Mercatus Site Feed en Social Capital and Social Learning after Hurricane Sandy <h5> Publication </h5> <p>The post-disaster context is one characterized by profound uncertainty. Those affected by the storm, or earthquake, or flood, must determine what strategies to pursue in response to the disaster and must find ways to coordinate their recovery efforts with others in their community. Ex ante it is not clear what strategies will be most effective. If communities are to recover after a disaster, community members must engender and engage in a process of social learning involving experimentation, communication, and imitation. This paper explores the post-disaster social learning process. Specifically, we focus on the importance of social capital in facilitating social learning after a disaster, including facilitating community members’ ability to communicate their desire to return, to assess damage, to overcome barriers to rebuilding through collective yet voluntary action, and to learn from and imitate others’ successes. Focusing on how this process took place after Hurricane Sandy in Rockaway, New York, especially within the Orthodox Jewish community, we examine how community groups (a) adapted existing organization structures and (b) created new procedures and imitated the successful actions of others in order to spur recovery.</p><p>Find the article at <a href="">SpringerLink.</a></p> Thu, 25 Aug 2016 11:27:30 -0400 ACA Medicaid Expansion Enrollees 49% More Expensive Than Projected <h5> Video </h5> <iframe width="560" height="315" src="" frameborder="0" allowfullscreen></iframe> <p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: #ffffff;">In a new video, Mercatus Center Senior Research Fellow Brian Blase discusses a report from the Department of Health and Human Services that finds Medicaid enrollees who gained coverage through the Affordable Care Act cost almost 50 percent more, on average, than the government projected just one year ago.</p><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: #ffffff;">Why were the projections so far off?</p><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: #ffffff;"><b>CONTACT&nbsp;<b>Camille Walsh at&nbsp;<a href="" style="font-size: 12px; color: #666699;"></a>&nbsp;t</b>o schedule an interview with Brian Blase to discuss his findings about the costs of Medicaid expansion.</b></p><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: #ffffff;"><a href="" style="font-size: 12px; color: #666699; text-decoration: underline;">Cost of Medicaid Expansion Far Exceeds Initial Estimates</a>&nbsp;<br /><i>Philadelphia Inquirer</i>&nbsp;| August 15, 2016&nbsp;</p><p style="padding-left: 30px; font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: #ffffff;">Brian Blase considers a new government report that reveals Medicaid enrollees who gained coverage through the ACA cost almost 50 percent more, on average, than the government projected just one year ago.</p><p style="font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: #ffffff;"><a href="" style="font-size: 12px; color: #666699;">Government Report Finds That ACA Medicaid Enrollees Much More Expensive Than Expected</a>&nbsp;<br /><i>Forbes&nbsp;</i>| July 20, 2016</p><p style="padding-left: 30px; font-weight: normal; font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; background-color: #ffffff;">Brian Blase considers the Department of Health and Human Services' (HHS) annual report that finds the Affordable Care Act's Medicaid expansion enrollees are nearly 50% more expensive than HHS projected.</p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe width=&quot;560&quot; height=&quot;315&quot; src=&quot;; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Thu, 25 Aug 2016 10:08:41 -0400 Free Trade: Principles, Myths, Prospects ( <h5> Events </h5> <p>While the United States has a 70-year history of free trade, not everyone agrees that the benefits outweigh the costs. The debate on free trade has been brought to center stage with the Trans-Pacific Partnership Agreement, a watershed moment which will decide where the US and major countries around the world go next with trade.</p><p>Please join the Mercatus Center at George Mason University on October 6 for the inaugural event of the <b><a href="">Program on American Economy and Globalization</a></b> hosted by Mercatus Scholars and Co-Directors <b><a href="">Donald J. Boudreaux</a></b> and <a href=""><b>Daniel Griswold</b></a>. The keynote speech will be given by <b><a href="">Douglas Irwin</a></b> of Dartmouth College and author of <i>Free Trade Under Fire</i>.</p><p>The panel discussion will focus on Congress and the Trans-Pacific Partnership Agreement, identifying areas of agreement and opportunities to strengthen the existing proposal to benefit economies around the world. Distinguished panelists include <b><a href="">Linda Dempsey</a></b> of the National Association of Manufacturers, <b><a href="">Ed Gerwin</a></b> of the Progressive Policy Institute, and <b><a href="">Edward Gresser</a></b>, Assistant United States Trade Representative for Trade Policy and Economics.</p><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;">The event will address long-standing questions about free trade, such as:</div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;"></div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;">* How does trade affect manufacturing?</div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;"></div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;">* What does an $800 billion trade deficit mean and does it matter?</div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;"></div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;">* How do small and medium-sized enterprises benefit from trade?</div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;"></div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;">* Why is free trade important to middle class Americans?</div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;"></div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;">* What have been the effects of trade agreements? Is NAFTA, and other agreements like it, a disaster or a success?</div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;"></div><div id="_mcePaste" style="position: absolute; left: -10000px; top: 17px; width: 1px; height: 1px; overflow: hidden;">* What are the geo-strategic effects of trade; is trade important to diplomacy and safety?</div><p>The event will address long-standing questions about free trade, such as:</p><ul><li><span style="font-size: 12px; background-color: white;">How does trade affect manufacturing?</span></li><li><span style="font-size: 12px; background-color: white;">What does an $800 billion trade deficit mean and does it matter?</span></li><li><span style="font-size: 12px; background-color: white;">How do small and medium-sized enterprises benefit from trade?</span></li><li><span style="font-size: 12px; background-color: white;">Why is free trade important to middle class Americans?</span></li><li><span style="font-size: 12px; background-color: white;">What have been the effects of trade agreements? Is NAFTA, and other agreements like it, a disaster or a success?</span></li><li><span style="font-size: 12px; background-color: white;">What are the geo-strategic effects of trade; is trade important to diplomacy and safety?</span></li></ul><p>This event will be interactive and have Q&amp;A during each session. The first 70 attendees will receive a copy of <i>Free Trade Under Fire</i> (4th ed.) by keynote speaker Douglas Irwin.&nbsp;</p><p>Lunch will be provided. Please let us know of any dietary restrictions.</p><p><span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-weight: normal; background-color: white;"><i>Please RSVP as seating is limited.&nbsp;</i></span><i>Questions? Contact Jen Campbell at <b><a href=""></a></b> or 703-993-4967. Please see <b><a href="">these directions</a></b>&nbsp;to easily access the event room.</i></p><p>AGENDA</p><p>INTRODUCTION and OVERVIEW</p><ul><li><span style="font-size: 12px; background-color: white;"><b><a href="">Donald J. Boudreaux</a></b>, Senior Fellow, Mercatus Center&nbsp;</span></li><li><b><a href="">Daniel Griswold</a></b>, Senior Research Fellow, Mercatus Center</li></ul><p><span style="font-size: 12px; background-color: white;">KEYNOTE</span></p><ul><li><span style="font-size: 12px; background-color: white;"><a href=""><b>Douglas Irwin</b></a>, John Sloan Dickey Third Century Professor in the Social Sciences, Department of Economics, Dartmouth College</span></li></ul><p>PANEL: Congress and the Trans-Pacific Partnership Agreement</p><ul><li><span style="font-size: 12px; background-color: white;"><b><a href="">Linda Dempsey</a></b>, Vice President of International Economic Affairs, National Association of Manufacturers</span></li><li><span style="font-size: 12px; background-color: white;"><b><a href="">Ed Gerwin</a></b>, Senior Fellow, Trade and Global Opportunity, Progressive Policy Institute</span></li><li><span style="font-size: 12px; background-color: white;"><b><a href="">Ed Gresser</a></b>, Assistant United States Trade Representative for Trade Policy and Economics, Office of the United States Trade Representative</span></li></ul><p>Moderator: <a href=""><b>Donald J. Boudreaux</b></a>, Senior Fellow, Mercatus Center</p><p>CLOSING REMARKS</p><ul><li><span style="font-size: 12px; background-color: white;"><b><a href="">Daniel Griswold</a></b>, Senior Research Fellow, Mercatus Center</span></li></ul><p><b><a href="">Click here for directions.</a></b></p><p><span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-weight: normal;"><i>This event is free and open to the general public. This event has been planned in accordance with the widely-attended event exception to congressional gift rules and government ethics memoranda.</i></span></p> Thu, 25 Aug 2016 11:46:12 -0400 Midnight Regulations Illustrate Larger Problems with the Regulatory Process <h5> Publication </h5> <p class="p1"><b>Midnight Regulations Have Lower-Quality and Less Transparent Analysis</b></p> <p class="p2"><span style="font-size: 12px; background-color: white;">The phenomenon known as “midnight regulation”—a surge of regulation that occurs at the end of presidential terms between Election Day and Inauguration Day—is well documented. The Obama administration could issue </span><a href="" style="font-size: 12px; background-color: white;">50 or more midnight regulations</a><span style="font-size: 12px; background-color: white;"> before the president leaves office. One major concern with midnight regulations is that they will be ineffective or excessively costly, because they are not thought through as carefully as other regulations.&nbsp;</span></p> <p class="p3"><a href=""><img src="" width="575" height="444" /></a></p><p class="p3"><span style="font-size: 12px; background-color: white;">The Mercatus Center’s </span><a href="" style="font-size: 12px; background-color: white;">Regulatory Report Card</a><span style="font-size: 12px; background-color: white;"> demonstrates that regulations finalized during the most recent midnight period, at the end of the Bush administration, are accompanied by less thorough and less transparent analysis than other regulations. For more than three decades, a series of presidential executive orders have required federal agencies to conduct a regulatory impact analysis (RIA) to identify the problem they are trying to address, assess its significance, examine a wide range of alternatives to solve the problem, and assess the benefits and costs of the alternatives. The Regulatory Report Card assessed the quality of RIAs for “economically significant” prescriptive regulations proposed from 2008 through 2013.</span></p> <p class="p1">Two major Report Card categories—Analysis and Openness—evaluate how well the agency analyzed the key topics an RIA is supposed to cover and how accessible, understandable, and well-documented the RIA is. As the chart shows, the Bush administration’s midnight regulations had lower scores both for Analysis and for Openness. Pre–June 1 midnight regulations were proposed before the administration’s self-imposed deadline of June 1 and finalized between Election Day and Inauguration Day. Post–June 1 midnight regulations were proposed after the June 1 deadline and finalized between Election Day and Inauguration Day.<span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1">The fact that midnight regulations had less thorough and less transparent analysis, even in an administration that tried to prevent midnight regulations, suggests they are a serious problem.<b style="font-family: inherit; font-style: inherit; background-color: white;">&nbsp;</b></p> <p class="p1"><b>Obama Administration Vulnerable to Midnight Regulation</b><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1"><a href="">Scholarly research</a></span> on midnight regulation demonstrates that the midnight effect usually occurs at the end of every presidential term—not just when a president is leaving office. The next chart shows the Obama administration’s regulations that could have been midnight regulations if the election of 2012 had turned out differently. It shows that these regulations have lower scores both for Analysis and for Openness. The problems with midnight regulation—less thorough and less transparent analysis—plague administrations of both parties.</p> <p class="p3"><a href=" copy.jpg"><img src=" copy.jpg" width="575" height="444" /></a></p><p class="p3"><b style="font-family: inherit; font-style: inherit; background-color: white;">Midnight Regulation Illustrates a Larger Problem</b></p> <p class="p1">The final chart compares the Bush administration’s midnight regulations with the Obama administration’s potential midnight regulations. Both sets of regulations have less thorough and less transparent analysis than other regulations. But the average Analysis and Openness scores for non-midnight regulations are hardly stellar. The best average score—for Openness in the Obama administration—would still earn no better than a “D.”</p> <p class="p1">Midnight regulations are a problem, but the overall poor quality of regulatory analysis is the elephant in the room.</p> <p class="p3"><a href=" copy.jpg"><img src=" copy.jpg" width="575" height="444" /></a></p> Wed, 24 Aug 2016 10:42:57 -0400 Transportation Taxation Without Representation <h5> Expert Commentary </h5> <div style="box-sizing: inherit;" class="ad-in-text-target"><p class="p1"><span class="s1">Earlier this month, Massachusetts became the 35th state to pass ride-hailing legislation to regulate so-called transportation network companies like Uber and Lyft. Much of the law is the same standard boilerplate used by other states, but Massachusetts' law has some new and frustrating twists.</span></p> <p class="p1"><span class="s1">Gov. Charlie Baker, who first proposed the legislation, said that it would ensure that Massachusetts remained a leader in innovative new technologies, but the governor and the Massachusetts legislature missed a major opportunity to be truly innovative. The Massachusetts law prohibits local jurisdictions from implementing their own licenses for ride-hailing firms or requiring them to pay fees – but it could have done the same for taxicabs and limos and applied the same regulations to all transportation service providers.</span></p> <p class="p1"><span class="s1">For example,&nbsp;<a href=""><span class="s2">Fort Worth, Texas</span></a>&nbsp;and&nbsp;<a href=""><span class="s2">Melbourne, Florida</span></a>&nbsp;recently enacted laws that more or less apply equally to all for-hire drivers. Instead of following their lead, Massachusetts' law simply offers another carve-out for a specific kind of service provider in the transportation industry, rather than creates a truly level playing field for all transportation services.</span></p> <p class="p2"><span class="s1"><a href="">Continue reading</a></span></p></div><div style="box-sizing: inherit;"><div style="box-sizing: inherit; color: #333333; font-family: Roboto, 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 16px; font-style: normal; font-weight: normal; line-height: 24px; background-color: #ffffff;" id="test-div"></div><div style="box-sizing: inherit; display: flex; color: #333333; font-family: Roboto, 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 16px; font-style: normal; font-weight: normal; line-height: 24px; margin-bottom: 0.9375rem !important; background-color: #ffffff;" class="reverse display-block-for-small-only block-normal flex-media"></div></div> Tue, 23 Aug 2016 11:39:37 -0400 Time to Tear down the Walls to Healthcare <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Politicians looking for a way to break through the stale healthcare debate in Washington are missing something obvious: Republicans — many of whom still pine for the Reagan Revolution — need only to finish what their former standard-bearer started. Democrats need only to follow through on a current Obama administration policy. And these two policies are one and the same.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p3"><span class="s1">As Salim Furth and Reece Brown have recently <a href=""><span class="s2">explained</span></a>, nearly 30 years ago President Ronald Reagan convinced Congress to repeal its mandate that states in our union restrict the provisions of healthcare services through certificate-of-need (CON) programs. For the preceding decade, these little-known, yet hugely significant programs required providers to demonstrate that a community "needed" their services before they could open a practice, offer a new line of services, or invest in certain devices or technology.</span></p> <p class="p1"><span class="s1">Repealing the mandate made sense. <a href=""><span class="s2">As I've previously described</span></a>, the process for granting permission is based on complex formulas, administrative hearings and a bureaucratic process that tends to look like high-stakes litigation. In most instances, current providers are notified of an application and invited to challenge would-be competitors' applications. This can end up taking years and costing hundreds of thousands of dollars before a provider is granted permission to make such straightforward purchases as an MRI machine.</span></p> <p class="p1"><span class="s1">While the programs were a burden on expanding the provision of healthcare in America, and present formidable barriers for new entrants to the provider market and those seeking care, the programs were justified as a way to control costs, increase charity care, protect rural hospitals and guarantee quality.</span></p> <p class="p1"><span class="s1">And, however well-intentioned the idea of CON laws were, they seem to prove one Reaganism to be true: "Government is not the solution to our problem; government is the problem." <a href=""><span class="s2">As my Mercatus Center colleagues and I have been detailing for several years</span></a>, these programs have failed on all accounts.</span></p> <p class="p1"><span class="s2"><a href="">Our most recent paper on this topic</a></span><span class="s1">, by economist James Bailey, suggests that these laws have not only failed to control costs, but are actually increasing them. He finds that, contrary to their intended purpose, CON laws raise overall healthcare spending by as much as 5 percent for physician care. In addition, he finds that CON laws increase overall Medicare spending by 6.9 percent.</span></p> <p class="p1"><span class="s1">And what happens when states repeal these laws? <a href=""><span class="s2">They experience overall reductions in healthcare spending by 0.8 percent per year</span></a>, leveling out to a 4 percent drop after year five.</span></p> <p class="p1"><span class="s1">This is what Reagan saw nearly three decades ago: Rigging the market does not lead to consumer benefits. The Obama administration agrees and has raised a <span class="s2"><a href="">number of concerns</a>&nbsp;</span>about CON laws across America.</span></p> <p class="p1"><span class="s1">There is only one problem: While the federal mandate was repealed, the laws had already been passed in nearly every state. And bad policy, especially one that creates the types of winners and losers that CON programs do, can be difficult to undo.</span></p> <p class="p1"><span class="s1">As of today, these barriers remain. Thirty-five states continue to implement these programs to the detriment of both new entrants as well as those seeking care. But what President Reagan started 30 years ago can be easily carried out by policymakers across the country today. If only they'd be willing to tear down these walls.</span></p> Tue, 23 Aug 2016 11:34:09 -0400 Risky Investments Hurt Alabama Pension Program <h5> Expert Commentary </h5> <p class="p1"><span class="s1">In "<a href=""><span class="s2">The truth behind the big money efforts to change pensions in Alabama</span></a>," (August 1 "Guest Voices) Tom Krebs makes two excellent points: Public sector employees deserve a secure retirement, and risky investments are no way to guarantee Alabama's pension holders what they've earned.</span></p> <p class="p1"><span class="s1">I agree with Mr. Krebs. Indeed, my research on Alabama's pension situation drives these points home. Importantly, another lesson of finance – don't value a guaranteed pension based on risky assets – continues to elude the Retirement Systems of Alabama, with predictable results.</span></p> <p class="p1"><span class="s1">Mr. Krebs cites numbers showing the pension plans are doing well, but recent returns suggest otherwise. According to the RSA's audited report in 2015, "a poor finish to the fourth fiscal quarter wiped out decent gains," returning only 1.04&nbsp;percent, 1.05&nbsp;percent&nbsp;and -0.54&nbsp;percent&nbsp;for the three plans—well below RSA's annual target of 8&nbsp;percent.</span></p> <p class="p1"><span class="s1">Returns over the last ten years have also fallen short at between 5.16&nbsp;percent&nbsp;and 6.1&nbsp;percent, reflecting the volatility of the RSA's investments.</span></p> <p class="p1"><span class="s1">When investment returns aren't enough, who foots the bill? Of the $2.26 billion in TRS revenues in 2015, only a sliver came from investment income while 83 percent came from the pockets of Alabama employees and their employers.&nbsp;</span></p> <p class="p1"><span class="s1">One important correction: Mr. Krebs implies that the Mercatus Center does directed research. That is not the case. Our research is independent, peer-reviewed, and held to the highest standards of academic excellence.</span></p> <p class="p1"><span class="s1">Public policy research should generate thoughtful discussion. We are always happy to be part of such conversations.</span></p> Tue, 23 Aug 2016 11:28:53 -0400 Don't Buy the Ex-Im Lie <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Don’t be fooled by lawmakers who tell you that government subsidy programs like the Export-Import Bank are necessary for the economy to create jobs. This is the whopper peddled by Rep. Charlie Dent (R, PA) in a recent article for the <i>Lebanon Daily News</i>.</span></p> <p class="p1"><span class="s1">There are plenty of bad arguments for why taxpayers should continue to subsidize large corporations via the Ex-Im Bank, but none are more misleading than Dent’s claim that&nbsp;“the bank provides financial protections, such as capitol guarantees, for American exporters looking to do business abroad […] where private sector banks are unable to provide the needed assurance.”</span></p> <p class="p1"><span class="s1">This is simply factually incorrect. Most of Ex-Im’s beneficiaries are powerful corporations, not capital-strapped firms. The main foreign and domestic beneficiaries of Ex-Im do not need the government to get access to capital. What’s more, foreign governments often benefit.&nbsp;Many Ex-Im beneficiaries include state-owned companies such as Pemex, the Mexican oil and gas giant, and Air Emirates, the airline of wealthy United Arab Emirates.</span></p> <p class="p1"><span class="s1">On the domestic side, 64 percent of Ex-Im financing benefits 10 large corporations and 40 percent benefits Boeing. Think about that. The primary reason the Ex-Im Bank exists appears to be to promote the specific welfare of a handful of corporations.</span></p> <p class="p1"><span class="s1">These large corporations that benefit from Ex-Im don’t want to lose their perks. They have every incentive to lobby for the Bank to continue.</span></p> <p class="p1"><span class="s1">But normal people matter too. It is critical that we consider the unseen victims of political privilege who pay for these benefits.</span></p> <p class="p1"><span class="s1">First, these victims are taxpayers who now bear the risk for $140 billion in liabilities. No matter what Mr. Dent claims, should the economy turn south and enough companies default on these loans, you Pennsylvanians will be on the hook. Remember Fannie Mae and Freddie Mac? They were solvent before they weren’t, too.</span></p> <p class="p1"><span class="s1">Second, these victims are consumers who pay higher prices for the purchase of subsidized goods. That includes Pennsylvania exporters who use Boeing planes to sell their goods abroad and face inflated costs as a result of the subsidies.</span></p> <p class="p1"><span class="s1">Third, these victims are unsubsidized firms competing with subsidized ones. Not only do they pay higher financing costs, but they also lose out when private capital flows to politically-privileged firms regardless of the merits of their projects. Unfortunately, we will never see the Pennsylvania businesses that could have been. We will never hear from the Pennsylvania workers whose wages weren’t raised or whose jobs disappeared because of unfair competition from Ex-Im-backed firms. Sadly, some people are victimized multiple times: first as taxpayers, then as consumers, then as competitors or workers, and finally as borrowers.</span></p> <p class="p1"><span class="s1">Rep. Dent wants to make you believe that without Ex-Im, Pennsylvanian exports would collapse. Not true. Quite the contrary: Most businesses in Pennsylvania face unfair competition from the subsidized companies thanks to Ex-Im. According to the International Trade Administration, Pennsylvanians exported $39.4 billion of merchandises in 2015. Only $486 million of that was backed by Ex-Im, or roughly 1 percent of all Pennsylvania exports. Pennsylvanians are doing great on their own. Needless to say, Pennsylvania exports wont collapse without Ex-Im.</span></p> <p class="p1"><span class="s1">Rep. Dent also writes that between 2011 and 2015, 246 businesses in the state sought financing from Ex-Im. That’s an average of 49 companies a year. According to the International Trade Administration, on any given year, some 15,600 companies export from the state. It means that over 99.9 percent of companies in Pennsylvania export without any government favors.</span></p> <p class="p1"><span class="s1">These subsidies might be a good deal for those who get them, but most Pennsylvanians will find it unfair that the profits of the winners of this arbitrary government selection come at the expense of the hundreds of thousands of unsubsidized firms, employees, and consumers. Subsidized businesses should not matter more than unsubsidized firms in the Keystone State merely because they happen to have friends like Rep. Dent in Washington. We must end the Export-Import Bank to help the 99.9 percent.</span></p> Tue, 23 Aug 2016 11:24:34 -0400 Comment on Proposed Rule on Arbitration Agreements, 12 CFR Part 1040 <h5> Publication </h5> <p class="p1"><span class="s1">BACKGROUND&nbsp;</span></p> <p class="p1"><span class="s1">The Bureau of Consumer Financial Protection (the Bureau) proposes a rule to prohibit mandatory arbitration agreements in consumer financial-product or service contracts. The Bureau bases its proposed rulemaking on findings from its 2015 study, which was mandated by Congress under Section 1028(a) of the Dodd-Frank Act.</span></p> <p class="p1"><span class="s1">In a new public interest comment for the Mercatus Center at George Mason University, University of Virginia law professor Jason S. Johnston, George Mason University law professor Todd J. Zywicki, and Mercatus Center senior policy writer Michael P. Wilt examine the Bureau’s proposed rule and findings, and they demonstrate that the Bureau’s data and analysis are often inconsistent, inadequate, and flawed.&nbsp;</span></p> <p class="p1"><span class="s1">Because of flaws in the methodology and data, the Bureau’s 2015 study should not be used as the basis for any regulatory proposal to limit the use of consumer arbitration. Furthermore, regulatory efforts to limit the use of arbitration will likely leave consumers worse off. A deeper analysis of the Bureau’s data shows that arbitration is, in reality, relatively fair and successful at resolving a range of disputes between consumers and providers of consumer financial products.&nbsp;</span></p> <p class="p1"><span class="s1">KEY FINDINGS&nbsp;</span></p> <p class="p1"><span class="s1">The Bureau’s proposed rulemaking makes several flawed assumptions and comparisons between arbitration and class-action litigation. Arbitration is an efficient and beneficial means of dispute resolution. Its procedural setup is more informal, quicker, and easier for consumers to use, and hiring counsel to represent a claim in arbitration is usually unnecessary. Litigation, on the other hand, can be expensive, time consuming, and complex, and it usually requires hiring an attorney. The comment letter finds several flaws in the proposed rulemaking’s analysis:&nbsp;</span></p> <p class="p1">&nbsp;</p><ul><li><span style="font-size: 12px; background-color: white;"><i>The Bureau’s proposed rulemaking incorrectly compares class-action settlements with arbitral awards. </i>This is a methodologically flawed means of comparison because most arbitrations settle, just as most consumer class actions settle.&nbsp;</span></li><li><span style="font-size: 12px; background-color: white;"><i>The Bureau paints a misleading picture of class-action litigation outcomes. </i>Typical settlements result in very small payouts ($32 per class member), while class-action attorneys are often the big winners; attorneys collected $424 million during the Bureau’s study period of 2010–2012.&nbsp;</span></li><li><span style="font-size: 12px; background-color: white;"><i>The Bureau should have excluded class actions that did not involve financial products or services subject to mandatory arbitration.</i> The inclusion of debt-collection cases and the simultaneous exclusion of ATM notice-failure cases biases the Bureau’s sample.&nbsp;</span></li><li><span style="font-size: 12px; background-color: white;"><i>The market’s solution for inaccurate charges works better than arbitration or litigation.</i> The Bureau’s survey of consumers shows that consumers prefer to simply change credit cards if the provider does not satisfactorily resolve a dispute, rather than litigate or arbitrate.&nbsp;</span></li><li><span style="font-size: 12px; background-color: white;"><i>Consumers perform better in arbitration than in litigation. </i>The Bureau’s data indicate that consumers have higher rates of overall success in arbitration and that arbitrations are resolved within a matter of months.&nbsp;</span></li><li><span style="font-size: 12px; background-color: white;"><i>The Bureau did not adequately consider the costs of its proposal. </i>Economic theory predicts that over time, financial-services providers will pass on the costs of the arbitration ban to their consumers.&nbsp;</span></li><li><span style="font-size: 12px; background-color: white;"><i>The Bureau did not consider less restrictive alternatives to banning mandatory arbitration.</i> The Bureau should reassess its proposal in light of successful consumer arbitration clauses such as AT&amp;T’s, which provides thousands of dollars in liquidated damages and no filing fees.&nbsp;</span></li></ul><p>&nbsp;</p> <p class="p1"><span class="s1">RECOMMENDATION&nbsp;</span></p> <p class="p1"><span class="s1">The proposed arbitration rules are not in the public interest and will not protect consumers as intended and required under the Dodd-Frank Act. The Bureau should go back to the drawing board, conduct a proper study with accepted econometric methodology, consider less restrictive alternatives, and reconsider its decision to impose new regulations that will inhibit an efficient and effective means of dispute resolution.</span></p> Wed, 24 Aug 2016 16:38:28 -0400 ACA and the Increasing Politicization of Health Care <h5> Expert Commentary </h5> <p class="p1"><span class="s1">The Affordable Care Act (ACA) has <a href=""><span class="s2">produced</span></a> massive consolidation among health care providers, largely the result of hospitals merging and large hospital systems taking over private doctor practices. In response and in an apparent attempt to improve their negotiating position with the consolidated providers, four of the five major for-profit health insurance companies have proposed mergers: Aetna with Humana and Cigna with Anthem. The Department of Justice (DOJ) <a href=""><span class="s2">has moved</span></a> to block the mergers, citing a growing threat to health care market competition.</span></p> <p class="p1"><span class="s1">Before making that decision, the DOJ asked Aetna, and likely the other insurers as well, how DOJ action to challenge the merger would affect the insurer’s decision to participate in the ACA exchanges. Aetna CEO Mark Bertloni <a href=""><span class="s2">wrote</span></a> in reply:</span></p> <p class="p2"><span class="s1">The President asked us to take a long-term view when this law went into effect, and, unlike many others, we have stayed the course and worked constructively to make the public exchange market work. The acquisition of Humana puts Aetna in a significantly better position to continue and expand its support.</span></p> <p class="p2"><span class="s1"><b><i>Unfortunately, a challenge by the DOJ to that acquisition and/or the DOJ successfully blocking the transaction would have a negative financial impact on Aetna and would impair Aetna’s ability to continue its support, leaving Aetna with no choice but to take actions to steward its financial health. …</i></b></span></p> <p class="p2"><span class="s1"><b><i>Although we remain supportive of the Administration’s efforts to expand coverage, we must also face market realities. … We have been operating on the public exchanges since the beginning of 2014 at a substantial loss. … Our ability to withstand these losses is dependent on our achieving anticipated synergies in the Humana acquisition. …</i></b></span></p> <p class="p2"><span class="s1"><b><i>Our analysis to date makes clear that if the deal were challenged and/or blocked we would need to take immediate actions to mitigate public exchange and ACA small group losses. Specifically, if the DOJ sues to enjoin the transaction, we will immediately take action to reduce our 2017 exchange footprint.</i></b></span></p> <p class="p1"><span class="s1">In other words, Aetna’s position is that it would continue to participate in the exchanges, despite the fact that they were a money losing proposition, if a favorable decision on merging with Humana was forthcoming so the insurer would have extra synergies, i.e. profits, elsewhere. The inescapable and disturbing implication here is that due to the ACA, important decisions affecting health care markets, made both by government and by private companies, are now increasingly becoming a function of political negotiations and DOJ market concentration calculations.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1"><b>Providing Insurers with Taxpayer Funds to Prop up the ACA</b></span></p> <p class="p1"><span class="s1">While I worked for the House Committee on Oversight and Government Reform in 2014, we obtained and released <a href=""><span class="s2">communications</span></a> between top White House officials and insurance company executives, which demonstrated the close relationship between the Obama administration and health insurers. For example, in the spring of 2014, the CEO of CareFirst, Chet Burrell, <a href=""><span class="s2">exchanged</span></a> numerous emails with senior presidential advisor Valerie Jarrett, asking that the administration allow tax money to flow through the ACA risk corridor program. Burrell warned Jarrett of “an unwelcome surprise” and that premiums would increase upward of 20% if risk corridors were made budget neutral. Jarrett forwarded the information to the administration’s top health care staffers, telling Burrell that “the policy team is aggressively exploring options.” Eventually, Jarrett <a href=""><span class="s2">told</span></a> Burrell that the administration had given the industry 80% of what it requested.</span></p> <p class="p1"><span class="s1">More recently, the administration has provided billions of dollars above what the law allows to insurers participating in the ACA. In May, a federal judge <a href=""><span class="s2">ruled</span></a> that the Obama administration’s payments to insurers through its cost sharing reduction program are unconstitutional because Congress never appropriated the funding. (I discussed this program and the decision in depth <a href=""><span class="s2">here</span></a>.) These payments likely exceeded $7 billion in 2014 and 2015 combined, and the administration continues to make them. The administration is also <a href=""><span class="s2">diverting</span></a></span><span class="s2"> </span><span class="s1">billions of dollars in funds in reinsurance program contributions to insurers, funds that are legally required to be deposited in the U.S. treasury. (Doug Badger of the Galen Institute discussed this issue in depth <a href=""><span class="s2">here</span></a>.) Given how <a href=""><span class="s2">poorly</span></a> the ACA exchanges are performing relative to projections, the situation would likely be far worse without the administration delivering billions of dollars in unlawful payments to insurers on top of the enormous front-end subsidies that insurers are receiving.</span></p> <p class="p1"><span class="s1"><b>Conclusion</b></span></p> <p class="p1"><span class="s1">The ACA has led to significant consolidation among providers through the health care market and is producing a severe adverse selection spiral in many states’ individual health insurance markets. Despite substantial subsidies—well in excess of $10 billion thus far beyond what the law allows—many insurance companies, faced with massive losses, have either collapsed or are exiting the exchanges. Now, exchange participation decisions are reportedly being made contingent upon DOJ decisions with respect to corporate mergers. What a mess! Now more than ever, we need to depoliticize health care and create transparent marketplaces where insurers heed the wishes of customers rather than government officials.</span></p> Fri, 19 Aug 2016 11:06:47 -0400 ACA on the Brink <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Outside the legal challenges it previously faced, the Affordable Care Act has never been as threatened as it is right now.</span></p> <p class="p1"><span class="s1">President Barack Obama’s signature law has so destabilized the individual market for insurance that three large companies have announced they are better off not participating in the exchanges.</span></p> <p class="p1"><span class="s1">Aetna earlier this week announced it will exit 11 of the 15 states where it has offered plans through ACA exchanges, while UnitedHealthcare plans to exit 30 of its 34 states, and Humana is pulling out of 88 percent of the counties where it offered coverage.</span></p> <p class="p1"><span class="s1">While these big players are cutting their ACA losses, they’re fortunate enough to have other business lines to fall back on. Without those buffers, the new health insurance cooperatives that started with funding through the ACA have mostly collapsed. To date, 16 of 23 have failed, taking billions of dollars in taxpayer loans with them.</span></p> <p class="p1"><span class="s1">As insurers exit and fold, the choices available to people will plummet next year. Before Aetna’s announcement, there were at least 650 counties with only one insurer slated to offer exchange coverage. After Aetna’s decision, it’s possible that there will be more than 1,000 counties with just one insurer and several counties without any.</span></p> <p class="p1"><span class="s1">Insurers were hopeful that the ACA could offer a major profit opportunity for them. They were set to receive tens of billions of dollars in several types of government subsidies as well as the enactment of an unprecedented federal penalty if people failed to purchase their product. Washington delivered the subsidies — in some cases more than Congress authorized — and the penalty survived a major constitutional challenge. But, the law is producing large insurer losses and significant instability in the individual market. Why?</span></p> <p class="p1"><span class="s1">The explanation is simple: The coverage is extremely unattractive to the vast majority of potential buyers.</span></p> <p class="p1"><span class="s1">Every plan covers an extensive list of services, some of which are unwanted, and the plans generally have very large premiums and deductibles.</span></p> <p class="p1"><span class="s1">For example, the cheapest unsubsidized bronze plan (covering about 60 percent of expected health care expenses) available to a family in Winston-Salem, N.C., has a yearly premium of $11,760 and a $13,700 deductible. The cheapest unsubsidized silver plan (covering about 70 percent of expected health care expenses) has a yearly premium of $13,872 and a $10,000 deductible. In addition to high premiums and deductibles, far fewer doctors and hospitals are covered by exchange plans relative to other types of plans.</span></p> <p class="p1"><span class="s1">As a result, only two groups of people are buying plans to a significant extent: The first group includes single people with income below about $24,000, who receive very large subsidies to reduce premiums and deductibles. The second group includes people who expect to use a lot of health care services.</span></p> <p class="p1"><span class="s1">The rest of potential buyers, generally middle-class people without insurance through the workplace, are making an economically rational decision to remain uninsured. For the most part, the ACA has made them much worse off. The only plan they can buy is expensive and provides low value relative to the price. And they must pay higher taxes to finance the law’s massive new spending. This includes the penalty for remaining uninsured, which is expected to equal about $1,000 for the typical payer in 2016.</span></p> <p class="p1"><span class="s1">Another key problem that worsens the viability of the exchanges is that people have figured out how to game the new rules. Since the ACA requires insurers to offer coverage to applicants without varying premiums based on their health, the law incentivizes people to wait until they are sick to purchase coverage. Controls put in place by the law and by regulators to minimize this behavior have not worked thus far.</span></p> <p class="p1"><span class="s1">The Obama administration has attempted to prop up insurers with as much taxpayer money as possible, including roughly $7 billion in payments in 2014 and 2015 that a federal judge ruled unconstitutional because the funds were not appropriated by Congress. The subsidies and corporate welfare have not worked. As choices diminish and premiums soar — they’re likely to rise by an average of 25 percent next year — people will rightly demand change.</span></p> <p class="p1"><span class="s1">The change shouldn’t be more corporate welfare, subsidies, mandates and rules. Instead, policymakers could repeal the law’s insurance market regulations and allow people to purchase plans that appeal to them. As demonstrated throughout the rest of the economy, letting people make decisions uninhibited from Washington rules and complicated subsidy structures will almost certainly lower prices and increase quality throughout the health care market.</span></p> Fri, 19 Aug 2016 10:57:54 -0400 Getting More Out of State Transportation Infrastructure Spending <h5> Publication </h5> <p class="p1"><span class="s1">The federal role in highway spending is expected to get smaller because fuel tax revenues are decreasing and Congress is holding off on raising the federal gas tax rate. Meanwhile, states are not getting the most out of their highway spending. Traffic congestion plagues urban areas, and simply investing in highways and transit will not be enough to fix the problem.&nbsp;</span></p> <p class="p1"><span class="s1">A new study for the Mercatus Center at George Mason University discusses general principles that can help states maximize the value they get from their highway spending. While no two states are identical, policymakers can still learn from one another by observing what works and using the same general principles to create reforms that work for their states.&nbsp;</span></p> <p class="p1"><span class="s1">THE TRANSPORTATION PROBLEMS STATES FACE&nbsp;</span></p> <p class="p1"><span class="s1">States face a number of problems related to transportation funding and management, including costly regulations at all levels of government, competing spending priorities, asset management issues, and competing goals in urban areas. As the chart below demonstrates, decisions about highway and transit funding are affected by interactions among all levels of government.&nbsp;</span></p> <p class="p1"><span class="s1"><b>Regulations Increase Project Costs&nbsp;</b></span></p> <p class="p1"><span class="s1">States must comply with all federal regulations if they want to receive transportation funding. Regulations are also imposed by the state governments themselves. For example, states often implement prevailing wage laws, which prevent less-skilled labor from working on projects, and give preferential treatment to in-state firms even when out-of-state firms would be cheaper.&nbsp;</span></p> <p class="p1"><span class="s1"><b>Surface Transportation Funding Flows among Levels of Government: Spending on Highways and Transit, 2012&nbsp;</b></span><a href=""><img src="" width="575" height="377" style="font-size: 12px; background-color: white;" /></a><br /><span style="font-size: 12px; background-color: white;"><a href="">Source: Pew Charitable Trusts, “Funding Challenges in Highway and Transit: A Federal-State-Local Analysis,” February 24, 2015.&nbsp;</a></span></p> <p class="p1"><span class="s1"><b>Different Transportation Modes Compete for Scarce Government Funds&nbsp;</b></span></p> <p class="p1"><span class="s1">Policymakers must identify whether mass transit or highway construction offers the greatest benefits and lowest costs:&nbsp;</span></p> <ul class="ul1"> <li class="li4"><span class="s1">Ideally, funding is allocated based on marginal benefits and costs, but—because there is no “market price” for a stretch of highway—calculating marginal benefits and costs is difficult.&nbsp;</span></li> <li class="li4"><span class="s1">Most transportation projects involve something supplied by the government, which makes it difficult to determine how much of the costs incurred by a government agency should be allocated for each project.&nbsp;</span></li></ul><p><b style="font-family: inherit; font-style: inherit; background-color: white;">Political Considerations Affect How Much Is Spent on Transportation&nbsp;</b></p><p><b style="font-family: inherit; font-style: inherit; background-color: white;"></b><span style="font-size: 12px; background-color: white;">Funding decisions are also influenced by interest-group lobbying instead of by benefits and costs. Costs of favored projects are often underestimated while their benefits are overestimated. This is prominent in the case of rail construction:&nbsp;</span></p><ul class="ul1"><li class="li4"><span class="s1">Federal subsidies for rail transit expansion make expanding rail transit less costly for local transit agencies than expanding bus service. Because local costs for expanding are relatively low, cities are inclined to take advantage of this federal funding.&nbsp;</span></li> <li class="li4"><span class="s1">Therefore, many cities focus on rail systems even when these incur high costs (considering both federal and local costs) and expanding them brings only small increases in rail use.&nbsp;</span></li> </ul><p><b style="font-family: inherit; font-style: inherit; background-color: white;">Asset Management Tends to Be Reactive&nbsp;</b></p><ul class="ul1"> </ul> <p class="p1"><span class="s1">States should be proactive rather than reactive about asset management. While funding is scarce, they should focus on preventive maintenance to extend projects’ lives rather than spending more later to replace worn-out infrastructure.&nbsp;</span></p> <p class="p1"><span class="s1"><b>Urban Development Goals Must Be Balanced&nbsp;</b></span></p> <p class="p1"><span class="s1">Transportation plans must foster the kind of development people would choose for themselves rather than imposing the plans of policymakers. For example, instead of emphasizing the expansion of rail transit, policymakers should aim to reduce road congestion for drivers (e.g., by congestion pricing).&nbsp;</span></p> <p class="p1"><span class="s1">OPTIONS FOR REFORMING FUNDING AND MANAGEMENT&nbsp;</span></p> <p class="p1"><span class="s1"><b>Change the State Political Culture and Institutions&nbsp;</b></span></p> <p class="p1"><span class="s1">Politics will be the driving factor in how transportation funding is used as long as governments control road funding. Combining state funding with another source of funding can help alleviate this problem.&nbsp;</span></p> <p class="p1"><span class="s1"><b>Institute Tolling&nbsp;</b></span></p> <p class="p1"><span class="s1">Drivers could pay tolls that vary as demand for the road varies to help alleviate congestion. How- ever, there’s large popular opposition to congestion tolls, which are viewed as another tax, and a regressive one at that. Tolls may be more politically acceptable if they replace fuel taxes, which are also regressive.&nbsp;</span></p> <p class="p1"><span class="s1"><b>Permit Public-Private Partnerships&nbsp;</b></span></p> <p class="p1"><span class="s1">Firms can lease highways from governments and fund them through tolls or state payments. However, this may enable firms to influence government decisions about transportation to be in their favor rather than in the interests of the voters using the roads. To avoid such an outcome, states could pass legislation that would prevent the government from making any agreements to limit the construction of competing modes of transportation.&nbsp;</span></p> <p class="p1"><span class="s1"><b>Change the Source of Management and Funding&nbsp;</b></span></p> <p class="p1"><span class="s1">Federal funding can be provided in block grants, allowing state transportation departments greater discretion about how they use funds. Requiring local governments, rather than state governments or the federal government, to fund public transit systems and roads used primarily by local residents may provide better incentives for the efficient management of this infrastructure.&nbsp;</span></p> <p class="p1"><span class="s1">CONCLUSION&nbsp;</span></p> <p class="p1"><span class="s1">States face a variety of challenges related to transportation funding and management. This means that policymakers must consider solutions that give better incentives to all parties involved. Limiting the federal role in transportation spending to interstate highway funding would be a start. Granting local governments and private companies greater control over transportation spending would go further toward encouraging development shaped by resident preferences.&nbsp;</span></p> Tue, 23 Aug 2016 13:21:34 -0400 Small-Business Financing after the Financial Crisis: Lessons from the Literature <h5> Publication </h5> <p class="p1"><span class="s1">Small businesses feature prominently in the US economy because they employ about 50 percent of the workforce and pay about 50 percent of American wages. Also, small businesses are often a source of innovative ideas that can drive growth. To the extent that access to finance plays a role in bringing those ideas to the real economy, small-business finance remains important for the future of the economy. Yet new financial regulations arising from the Dodd-Frank Act that were intended to stabilize the banking industry after the 2008 financial crisis may be unintentionally limiting small businesses’ access to credit.&nbsp;</span></p> <p class="p1"><span class="s1">In a new study from the Mercatus Center at George Mason University, researchers Stephen Matteo Miller, Adam Hoffer, and David Wille provide a review of the latest academic research into the major sources of capital used by small businesses in the United States and summarize the major trends and challenges that small-business owners face in obtaining capital today.&nbsp;</span></p> <p class="p1"><span class="s1">THE IMPORTANT ROLE OF FINANCIAL SERVICES&nbsp;</span></p> <p class="p1"><span class="s1">Bank credit plays an important role in the capital structure of US small businesses both at the time of startup and as the small business matures.&nbsp;</span></p> <p class="p1"><ul><li><span style="font-size: 12px; background-color: white;"><i>Owner capital is not the only source of financing for new businesses. </i>This statement runs contrary to standard theories of small-business financing, which predict that the owners of new firms are limited in their access to traditional loans, forcing them to rely on their own capital and financing from their family and friends.&nbsp;</span></li><li><span style="font-size: 12px; background-color: white;"><i>New business owners obtain credit from banks.</i> But while owner equity is indeed an important source of capital for these small firms, especially at the time of startup, research shows that small-business owners are able to obtain credit from the traditional 2 banking industry in the form of both consumer financial products (like credit cards) and business loans.&nbsp;</span></li></ul></p> <p class="p1"><span class="s1">The financial services industry thus plays a vital but underappreciated role in financing small firms—a role that has important implications for how new financial regulations may be impacting small-business owners’ access to credit.&nbsp;</span></p> <p class="p1"><span class="s1">SMALL-BUSINESS FINANCING REMAINS WEAK AFTER THE 2008 FINANCIAL CRISIS&nbsp;</span></p> <p class="p1"><span class="s1">Small-firm financing still remains less robust than before the Great Recession. Surveys of smallbusiness owners show, at best, a mixed picture of small-business owners’ use of capital today and their expectations for access to financing in the future. Small-business lending in particular is still well below its precrisis peak, even as total business lending has fully recovered. The proportion of small-business owners who say they are always turned down for credit is still above its average before the crisis.&nbsp;</span></p> <p class="p1"><span class="s1">While the uneven recovery in small-business financing may reflect weaker demand for capital, recent research indicates that postcrisis financial regulation is an important factor impacting small businesses’ access to financing, particularly bank credit.&nbsp;</span></p> <p class="p1"><span class="s1">KEY FINDINGS: THE UNINTENDED CONSEQUENCES OF FINANCIAL REGULATION&nbsp;</span></p> <p class="p1"><span class="s1">Dodd-Frank was intended to stabilize the banking industry after the crisis, but new regulations arising from it may be unintentionally limiting small businesses’ access to credit. Recent studies on this topic point to at least three ways in which these regulations impact small-business financing:&nbsp;</span></p> <p class="p1"><ul><li><span style="font-size: 12px; background-color: white;"><i>There are higher compliance costs at banks.</i> Increased scrutiny, mandatory changes to banks’ capital structure, and regulatory uncertainty have made small-business lending less profitable relative to other types of lending.</span></li><li><span class="s1" style="font-size: 12px; background-color: white;"><i>There is a disproportionate impact on small banks. </i>While small banks were supposed to be shielded from the&nbsp;</span><span style="font-size: 12px; background-color: white;">higher costs of new financial regulations, surveys of small-business executives show they are still spending more on compliance. This is a concern because banks with under $10 billion in assets issue about half of all small-business loans in the United States.&nbsp;</span></li><li><span style="font-size: 12px; background-color: white;"><i>There are increased costs of credit.</i> There is evidence that new regulatory burdens are increasing the costs of credit for the small-business owners who do obtain it, particularly the costs of the consumer financial products that many small firms rely on like personal loans and credit cards.&nbsp;</span></li></ul></p> <p class="p1"><span class="s1">As a result, a new FinTech industry is emerging, composed of entrepreneurs who are facilitating financing through new digital intermediaries. Start-ups offering so-called marketplace lending, peer-to-peer lending, and crowdfunding are increasingly courting small-business owners as banks retreat from this market. But pending regulation of this new industry will dictate how much of a role it will play in small-business financing in the future.</span></p> Tue, 23 Aug 2016 08:42:03 -0400 Promising More of Everything -- Except for Growth <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Hillary Clinton recently laid out her plan for the economy, which boils down to more government, more spending, more taxes, more regulations and more red tape. It translates into more debt and less growth. Some of the most outrageous provisions of her plan are those that target U.S. corporations abroad.</span></p> <p class="p1"><span class="s1">To be fair, Clinton's policies are very similar to those of President Barack Obama. They both want to prevent U.S. companies from leaving the country through a process called inversion. They both also fundamentally misunderstand the reasons behind inversions and try to fix the perceived problem by treating the symptoms rather than the causes.</span></p> <p class="p1"><span class="s1">The reason companies engage in inversions (usually by merging with a foreign firm to pay taxes abroad instead of at home) is obvious to most economists: U.S. companies doing business overseas are put at a terrible disadvantage because of our punishing corporate income tax system. The United States has the highest rate of all the Organization for Economic Cooperation and Development countries (35 percent at the top federal level and close to 40 percent when you add state taxes), including all the big welfare states in Europe.</span></p> <p class="p1"><span class="s1">The United States also taxes income on a worldwide basis. This means that a U.S. company operating in Ireland pays the Irish rate first on its Irish income and then will pay the U.S. rate minus the tax paid in Ireland when it brings the income back to the United States. Contrast that with a French competitor doing business in Ireland. The French company pays the low Irish rate of 12.5 percent, period. To cope with the penalty or to try to remain competitive, U.S. companies are either not bringing their income back to the United States (there's supposedly $2 trillion of earned U.S. income abroad) or performing inversions.</span></p> <p class="p1"><span class="s1">As it happens, there is wide bipartisan support to reform the corporate income tax. But it wouldn't happen under a President Clinton. Her plan would change a key rule to make it more difficult to invert. Another portion of her plan would limit the deductibility of interest when it is supposedly used as a tool to avoid American taxes. Never mind that it would be up to the government to decide when the use of such a deduction would be appropriate or not.</span></p> <p class="p2"><span class="s1">&nbsp;</span></p> <p class="p1"><span class="s1">Another provision is an "exit tax" on companies that relocate outside the United States without first repatriating earnings kept abroad. This one is particularly awful because it amounts to demanding a ransom from companies when they decide that enough is enough and that the survival of their business requires them to effectively change their citizenship.</span></p> <p class="p1"><span class="s1">Interestingly, Clinton may have gotten this authoritarian idea from her husband, who enacted a law in 1996 that imposes an exit tax on people who decide to move abroad and change their citizenship to avoid the same punishing tax system. It's worth noting that the United States is one of the very few countries taxing individuals on worldwide income.</span></p> <p class="p1"><span class="s1">What's stunning is that Clinton's refusal to reform the corporate income tax doesn't fit well with her claim that she wants to help American workers and that she cares about rejuvenating left-behind communities, such as Detroit. The economic literature shows that workers are shouldering the burden of the corporate income tax.</span></p> <p class="p1"><span class="s1">Writing in The Wall Street Journal, the American Enterprise Institute's Kevin Hassett and Aparna Mathur note, "Our empirical analysis, which used data we gathered on international tax rates and manufacturing wages in 72 countries over 22 years, confirmed that the corporate tax is for the most part paid by workers." In a piece appropriately called "The Cure for Wage Stagnation," they also cite works by the University of Michigan and Harvard University, among others. For instance, they write, "In (a) 2009 paper, (Kansas City Fed economist Alison) Felix and co-author James R. Hines of the University of Michigan discovered that the effects of lower tax rates are especially strong for union workers."</span></p> <p class="p1"><span class="s1">You would think that Clinton would be more favorable to helping low-income Americans and union workers in particular. If she were, the way to go would be to reform the corporate income tax, not to arbitrarily prohibit companies from moving to where tax laws are less punitive.</span></p> Wed, 17 Aug 2016 17:17:50 -0400 Ditching NAFTA Would Be a Bad Deal for America <h5> Expert Commentary </h5> <p class="p1"><span class="s1">With all the challenges confronting the United States, the two major presidential candidates have committed themselves to picking a needless trade fight with the two biggest customers for U.S. exports: Canada and Mexico. Hillary Clinton recently joined Donald Trump in threatening to reopen and potentially scuttle the 22-year-old North American Free Trade Agreement. But tearing up NAFTA would be an economic and foreign-policy blunder of historic proportions.</span></p> <p class="p1"><span class="s1">NAFTA was a bipartisan achievement, approved by Congress with strong Republican support and signed into law by Bill Clinton in 1993. Once fully implemented, the agreement eliminated virtually all trade barriers between the United States, Canada and Mexico. By every reasonable measure, NAFTA has been a success.</span></p> <p class="p1"><span class="s1">The trade agreement delivered its core promise of deeper North American economic integration. Since its passage, our two-way trade with Canada and Mexico has more than tripled, with trilateral trade flows within NAFTA topping $1 trillion in 2011. Canada and Mexico are now the No. 1 and No. 2 foreign markets, respectively, for U.S. goods and services, collectively buying 34 percent of total U.S. exports.</span></p> <p class="p1"><span class="s1">NAFTA delivered the level playing field politicians say they want. Before NAFTA, Mexico imposed tariffs on U.S. agricultural and manufactured goods that were significantly higher than U.S. tariffs on Mexican goods. NAFTA reduced all duties in all directions to zero. What could be more fair than that?</span></p> <p class="p1"><span class="s1">As a result, North American production and capital markets are highly integrated, making companies in all three partner countries more competitive in global markets. The auto sector is especially intertwined, going back to the U.S.-Canada auto pact of 1965. NAFTA is a major reason, despite other challenges, the North American economies have outperformed those of the European Union and Japan.</span></p> <p class="p1"><span class="s1">Critics of NAFTA make outlandish claims about its impact on American workers and industry. Trump asserts that the agreement has been “totally disastrous” for the United States. More than two decades ago, H. Ross Perot warned that passage of NAFTA would unleash “a giant sucking sound” of jobs and investment going south of the border. Critics were wrong then, and they’re wrong now.</span></p> <p class="p1"><span class="s1">NAFTA was never going to have a huge positive or negative effect on the United States, though most studies show a modest positive effect on the U.S. economy. When NAFTA took effect, our economy was more than 17 times larger than Mexico’s, our barriers were already low, and our two-way trade with Mexico was a mere 1.4 percent of the U.S. gross domestic product.</span></p> <p class="p1"><span class="s1">Manufacturing investment to Mexico did increase after NAFTA, but it remains a fraction of annual manufacturing investment in the U.S. domestic economy. In the five years after NAFTA’s passage, the U.S. economy added more than 500,000 manufacturing jobs. Real, inflation-adjusted manufacturing output is up 40 percent since NAFTA came into effect. The loss of manufacturing jobs since 2000 wasn’t because of NAFTA, but because of gains in productivity fueled by automation.</span></p> <p class="p1"><span class="s1">Along with the economic gains, NAFTA has been a foreign policy success. It locked in Mexico’s economic reforms and stabilized its economy. Today Mexico is a multi-party democracy with a growing middle class. Relations with our southern neighbor and its 100 million citizens have never been better.</span></p> <p class="p1"><span class="s1">Mexico’s improving economy has reduced the incentive for its citizens to migrate to the United States. Net immigration from Mexico has turned negative in recent years, with more Mexicans returning to their homeland each year than entering the United States. If Mexican workers are barred from selling their goods in the United States, they’ll be more tempted to export their labor.</span></p> <p class="p1"><span class="s1">Withdrawing from NAFTA would be a disaster for the United States. What sort of business model would impel a company or a nation to provoke an unnecessary fight with its top two customers? Overturning this successful, 2-decade-old commercial agreement would disrupt supply chains and put millions of current U.S. jobs at risk. It would make U.S. companies less competitive in global markets, reducing U.S. imports, exports, output and employment.</span></p> <p class="p1"><span class="s1">That would be a bad deal by any measure.</span></p> Wed, 17 Aug 2016 16:57:57 -0400 An Effective Plan for Regulatory Reform <h5> Expert Commentary </h5> <p class="p1"><span class="s1">In his recent Detroit Economic Club speech, Donald Trump <a href=""><span class="s2">labeled</span></a> federal regulation “the anchor that is dragging us down.” He promised to remove this burden by adopting a temporary regulatory moratorium and asking every federal agency to identify and eliminate regulations that “are not necessary, do not improve public safety, and which needlessly kill jobs.”</span></p> <p class="p1"><span class="s1">It will take a lot more than that to ensure that regulations solve real problems at a reasonable cost. A targeted and effective regulatory reform program would consist of at least three elements:</span></p> <p class="p1"><span class="s1">1. Agencies should be required to show evidence that a significant problem exists, that they understand its root cause, and have considered alternative solutions that address it — before the agency proposes any new regulations.&nbsp;</span></p> <p class="p1"><span class="s1">Data from the Mercatus Center’s Regulatory Report Card project <a href=""><span class="s2">show</span></a> that only one in eight of the 130 major prescriptive regulations proposed by executive branch agencies between 2008 and 2013 were accompanied by substantial evidence demonstrating the existence, size, or cause of the problem the agency sought to solve. And for about one-quarter of the regulations, the agencies considered no significant alternatives to the regulations they proposed.</span></p> <p class="p1"><span class="s1">Moreover, agencies often produce economic analyses that seek to justify regulatory decisions that have already been made, instead of informing the decision-making process. A <a href=""><span class="s2">colleague</span></a> of mine who had a long career at a regulatory agency reports that he was often told on a Friday that if he couldn’t find enough benefits to justify the costs of a proposed regulation over the weekend, he shouldn’t bother coming back to work Monday.&nbsp;</span></p> <p class="p1"><span class="s1">This is backwards. The assessment of a regulation’s benefits, costs, and alternatives should be completed before the agency decides on it. One solution is to require agencies to publish their analyses for public comment before they propose regulations, encouraging them to look before they leap.</span></p> <p class="p1"><span class="s1">2. The regulatory system should have an external check on the accuracy of agencies’ analyses. Judicial review could provide this check.</span></p> <p class="p1"><span class="s1">The Securities and Exchange Commission’s (SEC) experience illustrates the salutary effects of judicial review. Unlike many agencies, the commission is required by statute to conduct economic analyses for many of its regulations. After having several important regulations overturned in court due to shoddy economic analyses, the SEC’s staff <a href=""><span class="s2">issued</span></a> new guidance in 2012 that lays out analytical standards and involves economists in rulemaking from the beginning. By <a href=""><span class="s2">some accounts</span></a>, the SEC’s methodology has since improved.&nbsp;</span></p> <p class="p1"><span class="s1">3. Review of existing regulations will not be fully effective unless conducted by an expert entity that is independent of the agencies issuing the regulations.</span></p> <p class="p1"><span class="s1">Having agencies review their own regulations is like asking students to grade their own homework. An independent commission could be <a href=""><span class="s2">patterned</span></a> after the Base Realignment and Closure Commission that recommends military bases for closure. It would assess the benefits associated with a defined group of regulations — such as all regulations with the same intended outcome — and identify a package of regulations that should be modified or eliminated if they are not effective or produce only small benefits at high costs. And the changes would take effect unless Congress voted to disapprove the entire package.</span></p> <p class="p1"><span class="s1">Rather than slashing regulations willy-nilly, these three reforms would help protect us from those regulatory burdens that do more harm than good.</span></p> Wed, 17 Aug 2016 16:53:21 -0400 The World Bank and Middle East Development Policy <h5> Expert Commentary </h5> <p class="p1"><span class="s1">In July 2016, the World Bank appointed American Paul Romer as the Bank’s chief economist. This was quite a radical decision; the World Bank usually prefers conservative figures for its top positions, whereas Romer is a commercial and intellectual entrepreneur, who left the academy, first to establish Aplia, which heralded a transformation in the higher education sector, and subsequently to launch the “charter cities” development project. This latter innovation is yet to bear fruit, but in light of the Middle East’s current predicament, there is an opportunity to rehabilitate it with the assistance of the Gulf countries.</span></p> <p class="p1"><span class="s1">To understand the idea behind charter cities, one must first delve into Romer’s academic and intellectual past. Tackling low living standards has been the most important problem that economists have tried to solve since 1776, when the Scottish intellectual Adam Smith published his treatise, “The Wealth of Nations,” initiating the birth of modern economics.</span></p> <p class="p1"><span class="s1">The theory of economic growth has developed over the centuries, and in the 1980s, experts concluded that what distinguishes rich countries, such as America and France, from poor ones, such as the Democratic Republic of Congo and North Korea, is the volume of physical and human capital accumulated, including machines, factories, tools, educational qualifications, and so on, all of which raise the productivity of workers. Accordingly, to raise living standards in a poor country, a sustained period of national savings, and hence capital accumulation, is required, to provide workers with more advanced tools, equipment, and skills.</span></p> <p class="p1"><span class="s1">In 1990, Romer published a paper where he proposed a set of factors that he regarded as more important than the traditional set in explaining the global variation in economic development. He emphasized knowledge, innovation, culture, and social norms. Romer theorized that if, for example, the Kenyan government wanted to raise a Kenyan worker’s productivity to that of his/her American counterpart, then equipping him/her with the same machines, tools, and education would not suffice. Rather, there would need to be a fundamental change in the work environment; in particular, the US is characterized by (relatively) impartial and transparent enforcement of the rule of law, protection of property, incentives to innovate, and a general assurance that people’s rights do not get violated.</span></p> <p class="p1"><span class="s1">Romer’s theory was accepted by his peers, but he did not go on to develop it because he retired from academia, choosing instead to become one of the innovative entrepreneurs that he studied during the 1990s. At the start of the new millennium, he returned to his research, but not with the aim of building upon it, but rather seeking to apply it in the developing world.</span></p> <p class="p1"><span class="s1">Romer argued that poorer countries would need decades or more to overcome the barriers to a positive economic environment, such as corruption, political intransigence, weak legal systems, and widespread insecurity; he wanted a faster solution. Romer was fascinated by the case of colonial Hong Kong, which was geographically part of China, but was administered by the UK. He noted that while the Chinese people were largely impoverished and economically backward, due to communism and corruption, Hong Kong prospered due to its economic openness and its unbiased legal system, especially in the domain of property rights.</span></p> <p class="p1"><span class="s1">Romer sought to replicate this experiment elsewhere by convincing the governments of development countries to establish independent cities within its territory. These charter cities would not submit to the country’s law, instead being administered according to their own legal charters. Who would manage the cities? At the outset, Romer tried to convince the governments of rich countries to run the charter cities, in a similar fashion to Hong Kong. However he surmised that the host country’s citizenry would object to such an arrangement due to its similarity to colonialism. Instead, Romer proposed independent management boards staffed by people from a range of advanced economies, to emphasize the project’s developmental goals over its colonial luster.</span></p> <p class="p1"><span class="s1">Romer reached an advanced stage of negotiations with Madagascar’s government, but the people rejected the move at the eleventh hour. The Honduran government went a step forward and launched a charter city, but Romer resigned from its board after the Honduran government violated its independence. In the wake of his appointment as chief economist at the World Bank, he is surely looking for an opportunity to rehabilitate the project.</span></p> <p class="p1"><span class="s1">In the Middle East today, one of the leading cause of wars and instability is the economic weakness of most countries, especially the republics. In spite of the widespread chaos, countries such as the UAE and Qatar have succeeded in creating an environment conducive to production, and hence high living standards. Perhaps not as successfully as Singapore or Switzerland, but certainly preferable to the prevailing alternatives in the Middle East. This is not merely an artifact of the Gulf countries’ oil wealth, as there are other countries in the region that are endowed with huge amounts of oil and non-oil resources, but suffer from poor business environments.</span></p> <p class="p1"><span class="s1">This raises the possibility of cooperation between the World Bank (under Romer’s stewardship) and the Middle East countries for the establishment of charter cities, with opportunities for the governments of Abu Dhabi, Dubai, and Qatar to occupy posts in the management boards. A large proportion of the violence in the region can be attributed to the lack of economic opportunities, and the widespread corruption; as such, in response to the unfolding conflicts, consideration should be given to using economic policies in parallel to the security and political interventions favored at present by the major powers.</span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1">Several GCC countries, especially Saudi Arabia and the UAE, have realized the importance of economic policies to regional stability, but they have focused on traditional interventions, such as direct foreign aid and investment, which they have deployed in Egypt, Lebanon, Yemen, and elsewhere. In an effort to improve the performance of such policies, the GCC countries may wish to consider Romer’s charter cities. With the traditional solutions failing in various Middle Eastern countries, there is a pressing need to consider novel alternatives.</span></p> <p class="p2"><span class="s1">&nbsp;</span></p> Wed, 17 Aug 2016 15:58:12 -0400 A Proposal for Allowing State Pension Buyouts <h5> Expert Commentary </h5> <p class="p1"><span class="s1">Many U.S. state and local employee pensions are facing dire problems as massive plan liabilities come due, threatening to drain government coffers. As Robert Novy-Marx and Joshua Rauh wrote in the <a href=""><span class="s2"><i>Journal of Finance</i></span></a>, 21 state pensions held less than 40 percent of the assets needed to pay benefits. Their estimate of the aggregate “funding gap” faced by states was roughly $2.5 trillion in 2009. Since then, the story has not improved, and it has likely worsened. Puerto Rico recently joined Detroit as a case study of fiscal and public pension mismanagement and failure, and the Puerto Rican pension is essentially without any assets.</span></p> <p class="p1"><span class="s1"><b>Prohibitive Costs of Full Funding</b></span></p> <p class="p1"><span class="s1">In short, many state and local plans today are simply unsustainable. To fix the problem, taxpayer contributions to these funds would need to drastically increase, on top of already-high tax rates. Another study by Novy-Marx and Rauh in the <a href=""><span class="s2"><i>American Economic Journal</i></span></a>reported that state and local governments contribute an average of 5.7 percent of their annual revenue to employee pensions. Fully funding the plans would require raising annual contributions to 14.1 percent, meaning an extra $1,385 per year from each taxpayer – and the annual shortfall exceeded $2,000 per taxpayer in five states.</span></p> <p class="p1"><span class="s1">These calculations exclude state obligations for retiree health benefits to former employees. Paying for all these employee obligations and already-existing public debt is going to get more difficult as citizens and businesses begin to move to other locations where the tax overhang is less onerous.</span></p> <p class="p1"><span class="s1"><b>A Buyout Proposal</b></span></p> <p class="p1"><span class="s1">We recently <a href=""><span class="s2">proposed</span></a> a realistic and fair approach to public plan reform, in which distressed states and localities could be allowed (but not required) to offer pension participants a buyout of their benefits. In particular, the buyout amount would be calculated by taking the present value of each person’s accrued retirement benefits discounted according a conservative interest rate, and multiplying it by the funded percentage of the plan plus five percentage points. Using the plan’s funded status will prevent the plan from becoming insolvent if many retirees select the buyout, while the extra five percent serves as a sweetener to take the offer.</span></p> <p class="p1"><span class="s1">Additionally, federal law should require that state and local governments file an annual report with the U.S. Treasury that includes information on plan participant demographics and the current and expected future funding status of their pension plans, using uniform and conservative economic and financial assumptions. This is now required for private sector pensions and Social Security. Moreover, all pension plans should be required to report this information to participants in plain language.</span></p> <p class="p1"><span class="s1"><b>Will Buyouts Work?</b></span></p> <p class="p1"><span class="s1">Some claim that a buyout plan like ours will <a href=""><span class="s2">not work</span></a>. For instance, they <a href=""><span class="s2">worry</span></a> that take-up rates could be disproportionately high for low-income workers or those with pressing medical needs. But it is unlikely that there will be disproportionate exodus of the low-income, low-health from pension plans, since <a href=""><span class="s2">several</span></a><a href=""><span class="s2">studies</span></a> show that healthy, high-earning individuals also discount future earnings. In tandem, physical and financial health usually lead to greater enjoyment from immediate income.&nbsp; Therefore, we might expect both high-and-low earners to take lump-sum offers, leaving behind individuals on neither extreme.</span></p> <p class="p1"><span class="s1">Lump-sum critics also warn us that if the proposal were adopted, pensioners wouldn’t take it and instead simply wait around for a federal bailout. But we are convinced that a federal bailout is not forthcoming, since Congress and the Administration pointedly did not bail out Detroit, Puerto Rico, or multiemployer pension plans.&nbsp; They understand the massive burden that this would impose on taxpayers now and in the future.</span></p> <p class="p1"><span class="s1">An old proverb states that when on a sinking ship, “he who hesitates is lost.” Policymakers must act quickly to unshackle pensioners from fiscally unsustainable plans when state law and constitutions prohibit the kinds of pension changes that private employers have been able to bring about. Lump-sum schemes aren’t perfect, but they offer a realistic path to reform while giving public employees more certainty and sparing states and municipalities from fiscal ruin.</span></p> Wed, 17 Aug 2016 15:50:25 -0400 Federal Regulation of Food Safety <h5> Publication </h5> <p class="p1">Chairman Johnson, Ranking Member Carper, and members of the committee, thank you for inviting me to testify on the impact of federal regulations on America’s food and agriculture.</p> <p class="p1">Federal regulations affecting food are intended primarily to protect public health by ensuring that food is safe. These regulations affect both the cost of growing and manufacturing food and the ever-changing makeup of the food supply. According to President Clinton’s Executive Order 12866, food safety regulations (like all regulations) must be based on “the best reasonably obtainable scientific, technical, economic and other information concerning the need for, and consequences of, the intended regulation.” Agencies are also legally responsible for ensuring that the science and analysis within these regulations satisfies quality, objectivity, utility, and integrity requirements. Yet far too often, federal food regulations conform to none of these requirements. As a result, food regulations cost far too much and accomplish far too little, far too often.</p> <p class="p1">My testimony today will touch on these problems with our current food regulation system. I will provide several examples of failed food safety regulations and explain why there are better approaches to solve food safety problems than regulations that try to anticipate every conceivable problem.</p> <p class="p1"><b>Federal Food Safety Mandates Can Be Counterproductive</b></p> <p class="p1">One example of how food safety regulation can cost a lot but deliver little is the most recent expansion of a process control approach called hazard analysis critical control points, or HACCP. The food industry invented this approach 50 years ago for NASA to use in the space program. HACCP is a system of preventive controls that relies on monitoring and recordkeeping at critical points where contaminants can be detected and eliminated.&nbsp; Following its use in the space program, HACCP was used extensively by food manufacturers before the government got involved. Over the decades before federal involvement, HACCP was successfully implemented where it was needed, but today most food safety failures in processing plants are due to problems with cleaning, sanitation, or management.</p> <p class="p1">Nevertheless, in 2011 Congress passed the Food Safety Modernization Act (FSMA), which “aims to ensure the U.S. food supply is safe by shifting the focus from responding to contamination to preventing it.” In fact, regulations promulgated by the Food and Drug Administration (FDA) and the US Department of Agriculture (USDA) have always focused primarily on prevention. FSMA now requires the entire food industry to implement HACCP.&nbsp;</p> <p class="p1">But because HACCP is now a government-run program, it is no longer a firm-run food safety tool. It is now a bureaucratic mandate that generates massive amounts of paperwork that can be reviewed by FDA. In fact, prior to FSMA, FDA and USDA had already mandated HACCP in three different industries.</p> <p class="p1"><b>HACCP Regulations Have Failed in Three Industries</b></p> <p class="p1">These three industries are case studies of failed government regulations using HACCP. The first industry FDA imposed HACCP on was the seafood industry. When FDA implemented the first HACCP regulation for seafood in the mid-1990s, the major health hazard related to seafood involved raw shellfish, particularly contaminated oysters from the Gulf of Mexico. The problem for FDA was that there is no “control point” where the contamination can be reduced or eliminated. The HACCP approach failed to reduce seafood contamination because it did not work on products served raw—in fact, despite the regulation, illnesses from oysters in the United States virtually doubled by 2011. Since all sellers of seafood (i.e., fish and shellfish) had to use HACCP regardless, it was mostly a waste of resources. This is an example of why it makes no sense to require everyone in the food industry to use HACCP.</p> <p class="p1">The second industry on which FDA imposed HACCP was the fruit juice industry. The director in charge of the regulations pressed hard to have the federal juice HACCP rule cover the little girl in his neighborhood who sold lemonade from her stand. (I attended this meeting.) He lost on that point, but FDA did end up covering all juices even though only apple and orange juice were causing problems. FDA estimated the first-year costs of this rule at $44 million to $58 million and recurring costs at $23 million. The solution was not HACCP, it was pasteurization.</p> <p class="p1">Finally, in 1995, USDA imposed a HACCP rule on the meat and poultry industry. At the time, USDA estimated costs to the industry over 20 years at $2.2 billion. USDA presented a range of benefits and claimed to be “without the knowledge to predict the effectiveness of the requirements in the rule to reduce foodborne illness.” Nevertheless, the department concluded that the program would only have to reduce foodborne illness by 14–17 percent to cover the costs. Despite that, a study four years later concluded that the costs of the rule could “plausibly exceed” the benefits.</p> <p class="p1"><b>The FSMA Continued and Expanded Government Regulatory Failures</b></p> <p class="p1">Despite the failures associated with the three previously mandated HACCP rules, FSMA expanded the mandate dramatically by requiring HACCP for the rest of the food industry. Three examples show how regulations have not been informed by science or analysis or have missed their mark.</p> <p class="p1">The first example concerns a HACCP-type regulation for animal feed. This rule was proposed in 2013 and finalized in 2015. It covers both pet food and farm animal feed, though FDA’s own analysis demonstrates that there is no microbial contamination problem with farm animal feed. My colleague Jerry Ellig and I commented that this rule was not needed for farm animal feed. Rather than address that point, FDA, oddly, relied on experts’ opinions about how effective the rule would be at preventing contamination of livestock feed. Despite its failure to find any problems with farm animal feed, FDA imposed the regulation and all its costly recordkeeping and monitoring requirements on both pet food and farm animal feed, needlessly raising the cost of farm animal feed.</p> <p class="p1">Another FSMA example is the supposedly “risk-based” new regulations on produce that might be consumed raw. All fruits and vegetables that might be eaten raw are covered, despite the lack of evidence that most have caused any problem whatsoever. For instance, sweet corn is not considered to be for raw consumption, but bok choy, brussels sprouts, rhubarb, and turnips are covered. FDA’s reasoning for covering all these fruits and vegetables is that, although the vast majority of fruits and vegetables have caused no outbreaks, there is always a possibility that they might cause a problem in the future. FDA states,</p> <p class="p2">As discussed in the 2013 proposed rule and the QAR [qualitative assessment of risk], we agree that an approach that relies on outbreak data, or certain commodity characteristics, to make determinations about which produce should be covered would be inconsistent with the prevention-based approach mandated by FSMA and that relying on outbreak data would be insufficient to protect the public because many foodborne illnesses are not linked to an outbreak and the patterns of outbreaks associated with produce commodities change over time. .&nbsp;.&nbsp;.</p> <p class="p2">.&nbsp;.&nbsp;. We conclude that, while different commodities may have different risk profiles at different stages of production, all commodities have the potential to become contaminated through one or more of the routes identified, especially if practices are poor and/or conditions are insanitary.</p> <p class="p1">Think about that for a moment. That is the ultimate regulatory philosophy: there is no identifiable problem, but anything could happen at any time. That philosophy redefines the food safety problem as a <i>lack of regulation</i>. Unfortunately, like farm animal feed producers, if you grow oranges, grapes, carrots, celery, cucumbers, or other problem-free produce, you are on the losing team and have to comply with unnecessary rules.</p> <p class="p1">It’s not just that FDA is applying its rules to too many products. In some cases, FDA is actually going after the wrong area of the food supply. The third example concerns FDA regulation of packaged food. There is scant evidence that there is a large, systemic problem with packaged food, despite some highly publicized recalls. Nevertheless, FDA imposes its ramped-up HACCP program on packaged food, though this may, according to one industry estimate, cost $18 billion. (FDA estimated initial costs of $1.8 billion and recurring costs of $1.2 billion.) In fact, FDA notes that most food safety problems occur in places are not covered by FSMA: restaurants, other retail establishments, and homes.</p> <p class="p1"><b>Failed Regulations Burden Businesses While FDA Expands Its Overreach</b></p> <p class="p1">Those who must comply with rules that aren’t needed or don’t work probably take no solace in the fact that these laws and regulations benefit those who promoted them, by gaining them a competitive advantage, large consulting fees, or—in the case of FDA—a bigger budget. While our country has labored through one of the worst, longest-lasting recessions in its history, FDA has expanded its food-related budget from $457 million in 2007 to $987 million today, an increase of 116 percent (see attached chart).</p> <p class="p1">Maybe the regulatory system would improve if all voices were heard, but they are not. Most of the regulated farmers, manufacturers, retailers, warehousers, packers, and shippers don’t participate in the regulatory process. They don’t have the time or resources to read the <i>Federal Register</i> every day and hire attorneys and experts to try to influence regulations in their favor. They are too busy trying to make payroll, to be competitive, and to feed their families, not to mention the United States and often the world.</p> <p class="p1">Why can’t we get better outcomes? It’s certainly not because most participants in the regulatory system aren’t well intentioned or don’t want safe food. But our method of achieving our goals rests on a century-old theory that the way to govern is to assemble a body of experts and give them lawmaking authority. But that theory produces an unoriginal stream of rules, particularly as there is no accountability for failure to produce food safety results. For those who must comply with those rules, the uncertainty associated with more costs would be easier to bear if the regulations actually solved problems.</p> <p class="p1"><b>Solutions to FDA’s Burdensome Regulatory Overreach</b></p> <p class="p1">For a start, let’s reprogram FDA. First, we are now in a much better position to trace food contamination outbreaks to their sources. Let’s task FDA, USDA, and the Centers for Disease Control and Prevention with doing more of that: tracing food safety outbreaks back to their sources, finding out what went wrong, and then posting the results on the Internet.&nbsp; This is a different approach from trying to anticipate every possible problem and regulate food companies into compliance.</p> <p class="p1">With new information on actual causes of outbreaks, the market will adjust as (where applicable) millions of food companies incorporate those results into their contracts to ensure that they are not the next to lose sales because of Internet publicity, pay for costly recalls, and suffer lawsuits due to contaminated food. This course of action would use the power of markets and market-based contracts and inspections to do what FDA has been unable to do: establish strong incentives for producers to exercise due diligence.</p> <p class="p1">Second, we need to ensure that before enacting laws or regulations that are unlikely to work (except for the well-connected), regulators perform much better risk analysis and benefit-cost analysis. Stakeholders should be able to sue when this analysis is absent, ignored, or just poorly done.</p> <p class="p1">Finally, let’s stop trying to penalize new technologies, and instead embrace them. Just as pasteurization enabled massive improvements in food safety when it was first incorporated into the production process, so too does genetic modification promise to be a boon for both nutrition and food safety.</p> <p class="p1">We have relied on anticipatory regulations for too long to solve food safety problems. It’s time to go in new directions if we are to make progress reducing foodborne disease.</p> Wed, 17 Aug 2016 10:06:17 -0400 Bot-Run Company of the Future Gets Hacked <h5> Expert Commentary </h5> <p class="p1"><span class="s1">If you can't understand how a cutting-edge new investment platform works, it's probably a bad idea to put serious money (or a good portion of an infant cryptocurrency network) behind it. This is a lesson that backers and enthusiasts of the Ethereum platform and its pet project—a bot-run investment corporation known as <a href=""><span class="s2">The Decentralized Autonomous Organization (DAO)</span></a>—had to learn the hard way recently.</span></p> <p class="p1"><span class="s1">In May, I <a href=""><span class="s2">discussed</span></a> the development of this new "leaderless" investment corporation, which was purported to be "<a href=""><span class="s2">bound by code</span></a>"—i.e. run by a bot—and supposed to operate as an automated crowdfunding and profit-sharing venture that obviated the need for human administration. Since its creation on April 30, The DAO <a href=""><span class="s2">raised $150 million in investment</span></a> on the <a href=""><span class="s2">trendy Ethereum smart-contract platform</span></a> and plenty of <a href=""><span class="s2">positive press</span></a> in the weeks leading up to its maiden IPO.</span></p> <p class="p1"><span class="s1">There was just one big problem: The <a href=""><span class="s2">code was broken</span></a>, and <span class="s2"><a href="">The DAO got hacked.</a></span></span><span style="font-size: 12px; background-color: white;">&nbsp;</span></p> <p class="p1"><span class="s1"><b>Bound by Code<br /> </b></span></p> <p class="p1"><span class="s1">The DAO was conceptualized as a kind of decentralized venture-capital fund that could not be controlled by any one person or group. People who wanted to invest in The DAO could purchase "DAO tokens" using Ether (ETH), the native cryptocurrency of the Ethereum platform.</span></p> <p class="p1"><span class="s1">With DAO tokens, people could then vote to invest in a number of <a href=""><span class="s2">pre-approved</span></a>, startup-like projects proposed by entrepreneurs The DAO called "contractors." If a project got enough votes, it would be green-lit and the funds immediately distributed. If the startup began to rake in money, the profits would be dispersed among token holders. If, however, a project started hemorrhaging money, token holders would just have to take that hit.</span></p> <p class="p1"><span class="s1">The core innovation of The DAO was that all of these operations were to occur autonomously, facilitated by code rather than fund managers and administrators. In technical terms, The DAO was designed as a kind of "<a href=""><span class="s2">smart</span></a> contract," a digitized system set up in such a way that breaches of contract are expensive or impossible. There would be no Kickstarter administrator or venture capital general partner that would be capable of censoring or overriding decisions. As The DAO developer Stephen Tual told the <i>Wall Street Journal</i> on May 16, the project was "<a href=""><span class="s2">not bound by terms of law and jurisdiction</span></a>. It's bound by code." At least, this was the theory.</span></p> <p class="p1"><span class="s1"><b>Ack! A Hack!</b></span></p> <p class="p1"><span class="s1">But <a href=""><span class="s2">a funny thing happened</span></a> on the way to a post-capitalist crypto-anarchist utopia.</span></p> <p class="p1"><span class="s1">Amid the <a href=""><span class="s2">fawning press</span></a> and <a href=""><span class="s2">general euphoria</span></a> imbuing The DAO community, a group of security researchers led by Cornell University's Emin Gün Sirer <a href=""><span class="s2">published</span></a> a May <a href=""><span class="s2">white paper</span></a> sounding the alarm about many troubling vulnerabilities present in The DAO's code. The researchers noted a number of mechanism design weaknesses that could promote sub-optimal voting behavior among token holders or even outright theft of funds. The DAO developers <a href=""><span class="s2">did issue some patches</span></a> to smooth everything over—but it was too little, too late. The DAO proceeded along its original deployment timeline, <a href=""><span class="s2">warts and all</span></a>.</span></p> <p class="p1"><span class="s1">This rush to release proved fatal for the project.</span></p> <p class="p1"><span class="s1">On the morning of June 17, startled token-holders <a href=""><span class="s2">logged online</span></a> to learn that The DAO was being <a href=""><span class="s2">rapidly drained of its funds</span></a>. Just as Sirer and his associates warned, an attacker had exploited a <a href=""><span class="s2">vulnerability</span></a> in The DAO's "split function," which allowed the hacker to drain Ether multiple times during the course of one transaction. <a href=""><span class="s2">Panic struck</span></a> the community as ETH <a href=""><span class="s2">trickled into the attacker's clutches</span></a> without pause. The <a href=""><span class="s2">price of ETH tumbled</span></a>. Panicked token-holders took to the forums to <a href=""><span class="s2">demand answers</span></a> and quick action from <a href=""><span class="s2">developers of Ethereum</span></a> and <a href=""><span class="s2">The DAO</span></a>.</span></p> <p class="p1"><span class="s1">In the course of one fateful day, The DAO went from a "<a href=""><span class="s2">new paradigm in economic cooperation</span></a>" to yet another punchline in the wild world of cryptocurrency.</span></p> <p class="p1"><span class="s1"><b>So Much for "Code Is Law"</b></span></p> <p class="p1"><span class="s1">In the aftermath of the hack, the high-tech sloganeering used to market The DAO proved little more than pretty words.</span></p> <p class="p1"><span class="s1">In good times, THE DAO developers never tired of extolling that "code is law" and mere mortals could never deign to intervene in their ironclad system design. The DAO's initial terms and disclaimers clearly explains that purchasing tokens signified <a href=""><span class="s2">"[express agreement] to all of the terms and conditions set forth in that code</span></a>"—which included the risk of major loss. Yet at the first sign of trouble, these principles were immediately cast to the side. All of a sudden, preexisting common law principles and external protocols became sovereign.</span></p> <p class="p1"><span class="s1">Because of the way that The DAO was designed, there was no way for its leaders to reverse the hack and restore funds to the proper holders. In fact, by the bare language of its code and contract, The DAO hacker did not do anything "wrong" at all. He or she simply took advantage of a profit opportunity overlooked by the many people who agreed to bind themselves to that specific code. If anything, according to the stated ethos of the project, The DAO hacker—<a href=""><span class="s2">whoever they are</span></a>—should be applauded. He or she essentially claimed a large "bug bounty" for finding a vulnerability in The DAO's code. Rather than chastising The DAO hacker, perhaps the leadership of Ethereum and The DAO should hire him or her!</span></p> <p class="p1"><span class="s1">Yet the many people who lost a lot of money in The DAO hack obviously don't see it that way.</span></p> <p class="p1"><span class="s1">The <a href=""><span class="s2">multi-million dollar heist alone</span></a> would have been bad news enough, but the project's intimate ties with the broader Ethereum network <a href=""><span class="s2">created a crisis</span></a> for the alternative-cryptocurrency in its own right. Because so much ETH was tied up in The DAO, the outcome of The DAO debacle would have a dramatic effect on its market price.</span></p> <p class="p1"><span class="s1"><b>A Bailout by Another Name?</b></span></p> <p class="p1"><span class="s1">Token-holders turned to the Ethereum developers to "do something." The only way for their funds to be restored would be for developers to make a major change to the network, called a "fork." But this change would violate two the supposedly central principles of the projects involved. First, it would supersede the "code is law" manta of The DAO, as mentioned. It would also <a href=""><span class="s2">violate the perceived censorship-resistance of the Ethereum platform</span></a>.</span></p> <p class="p1"><span class="s1">Many critics of The DAO project, including some former investors, argued that such a fork of the Ethereum network<a href=""><span class="s2">amounted to little more than a "bailout" for a project gone awry</span></a>. They make a strong case. Token-holders knew their investment carried risks. That "boneheaded code vulnerabilities" were not among the risks they accurately gauged does not make them any more absolved of their mistaken calculations. And the modest size of the Ethereum community does not help the "revolving doors" optics suggested by the overlap between developers working on Ethereum and The DAO-related projects.</span></p> <p class="p1"><span class="s1">Then there is the question of precedent. Even someone who is willing to grant that The DAO investors should be bailed out could legitimately question whether future applications of this new authority will be as wise for the network's future. Even if Ethereum developers are angels, the worrying trend of <a href=""><span class="s2">governments pressuring developers</span></a> to change their own software is an omnipresent threat.</span></p> <p class="p1"><span class="s1">Complicating this developing governance crisis for Ethereum was the fact that the <a href=""><span class="s2">Bitcoin community had been struggling</span></a>with questions about the ethics of chain-forking for entirely separate reasons. Supporters of an Ethereum fork were not entirely groundless in <a href=""><span class="s2">suggesting</span></a> that much of the anti-fork animus was encouraged by anti-fork Bitcoin holders hoping to make a theoretical point about forks on another chain. The presence or lack of interchain anti-fork solidarity should have no bearing on the objective question of whether forking Ethereum to rescue DAO token holders was ethical, but precious few questions in the cryptocurrency space are decided on purely objective grounds.</span></p> <p class="p1"><span class="s1"><b>A tale of two Ethereums</b></span></p> <p class="p1"><span class="s1">In the end, <a href=""><span class="s2">Ethereum did fork</span></a>, on July 20. Vitalek Buterin, the founder of Ethereum and a widely-respected figurehead for the project, <a href=""><span class="s2">quickly and firmly affirmed his support</span></a> to modify his protocol and assist The DAO. The new version of Ethereum attempted to move the hacked funds to a <a href=""><span class="s2">new address</span></a> controlled by token holders and amended the chain as if the hack never happened. It was a way to try and rewrite history.</span></p> <p class="p3"><span class="s3">Token holders can now <a href=""><span class="s4">appeal to retrieve their ill-gotten ETH</span></a> from the <a href=""><span class="s4">disgraced DAO</span></a>.</span></p> <p class="p1"><span class="s1">Yet not everyone in the Ethereum community accepts this revised chain. A movement of anti-fork Ethereum investors and miners are sticking with an "alternative" version of the chain that proceeds as if the fork never happened. It is called "<a href=""><span class="s2">Ethereum Classic</span></a>," or "ETC," and it views itself as the true protector of the Ethereum project. Incidentally, on the ETC chain, The DAO hacker still has access to his or her rightful (according to DAO law) coins.</span></p> <p class="p1"><span class="s2"><a href="">Tensions have been a bit high</a></span><span class="s1"> between the two chains, with advocates from both camps decrying the other as a naive or corrupt saboteur of the "real" heritage of Ethereum. Initially, it was thought that Ethereum Classic would fade into embarrassing obscurity, since the majority of the corporate Ethereum entities were devoting resources to the forked chain, now differentiated as simply "ETH." Yet ETC has chugged along <a href=""><span class="s2">against difficult odds</span></a>, presenting opportunities for price arbitrage between ETC and ETH and even getting a boost by <a href=""><span class="s2">being listed on the Poloniex exchange</span></a>.</span></p> <p class="p1"><span class="s1">The DAO episode provides a cautionary tale for those interested in the often-hyped cryptocurrency space: don't put serious money into platforms you don't entirely understand. More existentially, Ethereum's short-term "victory" over The DAO hacker may very well prove to have been a Pyrrhic one. By amending the protocol to reverse a specific transaction, Ethereum has established a potentially damaging precedent. Whether the developers can forge a trusted new set of principles that protects the interests of their passionate community remains to be seen.</span></p> Tue, 16 Aug 2016 18:23:10 -0400