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The Perils of Classifying Social Media Platforms as Public Utilities

Adam Thierer — Fri, 30 Jan 2015 10:46:41 -0500

Publication

I. INTRODUCTION

To the extent public utility-style regulation has been debated within the Intemet policy arena over the past decade, the focus has been almost entirely on the physical layer of the Internet.¹ The question has been whether Internet service providers should be considered "essential facilities" or "natural monopolies" and therefore regulated as public utilities.² Such concerns served to drive the debate over "net neutrality" regulation.³

While the net neutrality debate rages on, the rhetoric of "public utilities" and "essential facilities" is increasingly creeping into policy discussions about other layers of the Internet, such as the search layer.⁴ More recently, academic and public policy circles are discussing whether social media platforms especially social networking sites-might also possess public utility characteristics.⁵ Presumably, such a classification would entail greater regulation of those sites' structures and business practices.

Proponents of a public utility regulatory regime for social media platforms offer a variety of justifications for this approach. Amorphous "fairness" concerns animate many of these calls, but privacy and reputational harms are also frequently mentioned as rationales for regulation.⁶ Proponents of regulation also sometimes invoke "social utility" or "social commons" arguments in defense of increased government oversight, even though these notions lack clear definition.⁷

However, social media platforms do not resemble traditional public utilities, and there are good reasons for why policymakers should avoid a rush to regulate them as such. Treating these nascent digital services as regulated utilities would harm consumer welfare because public utility regulation has traditionally been the archenemy of innovation and competition.⁸ Furthermore, treating today's leading social media providers as digital essential facilities threatens to convert natural monopoly or essential facility claims into self-fulfilling prophecies. Related proposals to mandate "API neutrality"⁹ or enforce a "Separations Principle"'¹⁰ on integrated information platforms would be particularly problematic because such regulation threatens innovation and investment.¹¹ Marketplace experimentation in search of sustainable business models should not be made illegal.

Remedies less onerous than regulation are available. Transparency and data portability policies would solve many of the problems that concern critics, and numerous private empowerment solutions exist for those users concerned about their privacy on social media sites. Finally, because social media are fundamentally tied up with the production and dissemination of speech and expression, First Amendment values are at stake, warranting heightened constitutional scrutiny of proposals for regulation. Social media providers should retain the editorial discretion to determine how their platforms are configured and what can appear on them.

Russ Roberts Book Panel: How Adam Smith Can Change Your Life

Peter J. Boettke, Daniel Klein, Russell Roberts, Ryan Hanley — Thu, 29 Jan 2015 13:50:15 -0500

Video

Adam Smith’s insights into human nature are just as relevant today as they were 300 years ago. What does it take to be truly happy? Should we pursue fame and fortune or the respect of our friends and family? How can we make the world a better place? When Russ Roberts finally picked up Adam Smith’s Theory of Moral Sentiments, he realized he’d stumbled upon what might be the greatest self-help book that almost no one has read. In this book panel, Russ Roberts discusses his new book How Adam Smith Can Change Your Life. He is joined by chair Peter Boettke and commenters Ryan Hanley and Daniel Klein.

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Full Expensing Will Create Jobs and Economic Growth

Jason J. Fichtner, Adam Michel — Fri, 30 Jan 2015 09:11:13 -0500

Expert Commentary

One of the last votes the Senate made in December before adjourning was to yet again pass a bill of so-called “tax extenders” to renew a long list of temporary tax provisions. While all tax extenders provide an advantage vested interests—rum producers, race horse owners, farmers, small businesses, NASCAR race tracks, etc.—many do so at the disadvantage of others, and should be eliminated. The legislation passed last month only extends these provisions for the 2014 tax year. Therefore, the new Congress has another chance to make meaningful tax reform this year or else be saddled with passing another temporary tax bill come December 2015.

One tax extender that would benefit all industries, however, is “expensing.” Full expensing levels the playing field from an economic standpoint and, from a political standpoint, makes it harder for Congress to choose winners and losers in the tax code. This simple change will promote economic growth by encouraging increased investment and employment, and should be made a permanent feature of the tax code, not just a temporary provision subject to annual uncertainty over Congressional renewal.

The current tax code does not let businesses deduct the full value of purchases, but rather deduct a certain value each year over the useful life of the asset. This “deprecation” distorts corporate profits and, by extension, increases the real taxes paid to government. Full expensing would let business deduct spending on manufacturing plants and farm equipment in the same way they currently deduct their spending on employee wages.

It’s important to note that expensing isn’t a tax cut—it’s a change to the timing of tax payments. Expensing allows business to deduct more today and deduct less in the future. This has the result of lowering tax payments today but raising payments tomorrow.

As our new research on “Options for Corporate Capital Cost Recovery: Tax Rates and Depreciation” published by the Mercatus Center at George Mason University shows, the current system of depreciating assets for tax purposes decreases the profitability of investments, creates different effective tax rates across industries, complicates the tax code, and rewards special interest lobbying.

Under the U.S. tax code, every durable good must have a defined asset life. This specification gives the IRS, Treasury, and Congress an impossible task of trying to determine the useful life of all assets. But useful life depends on maintenance, frequency of use, climate, initial quality, and any number of other factors. An attempt to account for the natural depreciation of equipment in the tax code results in seemingly random asset classifications.

The arbitrary nature of depreciation timelines leaves the tax code open to modifications promoted by special interests. A 2012 report by the Joint Committee on Taxation lists 55 separate statutory changes to depreciation periods. In many instances, Congress has the ability to shorten a depreciation timeline and increase the profitability of a special type of capital, meaning Congress can make one firm or industry more profitable than another by manipulating depreciation laws.

When a capital purchase is depreciated for tax purposes, the government effectively receives an interest-free loan from the business community as tax payments are larger up front than they would be under expensing. Furthermore, the businesses’ after-tax return on investment is diminished. Because the deduction loses value over time, the longer an asset is depreciated, the less profitable it becomes. Tax depreciation discourages long-term investments, while full expensing treats capital expenditures similarly and would encourage long-term investments and lead to job creation and economic growth.

An alternative proposal to full expensing is “bonus depreciation,” or 50 percent expensing. This allows businesses to write off half their investment upfront and depreciate the rest. Even though 50 percent expensing is popular in Congress, it would be more advantageous for both businesses and workers if full expensing were adopted.

Advocating for 50 percent expensing, recent Ways and Means Committee Chairman Dave Camp (R-Mich.) said, “it's time for us to agree that we should make it permanent so businesses can do what they do best, invest in the economy and hire new workers.” The 50 percent expensing policy has been renewed nine out of the last dozen years. But the temporary nature of the policy leaves business uncertain of its permanency. For business, uncertainty of future tax policy leads to paralysis of investment which holds back economic growth and job creation. Adopting a tax policy of permanent full expensing would generate even more jobs and investment.

The beneficial effects of full expensing were highlighted by the Tax Foundation finding that “full expensing would increase GDP by 5.13 percent, lift the capital stock by 15.4 percent, raise wages by 4.36 percent, create 885,300 jobs, and boost federal revenue by $121.3 billion.” Opponents who claim full expensing does nothing but decrease federal revenues fail to account for the higher taxes resulting from increased economic growth and the benefits of a simplified tax code gained from full expensing.

The current corporate tax code distorts investments, hurting some industries while privileging others. It’s time we move away from temporary tax policy and adopt meaningful reforms. Congress should consider full expensing as a permanent change to the tax code to level the playing field and grow the economy.

Three Ways to Level the Economic Playing Field

Matthew Mitchell — Wed, 28 Jan 2015 14:16:31 -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 2008-9 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.

What Australia Can Teach Us About Regulatory Hoarding

Hester Peirce — Wed, 28 Jan 2015 14:06:21 -0500

Expert Commentary

Monday was Australia Day. To celebrate, the United States ought to take a page from Australia's regulatory reform book. Australia is in the midst of a red-tape cutting initiative, which includes discarding unnecessary regulations and taking greater care in adopting new ones. The United States would greatly benefit from a similar regulatory reform effort.

Australia's prime minister, in announcing the round of regulatory reforms, noted that "Red tape is what officials wrap people in when they think that government knows best." To loosen that overly constrictive regulatory wrapping, on two "repeal days" during 2014, the government identified thousands of pages of regulation and legislation fit for the trash pile. The government promised that repeal days would become a semi-annual tradition.

To prevent the replacement of the bad old regulations with bad new regulations, the government published a guide "intended to be read by every member of the Australian Public Service involved in policy making-from the most junior member of the policy team to the departmental secretary." The guide emphasizes that regulation is "a means of last resort," not the "default option." The guide reminds policymakers that "regulation cannot eliminate risk entirely," and should not seek to do so. If a contemplated regulation will impose greater costs on people and businesses than the benefits it offers, it may be better to do nothing at all. In assessing a potential regulation, rule writers should take the time and trouble to "walk in the shoes of the people, business decision makers and community groups affected by [their] policy proposal." To do this, regulators need to employ transparent and inclusive processes in crafting regulation.

The United States, like Australia, is knee-deep in regulations. Rather than cutting rules that have outlived (or never manifested) their worth, the United States is adding more rules at a terrifying clip thanks to massive new statutory mandates like Dodd-Frank. Politically driven efforts to repel any changes to regulations once they are in place mean that rulebooks will only keep growing.

To make matters worse, American policymakers are not taking the careful, deliberative approach laid out in the new Australian guidelines to prevent the rules from doing unnecessary harm. Financial regulators, insisting optimistically that the new rules' benefits surely outweigh their costs, rarely deign to engage in serious economic analysis. Their optimism is consistent with the Australian guidance's observation that "many studies have shown that humans habitually over-estimate potential benefits and under-estimate potential costs."

Procedural protections to ensure that public input is received and considered are also falling by the wayside. The Securities and Exchange Commission's Daniel Gallagher pointed out several instances of procedural laxity earlier this month in connection with Dodd-Frank rulemakings related to derivatives data reporting. Commissioner Gallagher called his agency out for failing to propose certain regulatory provisions before adopting them. The commissioner also faulted the SEC for asking for information on forms without first considering whether the benefits of obtaining the information outweigh the costs of providing it. Gallagher's colleague, Michael Piwowar, also objected to the rules because they incorporated last-minute changes without consideration for their "real-world implications." The SEC's procedural shortcuts mean people will have to comply with requirements about which they did not have an opportunity to comment.

The SEC is not the only agency taking shortcuts that deprive it of critical input about the consequences of its rulemaking. Commissioner Christopher Giancarlo of the Commodity Futures Trading Commission called his agency out in a speech earlier this week for failing adequately to consider the effect of its rules on farmers, non-financial companies, and ultimately the general public. Mark McWatters, a member of the National Credit Union Administration board, in a dissent earlier this month from a proposed change to the credit union net worth rule, took issue with the agency's lack of legal authority, flawed rulemaking process, and inadequate endeavor to understand the costs of its proposal.

It is time that we follow Australia's example and recognize that we have a serious regulatory hoarding problem. We cannot bear to let go of the regulations we already have for fear of adverse consequences. And we cannot resist the impulse to indiscriminately add new regulations to our already over-stuffed rulebooks. The resulting regulatory clutter hampers our economy's ability to grow and adapt to meet the needs of everyday Americans.

Options for Corporate Capital Cost Recovery: Tax Rates and Depreciation

Jason J. Fichtner, Adam Michel — Fri, 30 Jan 2015 09:11:52 -0500

Publication

The US tax code is excessively complex and riddled with special-interest loopholes. Tax rates that treat similar activities unequally can distort consumer and investor decisions, which damages the economy. The current tax system’s treatment of corporate capital investments is emblematic of these problems.

A new study for the Mercatus Center at George Mason University reviews the tax code’s requirement that businesses use “depreciation”—the process of writing off a capital purchase over time—and explains how this treatment leads to unequal tax rates across industries.

Shifting to “full expensing”—allowing business to write off all expenditures in the year they are purchased—would offer an even ground for capital investments. It would also simplify the tax code, increase investment, and reduce the ability of politically favored industries to gain targeted tax benefits. While expensing would likely reduce related government revenue in the short run, over the longer run it would likely be revenue-neutral or even growth- and revenue-enhancing.

Using IRS Statistics of Income data for active corporations from 1998 to 2010, the study estimates which industries would be most sensitive to changes in depreciation and how the removal of existing depreciation policies would affect the tax rates of 11 industries. Industries more sensitive to changes in capital cost recovery would likely benefit the most from full expensing, but all industries would receive some benefit.

To read the study in its entirety and learn more about its authors, Mercatus senior research fellow Jason J. Fichtner and MA fellow Adam N. Michel, please see “Options for Corporate Capital Cost Recovery: Tax Rates and Depreciation.”

SUMMARY

The US tax code requires most new purchases of capital, such as machines and buildings, to be deducted from total revenue over the course of many years. This is called “depreciation” or “capital cost recovery.”

The Advent of Depreciation
Depreciation was first instituted as an accounting practice when businesses reported earnings to shareholders. Without depreciation, years with large investment purchases could show negative profits while years with no investments showed high profits, all else being equal. To reduce these swings in reported earnings and convey a company’s true position, accountants now distribute the cost of each investment over the number of years it will be in service.

Problems with Depreciation
While depreciation helps communicate profitability to shareholders, it distorts the profitability of capital investments when applied to the tax code. This is because businesses make investment decisions based on after-tax profitability, which is directly impacted by how an asset is depreciated.

Determining how a capital asset is to be depreciated depends on its estimated “useful life.” Estimating useful lives for all possible assets is nearly impossible, which allows current depreciation rules to be arbitrarily set and manipulated.

Accelerated Depreciation
One way depreciation rules can be manipulated is through “accelerated depreciation.” Accelerated depreciation allows more of the cost of the asset to be deducted closer to the time of purchase.

One specific type of accelerated depreciation is “bonus depreciation,” which allows a one-time deduction of 30–100 percent of the initial cost in the year of purchase. This has become a favored policy tool in recent years to stimulate investment and the economy.
Accelerated depreciation, including bonus depreciation, has also received attention because it is the largest corporate tax expenditure. As a result, depreciation is a much-discussed candidate for tax reform, with various advocates arguing for manipulating the timeline in order to lower the statutory corporate tax rate, increase federal revenue, or further stimulate investment.

KEY FINDINGS

Expensing is a better alternative than depreciation for the following reasons:

Zero effective tax rate. Expensing lowers the effective corporate tax rate on new equity financed capital assets to zero, while leaving the statutory rate unchanged. A zero effective rate on capital increases the after-tax rate of return on new investments, making new investments more attractive under expensing.
Greater asset profitability. Tax depreciation decreases asset profitability by diminishing the value of the tax write-off. The decrease in value is felt disproportionately on investments that have long useful lives, such as buildings and other infrastructure. This problem is compounded by uncertainty stemming from unknown long-run expectations about inflation.
Less bias against equity-financed capital. The current tax code is biased in favor of debt-financed investment. Although expensing will not fix this disparity, it will move the effective tax rate on equity-financed capital to zero.
Equal treatment of all investments. Expensing treats all investments similarly. Depreciation will always favor certain investments over others. Even within the same industry, tangible investments can be treated differently from intangible investments and investments in equipment from investments in structures. Expensing removes these inequities. The ability to manipulate depreciation for special tax breaks also opens the door to corporate lobbying and special treatment.
Long-term economic growth. If an expensing policy were enacted today, there would likely be small revenue losses in the short run and modest revenue increases in the long run. Moreover, because expensing makes investment relatively more attractive, it can be reasonably assumed that there would be some economic growth effects from the tax change.

CONCLUSION

Expensing would be a more efficient tax rule than depreciation. Switching from depreciation to expensing could lower public and private administrative costs by simplifying the tax code. Because expensing makes investment relatively more attractive, switching to expensing would promote positive economic growth.

Five Uses for the Distinction between Direct and Overall Liberty

Daniel Klein — Wed, 28 Jan 2015 14:54:51 -0500

Video

In November 2014, Daniel Klein gave a talk to the GMU Center for the Study of Public Choice’s Wednesday Seminar Series. In this lecture, Prof. Klein argues that the five uses for the distinction between direct and overall liberty include: (1) Addressing whether liberty talk and classical liberalism are coherent; (2) Exploring the tensions between libertarians and conservatives; (3) Articulating why I find anarchy talk dissatisfying; (4) Clarifying and distinguishing political theories; (5) Teaching libertarians to see the brighter side of nation-states. The Powerpoint presentation slides are here.

Regulatory Analysis and Regulatory Reform: An Update

Jerry Ellig, Sherzod Abdukadirov — Tue, 27 Jan 2015 18:44:38 -0500

Publication

Congress and the executive branch have attempted to improve the quality of regulatory decisions by adopting laws and executive orders that require agencies to identify the problem they are trying to address and assess its significance, examine a wide range of alternatives to solve the problem, assess the costs and benefits of the alternatives, and choose to regulate only when the benefits justify the costs. A research team from the Mercatus Center at George Mason University has assessed the quality and use of regulatory analysis accompanying every economically significant, prescriptive regulation proposed by executive branch regulatory agencies between 2008 and 2012.

The team found that, while it varied widely, the quality of regulatory analysis was generally low and did not alter much with the change of administrations. For 60 percent of the regulations, agencies failed to provide any significant evidence that any part of the regulatory analysis helped inform their decisions. Improving the quality and use of regulatory analysis will require institutional reforms to ensure that regulatory impact analysis is required, objective, and used to inform decisions about whether and how to regulate.

What Is Regulatory Impact Analysis?

Somewhere along the line, most people learn a few basic steps to take before making a major decision. These steps include:

Understand the root causes of the problem,
Define the goal to achieve,
Develop a list of alternative ways to solve the problem, and
Assess the pros and cons of each alternative.

Call these steps “Decision-making 101.”

For nearly four decades, presidential administrations have required executive branch agencies to follow these steps when they conduct Regulatory Impact Analyses (RIAs) that accompany major regulations. In 1993, President Clinton’s Executive Order 12866 laid out the fundamental requirements that have governed regulatory analysis and review ever since. In January 2011, President Obama’s Executive Order 13563 reaffirmed the principles and processes in the Clinton executive order:

Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness, and job creation. It must be based on the best available science. It must allow for public participation and an open exchange of ideas. It must promote predictability and reduce uncertainty. It must identify and use the best, most innovative, and least burdensome tools for achieving regulatory ends. It must take into account benefits and costs, both quantitative and qualitative. It must ensure that regulations are accessible, consistent, written in plain language, and easy to understand. It must measure, and seek to improve, the actual results of regulatory requirements.

Analytical requirements are especially rigorous for economically significant regulations, defined as regulations that have a material adverse effect on the economy or have an annual effect on the economy of $100 million or more.

Assessing the Quality and Use of Regulatory Analysis

The Mercatus Center at George Mason University has developed a qualitative framework to assess both the quality and use of regulatory analysis in federal agencies. The scoring process evaluates the quality of regulatory analysis using twelve criteria grouped into three categories:

Openness: how easily can a reasonably informed, interested citizen find the analysis, understand it, and verify its underlying assumptions and data?
Analysis: how well does the analysis define and measure the outcomes or benefits the regulation seeks to provide, define the systemic problem the regulation seeks to solve, identify and assess alternatives, and evaluate costs and benefits?
Use: how much did the analysis affect decisions in the proposed rule, and what provisions did the agency make for tracking the rule’s effectiveness in the future?

A research team evaluated each economically significant, prescriptive rule between 2008 and 2012—a total of 108 regulations. For each criterion, the evaluators assigned a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Quality of Analysis Is Low

The average total score was just 31.2 out of 60 possible points—barely 50 percent—the equivalent of a grade of “F.” Figure 1, below, shows that the majority of regulations, slightly over 60 percent, scored below 36 points—the equivalent of a “D.” No RIA did an excellent job on all aspects of regulatory analysis. The highest total score ever achieved was 48 out of 60 possible points (80 percent), equivalent to a “B−.” This was the joint Environmental Protection Agency-National Highway Traffic Safety Administration regulation proposed in 2009 that revised Corporate Average Fuel Economy standards.

Greatest Weaknesses: Retrospective Analysis

Table 1, below, shows the average scores on each of the 12 criteria. The two final criteria relating to retrospective analysis score particularly low. Few regulations or analyses set goals, establish measures, or establish protocols to gather data so that the effects of the regulation may be evaluated after it is implemented.

For each Report Card criterion, there are a few examples of reasonably good quality or use of analysis. But best practices are not widespread.

Analysis Rarely Used to Inform Decisions

Table 1 shows that most of the lowest scores are for criteria measuring the use of analysis. The broadest Report Card criterion measuring use of analysis (criterion 9) asks whether the agency claimed or appeared to use any part of the analysis to guide any decisions. As figure 2 demonstrates below, agencies often fail to provide any significant evidence that any part of the RIA helped inform their decisions. Perhaps the analysis affects decisions more frequently than these statistics suggest, but agencies fail to document this in the Notice of Proposed Rulemaking or the RIA. If so, then at a minimum there is a significant transparency problem.

Improving the Quality and Use of Regulatory Analysis

Average scores for prescriptive regulations are relatively low, earning slightly more than 50 percent of the total possible points. Clearly, agency regulatory analysis is often incomplete and seldom used in decisions. This pattern persists across administrations, indicating that the source of the problem is institutional, not political. Fundamental institutional reforms are necessary to ensure that agencies conduct high-quality regulatory impact analysis and use it in decisions. In short, regulatory impact analysis should be:

Required: Congress should require federal agencies to conduct thorough regulatory impact analysis before they write and propose significant regulations. Agencies tend to pay attention to what the law says they should do, because otherwise a court might vacate the regulation. The congressional requirement should include independent agencies that are not currently subject to the executive orders on regulatory analysis and review. Scholarly research has found that many independent agencies conduct even less thorough economic analysis than executive branch agencies. Requiring independent agencies to conduct regulatory impact analysis and explain how they used it in decisions would likely improve their quality and use of analysis.
Objective: All too often, regulatory analyses read as an afterthought. Agencies should be required to publish analysis of the systemic problem they seek to solve and alternative solutions (along with all underlying data and research) for public comment before making decisions about proposed regulations. Agency economists should have the independence to conduct objective analysis instead of simply justifying decisions that have already been made. Public hearings on regulations after they are proposed would give agencies an incentive to produce better analysis because they would have to defend it publicly. Expanding the resources of the Office of Information and Regulatory Affairs, which reviews all major regulations, can also help to improve the quality and use of analysis.
Used: Congress should require all agencies to explain, when proposing regulations, how the major elements of regulatory analysis affected decisions about the regulation. Consistent with the Government Performance and Results Modernization Act of 2010, agencies should also be required to explain how major regulations advance their high-priority goals and establish measures to track the regulation’s actual results.

Conclusion

Regulatory impact analysis assesses the need for, alternatives to, and benefits and costs of proposed regulations. Although administrations of both political parties have required regulatory impact analysis, the quality of that analysis has generally been low. To make matters worse, agencies often fail to provide any evidence that regulatory analysis, however imperfect, informed their decisions. In addition, agencies rarely establish plans for retrospective analysis to evaluate the effectiveness of their regulations. To be genuinely effective, regulatory impact analysis should be required by statute, objective, and used by federal agencies.

Health Care Innovation Through Less Regulation

Richard Williams — Wed, 28 Jan 2015 14:30:35 -0500

Expert Commentary

The next big wave of innovation, if it is allowed, is in health. The only question is whether we will embrace the new pioneers of health innovation or smother them in wet woolen blankets of regulation. The choices are fairly stark: We can settle for the status quo of turning everything into a “policy” or embrace policy-less innovation.

There are four big areas where we can improve health in order to prevent or ameliorate disease and injury: 1) nutrition; 2) medicine; 3) medical devices; and 4) exercise. Given the surplus of information freely available to inventors online, new ideas in each of these areas are springing up like wildflowers.

Making the Case for Free Trade

Veronique de Rugy — Mon, 26 Jan 2015 10:16:32 -0500

Expert Commentary

The president’s lukewarm embrace of truly unfettered international trade leaves a lot to be desired.

In his State of the Union address, the president told us he wants to craft a trade policy agenda fit for the 21st Century. If only!

A true free trade agenda should be the cornerstone of any “middle class economics” platform. Open international markets lower domestic prices for consumers, increase export opportunities for small and big business alike, and induce formerly-protected manufacturers to improve and compete on a global stage. But we shouldn’t expect Obama to embrace the benefits of free trade just yet.

So far, Obama has only been “pro-trade” when it serves interests defined by business lobbies and other pro-export mercantilists. But when it comes to the pro-trade policies that benefit U.S. consumers by introducing entrenched U.S. exporters to more competition, the president consistently falls back on basic protectionist instincts.

It’s not that Obama opposes all trade liberalization. His announcement that he would work to create a Trade Promotion Authority (TPA) was a high note of Tuesday’s speech. The TPA would empower the executive branch to negotiate trade pacts with our foreign trading partners—thereby fast-tracking foreign open markets upon congressional approval.

But even this proposal is far less than ideal. The TPA could merely become a device to streamline special interest policies. As Cato Institute Director of Trade Policy Studies Dan Ikenson explained to me over email, “While free trade agreements have protectionism baked into them and are thus definitely not free trade, they tend to make us more economically free.” A successful TPA would require strict discipline from Congress and the president to resist the strong pull of protectionist interests.

Flawed though it may be, the president’s TPA proposal is still a clear departure from the last six years of passivity on trade policy issues. After all, strong hostility from his base and the Democratic leadership toward trade makes change quite politically costly.

The President did begrudgingly lend support to completed agreements with South Korea, Colombia, and Panama after the GOP took control of the House in 2011—but, as Ikenson noted, even this was more “out of necessity than conviction.”

That was true on Tuesday, too. His sole lukewarm justification provided for a TPA was that it would benefit American companies to sell their goods and services beyond our borders. “Ninety-five percent of the world’s customers live outside our borders, and we can’t close ourselves off from those opportunities,” said the president. What a snoozer. If the president harbored a true and unimpeded understanding of the true benefits of trade liberalization, he’d make a much sexier pitch.

Increasing exports is only one of the many benefits of expanding trade. Imports are in many ways more beneficial for middle class growth. The more imports, the better, as it leads to greater consumer choices and varieties at lower prices.

As George Mason University economist Donald Boudreaux points out (PDF), “Prices are held down by more than two percent for every one-percent share in the market by imports from low-income countries like China.” Fearing cheaper imports from China, as the president does, is not a part of any middle class platform grounded in good economics. We should welcome lower prices!

Consumers aren’t the only beneficiaries of expanded trade. U.S. manufactures within our borders benefit from lower input good prices. At least half of U.S. imports are not consumer goods; they are inputs for US-based producers, according to Boudreaux.

Freeing trade reduces imported-input costs, thus reducing businesses’ production costs and promoting employment possibilities and economic growth. We should welcome U.S. business and employment growth!

Free trade also benefits the U.S. in incredibly effective ways that are harder to see. Opening trade barriers improves efficiency and innovation. It shifts workers and resources to more productive uses and allows more efficient industries to prosper. Over time, Boudreaux explains “higher wages, investment in such things as infrastructure, and a more dynamic economy that continues to create new jobs and opportunities”. Free trade also drives competitiveness which fuels long-term growth, higher quality of good and services—and still lower prices.

President Obama should be singing these praises of free trade from the rooftops, but instead he mumbles of its necessity like he’s feeding us mashed broccoli.

This is not a partisan issue. Economists of all ideological backgrounds agree that the net effect of free trade is positive and endures even if other countries continue in their protectionist ways. It will surprise no one that Milton Friedman was a fervent advocate of tearing down all protectionist policies. But did you know he is rivaled in this by none other than Paul Krugman? In a seminal Journal of Economic Literature article in 1997, Krugman wrote “the case for free-trade is essentially a unilateral case.”

The president doesn’t quite see it. His talk about the need for “fair” trade and for “leveling the playing field” is a strong signal that he intends to tilt the playing field in the home market against consumers and in favor of politically connected producers. Just look at his new and unfortunate support for the protectionist Export-Import Bank.

Politicians reveal their prioritization of entrenched exporters over average consumers and businesses in their irrational hysteria over China and other governments subsidizing their countries’ exports. Supporters of export credit subsidies claim that they are “leveling the playing field” against foreign competition, but basic economics says otherwise.

In fact, countries that receive the artificially cheap imports benefit far more than the protectionist country: recipient countries get more output for less input, and more imports for fewer exports. Let me make that clear: U.S. consumers of subsidized imports benefit by getting cheap goods at the cost of foreign taxpayers. That’s the closest thing to a “free lunch” in economics as you’ll ever find.

Do U.S. companies welcome this competition? For the most part, yes. But not always. Either way, politicians should never give into protectionist instincts to shelter U.S. companies, lest we end up doing more damage to our prosperity in the process.

Obama’s turn toward trade liberalization is both a good start and a missed opportunity. There is no need to give in to the pressures and fears of business lobbyists. The president should take a page out of Bill Clinton’s book and embrace free trade for all that it is. When you free markets, you free people to buy whatever goods and services he or she wishes irrespective of geographical location. And that is a freedom that ultimately benefits everyone.

March Madness Reception

contact@mercatus.org (Mercatus.org) — Sun, 25 Jan 2015 23:43:46 -0500

Events

Please join us for a casual reception where you can take a break from March Madness and meet some of our scholars who can provide the kind of practical information you need to be most effective in your work.

Drinks and “game day” hors d'oeuvres will be served. There is no charge to attend this event.

This event is open to all full-time congressional and federal agency staff. This event is not open to the general public.

Questions? Please contact Caitlyn Van Orden, Event Coordinator, at cvanorden@mercatus.gmu.edu or (703) 993-4925.

Score One for Science

Sherzod Abdukadirov — Fri, 23 Jan 2015 16:21:25 -0500

Expert Commentary

Bisphenol A is safe for all consumers, declared the European Food Safety Authority (EFSA) this week. Thus, the EU agency re-affirmed its 2006 decision declaring the chemical safe. In its statement, the agency justified its decision to revisit Bisphenol A (BPA) by pointing to a great deal of new research on the chemical’s health impacts. What it failed to mention in the official announcement was that its decision to re-examine BPA was also driven by the recent politically motivated French ban on BPA in food containers, which took effect on January 1 this year.

BPA is a chemical compound that is commonly used to produce plastic. At high levels, BPA could potentially be harmful. The main cause for concern stems from the ubiquitous use of plastic in food and cosmetic packaging. When plastic is used in packaging, trace amounts of BPA can leak into the food and cosmetic products and can be ingested or absorbed through skin.

The most crucial factor in trying to determine whether a chemical is harmful is correctly measuring the exposure level. The exposure level indicates the amount of a chemical that finds its way into human body. Since “the dose makes the poison,” it is important to determine whether the amount of chemical that consumers are exposed to is high enough to cause any harm. For many substances, there is typically a safe level of exposure, below which the substance is harmless.

The EFSA’s decision to declare BPA safe rested largely on its measurements of exposure levels for various consumer groups. The agency found that exposure levels were extremely low, about four to 15 times lower than the safe level. The finding held true despite the fact that the agency lowered the threshold for safe level of BPA from 50 micrograms per kilogram of body weight per day to only four.

Concerns over BPA’s impact are not new. In 2011, EU banned the use of BPA in baby bottles. In 2012, the Food and Drug Administration followed suit. Yet, as the FDA pointed out, its decision simply codified the steps that the industry has already taken to phase out BPA in baby bottles and sippy cups. Crucially, the FDA maintained that it considered the chemical safe at its current exposure levels. The agency issued the ban at the industry’s request in order to allay concerns that some parents may have, even though it found no evidence that BPA’s use in baby bottles caused any harm. The FDA’s position was confirmed by the EFSA’s announcement, which found BPA to be safe for all age groups including infants.

Yet, it was the French that took the unsubstantiated panic over BPA to the new heights. In 2012, the French government issued a law to ban BPA from all products that come into contact with food. The law went into effect at the start of this year. The French government’s actions set it up for a conflict with the other EU members, who argued that the ban amounted to an internal trade barrier. The EFSA and its French counterpart began discussions to resolve their differences.

By refusing to give in to the anti-BPA hysteria, the EFSA allowed companies to avoid the unnecessary costs of replacing BPA. It also saved European consumers money, as the additional costs of BPA phase out would be ultimately passed on to consumers—though French consumers would still have to pay the price for their government’s ban. Most importantly, the EFSA reaffirmed the principle that safety regulation ought to be driven by scientific evidence, not politics.

Bitcoin Financial Regulation: Securities, Derivatives, Prediction Markets, and Gambling

Jerry Brito, Houman Shadab, Andrea Castillo — Fri, 23 Jan 2015 13:58:01 -0500

Publication

The next major wave of Bitcoin regulation will likely be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions.

In this article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges. We find that Bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodities and Exchange Act to the extent such derivatives involve physical delivery (as opposed to cash settlement) or are nonfungible and not independently traded. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.

Following the approach to virtual currencies taken by the Financial Crimes Enforcement Network, we argue that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of their regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.

Matthew Mitchell Discusses State of the Union on CNBC Asia

Matthew Mitchell — Thu, 22 Jan 2015 14:18:30 -0500

Video

Matt Mitchell and Paul Krake talk about what to expect from President Barack Obama’s State of the Union address.

Embed Code:

Letter to House Committee on Energy and Commerce Concerning Television Regulation

Brent Skorup — Thu, 22 Jan 2015 10:12:30 -0500

Publication

January 22, 2015

Representatives Fred Upton and Greg Walden
Energy and Commerce Committee
United States House of Representatives

Dear Chairman Upton and Chairman Walden:

Thank you for the opportunity to respond to the Committee’s December 2014 questions on video regulation. The Technology Policy 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 economic and legal scholarship to assess legislation and regulation from the perspective of the public interest. Therefore, this response does not represent the views of any particular affected party but is designed to assist Congress as it explores these issues.

Please find attached a research paper by technology scholar Adam Thierer and me about the history of television regulation. This is an age of content abundance and competitive distribution, and we recommend paring down existing video regulations. While the paper was published a few months before the committee’s request for comment, it is responsive to the questions posed about industry developments and possible reforms. We show that the labyrinthine communications and copyright laws governing video distribution are now distorting the market and therefore should be made rational. Congress should avoid favoring some distributors at the expense of free competition. Instead, policy should encourage new entrants and consumer choice.

The focus of the committee’s white paper on how to “foster” various television distributors, while understandable, was nonetheless misguided. Such an inquiry will likely lead to harmful rules that favor some companies and programmers over others, based on political whims. Congress and the FCC should get out of “fostering” the video distribution markets completely. A light-touch regulatory approach will prevent the damaging effects of lobbying for privilege and will ensure the primacy of consumer choice.

Some of the white paper’s questions may actually lead policy astray. Question 4, for instance, asks how we should “balance consumer welfare and the rights of content creators” in video markets. Congress should not pursue this line of inquiry too far. Just consider an analogous question: how do we balance consumer welfare and the interests of content creators in literature and written content? The answer is plain: we don’t. It’s bizarre to even contemplate.

Congress does not currently regulate the distribution markets of literature and written news and entertainment. Congress simply gives content producers copyright protection, which is generally applicable. The content gets aggregated and distributed on various platforms through private ordering via contract. Congress does not, as in video, attempt to keep competitive parity between competing distributors of written material: the Internet, paperback publishers, magazine publishers, books on tape, newsstands, and the like. Likewise, Congress should forego any attempt at “balancing” in video content markets. Instead, eliminate top-down communications laws in favor of generally applicable copyright laws, antitrust laws, and consumer protection laws.

As our paper shows, the video distribution marketplace has changed drastically. From the 1950s to the 1990s, cable was essentially consumers’ only option for pay TV. Those days are long gone, and consumers now have several television distributors and substitutes to choose from. From close to 100 percent market share of the pay TV market in the early 1990s, cable now has about 50 percent of the market. Consumers can choose popular alternatives like satellite- and telco-provided television as well as smaller players like wireless carriers, online video distributors (such as Netflix and Sling), wireless Internet service providers (WISPs), and multichannel video and data distribution service (MVDDS or “wireless cable”). As many consumers find Internet over-the-top television adequate, and pay TV an unnecessary expense, “free” broadcast television is also finding new life as a distributor.

The New York Times reported this month that “[t]elevision executives said they could not remember a time when the competition for breakthrough concepts and creative talent was fiercer” (“Aiming to Break Out in a Crowded TV Landscape,” January 11, 2015). As media critics will attest, we are living in the golden age of television. Content is abundant and Congress should quietly exit the “fostering competition” game. Whether this competition in television markets came about because of FCC policy or in spite of it (likely both), the future of television looks bright, and the old classifications no longer apply. In fact, the old “silo” classifications stand in the way of new business models and consumer choice.

Therefore, Congress should (1) merge the FCC’s responsibilities with the Federal Trade Commission or (2) abolish the FCC’s authority over video markets entirely and rely on antitrust agencies and consumer protection laws in television markets. New Zealand, the Netherlands, Denmark, and other countries have merged competition and telecommunications regulators. Agency merger streamlines competition analyses and prevents duplicative oversight.

Finally, instead of fostering favored distribution channels, Congress’ efforts are better spent on reforms that make it easier for new entrants to build distribution infrastructure. Such reforms increase jobs, increase competition, expand consumer choice, and lower consumer prices.

Thank you for initiating the discussion about updating the Communications Act. Reform can give America’s innovative telecommunications and mass-media sectors a predictable and technology neutral legal framework. When Congress replaces industrial planning in video with market forces, consumers will be the primary beneficiaries.

Sincerely,

Brent Skorup
Research Fellow, Technology Policy Program
Mercatus Center at George Mason University

Read Related Research

Wars in the Middle East Have Cost Taxpayers Almost $1.7 Trillion

Veronique de Rugy — Thu, 29 Jan 2015 10:07:15 -0500

Publication

A recent report from the Congressional Research Service, which examines the cost of Iraq, Afghanistan, and other global “War on Terror” operations since 9/11, calculates a cumulative (fiscal year 2001 through fiscal year 2014) nominal price tag of $1.6 trillion. Adding the war funding for fiscal year 2015 that was passed in December pushes the total to almost $1.7 trillion. When it comes to funding national defense, policymakers tend to ignore war costs so an accurate assessment on the burden on taxpayer of overseas military ventures is increasingly important as pressure mounts to increase the Pentagon’s regular “base” budget.

As the following chart shows, the vast majority of the funding has been allocated to the Department of Defense ($1.562 trillion). The State Department and related foreign aid efforts received $101 billion and the Department of Veterans’ Affairs, $17 billion.

Looking at the cost of the post-9/11 wars is important because policymakers have a habit of citing the Pentagon’s base budget, which excludes war funding, when debating and discussing funding for national defense. But, as I discuss in a separate chart, using base Department of Defense figures severely understates the total cost to taxpayers for national defense. War funding, which is budgeted under the title “Overseas Contingency Operations” (OCO), is also exempt from the spending caps implemented by the Budget Control Act of 2011. Policymakers have been rightly criticized for evading the caps by designating funds as OCO that should arguably be in the Pentagon’s base budget.

With the Republicans now in complete control of Congress, there is growing speculation that the GOP will seek to bust the caps on defense funding. And the president’s upcoming Pentagon budget request is expected to propose the same. On top of the on-going fighting in Afghanistan, Iraq, and Syria, the recent high-profile attacks by ISIS and al-Qaeda affiliates in Europe are being cited by hawkish members of Congress as justification for additional funding. Before doing so, policymakers should consider whether our heavy military presence in the Middle East, and the $1.7 trillion allocated in war funding since 9/11, have created more problems than they have eliminated. Indeed, a strong case could be made that what taxpayers are actually paying for is national offense rather than national defense—and the former is driving the latter.

Ohio's Energy Efficiency Fiasco

Robert J. Michaels — Wed, 21 Jan 2015 13:47:16 -0500

Expert Commentary

Winter is here, and Americans are coping with more than just the cold -- many are dealing with a yearly spike in their energy bills. As rational consumers, they can be trusted to make efficient choices, and they benefit from doing so. Unfortunately, misguided policies often get in the way. Take, for example, Ohio's recent attempt to reduce energy use.

According to my research, a 2008 law drove utility bills in the state higher -- even as the law's energy-efficiency goals were in doubt. As of late last year, most energy-industry reports indicated that SB 221 was on track, but the evidence said otherwise. Accordingly, at the beginning of 2015, SB 221 was suspended for two years pending evaluation of its effects by an independent panel.

If it desires, the state will restore the law's efficiency requirements when the evaluation is finished. Before doing so, lawmakers should carefully note the key problems with the legislation as it was written and implemented.

Under SB 221, the Public Utilities Commission of Ohio (PUCO) must enforce an "Energy Efficiency Resource Standard" on Ohio's utility companies (municipal and cooperative systems are exempt). By 2022, utilities are required to facilitate a 22 percent reduction in energy use.

To accomplish this, they can spend up to 3 percent of their annual revenue on efficiency programs such as rebates on energy-efficient appliances, tune-ups of HVAC systems, or energy-efficient light-bulb subsidies, and then recover what they spend through customers' bills. To date, Ohio customers have paid more than $1 billion.

Aside from light-bulb subsidies (which cannot be tied to specific consumers and are addressed below), few of these programs are affecting very many consumers. In April 2013, for example, only 2 percent of FirstEnergy's business customers participated in its efficiency programs, leaving the remaining 98 percent to shoulder the costs. Only 7 percent of its residential users benefited from programs aimed at them.

Energy efficiency is important, and advocates of the law might argue that it's worth the billion-dollar public expense. They started with high hopes that innovative programs would benefit Ohio and the nation. But, expensive or not, the law doesn't appear to be working.

Utilities have complied largely by subsidizing retail sales of energy-efficient light bulbs. In 2012, lighting programs accounted for 83 percent of Dayton Power and Light's alleged energy savings, a lower percentage than some other utilities. Among the company's residential customers, lighting was 88 percent of the total.

Here's the catch: Most of those energy-efficient bulbs would have been purchased with or without SB 221. If you buy a subsidized bulb but would have paid full price, the industry calls you a "free-rider." Most other states account for free-riders in their measurement; Ohio does not. (A few years ago, PUCO, with the backing of utilities, ruled that free-riding is a form of saving, claiming that "gross" rather than "net" effects are what matters.) California calculates that about 70 percent of bulb buyers free-ride, and there is no reason to assume that Ohio is much different. It's clear that the great bulk of Ohio ratepayers' $1 billion has wound up in the pockets of free-riders.

If SB 221 is reinstated in its original form, these problems will become bigger, and quickly. PUCO rules require each utility to retain a consultant for its program. In 2013, most of their reports found the same thing: Opportunities for additional efficiency are rapidly diminishing. Dayton Power and Light's consultant reports that cost-effective programs are likely to run out before it achieves half of the law's required 2022 savings. The American Council for an Energy Efficient Economy acknowledges a need to devise new programs.

No one wants to break one of the biggest secrets in Ohio: Its energy-savings figures thus far are grossly in error, and opportunities to make up for it look scarce. The future belongs to the energy-efficient, but Ohio will never get there until its policymakers understand the difference between free-riding and true efficiency.

Fundamentals of Budget Process

contact@mercatus.org (Mercatus.org) — Wed, 21 Jan 2015 02:04:47 -0500

Events

As budget season gets underway, what do you need to know to navigate the process?

The Mercatus Center at George Mason University invites you to join David Primo, Associate Professor at the University of Rochester and senior scholar for the Mercatus Center, and Patrick Louis Knudsen, a former long-time policy director for the House Budget Committee, for a discussion of the congressional budget process.

This program will include:

An overview of the 1974 Budget Act, and subsequent laws and rules guiding the budget process;
A discussion of how and why the budget process has largely been abandoned in past years, and the potential implications of failing to follow a regular budget process; and
An outlook for the Fiscal Year 2016 budget season, including a review of key budgetary dates and events.

This event is free and open to all congressional and federal agency staff. This event is not open to the general public. Food will be provided. Due to space constraints, please no interns. Questions? Please contact Samantha Hopta, Event Associate, at shopta@mercatus.gmu.edu or (703) 993-4967.

Federal Cybersecurity Breaches Mount Despite Increased Spending

Eli Dourado, Andrea Castillo — Tue, 27 Jan 2015 23:15:21 -0500

Publication

In the wake of the high-profile cybersecurity breach at Sony Pictures Entertainment in December, President Obama unveiled reform proposals that would increase the federal government’s ability to direct American cybersecurity practices. These proposals, which include increased federal funding, a cybersecurity summit, and legislative changes to encourage information-sharing among private sector organizations and government bodies, are only the most recent efforts in a long line of government attempts to nationalize and influence private cybersecurity practices. Despite years of increased cybersecurity spending, the federal government already has a poor track record in maintaining good cybersecurity and information-sharing practices for its own information technology (IT) systems.

This week’s charts use data from the Congressional Research Serviceand the Government Accountability Office to display total federal cybersecurity spending required by the Federal Information Security Management Act of 2002 (FISMA) with the total number of reported information security incidents of federal systems from 2006 to 2013. The first chart shows that the number of federal cybersecurity failures has increased every year since 2006, even as investments in cybersecurity processes and systems have increased considerably.

FISMA was intended to strengthen federal IT systems by requiring agency leaders to develop and implement information security protections with the guidance of offices such as the National Institute of Standards and Technology (NIST), the Office of Management and Budget (OMB), and the Department of Homeland Security (DHS). In addition to authorizing the sums necessary for agencies to invest in cybersecurity technologies and infrastructure, FISMA compels agencies to proactively assess and reduce systematic risks, actively train personnel to meet and improve information security standards, improve cybersecurity risk reporting and information sharing capabilities, and develop contingency plans to respond to cyber-breaches.

Total FISMA information security spending reported by the OMB from FY 2006 to FY 2013 measured in real 2013 dollars is displayed on the chart in light green bars and measured on the left axis. The chart shows that federal spending on information security investments exhibited moderate growth over much of the period. Both the dramatic increase in FISMA spending from $7.4 billion in FY 2009 to $12.8 billion in FY 2010 and the dramatic decrease in FISMA spending from $14.8 billion in FY 2012 to $10.3 billion in FY 2013 are partially attributable to OMB’s decision to change its FISMA spending calculation methodology in those years. Even with this caveat on inter-year comparisons, the chart shows that the federal government has invested billions of dollars to improve its internal cybersecurity defenses in recent years. Altogether, the OMB reports that the federal government spent $78.8 billion on FISMA cybersecurity investments from FY 2006 to FY 2013.

Increased federal spending on cybersecurity, however, is not reflected in the rate of cyber-breaches of federal systems reported by the GAO. The total number of federal information security incidents reported from 2006 to 2013 is displayed by the blue line on the chart and measured on the right axis. The number of reported federal cybersecurity incidents increased by an astounding 1,012% over the selected years, from 5,503 in 2006 to 61,214 in 2013.

It is troublingly that many of these breaches exposed the personally identifiable information of federal personnel, veterans, and even civilians stored in federal systems to potential access by external groups. The second chart displays the proportion of all reported federal information security incidents that involved the exposure of personally identifiable information from 2009 to 2013. Federal information security failures that expose sensitive details about individuals’ lives—including data such as contact information and even Social Security numbers and financial information—have constituted roughly a third of all cybersecurity failures and is an increasing problem. By 2013, more than 40 percent of all reported cybersecurity failures involved the potential exposure of private data to outside groups.

Increased federal spending on cybersecurity investments do not seem to have stemmed the rate of federal information security failures. Despite first sounding the alarm about poor government information security practices in 1997, the GAO reported in April 2014 that federal agencies systematically fail to meet federal security standards owing to poor implementation of key FISMA practices outlined by the OMB, NIST, and DHS. After more than a decade of billion dollar investments and government-wide information sharing, in 2013 “inspectors general at 21 of the 24 agencies cited information security as a major management challenge for their agency, and 18 agencies reported that information security control deficiencies were either a material weakness or significant deficiency in internal controls over financial reporting.”

The federal government’s own failure to improve internal cybersecurity practices after years of increased spending and information-sharing among agencies calls into question the effectiveness of President Obama’s proposals to extend these policies to the private sector. While cybersecurity vulnerabilities and data breaches remain a considerable problem in the private sector as well as the public sector, policies that failed to protect the federal government’s own information security are unlikely to magically work when applied to private industry. The federal government’s own poor track record of increasing data breaches and exposures of personally identifiable information renders its systems a dubious safe house for the huge amounts of sensitive data affected by the proposed legislation. The federal government should focus on properly securing its own IT systems before trying to exert more control over private systems.

Laws Protecting Auto Franchises Are Bad for Consumers and Innovation

Jerry Ellig, Jesse Martinez — Tue, 20 Jan 2015 23:41:35 -0500

Expert Commentary

U.S. automobile sales at the end of 2014 hit their highest level since the first quarter of 2006, according to data compiled from industry analysis source Wards Auto. While auto sales have climbed back to pre-recession levels, another aspect of the industry has continued to expand as well: The number of laws that protect auto dealers from competition.

Almost every state regulates three aspects of auto dealer franchising. These regulations: prohibit manufacturers from terminating franchises with existing dealers unless they prove they have a “good cause” to do so, require auto manufacturers to sell new cars through franchised dealers, and protect dealers from competition by awarding exclusive territories. In 1979, fewer than half of the states regulated all three of these aspects of auto dealer franchising. Today, every state regulates all three of these aspects with the exception of Maryland, the only state which does not force manufacturers to give dealers exclusive territories.