Mercatus Site Feed en Washington, Take Note: California Experiments with Highway Funding <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Continued improvements in vehicle fuel efficiency are significantly reducing government revenues generated from the gasoline tax. In response to this decline, California is now considering replacing its gasoline tax with a vehicle-miles-traveled (VMT) charge to fund highway maintenance and construction. With this innovation comes an opportunity for additional reform.</span></p> <p class="p1"><span class="s1">By setting VMT charges higher during peak traffic times or in certain, traffic-dense locales, California could finally reduce highway congestion that has plagued the state for so many years — and without changing any infrastructure. Drivers would benefit from reduced congestion and taxpayers would avoid the expense of building additional highway capacity. But for states to take full advantage of the potential highway efficiency gains generated by a variable VMT system, Congress would need to end federal tolling restrictions on interstate highways.</span></p> <p class="p1"><span class="s1">In a recent poll by the Public Policy Institute of California, 64 percent of likely California voters agreed that traffic congestion is a major problem. This should come as no surprise since the Texas A&amp;M Transportation Institute <a href=""><span class="s2">ranks</span></a> Los Angeles, San Francisco, and San Diego among the 15 most congested cities in the nation. The Institute estimates that in 2014 congestion in these three cities cost drivers about $18 billion annually in time lost.</span></p> <p class="p1"><span class="s1">In 2014, Governor Brown signed <a href=""><span class="s2">SB 1077</span></a>, which outlines steps for a “road charge” that would generate revenues comparable to the current gasoline tax. This summer, based on recommendations from a technical advisory committee, the California State Transportation Agency is moving forward with a demonstration program to assess the workability of a VMT tax. Five thousand volunteers — I will be one of them — will receive a simulated bill based on miles driven.</span></p> <p class="p1"><span class="s1">Drivers will have a number of options for tracking vehicle miles. One option is to have monthly odometer readings taken at a specified location. Alternatively, this procedure could be automated using a GPS tracking system. In order to reduce privacy concerns, the technology and data management will be controlled by private firms rather than the government.</span></p> <p class="p1"><span class="s1">On its own, a tax on miles driven could have some impact on reducing congestion. But a flat road charge doesn’t distinguish between, say, a driver on a residential street at three in the morning and a driver on a highly congested highway during rush hour. Raising the VMT tax for highway drivers during peak drive times would create an incentive for some individuals to adjust their drive times to avoid the higher tax. This would require integrating the VMT system with GPS tracking. To protect privacy, travel information could be stored in the car’s system and deleted after drivers pay their bills.</span></p> <p class="p1"><span class="s1">A common concern with a variable charge system is that it affects low-income drivers disproportionately. But the same criticism can be lodged against the current gasoline tax. A variable-congestion-charge system’s impact on the poor would be no more regressive than the current system of funding highways.</span></p> <p class="p1"><span class="s1">Federal law governs the use of variable tolls on highways built with federal funds. Before 1991, tolls were prohibited. Reforms since then allow for a limited use of tolling as long as the number of toll-free lanes is not reduced. The result is that newly constructed lanes on interstate highways may use tolls. This exemption has been used to toll solo-driven vehicles in car pool lanes, as on the I-15 highway in San Diego.</span></p> <p class="p1"><span class="s1">Federal restrictions on tolling impede efforts to deal with serious congestion problems, particularly in urban areas. Congress could ease or eliminate these rules. This simple fix would allow innovations in tolling that would improve our transportation system significantly.</span></p> <p class="p1"><span class="s1">The public generally responds negatively to the notion of variable charges or tolls on highways, but they should know that highway tolls are not just another tax. Most taxes discourage economic activity, whereas highway tolls reduce congestion and can actually save taxpayers money on the construction of unnecessary additional highway capacity. Evidence from London and Sweden suggests that drivers’ attitudes toward variable charges change once they experience the resulting decline in congestion.</span></p> <p class="p1"><span class="s1">As California moves to a VMT tax, state officials shouldn’t be satisfied with a simple, flat-road charge. Taking advantage of GPS tracking to raise the cost of driving on congested highways during peak traffic times would go a long way toward solving the state’s serious and costly congestion problems. Washington could help California — and, indeed, every state — capture these gains by eliminating tolling restrictions on highways that receive federal funding.</span></p> Thu, 26 May 2016 11:34:32 -0400 Further Reforms Are Needed for the Retirement System of Alabama <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Defenders of Alabama's tenuous pension status quo accurately point out that we have not yet seen the full effects of the 2011 and 2012 reforms to the Retirement System of Alabama (RSA). Unfortunately, that is not an excuse to avoid further action.</span></p> <p class="p1"><span class="s1">My recent <a href=""><span class="s2">study</span></a> (coauthored with my colleague John Dove) finds that unfunded pension liabilities, as reported by the RSA, represent a substantial budgetary problem for Alabama, even with the recent reforms. The reality is that the problem is much worse than even the numbers reported by the RSA.</span></p> <p class="p1"><span class="s1">Robert Novy-Marx, a professor of business administration at the Simon Graduate School of Business at the University of Rochester, and Joshua Rauh, a professor of finance at the Stanford University School of Business, <a href=""><span class="s2">find</span></a> that state pension plans across the nation use economically invalid actuarial methods that <a href=""><span class="s2">obscure the true extent of the looming pension crisis</span></a>. In fact, an <a href=""><span class="s2">overwhelming majority of surveyed policy economists</span></a> believe that state pension funds, like the RSA, use misleading actuarial methods to understate liabilities. Novy-Marx and Rauh conservatively estimate that properly accounting for these pension liabilities adds $3.23 trillion to state debt across the nation. This has led some scholars to warn of a coming <a href=""><span class="s2">"fiscal ice age"</span></a> that state and local governments are going to face as pension obligations consume a larger portion of their budgets, leaving less for schools, infrastructure, and public safety.</span></p> <p class="p1"><span class="s1">All actuarial calculations rely on assumptions. For instance, the RSA's reported funded ratio depends on the RSA's assumed 8% rate of return. Pension experts believe this poses two problems. First, it doesn't reflect the realities of the <a href=""><span class="s2">low-interest rate</span></a> environment of our current economy. Second, even if an 8% rate of return is justified, it does not make economic sense to use the RSA's assumed rate of return as the discount rate for liabilities.&nbsp;</span></p> <p class="p1"><span class="s1">On the first problem, Andy Kessler, in the <a href=""><span class="s2"><i>Wall Street Journal</i></span></a>, calls inflated assumed rate of returns in public pensions the "biggest lie in global finance."&nbsp; While the RSA assumes an 8% rate of return, its rate of return over the 2014-15 fiscal year was <a href=""><span class="s2">1.04% (TRS), 1.05% (ERS), and -.54% (JRF). The RSA's 10-Year returns for the TRS, ERS, and JRF were 5.41%, 5.16%, and 6.10%.</span></a> The reality is that it is hard to achieve an 8% rate of return in today's <a href=""><span class="s2">low-rate environment</span></a>without taking on additional risk.</span></p> <p class="p1"><span class="s1">By comparing the RSA's assumed 8% rate of return to the risk-free rate of return each year, we can calculate the RSA's assumed risk premium, a measure of how much risk the RSA would be taking on to achieve its target rate of 8%. Since 2003, the RSA's risk premium has increased 35%. In comparison, the RSA's assumed rate of return would be around 6.5% if they had maintained a constant risk premium over this time period. With the RSA's reported funding health increasingly relying on higher levels of assumed risk, these assumptions have translated into real risk exposure for taxpayers. Equity investments, the riskiest class of investments, have increased from <a href=""><span class="s2">43.5% of the TRS's portfolio to 66.8%. The ERS (47% to 65%) and JRF (48.6% to 70.6%)</span></a> have similarly shifted to riskier investment strategies since 2001.</span></p> <p class="p1"><span class="s1">On the second problem, the RSA's funded ratio calculation takes their assumed 8% rate of return and then uses it as the discount rate for their liabilities. In their study published in the <a href=""><span class="s2"><i>Journal of Economic Perspectives</i></span></a>, Robert Novy-Marx and Joshua Rauh find that using an assumed rate of return as a discount rate does not have a "valid economic motivation." The only justification for discounting liabilities at a higher rate than the risk-free rate (the guaranteed rate), would be if the State of Alabama and the RSA were assuming that these pension obligations weren't guaranteed, <a href=""><span class="s2">meaning that, in evaluating the funding health of the RSA, they are factoring in a probability of defaulting on their own promises made to RSA members</span></a>. Using a higher rate to discount liabilities substantially understates the liabilities owed to retirees, making it more difficult for the state to plan and budget to meet these obligations.&nbsp; If the RSA's promised benefits are, in fact,<a href=""><span class="s2">guaranteed</span></a>, they should be accounted for using a guaranteed, risk-free, discount rate.</span></p> <p class="p1"><span class="s1">Using an economically valid risk-free rate to discount liabilities provides a much more realistic assessment of the health of the RSA. For instance, the funded ratios–the percentage of actuarial liabilities that are covered by actuarial assets–for the TRS, ERS, and JRF fall to as low as 32%, 32%, and 29% respectively using a 15-Year Treasury bond rate. This risk-free discount rate brings total TRS, ERS, JRS, unfunded liabilities to $61 billion. Even if we put every cent of our tax revenues towards paying this liability, it would take a staggering 6.66 years to completely fund these pension obligations (based off of constant 2014 tax revenue).</span></p> <p class="p1"><span class="s1">We hope that RSA members, policymakers, and concerned taxpayers will take the time to read our <a href=""><span class="s2">report</span></a>. Many states across the country are facing similar pension problems and have undertaken, or are considering, the structural reforms necessary for establishing a sustainable retirement structure for state employees, teachers, and judges.</span></p> <p class="p1"><span class="s1">RSA members and Alabama taxpayers have too much at stake to settle for temporary reforms.</span></p> Thu, 26 May 2016 11:16:49 -0400 Why the New Nutrition Labels Won't Work <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The Food and Drug Administration’s Office of Nutrition has a tendency to cling to bad policies and reject any new ideas. So it was <a href=""><span class="s2">back in the 1990s</span></a>, and so it is now—a couple of decades later.</span></p> <p class="p1"><span class="s1">The latest evidence came Friday when it released a long-awaited proposal to fix the nutrition label. The proposal received widespread praise, including by the first lady and the FDA commissioner who touted it as a “valuable resource.” Just one problem: The idea of a label makes much more sense on paper than it does in real life. Consumers don’t really use nutrition labels to eat healthier because it’s too complicated to try and combine all of the information into one decision. Perhaps even worse, what we know about the relationship between diet and disease is almost entirely <a href=""><span class="s2">based</span></a> on data that come from people trying to remember what and how much they ate. Their memories are terrible, and subsequent study has shown that the data are flat wrong. The FDA needs to give up on this failed policy and try other ideas that help consumers make healthier choices.</span></p> <p class="p1"><span class="s1">How am I so sure that the nutrition facts panel has been a failure? Because I made all of the upbeat predictions about how helpful it would be when, in 1993, we implemented the Nutrition Labeling and Education Act of 1990. That law created, among other things, the Nutrition Facts Panel that you see on the back of packaged food. At the time, I was the chief economist at the Center for Food Safety and Applied Nutrition in the FDA and I <a href=""><span class="s2">asserted</span></a> that people would see this information and use it to make wise, healthy choices, which would lead to better health outcomes for the nation. We thought we would see about 40,000 fewer cases of cancer and heart disease over the next 20 years and prevent 13,000 deaths.</span></p> <p class="p1"><span class="s1">Sadly, as nearly a quarter of a century of experience has revealed, pretty much none of that occurred. Today, fewer people read food labels, and most Americans think it’s easier to figure out their income taxes than to really understand how to eat healthy. After all, who knows how to trade off the different kinds of good fats and bad fats and good fiber and—in some cases, but not all—bad sodium and calories all together. If you don’t know, don’t feel bad; virtually no one does. The FDA suggests using its “<a href=""><span class="s2">5/20 rule</span></a>,” which calls for limiting the bad characteristics of the food you buy to less than 5 percent and making sure the good ones exceed 20 percent. Unfortunately, the science doesn’t tell us whether this actually helps.</span></p> <p class="p1"><span class="s1">Part of the problem is that different people have different dietary needs. As scientific advances move toward allowing doctors to offer customized treatment plans for patients based on very specific needs, nutrition science continues to use a one-size-fits-all solution.</span></p> <p class="p1"><span class="s1">But even if everyone’s needs were uniform, <a href=""><span class="s2">research</span></a> from the FDA’s sister agency, the Department of Agriculture, shows that the nutrition labeling law has no effect on consumption of total fat, saturated fat or cholesterol. Another <a href=""><span class="s2">study</span></a> suggests that food labels may be actually misleading to consumers who are trying to make healthy choices.</span></p> <p class="p1"><span class="s1">Nutrition science also turns out to be much more uncertain than we thought. To estimate the effects of the label changes in the ’90s, we used nutrition science to link dietary fat to cancer, but now it <a href=""><span class="s2">appears that relationship doesn’t exist</span></a>. We also linked high levels of LDL cholesterol to heart disease, but the age-adjusted decreases in coronary heart disease <a href=""><span class="s2">ceased to decline</span></a> even as LDL continued to decline.</span></p> <p class="p1"><span class="s1">In its latest iteration, the FDA is updating two of the least understood parts of the nutrition label: the Daily Reference Values and Reference Daily Intakes. The former is the average percentage of a nutrient that a serving of a food provides in a day and the latter is the numerical quantities of the amounts of macronutrients that a person who consumes 2,000 calories per day needs<b>. </b>From a nutritionist’s perspective, those values may be useful information. But for most Americans, they are entirely meaningless and may serve only to discourage consumers from even looking at the label. One of the lead nutritionists at the FDA once told me that the problem was so complex, she would need to sit down with every American family for at least 15 minutes to explain the label.</span></p> <p class="p1"><span class="s1">If the nutrition label doesn’t work, how else can the government help consumers make more informed, healthier choices? For starters, the FDA should be more like the Defense Advanced Research Projects Agency, the people who created the Internet. Instead of just focusing on trying to fix the unfixable, the FDA could shift its focus toward thinking more creatively about viable solutions and give up on what isn’t working.</span></p> <p class="p1"><span class="s1">First, the FDA would need to honestly concede how little it knows about how different foods and food combinations actually affect individuals with distinct genetic and environmental factors, along with their personal preferences or capacity (or willingness) to exercise. The FDA would need to expand its base of knowledge and understanding within these areas and then consider how manufacturers and consumers would respond to any changes the FDA suggests as a result.</span></p> <p class="p1"><span class="s1">The FDA may need to think beyond labels or, at a minimum, think about something <a href="'Abbe.pdf"><span class="s2">simpler</span></a> like front-of-package signals that would convey the food’s nutrition information as a “healthier” or “less healthy” choice. Or maybe it’s time to start thinking even more outside the panel and consider using genetic modification to create foods that are healthier—as the researchers at the John Innes Centre did when they created a <a href=""><span class="s2">tomato</span></a> packed with extra antioxidants meant to fight cancer.</span></p> <p class="p1"><span class="s1">Eventually, rather than consumers relying on poor memories of what they have eaten, we’ll have personal nutrition monitoring devices (including apps on <a href=""><span class="s2">cellphones</span></a>) that can scan bar codes in grocery stores and input <a href=""><span class="s2">better data</span></a> for <a href=""><span class="s2">actual meal intake</span></a>. Rather than relying on faulty recall data, this could generate accurate data to establish diet-disease relationships—e.g., diets high in saturated fat leading to heart disease. The FDA can play a role in providing food labels that have more information in bar codes on packages or <a href=""><span class="s2">electronic tags within foods</span></a>, which can provide more useful information to help with individual diets.</span></p> <p class="p1"><span class="s1">Whatever the FDA does, it should study, test and try pilot programs first—but it should not experiment on the entire American population without performing this due diligence. The health of 320 million people is far too important to leave to outdated policies and practices. The Nutrition Facts Panel is certainly not improving our health—and more and more tinkering is just poor policy.</span></p> Thu, 26 May 2016 11:10:33 -0400 The Uncompetitive Effects of Tax Harmonization <h5> Expert Commentary </h5> <p class="p1"><span class="s1">During a visit to the World Bank this week, I got a sobering lesson about the degree to which the people working at international bureaucracies, including the Organization for Economic Cooperation and Development, dislike tax competition.</span></p> <p class="p1"><span class="s1">For years, these organizations — which are funded with our hard-earned tax dollars — have bullied low-tax nations into changing their tax privacy laws so uncompetitive nations can track taxpayers and companies around the world. The global bureaucrats want to rewrite the rules of international commerce to protect uncompetitive nations, such as France, from the consequences of reckless fiscal policy.</span></p> <p class="p1"><span class="s1">The bureaucracies, which are controlled by high-tax nations, don't like it when companies, investors and entrepreneurs invest their capital in low-tax nations.</span></p> <p class="p1"><span class="s1">They have a point. Tax competition means that taxpayers can shop around for the best place to invest money based on a variety of factors, including the tax treatment of their investment. As a result, capital will most likely flow out of high-tax nations to go to a low-tax environment. And that's a good thing.</span></p> <p class="p1"><span class="s1">As Nobel laureate Gary Becker wrote, "competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations."</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1">It was the friendly but fierce tax competition between then-Prime Minister Margaret Thatcher in the United Kingdom and President Ronald Reagan in the United States that led to significant reductions in top marginal income tax rates in both countries, as well as a cut to the corporate rate. Arguably, the cuts unleashed the economic growth of the '90s and led other countries to cut their taxes, too. This is why, as another Nobel laureate, James Buchanan, said, "tax competition among separate units ... is an objective to be sought in its own right."</span></p> <p class="p1"><span class="s1">In most cases, investing in low-tax nations isn't illegal; the problem for high-tax nations and those at the World Bank is that it's getting in the way of maximum tax extractions for countries such as France. They also claim that their fight against tax competition is a fight against tax evasion. However — as we have seen after the release of the Panama Papers, which were stolen from Panama-based firms — for the most part, taxpayers are pretty honest. Politicians, not so much.</span></p> <p class="p1"><span class="s1">Now, some people do evade taxes by investing their assets in low-tax countries. However, that's no reason to force low-tax countries to act as deputy tax collectors. Investors have committed no crime in the country where the money is invested, and low-tax nations shouldn't have to enforce other countries' tax laws unless they sign a tax treaty for that purpose. Second, a more effective way to fight evasion would be for high-tax nations to implement a reasonable and non-punitive tax code that finances a modest-sized, non-corrupt government. This would instantly improve tax compliance.</span></p> <p class="p1"><span class="s1">Translation: If France is upset about tax evasion, it should cut the size of its government and reform its confiscatory tax regime. Forcing financial institutions to automatically share the private information of all their foreign clients won't solve anything.</span></p> <p class="p1"><span class="s1">While international bureaucrats enjoy tax-free salaries, they never tire of trying to raise taxes on everyone else. Take the Organization for Economic Cooperation and Development's latest attempt to impose a one-size-fits-all system of "automatic information exchange" that would necessitate the complete evisceration of financial privacy around the world. A goal of the Convention on Mutual Administrative Assistance in Tax Matters is to impose a global network of data collection and dissemination to allow high-tax nations to double-tax and sometimes triple-tax economic activity worldwide. That would be a perfect tax harmonization scheme for politicians and a nightmare for taxpayers and the global economy.</span></p> <p class="p1"><span class="s1">This is bad policy regardless, but just imagine what it would mean for the United States to exchange sensitive financial information — such as balances, interest, dividends and proceeds from sales of financial assets — about American citizens or corporations with countries that have systemic problems with corruption or aren't so friendly to us.</span></p> <p class="p1"><span class="s1">Somehow the bureaucrats persuaded the lawmakers on the Senate Foreign Relations Committee to approve it. Thankfully, it's currently being blocked by Sens. Rand Paul, R-Ky., and Mike Lee, R-Utah. But the bureaucrats won't give up. They are true believers in tax harmonization.</span></p> Thu, 26 May 2016 11:05:44 -0400 Treasury Must Not Forget That with Lending, Ignorance Isn't Bliss <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The use of technology to better assess a potential borrower's risk profile and score borrowers who previously could not be scored-or were scored inaccurately-is one of the most exciting elements of marketplace lending. That is, of course, unless you are the U.S. Treasury Department, which according to its recently released <a href=""><span class="s2">report on marketplace lending</span></a> worries that technology will make loan underwriting too good. That isn't a typo; the Treasury is worried that better underwriting may be "unfair" because it can disadvantage borrowers who are currently mischaracterized as low risk by making them pay higher (that is to say, correct) rates.</span></p> <p class="p1"><span class="s1">Such thinking is dangerous and itself unfair. It's unfair to lenders. It's unfair to borrowers who are currently and mistakenly treated as high risk. And it's unfair to the very borrowers who are currently miscategorized as low risk. Rather than something to be feared, more accurate pricing is essential to expanding capital access and protecting borrowers, and Treasury should not discourage it.</span></p> <p class="p1"><span class="s1">It's important to remember that the interest charged on a loan partially compensates the lender for the risk that the borrower may not pay the money back. The underwriting used to assess this risk and set the rate is inherently uncertain, since the lender doesn't know what the borrower will do and can only use information-about the borrower's circumstances, past acts, and people who are similarly situated to the borrower-to form a guess.</span></p> <p class="p1"><span class="s1">If the lender cannot be reasonably certain that it will be repaid, or be able to charge an interest rate that compensates for the risk of not getting repaid, the lender won't lend. Discouraging or denying lenders the ability to make the best possible guess is not only unfair to them, but it will also discourage people from putting their money at risk by lending it out, making less capital available for riskier borrowers.</span></p> <p class="p1"><span class="s1">Discouraging better underwriting will also be unfair to borrowers who are currently inaccurately considered high risk. The traditional tools used to inform underwriting can be incomplete and fail to capture relevant data from sources such as utility bills or rental history, which may provide insight into a borrower's likelihood of paying back a loan. Existing models may inaccurately assess risk, especially for members of groups traditionally underserved by the credit markets.</span></p> <p class="p1"><span class="s1">Newer methods, such as those used by marketplace lenders, may better incorporate and process relevant data, allowing for better scoring. This is obviously good for the borrower, who is now getting credit based on actual risk (or lack thereof), and is therefore paying a lower rate to borrow. These new methods are also good for lenders seeking to loan money to less-risky borrowers, because these tools enable lenders to identify potential customers and compete to serve them. Discouraging new and more accurate underwriting will continue to deny these creditworthy, but improperly scored, borrowers from accessing credit at prices they deserve.</span></p> <p class="p1"><span class="s1">Discouraging better underwriting is also unfair to the borrowers currently inaccurately considered low risk. Underwriting isn't prophecy. It doesn't say for certain whether the borrower will default; it just provides information about the odds of a default happening. This information, communicated through prices, informs borrowers about the risks they are taking and helps them make choices and tradeoffs. More accurate information will improve the quality of those decisions.</span></p> <p class="p1"><span class="s1">While the Treasury is worried about borrowers who are fallaciously considered low risk having to pay more for loans, it should be more concerned about borrowers playing with fire because they lack accurate information. If we care about borrowers' ability to repay, we should want borrowers to have as complete a picture as possible about the risks they face and make decisions informed by that knowledge.</span></p> <p class="p1"><span class="s1">The Treasury cites concerns that more accurate credit models may lead to stratification where those who are credit worthy get access to credit while those who are riskier are frozen out. While such a divided world is undesirable, the answer isn't to discourage accurate underwriting.</span></p> <p class="p1"><span class="s1">First, we should remember that the current system isn't perfect. It creates its own divisions that unfairly penalize people who are credit worthy but whose data doesn't fit the preexisting boxes. Second, inaccurate underwriting gives people at greater risk a false sense of security about their finances. Finally, lenders need information to risk their money, which is essential for credit availability, and better information should help lenders get the info they need.</span></p> <p class="p1"><span class="s1">Instead of discouraging accurate underwriting, the Treasury should advocate for policies that encourage entry and competition, including the use of more accurate and expansive underwriting, so that lenders and borrowers can make informed and mutually beneficial decisions.</span></p> Wed, 25 May 2016 16:01:40 -0400 States Can Pursue Tax Reform While Federal Government Dawdles <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Federal tax reform has been an important election issue in the U.S. for many years and for good reason – complying with the federal tax code <a href=""><span class="s2">costs Americans over $200 billion</span></a> per year. In 2015 it <a href=""><span class="s2">cost the average person $110 and eight hours</span></a> to prepare their tax return. Both <a href=""><span class="s2">Hillary Clinton</span></a> and <a href=""><span class="s2">Donald Trump</span></a> – the likely 2016 presidential nominees – have plans to reform the tax code, but regardless of which one becomes the next president they may have to work with a congress that they don’t see eye to eye with. While this doesn’t make sweeping federal tax reform impossible, it does make it more difficult.</span></p> <p class="p1"><span class="s1">Thankfully there are plenty of reforms that state governments can implement that will make Americans’ lives better, even if we remain stuck with the convoluted federal tax code. To better understand what it takes to pass comprehensive tax reform at the state level, <a href=""><span class="s2">new research published by the Mercatus Center</span></a> at George Mason University examines five recent cases: Utah, Rhode Island, Michigan, Kansas and North Carolina.</span></p> <p class="p1"><span class="s1">The legislature in all five of these states passed comprehensive tax reform bills over the past 10 years and each instance provides insight into what it takes to accomplish a task that has eluded the federal government for years.</span></p> <p class="p2"><span style="font-size: 12px; background-color: white;">But before we can critique a state’s tax reform we need to know what good tax policy looks like. Adam Smith </span><a style="font-size: 12px; background-color: white;" href=""><span class="s2">wrote about the characteristics of good tax policy</span></a><span style="font-size: 12px; background-color: white;"> in his famous </span><i style="font-family: inherit; font-weight: inherit; background-color: white;">Wealth of Nations</i><span style="font-size: 12px; background-color: white;"> and his insights remain relevant. </span><a style="font-size: 12px; background-color: white;" href=""><span class="s2">Good tax policy</span></a><span style="font-size: 12px; background-color: white;"> should minimize distortions by having low rates and few deductions or exemptions, be easy to understand, be equitable, and be effective at raising necessary revenue.</span></p> <p class="p1"><span class="s1"><b>Success in Utah</b></span></p> <p class="p1"><span class="s1">Of the five states studied, Utah’s 2006 reform appears to have been the most successful. The income tax was simplified from six brackets to one and many deductions were eliminated, which made it less distortionary and easier to understand. The study also notes that Utah was able to improve the efficiency of its tax system without experiencing severe drops in revenue.</span></p> <p class="p1"><span class="s1">According to the study, Utah’s tax reform was successful because its supporters were able to identify key stakeholders and include them in the reform process. This ensured that any reform that reached the governor’s desk had broad support. The study also points out that Utah has had a relatively high level of economic freedom for many years. This is a sign that the institutions and cultural attitude required for comprehensive tax reform were in place.</span></p> <p class="p1"><span class="s1"><b>Problems in Kansas</b></span></p> <p class="p1"><span class="s1">Contrary to Utah’s experience, Kansas’ 2012 tax reform was more problematic. While the number of tax brackets was reduced from three to two and several tax credits were eliminated in order to broaden the base, Kansas’ reform also created a major distortion by exempting some business income from taxation.</span></p> <p class="p1"><span class="s1">This reform has allowed some businesses to avoid income taxes altogether which encourages others to mimic that behavior in order to minimize their tax own tax burden. One such example is <a href=""><span class="s2">University of Kansas basketball coach Bill Self</span></a>, who is primarily paid through his business entity that is exempt from state income taxes. The distortion in Kansas’ tax code incentivizes this behavior.</span></p> <p class="p1"><span class="s1">Another problem with Kansas’ tax reform is that the decline in tax revenue due to the reform was not matched by a similar decline in spending. This has resulted <a href=""><span class="s2">in budget deficits</span></a>. In Utah and the other cases studied tax reform was accompanied by reductions in state spending, which is crucial for maintaining a balanced budget.</span></p> <p class="p1"><span class="s1"><b>Comprehensive tax reform is easier under a unified government</b></span></p> <p class="p1"><span class="s1">More generally, the study notes that in three of the five cases the state government was unified in terms of political party: In Utah, Kansas, and North Carolina both the executive and legislative branch were under the control of Republicans. The study highlights this as evidence that comprehensive tax reform is easier under a unified government. Since the federal government is rarely unified for long it’s not surprising that federal tax reform has been more difficult to achieve.</span></p> <p class="p1"><span class="s1">Most people think of Republicans when they think of tax reform, but the experiences of Rhode Island and Michigan show that Democrats are also receptive. In Rhode Island, Democrats controlled both branches of the legislature but not the governor’s mansion, while in Michigan power was split between Democrats (Governor and House) and Republicans (Senate) leading up to reform.</span></p> <p class="p1"><span class="s1">Regardless of who the next president is, comprehensive federal tax reform will take time. But while we are waiting state officials can act to simplify their tax codes to reduce distortions, increase transparency, and – if done correctly – make tax season a little less painful.</span></p> Wed, 25 May 2016 15:58:25 -0400 Free Speech Is Good for the Economy <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Commencement season is now underway, and President Barack Obama recently <a href=""><span class="s2">had the honor of speaking at Howard University</span></a>. His speech touched on a variety of topics, including the troubling <a href=""><span class="s2">trend of colleges canceling speakers</span></a> that some students and faculty find offensive. The president is right that people should engage with one another on the battlefield of ideas rather than try to silence those with whom they disagree. <a href=""><span class="s2">As many people have pointed out</span></a>, this engagement is important for a well-functioning democracy. But what people may not realize is that it's critical for a well-functioning economy as well.</span></p> <p class="p1"><span class="s1">New ideas and innovation <a href=""><span class="s2">are necessary for sustaining economic growth</span></a>, and there's a large body of evidence that emphasizes <a href=""><span class="s2">the exchange of ideas</span></a> as an important component of an innovative economy. The United States has been especially successful at fostering innovation and growth in the technology sector. Facebook's market capitalization alone <a href=";pg=PT68&amp;lpg=PT68&amp;dq=adam+thierer,+unicorns&amp;source=bl&amp;ots=Jpaj9ANZIc&amp;sig=746LjTmjwrINvg5v6LJag2Km-W4&amp;hl=en&amp;sa=X&amp;ved=0ahUKEwi6r_eOurTMAhVLOj4KHXG7CkIQ6AEIQTAI#v=onepage&amp;q=adam%20thierer%2C%20unicorns&amp;f=false"><span class="s2">is twice the size of all the large European tech giants</span></a> combined. There's good reason to believe that America's economic prosperity in this rapidly changing sector is due to its commitment to the free exchange of ideas.</span></p> <p class="p1"><span class="s1">The theory that ideas and innovation are crucial to economic growth is an old one. <a href=""><span class="s2">Joseph Schumpeter's "creative destruction</span></a>" is perhaps the best known explanation of the role that innovation plays in the economy. Schumpeter explained that competition requires firms to constantly innovate, since those that don't will quickly be replaced by those that do. Ultimately micro-level creative destruction helps drive macro-level economic growth.</span></p><p class="p1"><span class="s1"><a href="">Continue reading</a></span></p> Wed, 25 May 2016 15:47:42 -0400 Can a Bot Run a Company? <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Can a bot run a company? A hot new tech venture that wants to run entirely by code thinks so. It's called "<a href=""><span class="s2">The DAO</span></a>"—short for Decentralized Autonomous Organization—and it aims to run as a for-profit corporate body that will obviate the need for human beings to make business decisions. That is, provided that the human beings behind The DAO can set it up right.</span></p> <p class="p1"><span class="s1">While this leaderless digital profit-maximization machine may sound more like a <a href=""><span class="s2">clever science fiction plot device</span></a> than a serious investment vehicle, <a href=""><span class="s2">The DAO has raised over $150 million</span></a> worth of funding <a href=""><span class="s2">on the Ethereum platform</span></a>since it first launched a mere month ago. For context, this blew the <a href=""><span class="s2">$116 million record</span></a> for cryptocurrency-business financing raised by Silicon Valley darling 21 Inc. out of the water. An eyebrow-raising start to be sure, but The DAO faces a long and bumpy road to the world of ubiquitous, autonomous digital organizations that its founders envision.</span></p><p class="p1"><span class="s1"><a href="">Continue reading</a></span></p> Thu, 26 May 2016 17:31:34 -0400 The Federal Government on Autopilot: Delegation of Regulatory Authority to an Unaccountable Bureaucracy <h5> Publication </h5> <p>Dear Chairman King and Ranking Member Cohen:</p> <p>My name is John D. Graham, Dean of the Indiana University School of Public and Environmental Affairs and former administrator of the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget (2001–2006). In my capacity as editor of an article series organized by the Mercatus Center at George Mason University and published in volume 37, issue 2 of the <i>Harvard Journal of Law &amp; Public Policy</i>, I submit the attached articles as my written testimony for the Executive Overreach Task Force’s hearing on May 24, 2016, entitled “The Federal Government on Autopilot: Delegation of Regulatory Authority to an Unaccountable Bureaucracy.”</p> <ul> <li>John D. Graham and James W. Broughel, “Stealth Regulation: Addressing Agency Evasion of ORIA and the Administrative Procedure Act,” <i>Harvard Journal of Law &amp; Public Policy</i>, Federalist Edition 1, no. 1 (2014).</li></ul> <ul> <li>John D. Graham and Cory R. Liu, “Regulatory and Quasi-Regulatory Activity without OMB and Cost-Benefit Review,” <i>Harvard Journal of Law &amp; Public Policy</i> 37, no. 2 (2014).</li></ul> <p>The viewpoints in my testimony do not necessarily reflect the viewpoints of the Mercatus Center at George Mason University or the School of Public and Environmental Affairs at Indiana University.</p> <p>I also attach my “Truth in Testimony” disclosure form and a brief biography.</p> <p>Sincerely,</p> <p>John D. Graham, PhD<span style="background-color: #b0b0b0;"><br /></span><span style="font-size: 12px; background-color: white;">Dean, Indiana University School of Public and Environmental Affairs</span></p> Tue, 24 May 2016 15:00:57 -0400 The Joint Budget Resolution: A More Collaborative Budget Process <h5> Publication </h5> <p><i>This essay is an edited excerpt from the 2015 Mercatus Research study, “The Budget Act at Forty: Time for Budget Process Reform,” which reviewed process reforms that can help facilitate agreement between Congress and the president and can focus attention on long-term spending commitments.</i></p> <p>The Congressional Budget and Impoundment Control Act of 1974 established the modern federal budget process. All signs indicate that the act, now four decades old, is not working.</p> <p>The fundamental problem with the nation’s finances—and thus the problem our budgetary procedures should focus on solving—is the runaway expense of entitlement programs, often described as “mandatory spending.” The current budget process does not force policymakers to confront the pressure that these massive programs exert on the federal budget. The process also lacks a ready mechanism for bridging the predictable conflicts that occur between the president and Congress.</p> <p>A joint budget resolution (JBR) could provide a partial antidote for the problems of budgetary drift, rising entitlement spending, and endless inertia in current federal budgeting practices. While today’s congressional budget resolution (CBR) applies restrictions only to consideration of legislation in Congress, the JBR is signed by the president and becomes law. It would thus have the potential to facilitate an agreement between the executive and legislative branches on key budgetary provisions that would govern decisions later in the budget process, and it could provide more structure and stability to government finances.</p> <p><b>THE ORIGINS OF TODAY’S BUDGET PROCESS</b></p> <p>The Budget Act of 1974 was enacted to turn back executive branch overreach in budgeting and to increase the legislative branch’s role in policymaking by creating an organized congressional process for budget development.</p> <p>The Budget Act’s most important institutional change was the creation of the House and Senate budget committees and the Congressional Budget Office (CBO). With the help of CBO’s independent and nonpartisan budgetary analyses, the budget committees develop a congressional budget resolution that serves as a counter or response to the president’s annual budget submission.</p> <p>Under the Budget Act, the CBR is not a law. Rather, it is a concurrent resolution, which means it is only relevant for Congress—the president is in no way bound by the CBR. If there is an ongoing disagreement between the branches, the anticipation of a veto is usually enough to bring the entire budget process to a standstill. This is an important reason why there are regular, drawn-out budget fights between Congress and the president.</p> <p><b>MOVING TO A JOINT BUDGET RESOLUTION</b></p> <p>A joint budget resolution<b> </b>may provide a better way forward. As a JBR must be signed into law, it has the potential to facilitate—and perhaps even pressure—agreement between the legislative and executive branches on key budgetary provisions that would govern decisions made by both branches later in the year.</p> <p>While today’s process allows for ad hoc negotiations on multiyear budgets, there is no expectation of regular legislative-executive engagement on a budget framework. This is one reason why the two branches engage so infrequently, allowing both branches to put off pressing fiscal issues like entitlement reform.</p> <p>The JBR would address each of the main decision points of a federal budget: discretionary spending (perhaps with separate limitations on defense and nondefense spending), entitlement programs, and revenue. Constructing the JBR in this way would help policymakers think more clearly about tradeoffs between the key budget categories and about projected deficit spending and debt. For instance, Congress and the president could choose to put more pressure on entitlement programs to ease pressure on discretionary accounts (or vice versa). They could also authorize higher levels of spending, but that would also mean larger deficits and higher debt. And proposals that cut deficit spending with tax hikes would be clearly identified in the budget plan.</p> <p><b>THE ENFORCEMENT MECHANISM</b></p> <p>The purpose of establishing an enforceable budgetary framework in a JBR is to set in motion additional legislation in Congress to bring programs and taxes in line with budget totals. Presumably, large changes in entitlement spending and taxes contained in a JBR would be assigned to the authorizing committees in the form of reconciliation instructions. This would allow fast-track consideration of the reforms implied in the JBR’s top-line numbers.</p> <p><span style="font-size: 12px;">Congress will only feel the pressure to act on tough legislative reforms if the budgetary caps in the JBR are binding in some way. It is critical, therefore, that the JBR have the capacity to trigger discipline in mandatory spending, along with enforceable caps on discretionary expenditures. Indeed, the primary advantage of the JBR over the CBR is that budgetary limits can be coupled with enforcement actions if they are combined in a law signed by the president.</span></p> <p>Budget sequestration—automatically triggered spending reduction—has been effective at controlling discretionary spending and could be continued in its current form in a JBR. Sequestration eliminates spending above the agreed-upon cap by applying a uniform, across-the-board cut to all nonexempt programs at a rate sufficient to eliminate the breach.&nbsp;</p> <p>Restraining mandatory spending will require additional features. Spending could be cut by canceling future spending increases and planned program liberalizations. Those changes could be coupled with other predetermined mechanisms of restraint.</p> <p>The process for enforcing mandatory spending levels should be recalibrated periodically so that actual spending is brought in line with the JBR levels based on revised estimates. In addition, spending restraint should be implemented over several years, perhaps as many as five, to avoid abrupt annual adjustments.</p> <p>Some programs for very low-income Americans, such as Supplemental Security Income, should be exempted from an enforcement mechanism for mandatory spending, but it is not unreasonable to include some income-support programs within the parameters of an enforcement approach. For instance, if spending breached an upper limit, eligibility for the Supplemental Nutrition Assistance Program might be lowered modestly for the highest-income participants. Similar adjustments could be made to other programs.</p> <p>Medicare and Medicaid should be explicitly included in the enforcement mechanism. For example, Medicaid matching payments to states should be reduced as needed to help keep total spending on mandatory programs below the cap. States will rightly complain that this move will burden their budgets. They should be granted relief from existing federal Medicaid mandates to provide them with flexibility when coping with this cut.</p> <p>Automatic cuts to Medicare should be designed to promote reform rather than hinder it, meaning cuts should focus on adding much-needed cost consciousness to the program’s design. For example, higher-income beneficiaries should be required to pay more for their services, and all beneficiaries should be required to pay something when they receive care.</p> <p><span style="font-size: 12px;">Finally, an effective sequester design would preclude any automatic increases if spending came in below the budget resolution caps. Any new spending would require legislation.</span></p> <p><b>IMPLEMENTING THE JOINT BUDGET RESOLUTION</b></p> <p>The Budget Act should be amended to allow an optional JBR “spin-off” from any CBR agreed to by both the House and Senate. Congress would not have to pursue a JBR, but if it chose to do so, the legislation would automatically be sent to the president upon adoption of a CBR. The JBR would reflect the key budgetary aggregates: total discretionary spending, total mandatory spending, revenues, deficits, and debt. The president could then approve or veto the bill.</p> <p>If the president vetoed the JBR, the process would revert back to the process that is in place today under the Budget Act. Congress could proceed under the terms of the budget resolution, and engagement with the executive branch would be postponed until later in the year when the spending and tax bills flowing from that budget move to the president. If, however, the president agreed to the JBR, the budget framework contained within it would be law, and both branches would be bound by it.</p> <p><b>CONCLUSION</b></p> <p>Reforming the congressional budget process cannot make up for a lack of political will, nor can it substitute for the policy changes necessary to correct the government’s fiscal problems. Yet the right reforms to the process, including the JBR, can open up new potential for agreements between Congress and the president and can focus attention on long-term spending commitments. Even in times of divided government, the JBR would allow for engagement between the branches that might, under some circumstances, facilitate compromise and agreement.</p> Wed, 25 May 2016 13:32:57 -0400 Save Puerto Rico by Setting the Island Free <h5> Expert Commentary </h5> <p class="p1"><span class="s1">There’s an old saying about raising children that “healthy birds fly away from the nest.” Applying this concept to territories of the United States, it may be time to consider setting a timetable for Puerto Rican independence as part of any effort by federal policymakers to help the beleaguered island regain its financial health.</span></p> <p class="p1"><span class="s1">Puerto Rico is the largest of the United States’ territories in terms of size and population. It’s also one of the largest headaches currently facing policymakers. That’s because the Caribbean island located <a href=""><span class="s2">1,000 miles southeast</span></a> of Miami is mired in a debt crisis thanks to a long-slumping economy — an economy hindered by counterproductive federal policies and its own fiscal incompetence.</span></p> <p class="p1"><span class="s1">Puerto Rico’s debt obligations have reached <a href=""><span class="s2">$72 billion</span></a> (<a href=""><span class="s2">roughly equal</span></a> to the size of its entire economy), and thanks to lavish benefits given to government employees over the decades, it faces more than <a href=""><span class="s2">$40 billion</span></a> in unfunded liabilities. The island defaulted on<a href=""><span class="s2"> $400&nbsp;million in debt service</span></a> payments at the beginning of May, and the prospects of it making good on another <a href=""><span class="s2">$1.9 billion in early July</span></a> look bleak unless it works out agreements with creditors or the federal government gets directly involved.</span></p> <p class="p1"><span class="s1">At this point, there’s little doubt that the latter will happen. The big question is how that involvement should be structured. Fortunately, a direct infusion of taxpayer-financed federal aid is unlikely now, though there appears to be sufficient support for legislation that would create an independent <a href=""><span class="s2">financial control board</span></a> to tackle the mess. There’s a genuine concern, however, that such legislation could lead to a trampling of bondholders’ rights and provide an incentive&nbsp;to&nbsp;other states in our union — with their own <a href=""><span class="s2">growing debt problems</span></a> — to hold out for help from the federal government. Other critics argue that Washington should focus on removing federal regulations that impede the island’s economic growth and force the Puerto Rican government to confront decades of fiscal profligacy.</span></p> <p class="p1"><span class="s1">To be sure, policymakers could help the island by exempting it from the federal minimum wage —which <a href=""><span class="s2">helped foster</span></a> the island’s high unemployment rate — and the federal <a href=""><span class="s2">Jones Act</span></a>, which requires shippers to use costly U.S. flagged ships that result&nbsp;in Puerto Rican consumers paying artificially higher prices for goods.</span></p> <p class="p1"><span class="s1">But the issue of Puerto Rico’s status as a territory of the United States should also be included in the discussion. Although it may be unlikely to happen, any legislation addressing the territory’s financial plight should come with a provision laying out a time-frame for the orderly granting of Puerto Rican independence. The idea sounds crazy, but it shouldn’t.</span></p> <p class="p1"><span class="s1">Puerto Rico didn’t become a territory of the United States until it, Guam, and the Philippines were obtained from Spain under the <a href=""><span class="s2">Treaty of Paris in 1898</span></a>, which ended the Spanish-American War. Prior to that, Puerto Rico was <a href=""><span class="s2">under Spanish control</span></a> for centuries. And before that, it was populated by indigenous peoples. American-occupied Cuba, which was relinquished by Spain, was allowed to declare <a href=""><span class="s2">formal independence</span></a>from the United States in 1902 with conditions (that’s why there’s still an American military base in Guantanamo Bay). While Guam remains a U.S. territory (and should also be freed), the Philippines formally obtained its independence back in <a href=""><span class="s2">1946</span></a>.</span></p> <p class="p1"><span class="s1">The point is that the United States’ ownership of Puerto Rico is, historically speaking, relatively new and occurred during a period when the western imperial powers were still fighting over the colonial spoils. Yes, in subsequent decades, the Puerto Rican people <a href=""><span class="s2">received greater control</span></a> over its internal affairs, and today a person born on the island automatically becomes a&nbsp;U.S. citizen. But the fact is that Puerto Rico owes its status to the United States’ lamentable turn toward global territorial expansion.</span></p> <p class="p1"><span class="s1">And what has this territorial expansion brought us? Over 100 years later, the United States’ federal government finds itself with a virtual military empire that, when all related costs like veterans’ benefits are factored in, soaks taxpayers <a href=""><span class="s2">close to $800 billion</span></a> a year. That’s a lot of money to effectively subsidize the defense needs of wealthy allies and exert control over foreign populations for the ostensible purpose of “spreading democracy.” And not coincidentally, the tentacles of the federal government can be found in virtually every aspect of our lives. After all, federal involvement in everything from <a href=""><span class="s2">education</span></a> to the <a href=""><span class="s2">federal highway system</span></a> has been justified on dubious “national security” grounds.</span></p> <p class="p1"><span class="s1">So, while raising the question of Puerto Rican independence might seem quaint, its prominent place in the news is at least an occasion to recognize that big government abroad and big government at home are two sides of the same coin. Relinquishing control of Puerto Rico would be a&nbsp;significant step toward a badly needed downsizing of the federal government.</span></p> Thu, 26 May 2016 13:18:52 -0400 New Overtime Regulations Could Harm Tech Startups and Small Businesses <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The Department of Labor has just finalized their <a href=""><span class="s2">new overtime regulations</span></a>, an update to the Fair Labor Standards Act of 1938 that will raise the salary threshold under which workers will qualify for overtime pay to about $47,476 beginning December 1, 2016. Previously, only workers making under $23,600 were subject to mandatory overtime pay regulation where employers track employee hours and pay them time-and-a-half for every hour worked over 40 hours a week. The Obama White House <a href=""><span class="s2">estimates</span></a> that approximately 5 million workers could be affected by the law, 39% of whom are millennials between the ages of 16 and 34.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1">It’s important to realize that this policy change is not an anti-poverty adjustment to the tax code, like a hypothetical expansion of the Earned Income Tax Credit (EITC), but rather a broad mandate for businesses to fundamentally change their business practices, a requirement that potentially comes with a handful of distortions. In part, the law means that millions of salaried workers will be reclassified to hourly, and many will be “back on the clock,” to use a 20th</span><span class="s3">-</span><span class="s1">century term that has almost fallen out of use.</span></p> <p class="p1"><span class="s1"><b>Overtime pay regulations were originally designed for the working poor in the 20th century manufacturing economy</b></span></p> <p class="p1"><span class="s1">We understand the good intentions of the new regulation. But there are many factors that the Department of Labor did not consider when expanding an 80-year old law in the 21st&nbsp;century. Requiring employers to pay salaried employees by the hour and to pay overtime is more closely aligned with how work was tracked (by the hour) and compensated for in the 20th&nbsp;century manufacturing economy. Furthermore, workers on hourly wages tend to skew toward lower-income workers, so when mandatory overtime regulations were initially extended to those making less than $23,600 annually, the distortionary impact of compliance was mitigated.</span></p> <p class="p1"><span class="s1">By in large, the U.S. economy has since evolved into a services and information economy where more workers are salaried and paid not just in cash but also other forms of benefits such as equity compensation.&nbsp;The White House further <a href=""><span class="s2">estimates</span></a>&nbsp;that 81.8%&nbsp;of workers affected by expanding the mandatory overtime threshold to $47,476 would have some college, a bachelor’s degree or some advanced degree.</span></p> <p class="p1"><span class="s1">For&nbsp;companies below a certain size or certain financing level that employ educated salaried employees, these sorts of rules could do serious harm.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s4"><b>Tech startups,</b></span><span class="s1"><b> non-profits and institutions of higher education are likely to bear the worst brunt of new overtime regulations</b></span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s2"><a href=";utm_medium=social&amp;utm_source=Facebook#link_time=1460265623">Non-profits</a></span><span class="s1"> and&nbsp;<a href=""><span class="s2">institutions of higher education</span></a> have been vocal about how damaging such rules would be for them.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1">Another highly impacted sector is the dynamic area of tech startups.</span></p> <p class="p1"><span class="s1">In their early phases, many tech startups are pre-revenue which constrains their ability to pay employees as they build a vision and a product depending on their access to financing. Even after crossing the hurdle of introducing their product to market, startups often continue to operate on a weak revenue stream. Although many associate tech startups as companies that pay their employees vastly above the $47,476 threshold, this is not the case for all roles in early startups.</span></p> <p class="p1"><span class="s1">Many startups have margins that remain very small, and that is one of the reasons they pay employees in equity instead of cash wages.</span></p> <p class="p1"><span class="s1">The unhindered start-up model with flexible compensation options has played a substantial role in what has often enabled tech startups to take-off. Adding even miniscule costs to their operations could seriously impact the start-up model and unlike large companies which can afford large compliance departments, start-ups cannot easily pass on the cost of this regulation.</span></p> <p class="p1"><span class="s1">Boots Dunlap, the CEO of <i>RRA Capital</i>, a small financial technology company in Scottsdale, Arizona illustrated this point to us in an interview, saying “This new rule will put so many small businesses like mine into cardiac arrest.” He further explained that&nbsp;“It was valiant to attack the Fat Cats of the 1920’s when a few heads of industry controlled the newspapers and politics; however, this rule is designed to continue to widen the gap between small business and big business; between struggling entrepreneurs and the heads of industry.”</span></p> <p class="p1"><span class="s1">Moreover, adjustments to comply with this law are not free. Most small startups do not have in-house counsel or compliance departments. Lawyers who work with start-ups typically charge between $350 and $800 per hour, and legal costs for non-complex matters (such as payroll and worker classification) are about $5,000 a year.</span></p> <p class="p2"><span style="font-size: 12px; background-color: white;">In New York, tech entrepreneur Dan Gelertner of </span><i style="font-family: inherit; font-weight: inherit; background-color: white;">Dittach</i><span style="font-size: 12px; background-color: white;"> explained to us how hard the new rules could be for his new company:</span></p> <blockquote><p class="p5"><span class="s1">In a startup, where our margins are already so tight, where we enter this difficult and dangerous field knowing that the vast majority of us will fail, a small increase in operating cost – a fraction of a percent, even something that costs only a thousand dollars – can make us insolvent. It can mean that all the money and energy we spent up to that point was wasted. It can mean that instead of employing a half-dozen people we can now employ no one at all.</span></p></blockquote> <p class="p1"><span class="s1">Major aspects of the overtime regulation are premised on a traditional view of what it means to work and on a traditional view of compensation structure. These factors are not easily applicable to the 21st&nbsp;century—in particular, to tech startups. While enhanced overtime regulations may make sense in some industries and some company sizes, it doesn’t for many others. In part, various updates to the original Fair Labor Standards Act of 1938 have acknowledged this by creating exemptions for various disciplines, however, technology jobs and small businesses remain non-exempt.</span></p> <p class="p1"><span class="s1">Alex Goldberg, a former tech entrepreneur and now a <a href=""><span class="s2">Managing</span></a>&nbsp;Director of a New-York based venture capital fund, <i>Canary Ventures, </i>argues for why such a tech exemption would make sense:</span></p> <blockquote><p class="p5"><span class="s1">I can imagine some contexts where the overtime regulations are important, with certain vulnerable populations in the workforce. But I do think there are certain types of companies, especially&nbsp;in tech,&nbsp;where a fluidity and variability of a policy would make more sense. In early phases of incubation, it’s quite usual for start-ups&nbsp;to drain their bank accounts,&nbsp;bit by bit. Money is extremely precious and salaries don’t look like what they are in corporate America. So you can imagine that when you have this type of&nbsp;government&nbsp;mandate on start-ups, the speed of innovation will be throttled.</span></p></blockquote> <p class="p1"><span class="s1"><b>Overtime Regulations Impacting Tech Startups and Innovation Could Further Hinder Productivity</b></span></p> <p class="p1"><span class="s1">The updated rules announced today unfortunately indicate that there will be no new exemption for tech companies. As real GDP growth continues to hover around 2%, largely driven by declining productivity, the new overtime rules and their negative impact on innovative tech startups are bound to exacerbate this trend more so than alleviate it.</span></p> Wed, 25 May 2016 10:22:00 -0400 FAA Projections Reflect Deep Uncertainty about the Effect of Regulations on Drone Adoption <h5> Publication </h5> <p><span style="font-size: 12px;">In March of this year, the </span><a href=";SECTION=HOME&amp;TEMPLATE=DEFAULT" style="font-size: 12px;">first FAA-approved autonomous commercial drone delivery</a><span style="font-size: 12px;"> to an urban residence took place in Nevada. This milestone highlights the exciting opportunities that unmanned aircraft systems (UAS) can present. If we get our policies right, UASs can yield dividends in cost savings and economic growth in areas like consumer delivery, agriculture, industrial management, and journalism. A </span><a href="" style="font-size: 12px;">new FAA report</a><span style="font-size: 12px;"> suggests that a poorly considered regulatory regime could severely inhibit the growth of this promising industry before it has a chance to take flight.</span></p> <p><a href=""><img src="" width="585" height="424" /></a></p> <p>This week’s charts use data from a recent Federal Aviation Administration report titled <a href=""><i>FAA Aerospace Forecast, Fiscal Years 2016–2036</i></a>, and show that even the FAA doesn’t know what effect its regulations will have on small UAS (sUAS) adoption over the next five years.<span style="font-size: 12px;">&nbsp;</span></p> <p>The agency’s report features two independently prepared forecasts. Both forecasts assume the same operating limitations for small UAS during the next five years: daytime operations, within visual line of sight, and a single pilot operating only one small UAS at a time. The independent estimates wildly diverged from each other because of the deep uncertainty generated by these regulations.</p> <p>The first chart displays the FAA’s projections of the number of sUAS units that will be sold from 2016 through 2020. The total number of projected model aircraft sales to noncommercial hobbyist operators are displayed in teal, while the projected sales of commercial sUAS units are displayed in green. The total of both categories is displayed on top of the bar for each year. The chart shows that the FAA expects roughly 7 million sUAS units to be sold by 2020, constituted of roughly 4.3 million noncommercial aircraft and 2.7 million commercial aircraft.</p> <p>In addition to this sales estimate, the FAA independently estimated the size of the operational commercial sUAS fleet in the US over the next five years. The agency expects that its final regulations will bifurcate the small drone market into two major categories: one “higher end” market consisting of units with an average sales price of approximately $40,000, and the second “lower end” market of crafts with an average sales price of roughly $2,500.&nbsp;</p> <p><span style="font-size: 12px;"><a href=""><img src="" width="585" height="425" /></a>&nbsp;</span></p> <p>The second chart displays the report’s projections of total “higher end” sUAS units in purple and “lower end” sUAS units in gold. The FAA states that it expects roughly 90 percent of the demand for sUAS units will be satiated by cheaper crafts. By 2020, the agency expects that the total US sUAS fleet will consist of around 542,500 units.<span style="font-size: 12px;">&nbsp;</span></p> <p>The FAA’s two independent projections of sUAS adoption in the US are wildly inconsistent. The agency projects that 7 million sUAS units will be sold by 2020, of which 2.7 million will be commercial aircraft. Yet the agency only expects that around half a million, or 20 percent of all commercial sUAS units they estimate will be sold, will constitute the US fleet of sUAS by 2020.</p> <p><a href=""><img src="" width="585" height="424" /></a></p> <p>The third chart compares the data from the first and second charts. The total number of projected commercial (nonhobbyist) sUAS unit sales are displayed in blue, while the total projected sUAS fleet (lower end and higher end) is displayed in red. Year after year, the FAA projects that the US sUAS fleet will comprise a slim portion of total sUAS sales.</p> <p>The inconsistency in these projections is understandable. The market for sUAS is still nascent, and the effect of the FAA’s regulations on the industry’s viability is unknown. It makes sense that two independent estimates might reach different conclusions about the health of the new industry after the imposition of unprecedented regulations.<span style="font-size: 12px;">&nbsp;</span></p> <p>The fact that there is so much uncertainty about the effect of the FAA’s regulations on the immature and fragile market for sUAS suggests that the regulations are far too burdensome. As Eli Dourado, Ryan Hagemann, and Adam Thierer of the Mercatus Center wrote in a <a href="%22http://">comment to the FAA on the proposed sUAS rule</a>, “An overly precautionary approach will discourage the many benefits associated with this rapidly evolving class of aerial technologies.” In light of the fact that even the FAA now acknowledges the possibility that its proposed rules may seriously damage the sUAS industry, the agency should reverse itself and adopt, as far as possible, a posture of <a href="http://permissi">permissionless innovation</a> toward sUAS.</p> Wed, 18 May 2016 14:49:14 -0400 Certificate of Need Laws Only Complicate Health Care and Stifle Competition <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Sometimes complex problems require complex solutions. Sometimes issues become so twisted and tied that only the most sophisticated answers could solve them. Trying to dissect the current debates over health care would leave one thinking that we've found ourselves in such a mangled situation that only Rube Goldberg himself could devise an appropriate solution.</span></p> <p class="p1"><span class="s1">This thinking, however, is not new or unique to today's debates about health care. In fact, it is what has created much of the current mess in the first place.</span></p> <p class="p1"><span class="s1">Take, for example, little-known yet hugely significant certificate of need or CON laws. Thirty-six states currently require government permission before health care providers can open or expand a practice or invest in certain devices or technology. Permission is granted on the basis of so-called "need" by using complex formulas, hearings and a bureaucratic process that tends to look like high-stakes litigation. In fact, in most instances, current providers are invited to challenge a would-be competitor's right to open a practice. And it may take <a href=""><span class="s2">years and hundreds of thousands of dollars</span></a> before a provider is granted permission to buy something as straightforward as an MRI machine.</span></p><p class="p1"><span class="s1"><a href="">Continue reading</a></span></p> Wed, 18 May 2016 11:34:14 -0400 A Hearing Brought to Tears over Right to Try Legislation <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Last week, Sen. <a href=""><span class="s2">Ron Johnson</span></a> (R-Wis.) introduced new Right to Try (RTT) legislation intended to prevent federal agencies from interfering with or blocking the implementation of RTT laws that have been passed in 28 states to date. I attended Johnson's press conference announcing his RTT bill — the<a href=""><span class="s2"> Trickett Wendler Right to Try Act of 2016</span></a> — and was given the opportunity to speak at the briefing on RTT and the <a href=""><span class="s2">Right to Try Act of 2015 (H.R. 3012)</span></a>, both of which took place in Washington on Tuesday, May 10 — National ALS Advocacy Day.</span></p> <p class="p1"><span class="s1">Johnson's proposal mirrors H.R. 3012, which is sponsored in the House by Rep. <span class="s2"><a href="">Matt Salmon</a>&nbsp;</span>(R-Ariz.). The language of the Senate bill is quite straightforward:</span></p> <blockquote><p class="p1"><span class="s1" style="font-weight: normal;">[T]he Federal Government shall not take any action to prohibit or restrict (1) the production, manufacture, distribution, prescribing, or dispensing of an experimental drug, biological product, or device that (A) is intended to treat a patient who has been diagnosed with a terminal illness; and (B) is authorized by, and in accordance with, State law. ...</span></p><p class="p1"><span class="s1" style="font-weight: normal;">[N]o liability shall lie against a producer, manufacturer, distributor, prescriber, dispenser, possessor, or user of an experimental drug, biological product, or device for the production, manufacture, distribution, prescribing, dispensing, possession, or use of an experimental drug, biological product, or device that is in compliance with [the statute]. ...</span></p><p class="p1"><span class="s1" style="font-weight: normal;">[T]he outcome of any production, manufacture, distribution, prescribing, dispensing, possession, or use of an experimental drug, biological product, or device that was done in compliance with subsection (a) shall not be used by a Federal agency reviewing the experimental drug, biological product, or device to delay or otherwise adversely impact review or approval of such experimental drug, biological product, or device.</span></p></blockquote> <p class="p1"><span class="s1">The last provision is critically important for drug companies, who develop and manufacture the experimental products. Their reticence to provide experimental drugs to patients who are not participating in formal clinical trials is driven mostly by the very real threat that the Food and Drug Administration (FDA) will suspend all studies of the compounds if a severe or unexpected adverse event were to happen in a compassionate use setting, as occurred with <span class="s2"><a href="">CytRx Corp.</a>&nbsp;</span>Additionally, companies fear that adverse events and other outcomes that occur in these uncontrolled settings could hamper interactions with the FDA and have a severe deleterious impact on the development course and timetable, as well as the approval and final labeling of experimental drugs.</span></p> <p class="p3"><span class="s1">J<a href=""><span class="s2">oining Johnson at the event</span></a> announcing his proposed legislation were Tim Wendler and Matt Bellina. Wendler's wife, Trickett, died of ALS (amyotrophic lateral sclerosis) in March of 2015. She was 39 years old — married for just 10 years and balancing a career and three young children — when she was suddenly unable to walk in the middle of a business trip. Two months later, she was diagnosed with ALS. <a href=""><span class="s2">As Trickett states in a moving video</span></a>, "I was literally taking Zumba classes in March and in a wheelchair by July." Trickett's father also had ALS and succumbed to his disease. They also share something else in common: Both were treated with the same drug, Rilutek (riluzole), which was approved in 1995, and slows the progression of the disease, but is not curative. Tim stated that "in a terminal illness, opportunities for hope are few and far between ... and having a bill like this introduced gives an opportunity for hope." He is worried for his three children who are predisposed for developing ALS by virtue of having the inherited gene.</span></p> <p class="p1"><span class="s1">There are experimental drugs in clinical trials for ALS; however, the entry criteria are quite restrictive. Therefore, compassionate-use requests are needed for the vast majority of patients who cannot obtain access to the studies. State RTT and the national bills look to expand the FDA's compassionate-use program. But the FDA maintains that RTT poses a significant threat to patient safety.</span></p> <p class="p1"><span class="s1">Bellina, a 32-year-old former Navy fighter pilot <a href=";"><span class="s2">who was diagnosed with ALS</span></a> in 2012 when he was 30 years old and is now confined to a wheelchair, doesn't see the safety issue when patients are terminal. He said, "we fight on principles for life, liberty and the pursuit of happiness ... our principles are not to provide an abundance of caution, or the illusion of safety ... we're about giving people a chance to do what they think is best for them." He closed by saying, "In this great country of ours, I am allowed to take my own life, in some states, but I can't try an experimental treatment that may save me."</span></p> <p class="p1"><span class="s1">Frank Mongiello, who developed ALS in October 2015 and is now wheelchair-bound and has great difficulty articulating due to muscle weakness of his jaw and tongue, also spoke. He drew a parallel to Abraham Lincoln's quote, "If I am killed, I can die but once; but to live in constant dread of it, is to die over and over again," by stating "I have an 80 chance to be dead in two years ... seeing these experimental drugs and not being able to take them is like dying over and over again."</span></p> <p class="p1"><span class="s1">Mongiello and is wife have six children, the youngest of which are 10-year-old twins. As v said, "We don’t have the luxury of time ... I have six children, a wife and great family and I am not ready to leave them." When Mongiello finished, there was not a dry eye in the packed room. As compelling as anything Frank labored greatly to say were two words on a bumper-sticker affixed to the back of his wheelchair: "ALS Sucks."</span></p> <p class="p1"><span class="s1">On Monday, May 16, the Reagan Udall Foundation for the FDA conducted a <a href=""><span class="s2">public meeting to discuss a navigator</span></a>, a "coordinated resource for clear information to help patients and healthcare providers navigate the Expanded Access (EA) request process, also known as compassionate use. The focus of the EA Navigator would be (non-emergency) individual patient access to investigational drugs ("single patient INDs")."</span></p> <p class="p1"><span class="s1">But a navigator is not what terminally ill patients need: With organizations like the <a href=";issue=right-to-try"><span class="s2">Goldwater Institute</span></a>, which has provided the model for state RTT laws, and patient advocacy and disease awareness groups, the knowledge of experimental drugs that may help patients is not at issue. In fact, the RTT movement itself is testimony to the fact that patients and their loved ones are quite savvy and capable of using the internet to find the experimental drugs. The real issues are the amount of time (100 hours) and paperwork (multiple submissions to the FDA and to institutional review boards), as well as the liability incurred by drug companies, doctors, hospitals and patients.</span></p> <p class="p1"><span class="s1">If the FDA truly supported compassionate use, it would fully endorse state RTT laws and the national acts introduced by Salmon and Johnson. Simultaneously, it would immediately enact its own <a href=""><span class="s2">guidance document</span></a> (issued in February 2015) that reduces the amount of time required to complete a compassionate use request from 100 hours to 15 minutes. Interestingly, at&nbsp;<a href=";utm_medium=post&amp;utm_campaign=RFnews"><span class="s2">yesterday’s navigator meeting</span></a>, the FDA committed to implementing this guidance document "very, very soon."</span></p> <p class="p1"><span class="s1">Actions speak louder than words, and the FDA's actions with respect to RTT clearly demonstrate that the agency is loath to see the compassionate use program expanded in any meaningful manner. The House and Senate need to pass these national bills to give terminally ill patients a chance and a real measure of hope.</span></p> Wed, 18 May 2016 11:22:20 -0400 How FCC Transaction Reviews Threaten Rule of Law and the First Amendment <h5> Publication </h5> <p class="p1">The Federal Communications Commission (FCC) has the power to approve or deny any transfer of licenses issued under its jurisdiction. In recent years, the FCC has increasingly been using this power to review mergers and extract regulatory concessions from merging companies as a way to enforce rules that it is otherwise unable or unwilling to promulgate through the normal rulemaking process. Merging companies have little choice but to agree to the nominally voluntary concessions if they want their merger to go through. Furthermore, because these regulatory concessions are considered voluntary, many of them are practically unappealable, shielding the FCC’s actions from judicial review. The FCC has used its ability to extract these merger conditions to skirt statutory, and in some cases constitutional, limits on its power, posing a threat to good governance, free speech, and the rule of law.</p> <p class="p1"><span class="s1">A new study for the Mercatus Center at George Mason University examines how and why the FCC uses its power over license transfers to extract regulatory concessions from businesses, and identifies the legal implications of the expanding use of this power. The FCC has used transaction reviews both to maximize the scope of its jurisdiction and to avoid oversight. This power, which is supposed to benefit the “public interest,” has instead served the political interests of FCC administrators, stifled free speech, and created a climate of legal uncertainty in the communications industry.</span></p> <p class="p1"><span style="font-size: 12px; background-color: white;"><b>BACKGROUND</b></span></p> <p class="p4"><span class="s3"><b><i>No Explicit Authority for Merger Review</i></b></span></p> <ul class="ul1"> <li class="li5">While the Communications Act of 1934 doesn’t provide the FCC with any explicit authority to review mergers, the FCC does have a statutory duty to find that license transfers serve “the public interest, convenience, and necessity” before approving them. The agency interprets this as de facto power to review and approve mergers.</li> <li class="li5">The vague “public interest” standard by which the FCC is supposed to evaluate license transfers has rarely been constrained by Congress or the courts. This gives the agency broad discretion in exercising its power.</li> <li class="li5">Communications-industry mergers are also subject to review by the Department of Justice and the Federal Trade Commission, and they must meet the same standards as mergers in many other industries. Both of these agencies have clearly defined merger review authority and use review processes that rely on welfare-based standards and rigorous economic analysis rather than an amorphous public interest standard.</li> </ul> <p class="p4"><span class="s3"><b><i>“Empire Building” through Regulation</i></b></span></p> <p class="p1">Scholars have long recognized that regulators, far from seeking to maximize the public interest, often strive to achieve their own goals and objectives. The “empire building” model of agency behavior provides a framework for understanding how regulators maximize their jurisdictions, reputations, and output, among other variables. Increased use of transaction reviews helps the FCC achieve two such goals:</p> <ul class="ul1"> <li class="li5"><i>Expand jurisdiction.</i> Agencies’ regulatory agendas are constrained by the statutory authority granted to them by Congress. Courts may strike down regulations enacted outside the scope of an agency’s statutory authority. To avoid this constraint and expand its jurisdiction, the FCC has used concessions gained through merger review to enforce regulations previously struck down by courts.</li> <li class="li5"><i>Avoid oversight.</i> Formal rulemaking procedures require public notice and comment periods, and the resulting rules are subject to judicial review. Even when particular regulatory policies are explicitly authorized by statute, the FCC has sometimes chosen to enforce those policies through merger conditions to avoid scrutiny from both the public and the courts.</li> </ul> <p class="p2"><span style="font-size: 12px; background-color: white;"><b>KEY FINDINGS</b></span></p> <p class="p4"><span class="s3"><b><i>FCC Merger Reviews Threaten Free Speech</i></b></span></p> <p class="p1"><span class="s1">Many recent concessions achieved by the FCC have dealt with issues related to speech and the distribution of speech. Given that courts have steadily weakened the FCC’s ability to regulate speech since the 1970s, the growth in speech-related merger concessions is consistent with an empire-building model of FCC behavior. Two examples illustrate the FCC’s use of merger reviews to impose regulations of speech:</span></p> <ul class="ul1"> <li class="li5"><i>Net neutrality.</i> Rules forcing Internet service providers to carry content they do not wish to carry were struck down in 2010 and 2014, but merger conditions enforcing “net neutrality” on some of the largest providers allowed the FCC to enforce this rule without judicial review or congressional authorization.</li> <li class="li5"><i>Programming mandates.</i> While Congress has authorized the FCC to enact certain rules regarding television programming, implementing such policy through the formal rulemaking process could attract negative attention from Congress, media companies, and the public. The FCC extracted many commitments related to programming from Comcast and NBCU during their 2011 merger, including quotas for Spanish-language and children’s programs, thereby avoiding significant public and court scrutiny of TV content regulations.</li> </ul> <p class="p1"><span class="s1">The Supreme Court has held that licensing laws that regulate distributors of speech are presumptively unconstitutional when those laws lack explicit limits on authority. The FCC’s solicitation and encouragement of “public interest” programming and net neutrality commitments from merging firms therefore may expose the agency to First Amendment challenges.</span></p> <p class="p4"><span class="s3"><b><i>FCC Merger Reviews Undermine Rule of Law and Create Uncertainty</i></b></span></p> <ul class="ul1"> <li class="li5"><i>There are no practical avenues for appeal.</i> While merger conditions are nominally voluntary, the consequences of not offering or accepting them—a rejected merger—are very costly, giving companies no choice but to accept. Appealing the “voluntary” conditions is practically impossible, allowing the FCC to impose conditions with almost no legal consequences or constraints.</li> <li class="li5"><span class="s1"><i>The review proceedings are slow and opaque.</i> Unlike other federal agencies that regulate mergers, the FCC has no statutory time limit for its transaction reviews. Reviews typically take a year, during which merging companies may not know what conditions will be attached to their merger. Firms may spend tens or hundreds of millions of dollars on an FCC merger review alone, only to be rejected or saddled with impractical merger conditions.</span></li> </ul> <p class="p2">&nbsp;<span style="font-size: 12px; background-color: white;"><b>POLICY RECOMMENDATIONS</b></span></p> <ul class="ul1"> <li class="li5"><i>Define clear limits and expand judicial review of merger conditions.</i> Constraining the FCC’s ability to extract concessions during merger reviews will require clear statutory limits on transaction reviews, such as limiting acceptable merger conditions to those that remedy specific merger-related harms. Allowing companies to appeal conditions in court could ensure that the FCC is not imposing arbitrary conditions that do not meet the new, strict criteria.</li> <li class="li5"><i>Remove the FCC’s transaction review power.</i> Congress should consider removing the FCC’s transaction review authority and relying instead on the Department of Justice and the Federal Trade Commission to oversee mergers, because both already have the authority and tools to do so. Furthermore, both agencies focus almost exclusively on competition policy across many industries, reducing the incentive to use merger review as a tool for enacting unrelated policy agendas.</li> </ul> Wed, 25 May 2016 12:31:44 -0400 The Regulatory Determinants of Railroad Safety <h5> Publication </h5> <p>The dramatic improvement in railroad safety since the 1970s has been accompanied by a substantial increase in safety regulation and a substantial reduction in economic regulation after 1980. We assess the effects of both regulatory changes on railroad safety with the use of RegData: a new data set that was developed by one of the authors that measures the amount of regulation that is imposed by specific regulatory agencies on specific industries. We find that partial economic deregulation is associated with improved safety. Safety regulation was most closely associated with improved railroad safety during the period when economic regulation curtailed railroads’ incentives to operate safely.</p><p>Find the article at <a href="">Springer Link.</a></p> Wed, 18 May 2016 10:02:31 -0400 The Curious Rise of the Push for $15 Wage <h5> Expert Commentary </h5> <p class="p1"><span class="s1">In 1987, the New York Times published an editorial, titled “The Right Minimum Wage: $0.00” – which advocated the complete abolition of minimum wage laws. In January 2009, the Democratic Party took complete control the federal government, including a filibuster-proof majority in the Senate. At the time, the minimum wage was $6.55 an hour, scheduled to rise to $7.25 an hour in July 2009. The Democrats decided not to boost the wage above the level set by the Bush administration, and thus the federal minimum wage has remained at $7.25 an hour ever since.</span></p> <p class="p1"><span class="s1">Over the next few years, however, something very strange happened. The progressive movement began advocating a $15-an-hour minimum wage, and the proposal has now been included in the Democratic Party platform. In a number of important states and municipalities, $15 minimum wage laws have been passed, albeit phased in over a number of years.</span></p> <p class="p1"><span class="s1">What explains this dramatic change in attitude?</span></p> <p class="p1"><span class="s1">Although it's been a few years since the most recent increase, the $15 proposals cannot simply be written off as a cost-of-living adjustment, as the consumer price index is up only some 11 percent since the previous increase.</span></p> <p class="p1"><span class="s1">Instead, there seems to have been a sea change in attitudes toward the minimum wage, not just among Democrats in the United States, but throughout the world. In 2004, Germany instituted a highly successful set of labor market reforms, which dramatically brought down the unemployment rate by controlling wage costs. Despite this success, Germany recently began reversing these reforms, instituting a new minimum wage law. The Conservative government in Britain recently enacted a dramatic increase in the minimum wage, and Republicans such as Mitt Romney have also advocated a higher minimum wage.</span></p> <p class="p1"><span class="s1">I have no answer to the question of why the minimum wage has suddenly become so popular, but I have done some research that suggests that we need to be very careful in this area. In my new book on the Great Depression, “The Midas Paradox,” I found five examples of New Deal policies that pushed up hourly wage rates in the United States.</span></p> <p class="p1"><span class="s1">The first, and most dramatic, occurred in July 1933, when President Franklin D. Roosevelt ordered an across-the-board 20 percent increase in hourly wages, despite high unemployment. In the previous four months, industrial production had soared by 57 percent. Unfortunately, the dramatic wage increase seems to have aborted the recovery, and industrial production would not reach July 1933 levels for another two years, after the Supreme Court ruled his wage-fixing policy unconstitutional in May 1935.</span></p> <p class="p1"><span class="s1">The other four wage shocks were not quite as dramatic, but in each case a promising recovery in industrial production was temporarily derailed. As a result, the United States did not recover from the Great Depression until the end of 1941, whereas recovery would have occurred years earlier if the growth had continued at the rapid rate that occurred during periods when wages were not being artificially inflated, such as the period right before July 1933 and right after May 1935.</span></p> <p class="p1"><span class="s1">There are some puzzling features associated with the push for a $15 an hour minimum wage in states like California. Many of the progressives that favor this initiative also oppose trade pacts with poor countries, worrying that apparel workers in Texas making $7.25 an hour can't possibly compete with Mexican workers making $3.50 an hour. That's not necessarily true if the differences reflect productivity. Ironically, it's a much better argument against an attempt to artificially boost the pay of apparel workers in California to $15 an hour, when workers with presumably comparable productivity in Texas could be paid $7.25 an hour.</span></p> <p class="p1"><span class="s1">It's also puzzling that labor unions in California have asked to be exempted from the minimum wage law. These groups were among the strongest proponents of this legislation. Why then, would they not want their own workers to benefit from this law? And even if they didn't think union workers needed the protection, perhaps because they could negotiate wages above $15 an hour without any help from the government, why bother to ask for an exemption? What harm could the law do?</span></p> <p class="p1"><span class="s1">Perhaps union leaders are aware of the impact of artificial attempts to push wages much higher during the 1930s.</span></p> Wed, 18 May 2016 08:57:48 -0400 Certificate-of-Need Laws and North Carolina: Rural Health Care, Medical Imaging, and Access <h5> Publication </h5> <p>Certificate-of-need (CON) programs are state laws that require government permission for healthcare providers to open or expand a practice or to invest in certain devices or technology. These programs have been justified on the basis of achieving several public policy goals, including controlling costs and increasing access to healthcare services in rural areas. Little work has been done, however, to measure what effects CON programs have on access and distribution of healthcare services. Two recent studies that examined the relationship between a state’s CON program and access to care found that these laws failed to achieve their stated goals.</p> <p>We highlight the results from these two studies and examine the effects that CON laws have on the distribution of hospitals and nonhospital providers, as well as the availability of medical imaging technology. Specifically, 36 states continue to enforce CON programs. Twenty-six of those states also regulate the entry and expansion of ambulatory surgical centers (ASCs), which are typically facilities that provide certain outpatient surgeries and diagnostic procedures. Additionally, 21 states restrict the acquisition of imaging equipment (i.e., MRI, CT, and PET scans).</p> <p>What effect do these regulations have on patients’ ability to receive care in North Carolina?</p> <p>CON laws protect established health care providers from competition, and this protection negatively affects North Carolinians. The data show that the presence of a CON program in North Carolina is associated with:</p> <ol> <li>Fewer rural hospitals and fewer hospitals overall;</li> <li>Fewer rural ASCs and fewer ASCs overall;</li> <li>Less availability of imaging services in CON states relative to non-CON states;&nbsp;</li> <li>Increases in the number of patients traveling out of state to obtain medical imaging relative to non-CON states.</li> </ol> <p>The following charts apply these findings to North Carolina, illustrating the empirical evidence regarding its CON program’s effect on rural health care, as well as its CON program’s effect on medical imaging services. The main finding is that CON laws create a formidable barrier to entry that restricts the available options for those seeking quality care in North Carolina. Moreover, for those policymakers looking to expand access to quality health care, repealing CON laws may be an easy place to start.</p> <p><b>The Impact of CON on Rural Health Care</b></p> <p>CON laws were supposed to protect access to health care, particularly in rural areas, by limiting how providers could enter and compete in particular markets. States justified regulating the entry and expansion of ASCs—which provide certain outpatient surgeries and procedures—based on the belief that, if not regulated, ASCs would choose to treat more profitable, less complicated, well-insured patients and leave hospitals to treat the less profitable, more complicated, and uninsured patients. The fear was that this disparity would put those hospitals operating with slim profit margins, especially in rural areas, in a precarious financial position and force some to close. Subsequent hospital closures would then leave rural populations with reduced access to important medical services.</p> <p>In reality, however, CON laws are associated with fewer overall hospitals and ASCs, as well as fewer rural hospitals and ASCs.</p> <p>The data show that the presence of a CON program is associated with 30 percent fewer total hospitals per capita. Moreover, the presence of an ASC-specific CON requirement is associated with 14 percent fewer total ASCs per capita. Figures 1 and 2 show what this might mean for North Carolina. In 2011, North Carolina had 132 hospitals and 85 ambulatory surgical centers. These charts show that the presence of a CON program in North Carolina means fewer new entrants, fewer providers, and lower overall access to care across North Carolina relative to non-CON states.</p> <p>Also, in direct contradiction to the stated justifications for these programs, the data show that CON laws are associated with fewer hospitals and ASCs in rural communities. Specifically, the presence of a CON program is associated with 30 percent fewer rural hospitals per 100,000 rural population, and the presence of an ASC-specific CON requirement is associated with 13 percent fewer rural ASCs per 100,000 rural population. In 2011, North Carolina had 56 rural hospitals and 11 rural ASCs. Figures 3 and 4 show that, while intended to protect access to care in rural communities, the presence of a CON program in North Carolina is associated with fewer providers.</p> <p><b>The Impact of CON on Medical Imaging Services</b></p> <p>CON requirements also effectively protect established hospitals from nonhospital providers, including independently practicing physicians, group practices, and others. The result of this protection is fewer overall imaging services in CON states relative to non-CON states.</p> <p>Specifically, the data show that the presence of CON is associated with a 34 percent decrease in MRI scans, a 44 percent decrease in CT scans, and a 65 percent decrease in PET scans. What does this mean for North Carolina? Using Medicare claims data, we can make some general estimates. Figure 5 shows that in 2013, North Carolina had almost 97,000 MRI claims, which means that there were an estimated 51,000 fewer MRI scans completed within the state given the presence of a CON requirement on MRI scans. Figures 6 and 7 show that for CT and PET, the presence of a CON requirement is associated with 61,000 fewer CT scans and 37 fewer PET scans.</p> <p>An additional and no less important factor in understanding a CON program’s effects on a state’s healthcare market is that the presence of a CON program has no statistically significant effect on imaging services provided by hospitals. This provides evidence that CON laws do protect hospitals from nonhospital competition, but they are also associated with a significant reduction in the number of imaging services provided across the state.</p> <p><b>The Impact of CON on Access to Care</b></p> <p>CON laws reduce the options available to patients across North Carolina. This is pushing patients to seek health care in other states, such as Georgia, South Carolina, Tennessee, or even Florida. These states have chosen not to regulate medical imagining as North Carolina does (Georgia does not regulate MRI or CT services, South Carolina and Tennessee do not regulate CT services, and Florida does not regulate MRI, CT, or PET services).</p> <p>For example, the presence of a CON program is associated with 3.93 percent more MRI scans, 3.52 percent more CT scans, and 8.13 percent more PET scans occurring out of state relative to states without CON. For North Carolina, this means that approximately 9,000 MRI scans, 19,000 CT scans, and 500 PET scans are happening outside of North Carolina annually.</p> <p><b>Conclusion</b></p> <p>CON laws decrease the supply and availability of healthcare services by limiting entry and competition. For North Carolina specifically, the data show that CON programs are associated with decreases in access and availability. This means there are fewer hospitals and ASCs across the state and in rural communities, imaging services are less available across the state, and an increasing number of patients are choosing to seek care outside of North Carolina.</p> <p>For policymakers in North Carolina, repealing CON laws would open the local healthcare market for new providers, allow for increased competition, and ultimately offer more options for quality care for North Carolinians.</p> <p>&nbsp;</p> <p>Figure 1. The Effect of CON on Hospitals in North Carolina</p><p><img src=" Carolina-MOP-charts-1.png" width="585" height="380" /></p> <p>Source: Authors’ calculations based on findings in Thomas Stratmann and Christopher Koopman, “Entry Regulation and Rural Health Care: Certificate-of-Need Laws, Ambulatory Surgical Centers, and Community Hospitals” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, February 2016).</p> <p>&nbsp;</p> <p>Figure 2. The Effect of CON on Ambulatory Surgical Centers in&nbsp;<span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">North Carolina</span></p> <p><img src=" Carolina-MOP-charts 2.png" width="585" height="354" /></p> <p>Source: Authors’ calculations based on findings in Stratmann and Koopman, “Entry Regulation and Rural Health Care.”</p> <p>&nbsp;</p> <p>Figure 3. The Effect of CON on Rural Hospitals in&nbsp;<span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">North Carolina</span></p> <p><img src=" Carolina-MOP-charts 3.png" width="585" height="386" /></p> <p>Source: Authors’ calculations based on findings in Stratmann and Koopman, “Entry Regulation and Rural Health Care.”</p> <p>&nbsp;</p> <p>Figure 4. The Effect of CON on Rural Ambulatory Surgical Centers in&nbsp;<span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">North Carolina</span></p> <p><img src=" Carolina-MOP-charts 4.png" width="585" height="372" /></p> <p>Source: Authors’ calculations based on findings in Stratmann and Koopman, “Entry Regulation and Rural Health Care.”</p> <p>&nbsp;</p> <p>Figure 5. The Effect of CON on Nonhospital MRI Claims for Medicare Beneficiaries in&nbsp;<span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">North Carolina</span></p> <p><img height="361" width="585" src=" Carolina-MOP-charts 5_0.png" /></p><p><span style="font-size: 12px;">Source: Authors’ calculations based on findings in Thomas Stratmann and Matthew C. Baker, “Are Certificate-of-Need Laws Barriers to Entry? How they Affect Access to MRI, CT, and PET Scans” (Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, January 2016).</span></p> <p>&nbsp;</p> <p>Figure 6.&nbsp;The Effect of CON on Nonhospital CT Claims for Medicare Beneficiaries in&nbsp;<span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">North Carolina</span></p> <p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><img style="font-size: 12px;" height="361" width="585" src=" Carolina-MOP-charts 6.png" /></p><div></div> <p>Source: Authors’ calculations based on findings in Stratmann and Baker, “Are Certificate-of-Need Laws Barriers to Entry?”</p> <p>&nbsp;</p> <p>Figure 7.&nbsp;The Effect of CON on Nonhospital PET Claims for Medicare Beneficiaries in&nbsp;<span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">North Carolina</span></p> <p><img height="354" width="585" src=" Carolina-MOP-charts 7_0.png" /></p> <p>Source: Authors’ calculations based on findings in Stratmann and Baker, “Are Certificate-of-Need Laws Barriers to Entry?”</p> Wed, 18 May 2016 09:48:32 -0400 A Federal Fintech Regime Should Be Opt-In <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The question of whether the <a href=""><span class="s2">current regulatory environment</span></a> is adequate or unnecessarily impeding positive innovation is gaining importance as technology continues to allow nontraditional companies to provide financial services in new ways.</span></p> <p class="p1"><span class="s1">How federal policymakers respond to the emergence of fintech disruptors will have far-reaching consequences. Among the regulatory proposals are efforts to rationalize rules for fintech firms that have a national footprint. For example, one legislative proposal would grant technology companies <a href=""><span class="s2">federal preemption</span></a> powers, so they could avoid having to comply with multiple state regimes. The Office of the Comptroller of the Currency is also considering a "limited-purpose" national bank charter for fintech firms.</span></p> <p class="p1"><span class="s1">But as these reform efforts gain steam, policymakers need to weigh the unique realities of this market. The array of financial services providers that use technology in some form is very diverse. There are large fintech insurgents getting the most attention in federal reform discussions that would benefit from preemption. But there are also smaller local nonbank providers — that use technology to varying degrees — that serve local needs and for which the state-level regulations were created. They stand to lose if federal fintech laws are imposed on them.</span></p> <p class="p1"><span class="s1">For example, the federal government has authority over interstate commerce, which has been defined very broadly, too broadly perhaps. Let's say a local brick-and-mortar lender, which only serves customer face to face decides to use the Internet — available in all 50 states — to expand its marketing efforts. If financial technology providers are suddenly bound by a federal framework, that lender could suddenly find itself subject to federal jurisdiction via the "Commerce Clause" since it is using a "channel" of interstate commerce. This could be even if it never seeks to do business across state lines.</span></p> <p class="p1"><span class="s1">Just as it doesn't make sense to force companies that serve a national market to comply with a patchwork of inconsistent state rules, it also isn't fair to ask businesses that only operates in a state or two to abandon the laws that work for them. Needlessly sweeping small local firms into a more comprehensive federal regime could also overburden federal regulatory, supervisory and enforcement resources that could be better used elsewhere.</span></p> <p class="p1"><span class="s1">Marketplace lenders, which use the Internet to make loans on a nationwide basis, need a federal framework. Storefront payday lenders that serve local areas but use the Internet to advertise or post information do not. Similarly, the PayPal's of the world could benefit from a federal solution, but not small money transmitters that operate a storefront to transmit money for people off the street.</span></p> <p class="p1"><span class="s1">Nationwide <a href=""><span class="s2">consistency</span></a> is vital. However, the new rules should also avoid imposing a one-size-fits-all regime built for fintech firms with diverse business models and expansive geographic reach on companies with a limited scope. Balancing these goals is tricky but possible, provided policymakers and regulators exercise wisdom and humility — and construct a system that offers choice and scalability.</span></p> <p class="p1"><span class="s1">Any new federal regime should be optional. Sure, making rules optional may seem silly. After all, isn't an optional rule just a suggestion? But in this case, it's important to remember that the status quo isn't a lack of regulation. Already, there is a body of law that exists at the state level for many fintech transactions, such as nonbank lending or money transfers. While these state laws may be inconsistent, cumbersome and counterproductive for companies that use technology to operate on a national level, they may make sense for traditional brick-and-mortar establishments that only operate locally or regionally. Forcing companies that have only had to comply with one or two states' laws to change to a national standard may do more harm than good.</span></p> <p class="p1"><span class="s1">A choice between a federal regime and the existing state-by-state approach would also respect the ability of the citizens of a particular state to create rules in cases where the costs, benefits and all of the relevant parties are within that state, while preventing the cumulative burden of each state's actions from hampering national markets.</span></p> <p class="p1"><span class="s1">It would also continue to allow the states to innovate and compete to create the regulatory system that best serves the needs of entrepreneurs and consumers. It is even possible that the states could create sufficient uniformity that state-by-state regulation becomes attractive enough to compete with the federal system for national-level companies.</span></p> <p class="p1"><span class="s1">Crafting rules that give innovators tools to compete with incumbents on the national stage but exempt small-scale companies from a regulatory regime not suited for them will be challenge. But policymakers, motivated by the great benefits of such a system, can and must meet the challenge.</span></p> Mon, 16 May 2016 16:37:41 -0400