

I am an economist and research fellow at the Mercatus Center, a 501(c)(3) research, educational, and outreach organization affiliated with George Mason University in Arlington, Virginia. I’ve previously served as a senior economist at the Joint Economic Committee and as deputy director of the Office of Policy Planning at the Federal Trade Commission. My principal research for the last 25 years has focused on the regulatory process, government performance, and the effects of government regulation. For these reasons, I’m delighted to testify on today’s topic.

I work at a university. That means I’m for knowledge and against ignorance. I think that regulators have a moral responsibility to make decisions about regulations based on actual knowledge of a regulation’s likely effects—not just on hopes, intentions, or wishful thinking. A decision maker’s failure or refusal to acquire this knowledge before making decisions is a willful choice to act based on ignorance.

Executive orders, and sometimes laws, seek to encourage regulatory agencies to act based on knowledge rather than ignorance. For more than three decades, presidents of both political parties have instructed executive branch agencies to conduct regulatory impact analysis when issuing significant regulations. Some independent agencies, such as the Securities and Exchange Commission, are required by law to assess the economic effects of their regulations. Executive orders and laws requiring economic analysis of regulations reflect a bipartisan consensus that economic analysis should inform, but not dictate, regulatory decisions. A good regulatory impact analysis also lays the groundwork for an effective retrospective review of the regulation by identifying the outcomes that should be tracked in order to assess whether the regulation accomplishes the desired goals.

Unfortunately, agencies’ regulatory impact analyses are not nearly as informative as they ought to be, and there is often scant evidence that agencies have utilized any part of the analysis in making decisions. These problems have persisted through multiple administrations of both political parties. The problem is institutional, not partisan or personal. Improvement in the quality and use of regulatory impact analysis will likely occur only as a result of legislative reform of the regulatory process. To achieve improvement, all agencies should be required to conduct thorough and objective regulatory impact analysis for major regulations and to explain how the results of the analysis informed their decisions.

Let me elaborate on each of these points.

WHY REGULATORY IMPACT ANALYSIS IS NECESSARY

We expect federal regulation to accomplish a lot of important things, such as protecting us from financial fraudsters, preventing workplace injuries, preserving clean air, and deterring terrorist attacks. Regulation also requires sacrifices; there is no free lunch. Depending on the regulation, consumers may pay more, workers may receive less, our retirement savings may grow more slowly due to reduced corporate profits, and we may have less privacy or less personal freedom. Regulatory impact analysis is the key tool that makes these tradeoffs more transparent to decision makers. So, understanding the effects of regulation has to start with sound regulatory impact analysis. A thorough regulatory impact analysis should do four things:

Assess the nature and significance of the problem that the agency is trying to solve, so the agency knows whether there is a problem that could be solved through regulation. If there is, the agency can tailor a solution that will effectively solve the problem.
Identify a wide variety of alternative solutions.
Define the benefits that the agency seeks to achieve in terms of ultimate outcomes that affect citizens’ quality of life, and assess each alternative’s ability to achieve those outcomes.
Identify the good things that regulated entities, consumers, and other stakeholders must sacrifice in order to achieve the desired outcomes under each alternative. In economics jargon, these sacrifices are known as “costs,” but just like benefits, costs may involve far more than monetary expenditures.

Without all this information, regulatory decisions are likely to be based on hopes, intentions, and wishful thinking rather than on reality. Regulators should not adopt a regulation without knowing whether it will solve a significant problem at a reasonable cost. Given the enormous influence regulation has on our day-to-day lives, decision makers have a moral responsibility to act based on knowledge of regulation’s likely effects, not just good intentions.

High-quality regulatory impact analysis is also essential for effective congressional oversight.

Mechanisms that provide for congressional approval or disapproval of individual regulations, such as the Congressional Review Act or the proposed REINS Act, presume that members of Congress have thorough knowledge about the root cause of the problem that the regulation seeks to solve and about the benefits and costs of alternatives. After all, how can legislators make a responsible decision to approve or disapprove a regulation if they do not know whether the regulation solves a real problem or whether there is a better alternative solution than the proposed regulation? Oversight of existing regulatory programs also presumes that congressional committees have good information about the outcomes that the regulation is intended to achieve and the results that are expected. A high-quality regulatory impact analysis provides that information.

Scrap Regulations that Thin the Ranks of Small Banks

Hester Peirce — Tue, 24 Feb 2015 16:41:29 -0500

Expert Commentary

Regulatory burdens allow big banks to flourish at the expense of their smaller competitors. This has become so obvious in the aftermath of the Dodd-Frank Act that even Goldman Sachs chairman Lloyd Blankfein admits to it.

The financial industry is an "expensive business to be in if you don't have the market share and scale," Blankfein remarked in a recent speech. Thanks to regulatory and technology demands, he said, "the barriers to entry [are] higher than at any other time in modern history."

Blankfein's comments were made in the context of Goldman's institutional client services business. But these concerns are broadly applicable across the financial services industry. There is nothing wrong with big, established banks gaining market share because they offer the mix and quality of products and services that customers want. There is something wrong, however, with these large banks beating off their smaller, newer rivals with a club fashioned by Washington legislators and regulators.

The Senate Banking Committee has considered the regulatory burden on community banks in two recent hearings. At one of these hearings, community bankers and credit union leaders testified about how their lending practices had been changed by Dodd-Frank.

Before Dodd-Frank, financial institutions were able to make loans to customers with whom they had long relationships and therefore had good reason to anticipate would be willing and able to repay. Now financial institutions are compelled to turn away these same customers because their loans would carry too much regulatory risk. Long-term, mutually beneficial banking relationships are crumbling as new regulations mount.

The federal regulators who appeared before the Banking Committee seemed unwilling to work to understand the depth of the problem. They complained that proposed legislative changes to help them better anticipate the costs and benefits of regulations before they adopt them would make writing rules more difficult.

It is true that rulemaking would be slowed if regulators are required to do the additional work upfront to answer the critical question of whether the benefits of a new rule outweigh the costs. But as I described in a 2012 study, the federal financial regulators charged with implementing Dodd-Frank are not doing the economic analysis that is required of other regulators. Doing so could save regulators the hassle of having to redo rules down the road when it becomes apparent that they are doing more harm than good.

In a new Harvard Kennedy School study of the impact of regulations on community banks, authors Marshall Lux and Robert Greene urge policymakers to embrace economic analysis as a way to "ensure better-designed regulation in the future and avert unintended consequences that jeopardize lending market vitality." The paper discusses the important role that small banks play in the lending markets and finds that community banks' share of U.S. banking assets has dropped more than 12% since the passage of Dodd-Frank. Community banks, especially the smallest ones, also have seen their market share decline in a number of lending markets.

Yet Sen. Elizabeth Warren posited at the Senate Banking Committee hearings that small banks' calls for regulatory relief are in fact veiled attempts by large banks to chip away at financial reform. After all, she argued, Dodd-Frank exempted community banks from certain provisions and authorizes regulators to make additional adjustments.

The problem is that exemptions don't always work. As Sen. Jeff Merkley explained, requirements can trickle down from big to small banks. He described how the following conversation often occurs between regulators and community bankers:

"Well, you must do X."

"Well, why is that?"

"Well, it's a best practice, and so you really don't legally have to do it, but we expect you to do it."

This scenario is consistent with the findings of a February 2014 survey of roughly 200 small banks published by the Mercatus Center at George Mason University. As one community bank respondent wrote, "Rules are written for the largest institutions in the country, yet the smaller institutions have to abide by the same rules."

Even when small banks receive explicit exemptions, we found that rules nonetheless impose additional burdens upon them. For example, although the Bureau of Consumer Financial Protection does not directly supervise community banks, the new agency was one of the biggest concerns for the small banks in our survey. Similarly, nearly half the banks in our survey reported being affected by the Durbin Amendment, a price cap on debit card processing fees that expressly does not apply to small banks. Small banks also expressed considerable frustration that Dodd-Frank's regulatory burdens were not producing any offsetting benefits for bank customers.

Poorly crafted regulations may warm some people's hearts because they enjoy sticking it to the financial industry. But the real victims of such regulatory vengeance are the individuals, companies, and communities that rely on banks of all sizes.

We should get rid of regulations that cost more than they are worth. This is a sensible way to ensure that financial institutions — large, small, well-established and new — can serve customers effectively and affordably.

Dark Dollar Dealings

William Luther — Thu, 26 Feb 2015 14:20:01 -0500

Expert Commentary

Yes, bitcoin helps illicit business dealings. But so does the $100 bill.

A U.S. District Court jury in Manhattan recently found Ross William Ulbricht guilty of seven charges, including narcotics conspiracy, engaging in a continuing criminal enterprise, conspiracy to commit computer hacking and money laundering conspiracy. Ulbricht is the founder of the Silk Road, an online marketplace where drugs and other illegal goods were listed for sale. The site was instrumental in the early success of the digital currency bitcoin. Ulbricht, who awaits sentencing in May, faces 20 years to life in prison.

The Silk Road, which Gawker described as “the Amazon of drugs,” launched in February 2011. A 2013 study by Nicolas Christin, assistant research professor at Carnegie Mellon University, confirmed that more than half of all items listed for sale on the site were illegal substances and that nearly half of all sellers were willing to ship goods anywhere in the world. Evidence presented at trial suggests the site generated more than $213 million in revenue. It was shut down in October 2013, after Ulbricht’s arrest.

Certificate-of-Need Laws: Implications for Virginia

Christopher Koopman, Thomas Stratmann — Thu, 26 Feb 2015 16:05:47 -0500

Publication

Thirty-six states and the District of Columbia currently limit entry or expansion of health care facilities through certificate-of-need (CON) programs. These programs prohibit health care providers from entering new markets or making changes to their existing capacity without first gaining the approval of state regulators. Since 1973, Virginia has been among the states that restrict the supply of health care in this way, with 19 devices and services—including acute hospital beds, magnetic resonance imaging (MRI) scanners, and computed tomography (CT) scanners—requiring a certificate of need from the state before the device may be purchased or the service may be offered.

CON restrictions are in addition to the standard licensing and training requirements for medical professionals, but are neither designed nor intended to ensure public health or ensure that medical professionals have the necessary qualifications to do their jobs. Instead, CON laws are specifically designed to limit the supply of health care, and are traditionally justified with the claim that they reduce and control health care costs. The theory is that by restricting market entry and expansion, states might reduce overinvestment in facilities and equipment. In addition, many states—including Virginia—justify CON programs as a way to cross-subsidize health care for the poor. Under these “charity care” requirements providers that receive a certificate of need are typically required to increase the amount of care they provide to the poor. In effect, these programs intend to create quid pro quo arrangements: state governments restrict competition, increasing the cost of health care for some, and in return medical providers use these contrived profits to increase the care they provide to the poor.

However, these claimed benefits have failed to materialize as intended. Recent research by Thomas Stratmann and Jacob Russ demonstrates that there is no relationship between CON programs and increased access to health care for the poor. There are, however, serious consequences for continuing to enforce CON regulations. In particular, for Virginia these programs could mean approximately 10,800 fewer hospital beds, 41 fewer hospitals offering MRI services, and 58 fewer hospitals offering CT scans. For those seeking quality health care throughout Virginia, this means less competition and fewer choices, without increased access to care for the poor.

The Rise of CON Programs

CON programs were first adopted by New York in 1964 as a way to strengthen regional health planning programs. Over the following 10 years, 23 other states adopted CON programs. Many of these programs were initiated as “Section 1122” programs, which were federally funded programs providing Medicare and Medicaid reimbursement for certain approved capital expenditures. Virginia enacted its first CON program in 1973. The passage of the National Health Planning and Resources Development Act of 1974, which made certain federal funds contingent on the enactment of CON programs, provided a strong incentive for the remaining states to implement CON programs. In the seven years following this mandate, nearly every state without a CON program took steps to adopt certificate-of-need statutes. By 1982 every state except Louisiana had some form of a CON program.

In 1987, the federal government repealed its CON program mandate when the ineffectiveness of CON regulations as a cost-control measure became clear. Twelve states rapidly followed suit and repealed their certificate-of-need laws in the 1980s. By 2000, Indiana, North Dakota, and Pennsylvania had also repealed their CON programs. Since 2000, Wisconsin has been the only state to repeal its program.

Virginia remains among the 36 states, along with the District of Columbia, that continue to limit entry and expansion within their respective health care markets through certificates of need. On average, states with CON programs regulate 14 different services, devices, and procedures. Virginia’s CON program currently regulates 19 different services, devices, and procedures, which is more than the national average. As figure 1 shows, Virginia’s certificate-of-need program ranks 11th most restrictive in the United States.

Figure 1. Ranking of States by Number of Certificate-of-Need Laws
Note: Fourteen states either have no certificate-of-need laws or they are not in effect. In addition, Arizona is typically not counted as a certificate-of-need state, though it is included in this chart because it is the only state to regulate ground ambulance services.

Do CON Programs Control Costs and Increase the Poor’s Access to Care?

Many early studies of CON programs found that these programs fail to reduce investment by hospitals. These early studies also found that the programs fail to control costs. Such findings contributed to the federal repeal of CON requirements. More recently, research into the effectiveness of remaining CON programs as a cost-control measure has been mixed. While some studies find that CON regulations may have some limited cost-control effect, others find that strict CON programs may in fact increase costs by 5 percent. The latter finding is not surprising, given that CON programs restrict competition and reduce the available supply of regulated services.

While there is little evidence to support the claim that certificates of need are an effective cost-control measure, many states continue to justify these programs using the rationale that they increase the provision of health care for the poor. To achieve this, 14 states—including Virginia—include some requirement for charity care within their respective CON programs. This is what economists have come to refer to as a “cross subsidy.”

The theory behind cross-subsidization through these programs is straightforward. By limiting the number of providers that can enter a particular practice and by limiting the expansion of incumbent providers, CON regulations effectively give a limited monopoly privilege to providers that receive approval in the form of a certificate of need. Approved providers are therefore able to charge higher prices than would be possible under truly competitive conditions. As a result, it is hoped that providers will use their enhanced profits to cover the losses from providing otherwise unprofitable, uncompensated care to the poor. In effect, those who can pay are charged higher prices to subsidize those who cannot.

In reality, however, this cross-subsidization is not occurring. While early studies found some evidence of cross-subsidization among hospitals and nursing homes, the more recent academic literature does not show evidence of this cross-subsidy taking place. The most comprehensive empirical study to date, conducted by Thomas Stratmann and Jacob Russ, finds no relationship between certificates of need and the level of charity care.

The Lasting Effects of Virginia’s CON Program

While certificates of need are neither controlling costs nor increasing charity care, they continue to have lasting effects on the provision of health care services both in Virginia and in the other states that continue to enforce them. However, these effects have largely come in the form of decreased availability of services and lower hospital capacity.

In particular, Stratmann and Russ present several striking findings regarding the provision of health care in states implementing CON programs. First, CON programs are correlated with fewer hospital beds. Throughout the United States there are approximately 362 beds per 100,000 persons. However, in states such as Virginia that regulate acute hospital beds through their CON programs, Stratmann and Russ find 131 fewer beds per 100,000 persons. In the case of Virginia, with its population of approximately 8.26 million, this could mean about 10,800 fewer hospital beds throughout the state as a result of its CON program.

Moreover, several basic health care services that are used for a variety of purposes are limited because of Virginia’s CON program. Across the United States, an average of six hospitals per 500,000 persons offer MRI services. In states such as Virginia that regulate the number of hospitals with MRI machines, the number of hospitals that offer MRIs is reduced by 2.5 per 500,000 persons. This could mean 41 fewer hospitals offering MRI services throughout Virginia. The state’s CON program also affects the availability of CT services. While an average of nine hospitals per 500,000 persons offer CT scans, CON regulations are associated with a 37 percent decrease in these services. For Virginia, this could mean about 58 fewer hospitals offering CT scans.

Conclusion

While CON programs were intended to limit the supply of health care services within a state, proponents claim that the limits were necessary to either control costs or increase the amount of charity care being provided. However, 40 years of evidence demonstrate that these programs do not achieve their intended outcomes, but rather decrease the supply and availability of health care services by limiting entry and competition. For policymakers in Virginia, this situation presents an opportunity to reverse course and open the market for greater entry, more competition, and ultimately more options for those seeking care.

Previewing the President’s Announcement Changing the Fiduciary Standard

Hester Peirce — Tue, 24 Feb 2015 15:57:55 -0500

Expert Commentary

In crafting the rule and understanding the consequences, DOL should also work with the Securities and Exchange Commission. As has too often been the case in financial services regulation, good intentions could produce bad results for Americans trying to save for retirement.

The Department of Labor appears to be moving forward with its fiduciary duty proposal. As DOL continues to contemplate change in this area, it should carefully consider the potential consequences of any changes, including the effects on investors of modest means.

In crafting the rule and understanding the consequences, DOL should also work with the Securities and Exchange Commission. As has too often been the case in financial services regulation, good intentions could produce bad results for Americans trying to save for retirement.

Cheap Avocados, the Super Bowl XLIX, and Regulatory Reforms

Patrick McLaughlin, Candace McTeer — Sun, 22 Feb 2015 13:39:03 -0500

Expert Commentary

If you missed this commercial in the Super Bowl, it's official: Mexican avocados are on national television. But they could have stayed on the bench, but for the Free Trade Agreement with North America (TLC) and some actions by the Inspection Service Animal and Plant United States Department of Agriculture (APHIS, for its acronym in English), who eliminated trade barriers that had been present for decades. It is clear that these actions increased the welfare of American consumers, avocado growers in Mexico, and football fans in the country.

However, is a shame that this regulatory reform occurred only after NAFTA forced to do: federal regulatory agencies - as APHIS- are free to review and amend regulations, if changing its own rules will benefit consumers. This is as simple as reviewing the problem that the regulation seeks to correct. Does the problem still exists? Is there any evidence that the regulation it is solving? If the answer to either of these questions is no, it's time to change the rules.

In this case, regulating trade between Mexico avocado and the United States began in 1914. The argument for these trade barriers resided in controlling pests, although actors with special interests also played an important role. Based on the FTA in 1994, Mexican avocado growers naturally wanted to export their product to the United States. Despite the protests of farmers in California, trade barriers avocado were phased out. In 1997, avocados of selected Mexican producers were approved for sale in 31 states between October 15 and April 15, because it is less likely that pests survive the cold winter.

The Mexican government asked the Department of Agriculture to allow the importation of Mexican avocados permanently to the 50 states. At the same time, not coincidentally, the Mexican government enacted trade barriers for imports of maize from the United States. APHIS published a study on pest risk 2004 concluding that removing the barriers would not pose a risk, thus initiating the process of regulatory change. That same year, APHIS allowed export throughout the year to all states of the Mexican avocado from places where inspectors of the Department of Agriculture had a presence, although the producers of California, Hawaii and Florida had two-year grace period before the Mexican avocados were allowed in their markets.

Forecasts drastically underestimated the benefits of these changes. In the 2004 APHIS predicted avocado consumption would increase 9 percent due to these changes. However, rose consumption 147.1 percent in the last decade. APHIS also predicted that California producers suffer a loss 7.3 percent in sales. However, sales of California avocados increased 18.4 percent during the same period. The increase in demand for avocados benefit all producers, as consumers developed a taste for the product.

The initial prognosis for lower prices avocado was also wrong. APHIS predicted that prices would fall 20.6 percent. The reality is that avocado prices have remained relatively constant with very small fluctuations from year to year. Again, the law of supply and demand works. Remove barriers to trade dramatically increased the supply of Mexican avocados. Simultaneously, consumers increased their demand. If barriers had been kept – ie the offer we would have increased- This increase in demand would have caused an increase in prices. Regulatory reform helped neutralize the possible price increases.

^{Data Source: Hass Avocado Board}

While US consumers have enjoyed relatively lower prices, Mexican farmers have also benefited. APHIS predicted that imports of Mexican avocados would increase 260 percent. However over the last decade consumption grew Mexican avocados 1377 percent. At the same time, there have been no major cases of pests associated with avocado since these restrictions were eliminated.

As a result, sales continue to rise and millions of American consumers are benefited. If more regulatory agencies consider reviewing the evidence and the results of its rules, could create similar benefits for other products and markets.

Mindless Yes, Austerity No: The Real Budget Problem

Charles Blahous — Thu, 19 Feb 2015 16:37:12 -0500

Expert Commentary

When his budget proposals were recently released, President Obama stated, “I want to work with Congress to replace mindless austerity with smart investments that strengthen America.” That quotation neatly summarizes how the White House is framing the basic trade-off faced in federal budgeting: between “austerity” (i.e., severe cuts in spending and deficits) and “investments” (i.e., spending on things needed to support future prosperity). The real trade-off we face, however, is fundamentally different.

It should be recognized up front that the president makes an important point. To see this, let’s put aside for a moment the semantic battle between right and left over whether to call government outlays “spending” (with its negative connotations) or “investments” (with its positive ones). Let’s also put aside important policy questions such as the relative efficiency of public vs. private investments in areas ranging from transportation infrastructure to education. The president is correct to suggest there has been a protracted decline in the share of our economic output going toward this type of federal expenditure.

The graph below shows total federal domestic appropriations as a percentage of GDP. This essentially includes (among others) the categories of spending described in the president’s budget as “investing in America’s future,” among them education, manufacturing research, and transportation infrastructure. This does not include mandatory “auto-pilot” spending such as Social Security, Medicare, and interest payments on the debt. The long-term trend for appropriated non-defense spending has indeed been down, at least as a share of our economic output, despite surging after President Obama took office. Under current Congressional Budget Office projections, this downward trend will continue: less of our output will be going toward such federal expenditures than was formerly the case.

This is not because we have been shifting our resources from domestic needs to fight wars. Spending on defense did increase in the 2000s after the 9/11 attacks, but overall the relative decline in defense spending has been even steeper than for domestic appropriations. In other words this has not been a shift of butter to guns; quite the opposite, as the next graph shows.

Is it correct, then, to say that our ability to spend/invest in the areas favored by the White House has been constrained by the practice of fiscal austerity? Decidedly not. Federal deficit spending has instead risen persistently, soaring to a post-WWII high in the first years of the Obama Administration. It has abated in the last few years but CBO finds it will resume rising in the years ahead.

These historically large deficits have produced historically large debt. Federal indebtedness to the public is now 74 percent of GDP, over twice the share of our economy that it was just seven years ago. CBO projects it will rise to roughly 79 percent of GDP by 2025, a level not seen this side of a world war.

Taken together, these graphs reveal that the fundamental trade-off we face is not between spending on education/innovation/infrastructure on the one hand and “mindless austerity” on the other. To the contrary, prioritization of such federal spending has declined during the same period that federal indebtedness has soared to historic highs.

Is this happening because Americans, specifically rich Americans, aren’t being taxed enough? No. In 2014 federal revenues equaled 17.5 percent of GDP, a little above the average (17.4 percent) over the last fifty years. Looking forward to when various current-law tax increases fully kick in, CBO projects revenue collections will reach 18.3 percent of GDP, well above historical norms. In other words, federal debt will be at historic highs while appropriated spending is lower than historically normal and taxation is higher than historically normal. Clearly these variables alone don’t explain what is going on.

Our debt has exploded because total federal spending, beyond those areas many define as “investments,” is rising faster than our economic output or our revenue base can sustain.

This unsustainable spending growth occurs because we continue to increase spending on Social Security, Medicare, Medicaid, and now on the massive expansion of federal health spending embodied in the Affordable Care Act. Growth in these four categories of federal entitlement spending accounts for our whole fiscal imbalance.

This last graph shows the essence of our budget problem. It reveals that the barriers confronting those who want to see more federal spending on education and infrastructure have little to do either with austerity or with insufficient taxes paid by rich people. Both taxation and debt are heading to historic highs despite the relative declines in the aforementioned spending. The reason we are spending relatively less on defense, education, and highways is purely because we are continually spending more on Medicare, Medicaid, Social Security, and the ACA.

A dialogue between left and right will not change this dynamic because the areas of strongest disagreement between left and right—taxation and alleged austerity—are not at the root of the problem. The dynamic will only change if the conversation within the political left changes; specifically, when left-of-center thinkers decide that rising entitlement spending is a problem because it steadily degrades our capacity to spend on other priorities. This would not require those on the left to abandon their philosophical commitment to Social Security, Medicare, Medicaid, or the ACA: only that they recognize these programs cannot perpetually grow faster than our ability to finance them, without undesirable consequences for the rest of the budget.

To date this conversation has yet to be seriously engaged. Certain narrative fictions persist, for example that the only thing preventing us from having enough money to spend on highways and community colleges is that the rich aren’t paying enough taxes. Though this fiction may suit certain political interests, it does not serve the interests of those serious about addressing other societal needs. Even if one believed this narrative, the fact remains that our abilities to tax and to issue debt are not unlimited. Plus, there are practical limitations that the political center will impose which the political left, left to its own devices, would not. It is not realistic to believe that our untenable entitlement spending growth path can remain in place, and that we will also find more money to invest in roads and bridges.

The evidence of these dynamics is clearly visible. In 2011, Democrat and Republican negotiators both well understood that entitlement spending growth was driving our fiscal imbalance. Still they could not agree on even modest corrections. Raising taxes on the rich, as President Obama succeeded in doing in early 2013, has not meaningfully changed the long-term trend. Even with these tax increases in hand, the burden of meeting fiscal targets under the Budget Control Act is falling primarily on the discretionary spending accounts, especially defense. This has meant across-the-board spending cuts (sequestration), mostly in appropriated spending, while entitlement spending continues to rise unchecked.

As long as spending growth in Social Security, Medicare, Medicaid and the ACA continues unabated, we can expect the share of national resources devoted to other federal government priorities to continue to decline. As former President Clinton might say, “it’s arithmetic.”

The Internet of Things and Wearable Technology: Addressing Privacy and Security Concerns without Derailing Innovation

Adam Thierer — Thu, 19 Feb 2015 11:22:18 -0500

Publication

This paper highlights some of the opportunities presented by the rise of the so-called “Internet of Things” and wearable technology in particular, and encourages policymakers to allow these technologies to develop in a relatively unabated fashion. As with other new and highly disruptive digital technologies, however, the Internet of Things and wearable tech will challenge existing social, economic, and legal norms. In particular, these technologies raise a variety of privacy and safety concerns. Other technical barriers exist that could hold back IoT and wearable tech — including disputes over technical standards, system interoperability, and access to adequate spectrum to facilitate wireless networking — but those issues are not dealt with here.

The better alternative to top-down regulation is to deal with these concerns creatively as they develop using a combination of educational efforts, technological empowerment tools, social norms, public and watchdog pressure, industry best practices and self-regulation, transparency, and targeted enforcement of existing legal standards (especially torts) as needed. This “bottom-up” and “layered” approach to dealing with problems will not preemptively suffocate experimentation and innovation in this space. This paper concludes by outlining these solutions.

Finally, and perhaps most importantly, we should not overlook the role societal and individual adaptation will play here, just as it has with so many other turbulent technological transformations.

Read Full Journal Article

Ex-Im Should Go

Veronique de Rugy — Thu, 19 Feb 2015 10:44:16 -0500

Expert Commentary

Politicians are hoarders. Instead of filling up their homes with junk and refusing to throw any of it away, they surround themselves with bloated government programs and come up with excuses to not get rid of any of them. Proposing “reform” is one of their favorite tactics to save rotting government programs that should be set out by the curb.

Rep. Stephen Fincher (R-Tenn.) is the latest example of a politician exploiting the popular ideas of “accountability” and “transparency” to protect a government program that should have been terminated decades ago. Fincher and 57 Republican co-sponsors introduced “reform” legislation that would reauthorize the Export-Import Bank (Ex-Im)—created in 1934 to subsidize exports to the Soviet Union—through September 2019.

Last week, Fincher made the grossly misleading claim that “Since its inception, the Ex-Im Bank has assisted in advancing our exports and has been an American job creator, filling a critical gap in the market.” As research by the Government Accountability Office and others demonstrates, Ex-Im simply isn’t the job creator that it claims to be. The bank itself reported that only 16 percent of its beneficiaries were seeking to overcome limitations in private sector export financing. And in cases where the private sector didn’t think it was a good idea to finance a deal, why should taxpayers have backed it instead?

The truth is that the bulk of Ex-Im’s activities benefit large, politically connected companies. Indeed, over 65 percent of Ex-IM Bank’s loan guarantee program benefits aerospace giant Boeing, which currently has a market cap of $106 billion. As Ex-Im critic Tim Carney notes, the company recently “announced $1.47 billion in fourth-quarter profits, 19 percent higher than last year, along with a record backlog of airplane orders that stretches eight years.” It certainly looks like Boeing should be able to meet its financing needs without help from taxpayers—as should its clients. In fact, several of them have come out a said so themselves.

Fincher also says that Ex-Im promotes exports and, hence economic growth. This, too, is misleading. Ex-Im Bank backs barely 2 percent of U.S. exports, which means that 98 percent of exports occur without it. Wouldn’t most of the exports the bank backed have happened anyway?

What Fincher fails to acknowledge are the many unseen victims of the bank. First, Ex-Im apologists claim that it returns money to Treasury, but the Congressional Budget Office projects that taxpayers will have to shoulder $2 billion in losses over the next decade. Even when there aren’t losses, it merely shows that the private sector could have handled the financing. Second, Ex-Im places the 99.96 percent of U.S. small businesses that it doesn’t subsidize at a competitive disadvantage because the subsidies artificially lower costs for privileged competitors. Indeed, the Cato Institute’s Dan Ikenson has shown that 189 industries are net losers due to Ex-Im’s subsidies.

Sadly, the privileges Ex-Im extends to the few come at the expense of countless American firms and their workers. Unsubsidized firms may see reduced revenues—and their employees may see their hours cut, their salaries stagnate, or their jobs simply vanish because their employers cannot compete on the uneven playing field created by the federal government.

But Americans never hear the darker side of the story because Ex-Im Bank and its corporate and political patrons willfully ignore it. And contrary to what Fincher would like you to believe, his so-called “reform” bill won’t create a happier ending. None of his proposed reforms address the bank’s fundamental flaw that it’s inherently redistributionist nature leads to the political picking of winners and losers. Instead, the Fincher bill would hire more bureaucrats to oversee Ex-Im Bank and require various government entities to issue reports, which would just add to the running stack that Congress already routinely ignores. Other provisions of the bill are merely reincarnations of “reform” included in the in the 2012 Ex-Im reauthorization bill. Together, they make for no real changes.

It is time for Congress to start cleaning up its house and agree to end programs that need to go away. Enough with the pretense of reform.

Presidents' Politicized Funding Priorities

Thomas Stratmann, Joshua Wojnilower — Thu, 19 Feb 2015 10:57:35 -0500

Expert Commentary

The Congressional Budget Office recently projected that discretionary outlays by the federal government will exceed $12.5 trillion over the next decade. With such large sums at stake, should we grant greater control over the bureaucracy to presidents?

For many scholars and political observers, the answer is clearly "yes." Legislators have a powerful incentive to win their next election, and the most influential members can use the power of the purse to secure their political futures. Over the long term, this can lead to a seemingly unfair distribution of federal funding across the nation. Presidents, so the thinking goes, will limit Congress's inefficient spending due to their nationwide constituency.

Our new research, however, demonstrates that presidents actually target politically important constituencies with federal funds just as much as Congress does. In 2009 and 2010, congressional districts within strongly Democratic states received approximately 50 percent more federal project-grant funding than comparable districts within strongly Republican states.

Although Congress authorizes the overall amount of project-grant funding, federal agencies exercise discretion as to the particular distribution. Presidents then exert influence over the federal agencies through their political appointees. This funding advantage represents $26 million more per district, or $37.50 more per capita, per year on average.

While these sums seemingly pale in comparison with the trillions noted above, imagine the difference $100 million could make for your district over the next four years. Would those changes influence your vote in an election? The evidence suggests that most, if not all, presidential administrations believe it might.

Our own research covers only two calendar years due to data limitations, but it is consistent with the results of several other studies that used longer time horizons as well as different combinations of presidential and congressional control. The presidential incentives driving our main results appear persistent regardless of which administration or party is in office.

This research, while significant in its own right, highlights important principles for a broader array of decisions from mandating vaccinations to education reform. In response to an undesirable outcome, such as a seemingly unfair distribution of federal funding, our initial inclination is often to make stark personnel changes in the decisionmaking body. Such action generally presumes the undesirable outcome was due to individual incompetency or greed. In contrast, our research demonstrates that institutional incentives can largely determine outcomes regardless of which individual or individuals are in charge. We should therefore seek to understand existing institutional incentives better before we make dramatic changes.

Over the coming decade, presidents and Congresses will influence the distribution of at least $12.5 trillion in federal funds. Our results show that presidents target politically important constituencies to influence voter behavior in presidential and congressional elections. Hence, granting greater control over the bureaucracy to presidents will not necessarily result in a more efficient distribution of federal funds. Perhaps scholars and pundits should reconsider whether granting presidents greater control over the bureaucracy is truly preferable.

Florida Fiscal Policy: Responsible Budgeting in a Growing State

Randall G. Holcombe — Thu, 26 Feb 2015 13:03:11 -0500

Publication

In a comprehensive assessment of Florida’s fiscal policy, Dr. Randall Holcombe of Florida State University examines the state’s education and health care spending, pension system, taxes and budget, land use regulation, homeowners insurance, and many other key policies.

To read the entire paper, please download the PDF. To view individual sections by issue, see below.

Today’s Solutions, Tomorrow’s Problems

Christopher Koopman — Tue, 17 Feb 2015 15:15:24 -0500

Publication

In his lead essay, Matthew Feeney provides a full-throated defense against the rush to regulate the new, innovative companies making up the “sharing economy.” Many will find his arguments both familiar and welcome, while others will find it unfair to competitors and potentially unsafe for consumers. This divide is ultimately the central feature of most policy debates surrounding the rapid rise of the sharing economy, and the growth of firms like Uber, Lyft, and Airbnb.

Though many aspects of this debate merit greater discussion, I want to limit my comments to ridesharing and the designation of “Transportation Network Companies.”

Some states – including Colorado, California, and (most recently) Virginia – seem to have struck a balance between the two sides of the debate. These states legalized ridesharing services under the designation of “Transportation Network Companies” (TNCs), while also creating specific regulatory requirements in the name of protecting consumers. Feeney is warranted in his skepticism of these attempts, as well as in his belief that these new laws will create opportunities for rent-seeking and regulatory capture in the future.

However, I would take his apprehension one step further and argue that Feeney’s fears are being realized in real time, and it is the consumer who is left worse because of it. As Freeney notes, the TNC designation is a win for incumbent ridesharing companies – not only because they can now operate legally, but because these new regulations limit the ability of smaller competitors to enter the market. While current ridesharing companies seem to welcome the regulatory protection today, it may prove to be the greatest impediment to continued growth and development of ridesharing in the future.

In terms of limiting competition, the TNC designation is an instant win for incumbents like Uber and Lyft. Organizing and running a successful startup is expensive and complicated enough, but the TNC regulations simply add additional barriers that make it costly for smaller companies to enter the market. Under Virginia’s pending TNC laws, for example, any company wishing to offer ridesharing services must pay the state a $100,000 licensing fee and $60,000 every year thereafter. These costs are relatively insignificant when viewed in the context of companies valued in the billions of dollars; however, they may be insurmountable for most startups looking to begin their own ridesharing venture to compete with those established firms.

Many argue that limiting those who can enter the market in this manner serves some public benefit. After all, limiting entry to protect consumers was the driving justification behind the taxicab regulations that persist throughout the United States. In fact the opposite tends to be true.

As I have noted in my research (with Adam Thierer and Matthew Mitchell), when competition is limited, consumer welfare suffers. Limiting the number of entrants and the ways in which they can compete, all in the name of “consumer protection,” actually undermines both the competitive rivalry within the industry as well as the incentive for firms to distinguish themselves in the level of customer service they provide.

As a result, consumers are often left with higher prices, fewer choices, and lower quality service. Barriers to entry mean that incumbent firms have little need to focus on satisfying consumer desires; instead, their success depends upon their ability to court regulators and retain regulatory protections. Over time, barriers to entry ensure that firms become sluggish, lazy, and less alert to the sorts of entrepreneurial innovations that drive consumers to purchase products or use their services.

The general lack of competition caused by taxi regulations explains the absence of customer care among taxicabs that created the opportunity for ridesharing to become as popular as it is today. Conversely, it is the current state of vibrant competition among ridesharing services that has reduced prices and improved conditions for drivers. It has also brought us on-demand ice cream,puppies, and toilet paper.

Moreover, while firms such as Uber and Lyft may be more than happy to accept the TNC regulations as a way to limit competition today, it may ultimately prove fatal to their own continued growth and development tomorrow. While Feeney believes this classification may limit Uber’s ability to grow outside of ridesharing, UberRUSH, UberMovers, and UberESSENTIALS all demonstrate that the company has moved far beyond simply driving people from one point to another.

Instead, I believe that the TNC designation will ultimately limit the ability of firms to grow within ridesharing. Specifically, the TNC classification is built on two basic assumptions about the relationship between the transportation network company and the cars being used to transport passengers: First, it assumes the transportation network company does not own the car. Second, it assumes that a person drives the car. For those states that have adopted the TNC designation, these two assumptions permeate their regulations.

While this may seem innocuous or benign, these regulations may have unintentionally foreclosed the opportunity for firms like Uber or Google to continue to push the margins of how ridesharing is provided. In particular, the issue of who owns or drives the cars takes on an entirely different character in light of Uber’s recent partnership with Carnegie Mellon University to research autonomous technology, or rumors that Google may offer its own ride-hailing service using autonomous cars.

Bringing these services to consumers would necessitate redefining the term “transportation network company.” Regulators would need to rethink how these companies may interact with drivers, or whether drivers are required at all. Regardless of how those questions are resolved, these issues would need to be re-debated each time ridesharing outgrows its current classification.

In addition, given the standard approach among states that otherwise yet-to-be-regulated ridesharing is illegal, those able to employ on-demand autonomous vehicles would first need permission before doing so. This would create a constant cycle of starts and stops, as regulators continually work to catch up to the sharing economy. Of course, this is all dependent on any given regulator’s willingness to adapt and evolve with a changing economy. If history is any guide, this may be the biggest hurdle to overcome.

Consider the destructive effects that regulation of this nature will have on a rapidly evolving space like the sharing economy. The market, as a process, is driven by entrepreneurs discovering new ways to meet consumer needs. The sharing economy, and its use of technology, has accelerated this process compared to many other industries. Regulation by its very nature imposes a type of stasis on this dynamic process. The juxtaposition between the market process and regulation is magnified by the speed with which the sharing economy is continually antiquating the attempts to regulate it.

Does this mean that doing nothing will leave the sharing economy somehow unregulated? Certainly not.

There are already a plethora of laws in existence – including both civil and criminal – that cover liability, theft, fraud, and other potential harms that many of these new regulations seek to address. Policymakers should first apply the existing legal apparatus before attempting to create a new one. And when the existing framework is unworkable they should, as Adam Thierer explains, strive for simple legal principles rather than complex “technology-specific, micromanaged regulatory regimes.” The watchword going forward should be “permissionless innovation.”

In sum, Feeney is correct in his assertion that regulators should resist the urge to impose old taxicab regulations on – or write new regulations for – the sharing economy. However, regulators should not do so because the industry deserves the chance to compete, but because it will make competition healthier and consumers better off. The sharing economy of today must be allowed to compete with and challenge the business models of the past. And – just as important – tomorrow’s innovators must be able to challenge today’s upstarts, who will soon enough be the incumbents.

Occupational Licensing Is Short-Sighted, Hurts Low-Income Workers

Edward J. Timmons , Anna Mills — Wed, 18 Feb 2015 13:56:37 -0500

Expert Commentary

The latest reading of the labor market in the United States from the Bureau of Labor Statistics brings to mind a veteran prize fighter trying to pull himself up from the mat after a dizzying flurry of blows. An easy way to help the U.S. labor market regain its championship form would be a broad reconsideration of occupational licensing. We, along with countless others, applaud the president for including $15 million in his recent budget to study the rationale for occupational licensing in the United States.

The scope of workers directly affected by U.S. occupational licensing laws has steadily increased over the last several decades. Today, nearly 30 percent of the workforce is required to obtain a license to work at their current place of employment. Occupational licensing laws make it illegal to work in a profession without first meeting specific requirements (such as a specific degree or passing a test).

Adam Smith's Wisdom

Donald J. Boudreaux — Tue, 17 Feb 2015 14:41:46 -0500

Expert Commentary

Since 2013, I've taught an annual seminar at George Mason University on Adam Smith's monumental 1776 book, “An Inquiry Into the Nature and Causes of the Wealth of Nations” — the book that is commonly and correctly credited with launching the discipline of modern economics.

Adam Smith (1723-90) was a Scottish moral philosopher and one of the most celebrated scholars in the Western world during his lifetime.

Smith was also a spectacularly good writer. Even today, Smith's prose remains sparkling and accessible. I want to share some of the many gems to be found in “The Wealth of Nations”:

“All [government-created] systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.”
•••
“The property which every man has in his own labour ... is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour, is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, so it hinders the others from employing whom they think proper. To judge whether he is fit to be employed, may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver lest they should employ an improper person, is evidently as impertinent as it is oppressive.”
•••
“There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”
•••
“Every man is, no doubt, by nature, first and principally recommended to his own care; and as he is fitter to take care of himself than of any other person, it is fit and right that it should be so.”
•••
“The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
•••
“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”

Three Ways to Level Economic Playing Field

Matthew Mitchell — Tue, 17 Feb 2015 14:32:28 -0500

Expert Commentary

President Barack Obama recently extolled the virtues of what he called “middle-class economics” or “the idea that this country does best when everyone gets their fair shot, everyone does their fair share, and everyone plays by the same set of rules.” The president is on to something.

Ours is not a country where everyone plays by the same set of economic rules. Many longstanding federal and state policies privilege some businesses and not others. This tilted playing field isn’t just unfair; it’s grossly inefficient. It undermines competition, discourages innovation, and prompts businesses to expend billions of dollars in socially wasteful efforts to win the favor of politicians. But it need not be this way.

A serious agenda to level the economic playing field appeals to both the progressive impulse to stick up for the powerless and the conservative urge to check government’s scope and power. The president and Congress will soon deliver more detailed agendas. Here are three ways they could level the economic playing field:

First, end corporate bailouts: The first time the federal government rescued a single private company (Lockheed Aircraft) was in 1971. It bailed out a railroad and Chrysler by the end of the ’70s; Continental Illinois National Bank in the ’80s; and the savings-and-loans in the late ’80s/early-’90s. But the big bailouts came in 2008-09 when the government rescued hundreds of insurance companies, financial institutions, and auto manufacturers. These bailouts give corporations the (correct) impression that politicians in Washington will rescue them if they get into trouble. That encourages risky behavior, making bailouts a self-fulfilling prophecy.

The Dodd-Frank regulatory overhaul may have strengthened this perception by directing the Federal Reserve to designate certain firms “systemically important financial institutions,” broadcasting the federal government’s belief that these firms are important enough to save. A good first step would be to repeal this designation.

A next step could be a constitutional amendment prohibiting bailouts. With the knowledge that they alone bear the costs of their mistakes, firms would be more prudent, and the entire financial system would be more secure.

Second, end trade protectionism: Scientific consensus can be elusive. But the closest we get in economics is the consensus view that barriers to trade are bad for an economy. Tariffs, quotas, and domestic subsidies stand in the way of competition, of lower prices, and of higher standards of living. These barriers pad the pockets of a few favored firms at the expense of millions of consumers and businesses who must pay more for the protected products.

The typical congressperson is generally in favor of freer trade but wants to make exceptions for hometown industries. For the better part of a century, the way to get around congressional parochialism has been to give the president “fast track” trade negotiating authority: Congress lets the president negotiate trade agreements and agrees to simply vote up or down without amendments. Democrats first came up with this idea. They should embrace it once again.

Congress can end protectionism in other ways. They could start by letting the Export-Import Bank’s authorization expire this summer. Taxpayers shouldn’t guarantee a loan that J.P. Morgan makes to Air India to buy a Boeing. Then-Senator Obama was right to call this corporate welfare, and he is wrong to have abandoned that view.

Third, eliminate the grab bag of subsidies to agribusiness: Everyone loves farmers. Many of us have some in the family. But that’s no reason to favor them with special privileges, especially since the average farm household makes 53 percent more than the average U.S. household. But agribusinesses enjoys a host of special privileges: price supports, tariffs, quotas, insurance subsidies, overseas marketing subsidies, and favorable tax treatment.

All of this should go.

There’s much more. Congress could end both traditional and “green” energy subsidies; it could reform corporate taxes by closing loopholes; and it could shut down programs that promote specific industries like tourism, shipping, and air travel.

It’s easy to oppose “special interest” politics. It’s much harder to get down to specifics and recommend that particular programs go. With a detailed and specific agenda to level the playing field, we could turn the president’s words into deeds.

Energy Conservation Standards For Residential Dishwashers

Robert J. Michaels — Wed, 25 Feb 2015 11:54:34 -0500

Publication

I. INTRODUCTION

A. The Proposed Rule

On December 19, 2014, the US Department of Energy (DOE) issued a Notice of Proposed Rulemaking (NOPR) on Energy Conservation Standards for Residential Dishwashers.¹ The proposed rule has been authorized under Title III, Part B, of the Energy Policy and Conservation Act of 1975 (EPCA), which authorized the “Energy Conservation Program for Consumer Products Other Than Automobiles.”² These products include residential dishwashers. Any new or amended standard issued under the act must be designed to “achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified” and must result in a “significant conservation” of energy.³ The NOPR details energy conservation standards for dishwashers that will become effective in 2019. It also summarizes studies by the DOE and others that purportedly show that the NOPR satisfies EPCA’s “maximum improvement” and “significant conservation” criteria. Current dishwasher standards were established in the DOE’s 2012 direct final rule, based on submittals by manufacturers, energy and environmental groups, and consumer groups and effective for products manufactured on or after May 30, 2013.⁴ EPCA requires that, within 6 years of issuing a final rule, the DOE shall publish either (1) a notice of determination that amended standards are not needed or (2) a NOPR that includes a new proposed standard.

B. Purpose of this Comment

The Regulatory Studies Program of the Mercatus Center at George Mason University is dedicated to advancing knowledge about the effects of regulation on society. As part of its mission, the program conducts careful and independent analyses that employ contemporary economic scholarship to assess rulemaking proposals and their effects on the economic opportunities and the social wellbeing available to all members of American society. This comment addresses the efficiency and efficacy of this proposed rule from an economic point of view. Specifically, it examines how the proposed rule may be improved by more closely examining the societal goals the rule intends to achieve and whether this proposed regulation will successfully achieve those goals. In many instances, regulations can be substantially improved by choosing more effective regulatory options or more carefully assessing the actual societal problem.

C. Summary of Comment

The NOPR provides, at best, a questionable rationale for the proposed rule. This comment concentrates on three aspects of the proposal:

1. Treatment of so-called “market barriers” to energy and economic efficiency. The NOPR’s implied estimate of consumers’ abilities to make rational decisions is significantly at variance with market reality. Markets for efficiency (in part through other DOE policies) have developed to a level at which we must rethink the presumption held by many economists: that market barriers still make governmental decisions more likely than private decisions to produce efficient outcomes.⁵

2. Uncertainty about benefits and costs. Uncertainty about magnitude of both benefits and costs is pervasive in the DOE’s analysis of the proposed rule. These uncertainties mean that small errors can change the benefit-cost balance. Some of these errors are remediable though further research, but others are inherent in the research methodology used by the NOPR’s authors.

3. Overestimates of benefits. The calculations exhibited in the NOPR are in important cases misleading, and important details are omitted or treated inadequately. In its analysis of the possible benefits of reduced US emissions under the rule, the NOPR arrives at estimates that are likely to be overestimates. Its treatment of benefits from the proposed rule to US residents being valued as benefits to the rest of the world is in violation of guidance from the Office of Budget and Management (OMB).

Further, the NOPR at numerous other junctures appears to depart from established methods of economic and policy analysis. Its treatment of the market responses and its consequent estimates of the profitability of appliance producers is highly ad hoc. Limits of time and space do not allow a full analysis of these and other difficulties here, but should not be ignored.⁶

An Avocado Success Story

Patrick McLaughlin, Candace McTeer — Tue, 17 Feb 2015 10:34:59 -0500

Expert Commentary

You probably don't think about free trade when you dip a chip into some guacamole or bite into an avocado seasoned with just a little lemon juice and salt. But maybe you should. The avocado has become more common — and central to many Americans diets — due to flexible trade agreements and regulations. And in that story is a larger lesson for our economy.

Avocado consumption per person has risen nearly tenfold over the last four decades. But it could have easily remained a marginal fruit for Americans had it not been for the North American Free Trade Agreement of 1994 and some moves by the U.S. Agriculture Department's Animal and Plant Health Inspection Service that dismantled decades-old trade barriers. Today, it's clear that these actions increased the well-being of American consumers and Mexican avocado farmers.

It's a shame that this regulatory reform occurred only after NAFTA forced action. Federal regulatory agencies can always re-examine whether changing their own rules would help the public. This can be as simple as re-examining the problem that the regulation is supposed to fix. Does the problem still exist? Is there evidence that the regulation is alleviating it? If the answer to either of those is no, then it's time to modify the regulation.

In this case, the regulation of U.S.-Mexican avocado trade began in 1914. Pest control was the rationale for erecting these barriers to trade — although special interests likely played a role too. Following the passage of NAFTA in 1994, Mexican avocado farmers naturally wanted to export to the United States.

Despite protests by Californian producers, reform of U.S.-Mexican avocado trade barriers gradually proceeded. First, in 1997, avocados from select Mexican municipalities were approved for sale in 31 states between Oct. 15 and April 15, ostensibly because fruit flies are less likely to survive during colder months.

The Mexican government then requested that the Agriculture Department's inspection service allow year-round avocado importation to all 50 states. Not coincidentally, the Mexican government began erecting barriers to corn imports from the United States.

The inspection service published a pest risk assessment in 2004 concluding that removing the existing trade barriers wouldn't pose a pest threat, paving the way for further regulatory reform. Subsequently, the service allowed year-round export to all states of avocados from approved Mexican municipalities where U.S. Agriculture Department inspectors are present — although domestic producers in Florida, California and Hawaii had two years to adjust before the Mexican avocados were let into their markets.

Forecasts at the time drastically understated the actual benefits of this rule. In 2004, the inspection agency predicted that avocado consumption would rise 9 percent due to these changes. In fact, consumption has risen by 147.1 percent in the last decade. The service also predicted that Californian producers would suffer a 7.3 percent decline in sales. In fact, sales of Californian avocados rose 18.4 percent during the same time. Increased demand for avocados helped, as domestic consumers developed a taste for guacamole and as the health benefits of avocados were more widely realized.

The expected reduction in avocado prices was also off the mark. The inspection service predicted prices for American consumers would fall by 20.6 percent. In fact, avocado prices have remained relatively constant. Again, the forces of supply and demand are at play.

The removal of trade barriers dramatically increased the supply of Mexican avocados. Yet simultaneously, consumers demanded more and more of the fruit. Had the pre-2004 status quo remained — that is, had supply not increased — the increased demand for avocados would have caused prices to increase. Regulatory reform helped neutralize the price increases that higher demand alone would have caused.

While American consumers enjoyed more avocados at relatively inexpensive prices, Mexican farmers also benefitted. The inspection agency first estimated that Mexican avocado imports would increase by 260 percent, but during the last decade consumption of Mexican avocados rose by 1,377 percent. Moreover, there have been no notable cases of avocado-related pest infestation since the 2004 reform.

Because of these regulatory reforms, sales continue to rise, prices remain relatively low, and millions of people are better off. Over the next few years, broader free trade partnerships with Asian countries and with the European Union will likely arise. Will we have to wait for those partnerships to force agencies to re-examine the justification and results of their regulations in order to achieve similar benefits? We shouldn't have to.