Mercatus Site Feed en Let Customers — Not Regulators — Decide the Right Size for Banks <h5> Expert Commentary </h5> <p class="p1">To see why it's absurd for Washington to be debating how big the country's banks should be, imagine the following scenario:</p> <p class="p1">You leave your hometown after high school to study and later work abroad for several years. After some time, you decide it's time to come home, at which point you reacquaint yourself with your high school prom date, who never left. You decide to get married. After the honeymoon, it's time to pay the bills, which means you have to choose how to bank. Your spouse has banked for years at a local small bank because of the personalized service it offers. It has only a few branches. But having moved around, you think fondly about all those times you found a bank branch during your travels — and you appreciate that you didn't have to close your account just because you moved to a different part of the state, let alone an entirely different state, or even abroad.</p> <p class="p1">What's the right way to go? That's for you and your spouse to decide. The decision should not involve politicians and regulators.</p> <p class="p1">Small banks may make more sense for people who seldom travel or relocate, or who use a limited range of services. Big banks may be preferable for people who move around more often or use a wider range of services — even with the advent of automated teller machines and telephone, online and now mobile banking. The best way forward is to let people vote with their feet, allowing banks to compete to offer the best service.</p> <p class="p1">That this debate arises in the political realm reflects what has always been wrong with the U.S. approach to banking politics and regulations, ever since Thomas Jefferson — as an anti-Federalist defending agrarian interests — challenged Alexander Hamilton's Federalist vision of an urbanized America with bank-financed industrialization. Author Ron Chernow makes that point in his fabulous Hamilton <a href=";qid=1408479087&amp;sr=8-1&amp;keywords=Chernow+Alexander+Hamilton%27">biography</a>. Two centuries on, the story hasn't changed much: "Jeffersonians" want lots of small banks, while "Hamiltonians" see nothing wrong with allowing some banks to get big.</p> <p class="p1">Professors Charles Calomiris and Stephen Haber at Columbia and Stanford respectively, in their recent book "<a href=";qid=1408479133&amp;sr=8-1&amp;keywords=Fragile+by+Design">Fragile by Design</a>," detail how populists and small banks in the United States historically colluded in the political sphere to prevent banks from getting too big. And now we have the Dodd-Frank Act, which through an evolving body of regulations seems intended to encourage shrinkage, though it may also — as an unintended consequence — work to the detriment of small banks (as my colleagues <a href="">Hester Peirce</a>, <a href="">Ian Robinson</a> and <a href="">Thomas Stratmann</a> have shown with&nbsp;<a href="">research on how small banks are faring under Dodd-Frank</a>).</p> <p class="p1">To be fair to the politicians and regulators involved in designing and implementing Dodd Frank, the issue of bank size ties in closely to the complexity of a bank's activities, because some complex activities — <a href="">like structuring collateralized debt obligations</a> — lay at the heart of the recent crisis. Since the repeal of Glass Steagall through the Gramm Leach Bliley Act in 1999, some big commercial banks have greatly increased their use of complex off (bank) balance sheet activities to engage in transactions that were previously the sole province of investment banks.</p> <p class="p1">Interest in such activities reflects the fact that as accounting rules, banking regulations and tax laws become more complicated, so have the ways of getting around the rules. But complexity and bank size are two separate issues. This is why some regional banks, like PNC, can credibly challenge the "systemically important financial institution" or "SIFI" designation, on the grounds that they were not involved in the recent crisis.</p> <p class="p1">To address complexity, how about simplifying banking regulations by simply raising capital requirements even more, as many advocate in various forms? Likewise, to address size, how about letting customers decide how big their banks should be?</p> <p class="p1">Many U.S. politicians, regulators, populists and small bankers want to convince us we should fear big banks. After four years, it seems the bigger concern lies with the regulatory burden made worse by Dodd Frank. That's because — to the extent that it greatly increases the cost of banking — those costs will be passed on to the customers in the form of fewer services, fewer branches, higher fees, and overall, even more customer dissatisfaction.</p> Thu, 21 Aug 2014 14:23:18 -0400 The United States’ Debt Crisis: Far from Solved <h5> Publication </h5> <p class="p1">The recent decline in federal deficits should not create a false sense that the national debt is no longer a clear and present threat. While this improvement may be encouraging, it represents only a temporary respite from the government’s growing fiscal imbalances. Congressional Budget Office (CBO) estimates show deficits growing again two years from now, returning to trillion-dollar levels within a decade, and worsening from there.</p> <p class="p1">In short, the United States’ fiscal outlook has not changed. Americans will soon have to deal with the consequences of being a highly indebted nation. While economists can’t predict exactly when or how a debt crisis will manifest itself in the United States, such a crisis is inevitable if current spending trends continue. The longer policymakers delay the needed course correction, the more likely they will be forced to rush through ill-conceived policies in the face of a crisis.</p> <p class="p1">DEFICITS AREN’T GOING AWAY</p> <p class="p1">The improvement in the fiscal situation over the past few years was driven largely by the extraordinarily high deficit levels between 2009 and 2013. The government’s deficits surged from about $459 billion in fiscal year (FY) 2008 to $1.4 trillion (9.8 percent of gross domestic product, or GDP) the following year, then remained above the trillion-dollar mark until 2013. They are now projected to fall to $492 billion in FY 2014 (2.8 percent of GDP) and then to decrease further to $469 billion in FY 2015 (2.6 per- cent of GDP).<sup>1</sup></p> <p class="p1">In the face of these large deficits, debt held by the public as a share of GDP has continued to grow and is projected to remain near three-fourths of total economic output in the near-term—levels higher than at any time since 1948—and to exceed the size of the entire economy by 2039.<sup>2</sup> Under different assumptions—with looser spending restraints and economic feedback of high government debt factored in—the CBO estimates that the debt-to-GDP ratio could reach 183 percent of GDP by 2039.<sup>3</sup></p> <p class="p1">Deficits and debt are merely symptoms; the disease is overspending, and only by curing it can Washington correct the phenomenal fiscal imbalance the government faces now and in the future. No level of taxes can close this gap over the long term,<sup>4</sup> and higher taxes would exacerbate the deficit and debt problem by acting as a drag on growth.<sup>5</sup></p> <p class="p1">The deficits caused by overspending are already impeding growth. For the past several years, following substantial fiscal and monetary stimulus measures, forecasters have predicted a return to normal rates of GDP growth, but these conditions have not materialized.<sup>6</sup> Further, recent job gains mask nagging underlying problems in the employment market, including a historically low labor force participation rate<sup>7</sup> and a chronically high number of long-term unemployed.<sup>8</sup></p> <p class="p4"><a href="">Continue reading</a></p> Thu, 21 Aug 2014 13:36:11 -0400 Shuttering Ex-Im Bank Good for Arizona <h5> Expert Commentary </h5> <p class="p1">Letting the New Deal-era corporate welfare program known as the Export-Import Bank expire is just good economics for Arizonans. There are plenty of bad arguments to reauthorize the Ex-Im Bank's charter, but none are more misleading than the claim that this government bank serves small businesses and that, without it, exports in Arizona would collapse.</p> <p class="p1">More than 80 percent of the bank's portfolio primarily benefits huge corporations. This leaves less than 20 percent of Ex-Im Bank's portfolio for small firms.</p> <p class="p1">But even this is misleading, since the Ex-Im Bank's definition of a "small business" isn't exactly small. However, Ex-Im Bank defines small businesses as companies with up to 1,500 employees or annual revenue up to $21 million.</p> <p class="p1">For example, the Ex-Im Bank considers Arizona company Competitive Engineering Inc. Global to be a small business. While public records suggest the firm employs a staff of between 100 and 249, it reportedly earns annual revenue of over $17 million and has offices worldwide. CEI Global should be proud of its success, but it is not "small" to most Americans and could be just as prosperous without the Ex-Im Bank.</p> <p class="p1">Even with this definition, the Ex-Im Bank benefits a minuscule percentage of small businesses.</p> <p class="p1">Data from the Census Bureau's Statistics of U.S. Small Businesses dataset and from the Ex-Im Bank's records show only 0.3 percent of all small-business jobs received assistance from the bank in 2007, the most recent year for which the full Census dataset is available.</p> <p class="p1">Let that sink in: Over 99.6 percent of American small-business jobs exist without any Ex-Im Bank assistance.</p> <p class="p1">What about the idea that without the Ex-Im Bank, Arizona exports would be hurt? It is fear-mongering. First, there isn't much to lose. From 2007 to 2014, the bank's data show that Arizona received 0.3 percent of all Ex-Im Bank financing.</p> <p class="p1">Washington, home to Boeing, received 47 percent of total Ex-Im Bank disbursements over that same time.</p> <p class="p1">Also, less than 0.5 percent of total Arizona exports were backed by the Ex-Im Bank over the past seven years. Needless to say, the sky isn't going to fall on Arizona exporters without the Ex-Im Bank.</p> <p class="p1">Shutting it down would restore some fairness in the state. When Ex-Im Bank subsidizes an Arizona company, it comes at the expense of the vast swath of other businesses and their employees. When a company or its customers get a cheap loan from the bank, they enjoy lower costs and a clear edge over the competition. Unsubsidized firms may attract less capital as a result, incur higher costs, cut back on hiring and grow less than they would have on a level playing field.</p> <p class="p1">Subsidized businesses should not matter more than unsubsidized firms in the Grand Canyon State merely because they happen to have friends in Washington. Arizonans should ask their lawmakers why they support a program that exposes them to so much risk mostly for the benefit of Washington state.</p> Thu, 21 Aug 2014 10:42:10 -0400 Subsidies for Big Business and Megabanks <h5> Expert Commentary </h5> <p class="p1">In the little time she’s been in Congress, Sen. Elizabeth Warren has made a name for herself as a populist who talks tough about Wall Street and other large corporations. But is she going to do more than just talk about it?</p> <p class="p1">Recently, Warren confirmed that she is renewing her support for the Export-Import Bank — an agency that lends money to foreign companies to buy U.S. goods and services. This may sound good on paper; however, Warren’s endorsement of the Ex-Im Bank is inconsistent with her otherwise populist stand.</p> <p class="p1">The biggest Ex-Im Bank beneficiaries are giant corporations like Boeing, General Electric, Caterpillar and their very wealthy foreign buyers. These companies don’t need the bank, but they love it. It increases their profits and transfers onto taxpayers the risk that the companies should be shouldering since they pocket the benefits.</p> <p class="p1">The foreign companies love it, too. While most of them do have access to capital without the bank, Ex-Im Bank loans are much cheaper, giving them a U.S. government-sponsored edge over their competitors — including American competitors.</p> <p class="p1">Take the wealthy state-owned Emirates Air. In June 2012, it received some Ex-Im Bank financing to buy two Boeing planes. The company could have bought them without Ex-Im Bank, since around that time it also bought four French Airbus planes without any export subsidies whatsoever. This dispels the myth that Ex-Im Bank fills a gap in financing from the private sector.</p> <p class="p1">Ex-Im Bank loans were a great financial deal since the interest rates were almost half that of the market at the time, and it let the company put less money down than with a regular loan.</p> <p class="p1">According to experts, Ex-Im Bank loans saved Emirates about $20 million in finance charges per plane. But that savings came at the cost of many U.S. jobs. Thanks to the money saved through Ex-Im Bank financing, Emirates can lower its price, open new routes (like it did between New York’s JFK Airport and Milan) and stick it to its U.S. competition. Estimates show that roughly 7,500 jobs in the U.S. airlines industries were lost because <i>our</i> government subsidizes foreign airlines.</p> <p class="p1">Meanwhile, the mega-banks that Warren always complains about are some of the biggest beneficiaries of the Ex-Im Bank. Companies like J.P Morgan and Citibank get to extend billions of dollars in loans — and collect large fees and interest rates — without shouldering most of the risk involved. U.S. taxpayers on the other hand will be left footing the bill if any loans default. This is exactly the kind of favoritism for Wall Street she says she opposes.</p> <p class="p1">Moreover, workers in unsubsidized companies may find their hours reduced, raises dampened, or jobs threatened because of the competition they face from Ex-Im Bank-subsidized companies. Business owners in Massachusetts have to compete with other firms that receive some working capital from the Ex-Im Bank. Massachusetts workers can lose their jobs or see their wages stagnate as a result.</p> <p class="p1">Warren often explains her support for the Ex-Im Bank based on the misleading claim that it focuses on helping American small businesses. However, only 19 percent of the bank’s activities benefit small businesses. What’s more, in 2007 (the most recent year data is available), only 0.3 percent of all small business export jobs were supported by the bank.</p> <p class="p1">Also, assuming that each of Ex-Im Bank’s small-business transactions went to a unique small business (even though they didn’t), only 0.04 percent of all small businesses were supported by the bank that year. That’s right; most small exporters export without an Ex-Im Bank handout, but they have to compete with Ex-Im Bank’s beneficiaries nonetheless.</p> <p class="p1">The bottom line is that Ex-Im isn’t for the little guys. The Export-Import Bank is a subsidy for big businesses and wealthy private lenders.</p> Thu, 21 Aug 2014 09:54:39 -0400 Privacy and the Internet: An Overview of Key Issues <h5> Publication </h5> <p><iframe src="//" width="427" height="356" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" style="border: 1px solid #CCC; border-width: 1px; margin-bottom: 5px; max-width: 100%;"> </iframe></p> <div style="margin-bottom: 5px;"><strong> <a href="" title="Thierer Internet Privacy Regulation" target="_blank">Thierer Internet Privacy Regulation</a> </strong> from <strong><a href="" target="_blank">Mercatus</a></strong></div> Wed, 20 Aug 2014 16:18:07 -0400 “Permissionless Innovation” & the Grand Tech Policy Clash of Visions to Come <h5> Publication </h5> <p><iframe style="border: 1px solid #CCC; border-width: 1px; margin-bottom: 5px; max-width: 100%;" scrolling="no" marginheight="0" marginwidth="0" frameborder="0" height="356" width="427" src="//"> </iframe></p> <div style="margin-bottom: 5px;"><strong> <a target="_blank" title="“Permissionless Innovation” &amp; the Grand Tech Policy Clash of Visions to Come" href="">“Permissionless Innovation” &amp; the Grand Tech Policy Clash of Visions to Come</a> </strong> from <strong><a target="_blank" href="">Mercatus</a></strong></div> Wed, 20 Aug 2014 16:10:01 -0400 Sales Taxes and Exemptions <h5> Publication </h5> <p class="p1">State and local governments often turn to increases in sales taxes to generate added revenue. Estimates of fresh revenue from the higher tax tend to be overly optimistic, partly because the number of&nbsp;<span style="font-size: 12px;">sales tax exemptions tends to rise with the rising tax rate. Given the fact that politicians seek to raise a certain amount of revenue and wish to maximize their chance of re-election, this relationship suggests that politicians face a trade-off when seeking votes from groups that favor sales tax decreases and groups that lobby for certain tax exemptions.</span></p> <p class="p3">Assuming that higher tax rates increase the incentive to lobby for tax exemptions, agencies that estimate the effects of sales tax increases should take into account the expected increase in tax exemptions as well. Ultimately, the link between sales taxes and sales tax exemptions serves to undermine the certainty of generating additional revenue by increasing sales taxes.<sup>1</sup></p> <p class="p5">PUBLIC CHOICE MODEL</p> <p class="p7">Public choice economics explains how&nbsp; politicians seek to maximize votes given that competing groups of voters vie for political support.<sup>2</sup> For instance, one group of constituents may want taxes raised on a certain group or a certain type of transaction, while another group may favor reductions in taxes or increases in tax exemptions. In order to maximize votes, politicians can satisfy both groups by simultaneously increasing taxes and expanding the number of exemptions, or loopholes. While the net result on tax revenue generated may be negligible, a politician can secure additional votes from both groups.</p> <p class="p8">University of Chicago economist Sam Peltzman’s analysis of the regulation of firms offers insights that are relevant to the study of sales taxes and exemptions.<sup>3</sup></p> <p class="p10">Given that firms demand price regulations that increase their profits and consumers desire regulations that lower prices, Peltzman analyzed how politicians approach regulating firms in order to maximize votes. This model presents a situation in which both groups can’t be simultaneously satisfied, just as is the case with sales taxes and exemptions. In a recent paper,<sup>4</sup> we use Peltzman’s model, showing that politicians seek to maximize support from competing groups, to analyze the relationship between sales taxes and sales tax exemptions.</p> <p class="p11">We analyze the equilibrium relationship between the sales tax rate and the number of sales tax exemptions in each state that levies sales taxes. Our theory suggests that as tax rates rise, so do lobbying activities, and therefore the number of exemptions. In this model, in order for a politician to maintain a certain amount of revenue, that politician is not able to satisfy all groups. In other words, when a politician decreases taxes— thereby increasing support from one group—that politician is forced by the revenue constraint to decrease tax exemptions as well—hence losing support from the other group. In this way, the wealth of one interest group increases at the expense of the other group. Given this state of affairs, the politician is faced with choosing a tax rate and a number of exemptions that maximizes the politician’s chance of re-election.</p><p class="p11"><a href="">Continue reading</a></p> Thu, 21 Aug 2014 10:19:19 -0400 Patrick McLaughlin Discusses Government Regulation on Wall Street Journal Opinion <h5> Video </h5> <iframe width="480" height="360" src="//" frameborder="0" allowfullscreen></iframe> <p>Patrick McLaughlin Discusses Government Regulation on Wall Street Journal Opinion&nbsp;</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;480&quot; height=&quot;360&quot; src=&quot;//; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Wed, 20 Aug 2014 23:13:21 -0400 Introducing RegData 2.0: A New Way of Measuring the Size and Scope of Federal Regulation <h5> Expert Commentary </h5> <p class="p1"><span style="font-size: 12px;">Today, the </span><a href=";utm_medium=RSP&amp;utm_campaign=Newsletter" style="font-size: 12px;">Mercatus Center at George Mason University</a><span style="font-size: 12px;"> launched the latest version of </span><a href=";utm_medium=RSP&amp;utm_campaign=Newsletter" style="font-size: 12px;"><b>RegData</b></a><span style="font-size: 12px;">, a tool created by </span><a href=";utm_medium=RSP&amp;utm_campaign=Newsletter" style="font-size: 12px;">Patrick McLaughlin</a><span style="font-size: 12px;"> and </span><a href=";utm_medium=RSP&amp;utm_campaign=Newsletter" style="font-size: 12px;">Omar Al-Ubaydli</a><span style="font-size: 12px;"> that improves the way we measure the size and scope of federal regulations.</span></p> <p class="p1">In today's edition of <a href=";utm_medium=RSP&amp;utm_campaign=Newsletter"><i>The Hill</i></a>, McLaughlin explains how <b>RegData 2.0</b> offers novel metrics of an important input in our economy — federal regulation — and takes the first step in using a "Moneyball" approach to improving the regulatory system.</p> <p class="p1"><b>How Is RegData Different?</b></p> <p class="p1">RegData significantly improves upon previous methods to measure regulation by searching the federal register and counting the number of restrictions. Previous methods, such as counting pages in the federal register, lack the accuracy of counting the number of command words in the federal register’s text. All of the data is accessible and available for download on the website.</p> <p class="p1"><b>How Can I Use RegData?</b></p> <ul class="ul1"><li class="li3">Go beyond 'page' or 'rule' count: RegData 2.0 allows you to assess regulations by number of restrictions per regulator, or restrictions relative to total words</li> <li class="li3">See how the regulatory metrics compare across industries</li> <li class="li3">See how much regulation comes from a particular agency, bureau, committee, or administration per year</li> <li class="li3">See how regulatory restrictions have changed over time in a particular industry</li> <li class="li3">Examine whether agency regulatory production rates change after major acts of Congress</li> </ul> <p class="p1">To learn more about how to use RegData, watch <a href=";utm_medium=RSP&amp;utm_campaign=Newsletter">this tutorial</a> from Patrick McLaughlin.</p><p class="p1"><a href=""><img height="1212" width="585" src="" /></a></p> Wed, 20 Aug 2014 14:32:44 -0400 FDA Fails to Account for E-Cigarettes’ Health Benefits <h5> Expert Commentary </h5> <p class="p1">Nevada Attorney General Catherine Cortez Masto joined 28 other state attorneys general last week in a letter supporting the Food and Drug Administration’s proposal to expand its regulatory umbrella over tobacco products to include electronic cigarettes. Unfortunately, the FDA jeopardizes public health by not adequately assessing the costs of suppressing the e-cigarette market.</p> <p class="p1">The FDA errs on the side of assuming e-cigarettes pose more of a health risk than an opportunity to improve public health. Numerous studies, however, show that e-cigarettes help some smokers reduce or quit smoking. Studies also suggest that e-cigarettes are at least as effective, if not more, than FDA-approved nicotine replacement therapies such as patches, gums and pills. Their effectiveness appears to be related to how they mimic the act of smoking.</p> <p class="p1">Federal regulators dismiss “harm reduction theory” — the theory that minimizing damage from risky behavior may promote public health more effectively than simply banning risky behavior. Such a model is in line with estimates that up to 98 percent of tobacco-related deaths are attributable to combustible products such as cigarettes, pipes and cigars.</p> <p class="p1">The FDA downplays the possibility that noncombustible products such as e-cigarettes are substantially less dangerous than combustible tobacco products by claiming lack of evidence.</p> <p class="p1">The American Medical Association may disagree. As AMA explains, e-cigarettes do not contain tobacco, the main reason regular cigarettes are so harmful. Moreover, vapor from e-cigarettes is much less toxic than secondhand tobacco smoke. And while e-cigarettes do contain nicotine, which is also not healthy, nicotine probably does not contribute nearly as much to smoking-related diseases as tobacco.</p> <p class="p1">The proposed rule would impose labeling requirements and warning statements for packages and advertisements. However, public health will likely be harmed if manufacturers are prohibited from marketing their products as safer alternatives to tobacco cigarettes or even inform consumers that their products do not contain tobacco. The proposed regulation will push manufacturers to tout other factors — such as flavor, price, and convenience — thus steering manufacturers away from developing new products aimed at helping smokers reduce or quit smoking.</p> <p class="p1">Unintended consequences abound. As the costs of bringing products to market rise, those costs will be passed on to consumers. Raising e-cigarette prices on smokers who are interested in quitting is unlikely to promote public health.</p> <p class="p1">If manufacturers are unable to inform smokers that e-cigarettes are safer alternatives, the FDA may unwittingly promote tobacco use. The proposed rule thus weakens the creative destruction that the e-cigarette industry might otherwise exert on the tobacco industry.</p> <p class="p1">There is evidence that smokers are interested in quitting, or at least want safer alternatives. A recent Gallup poll found that 74 percent of U.S. smokers want to quit. And one top tobacco analyst, Bonnie Herzog of Wells Fargo Securities, estimated e-cigarette sales in the United States topped $1.7 billion last year.</p> <p class="p1">The Centers for Disease Control and Prevention estimates the annual costs attributed to smoking in the United States are between $289 billion and $333 billion. In light of these costs, the possibility that e-cigarettes represent a market response that fills the need for harm reduction by the 32.2 million smokers wanting to quit is worth pursuing.</p> <p class="p1">This does not mean that the FDA should not regulate e-cigarettes. Prohibiting sales to youth and requiring a clear description of product ingredients may be appropriate. But prohibiting any information regarding potential harm reduction is hard to justify. The FDA needs to develop a regulatory strategy that fully considers the potential benefits of e-cigarettes and the unintended adverse effects on public health of stymieing the evolution of a promising harm-reduction tool.</p> <p class="p1">In other words, the FDA should not remove the financial incentive to develop safer smoking products. Instead, it should foster a competitive market that empowers consumers to make wise decisions about what they choose to put in their bodies.</p> Tue, 19 Aug 2014 11:25:30 -0400 How the Top Ten Regulators of 2012 Changed over Ten Years <h5> Publication </h5> <p><a href="">RegData 2.0</a> is a newly launched regulation database that permits users to view regulatory statistics for hundreds of federal agencies. The chart below uses statistics pulled from the new RegData website to determine which federal regulators published the most restrictions in the year 2012 and compare the number of restrictions from these regulators in 2012 to the number of restrictions they published ten years earlier.</p><p><a href=""><img src="" /></a></p><p><span style="font-size: 12px;">The bars in the chart show the number of restrictions published by the ten regulators with the most restrictions in 2012 alongside those regulators’ restriction counts in 2002. The doughnut chart shows that these regulators accounted for almost one-third of all restrictions published in 2012. RegData can compare agency-specific regulatory statistics in one year to another year, as done here; it can also plot year-to-year growth for all years between 1997 and 2012. As the figure above shows, growth trends can be quite different from one regulator to another.</span></p> <p>Restriction counts are an example of one statistic available with <a href="">RegData 2.0</a>, which uses text analysis software to search for specific sets of keywords. This particular set of keywords—restrictions—is defined as words likely to create a legally binding obligation to take some action or prohibition from doing so. The specific strings included in this set are “shall,” “must,” “may not,” “prohibited,” and “required.”<span style="font-size: 11.818181991577148px;">&nbsp;</span></p> <p>Regulators are defined in RegData 2.0 according to the<a href=""> Office of Management and Budget’s MAX system</a> (OMB MAX), with the exception of the Environmental Protection Agency (EPA). The EPA (which is treated as one single regulator by OMB MAX) was divided into different agencies according to the names of the chapters of regulatory text the EPA publishes, such as “Air Programs,” “Water Programs,” and “Pesticide Programs.”</p> <p>RegData objectively creates a “big picture” window into regulation. It measures not only that overall regulation tends to grow over time, but also which agencies account for that growth. Researchers and analysts can use the data created by RegData to better understand the causes and effects of regulation from specific agencies and on specific industries.</p> Tue, 19 Aug 2014 08:55:33 -0400 2014 Trustees’ Reports: Long-Term Medicare Program Cost Projections <h5> Publication </h5> <p class="p1">The recently released <a href="">2014 Social Security and Medicare Trustees’ Reports</a>, which project rising long-term costs under a number of assumed scenarios, should prompt a serious examination of the trust funds’ financial status.</p> <p class="p2"><a href=""><img src="" width="585" height="424" /></a></p> <p class="p1">This chart series includes updated versions of previous Mercatus Center charts presenting the <a href="">long-term projections</a> for Medicare programs. The first chart compares total Medicare cost projections under a current law assumption with two alternative projections under more realistic baseline assumptions, measured as a percentage of the economy. The second, third, and fourth charts compare cost projections under these various assumptions for Medicare Part B, Medicare Hospital Insurance (HI), and Medicare Part D expenditures, respectively.</p> <p class="p1">The charts display the long-term projections for all Medicare costs using current law assumptions along with two supplemental projections—called “projected baseline” and “alternative to baseline”—that incorporate alternative assumptions. The “projected baseline” scenario assumes a continuation of the historical pattern of sustainable growth rate (SGR) overrides, that is, the formula that establishes physician fee schedule payments under Medicare Parts B and D. The “alternative to baseline” scenario additionally assumes that certain controversial elements of the 2010 Affordable Care Act (ACA) are either scaled back during the period from 2020 to 2034 or eliminated altogether.</p> <p class="p1">These labels reflect a key change in this year’s report. The projected baseline and alternative baseline projections were called “first alternative” and “full alternative” scenarios in previous reports. This change demonstrates that the Trustees recognize that the current law projections likely understate expected costs and are emphasizing the projected baseline projections as more realistic.&nbsp;</p> <p class="p1">As the first chart shows, Medicare cost projections vary considerably in the long run, depending on the assumptions. A difference of one percentage point of GDP between calculations can yield enormous divergences in realized costs. For example, if the assumptions of the alternative baseline prove correct, then Medicare expenditures in 2080 could be about 45 percent greater than projected under current law. The chart shows that current law projections predict Medicare costs will be 6.26 percent of GDP in 2080. Under the projected baseline, total costs will be 6.78 percent of GDP in 2080. In the alternative to the baseline, total Medicare costs climb to 8.09 percent of GDP by 2080. In other words, total projected Medicare costs are on track to rise faster than GDP. If lawmakers continue to override the physician payment formula and decline to cut physician reimbursement, total Medicare costs will be substantially higher than projected in the long run under current law.</p><p class="p1"><a href=""><img height="425" width="585" src="" /></a></p><p class="p1"><span style="font-size: 12px;">The second chart limits the same analysis to the Medicare Part B program. Under current law, Part B spending is projected to increase from 1.47 percent of GDP in 2013 to 1.56 percent by 2020 and 2.56 percent of GDP by 2080. For the projected baseline, Part B almost doubles as a share of GDP between 2020 and 2080, growing from 1.62 percent of GDP in 2020 to 3.09 percent of GDP by 2080. In alternative baseline scenario, Part B is expected to reach 3.16 percent of GDP by 2080.</span></p> <p class="p1"><a href=""><img height="424" width="585" src="" /></a></p><p class="p1">The third chart displays cost projections for Medicare Hospital Insurance (HI). Under current law, HI costs are projected to increase from 1.56 percent of GDP in 2013 to 2.38 percent in 2080. The projected baseline just barely differs from the current law projection, predicting HI costs equal to 2.37 percent of GDP in 2080. This is because the only difference between the current law and baseline projections is the SGR override, which only affect the programs that draw from the Supplementary Medicare Insurance (SMI) trust fund. Since HI does not draw from this fund, there is little difference between the current law and baseline projections. The alternative to the baseline projects HI costs to exceed 3.5 percent of GDP by 2080.<span style="font-size: 12px;">&nbsp;</span></p> <p class="p1">The Medicare Hospital Insurance trust fund is now expected to run out of assets in 2030—that’s four years later than projected last year. This is nothing to celebrate—it’s not clear that these projections will materialize because the Trustees report that “the fund is not adequately financed over the next 10 years.” The HI trust fund, like the Social Security trust fund, determines the spending authority of the programs. Without an adequate trust fund balance, payouts will be limited to what the program collects by itself (Medicare HI also gets some income from premiums and from payments by states), which will result in sharp curtailment of payments.</p> <p class="p6"><a href=""><img src="" width="585" height="398" /></a></p> <p class="p1">The last chart displays cost projections for Medicare Part D expenditures. Compared to other programs, there appears to be very little difference between the various scenarios for Part D expenditures. This can be explained by the legislatively mandated solvency inherent in the design of Part D. As Mercatus fellow and Trustee Charles Blahous <a href="">explains</a>, “Payments for physician services (Part B) as well as prescription drugs (Part D) are made from Medicare’s Supplementary Medical Insurance (SMI) trust fund ($317 billion spent in 2013). SMI is kept solvent by statutory design; only about one-quarter of its revenues are provided by beneficiary premiums, the other three-quarters provided from the government’s general fund in whatever amounts are necessary to finance benefits.”&nbsp;</p> <p class="p9">As we’ve seen before, even these grim numbers might be too optimistic because&nbsp;some of the expected revenue or cost savings&nbsp;in the current law may never materialize. In fact,&nbsp;a&nbsp;section in an appendix of the 2014&nbsp;Trustees’ Report,&nbsp;called “Statement of Actuarial Opinion,” makes that point very clearly. (p. 276)&nbsp;For instance, Paul&nbsp;Spitalnic, the acting&nbsp;chief actuary of the program,&nbsp;explains that “current law would require a physician fee reduction of an estimated 21 percent on January 1, 2015—an implausible expectation.”</p> <p class="p9">The report projects dwindling trust funds, greater enrollment, higher costs per beneficiary, and insufficient revenues to fund future payouts. These charts show that a slight change in economic assumptions in the present can yield dramatic effects in the long run that further undermine program solvency. These programs are in dire need of fundamental reform, and time is running out.</p> Mon, 18 Aug 2014 14:43:14 -0400 Economic Patriotism Would Be Bringing Taxes and Spending in Line <h5> Expert Commentary </h5> <p class="p1">Several states cut a wide variety of taxes this summer. Indiana and Rhode Island, for example, cut the conventional corporate tax. Idaho, meanwhile, took an unconventional route by cutting sales taxes on software purchased through “the cloud.” When revenues are on the rise, some states choose to lower taxes, while others prefer to spend the tax windfall. Both moves could be wrong.</p> <p class="p1">All states except for Vermont must balance their budgets, making state finances very pro-cyclical. In other words, tax revenues rise during good economic times and fall during hard times. The latter can often force policymakers to raise taxes when residents can least afford it.</p> <p class="p1">A wise policy would be to stash budget surpluses in a rainy day fund to help pay for government spending in tough times without raising taxes. Regrettably, policymakers often end up with their hands in the fiscal cookie jar and quickly spend the accumulated surpluses even in good times. Government spending must be low enough and taxes must be high enough to maintain a balanced budget, on average, over many decades.</p> <p class="p1"><a href="">Continue reading</a></p> Thu, 21 Aug 2014 09:35:51 -0400 Regulatory Measurement Can Lead to Actionable Knowledge <h5> Expert Commentary </h5> <p class="p1">Scientific progress requires measurement, especially when working with a complex system such as the economy or the human body. For example, our understanding of the relationship between cholesterol and human health <a href="">continues to evolve</a>, but it has only gotten to the point where we debate the merits of "good" cholesterol and "bad" cholesterol via a <a href="">century of investigation</a> and the development of measurement techniques. Similarly, although in a very different field, professional sports teams increasingly develop new, quantitative metrics of player performance in order to optimize team performance — as described by the book and movie "Moneyball."</p> <p class="p1">Good governance also can develop over time through careful measurement combined with scientific inquiry. To that end, I developed (along with my colleague, George Mason University economics professor Omar Al-Ubaydli) a new set of metrics of federal regulation called <a href="">RegData</a>.</p> <p class="p2">RegData offers novel metrics of an important input in our economy — federal regulation — and takes the first step in using a "Moneyball" approach to improving the regulatory system. This tool creates statistics based on the actual text in federal regulation, and these statistics can be <a href=";Productivity_v1.pdf">used</a> by <a href="">researchers</a> to create a better understanding of the causes and consequences of regulation. This week, a new version — RegData 2.0 — will be available for use, and it's no longer just for researchers. RegData 2.0 can provide insights on the regulatory climate for anyone with a more than casual interest in regulations and public policy.</p> <p class="p1">RegData 2.0 relies on custom-made text analysis software. With this software, federal regulatory text, as published annually in the Code of Federal Regulations (CFR), can be searched for different sets of key words. Moreover, the regulatory text can be divided up according to the regulator that created it, allowing the creation of regulator-specific quantifications of regulation. Two of RegData's regulator-specific measurements are word counts and restriction counts. Word counts are what you imagine — the total number of words contained in a regulator's text. Figure 1 below was created with data given <a href=";regulator%5b%5d=295">here</a>, and shows word count data for the Commodity Futures Trading Commission (CFTC) — the regulator in charge of futures and options markets. From 1997 to 2010, the CFTC's regulatory text grew from 302,087 to 355,842 words. Years 2011 and 2012, however, saw a precipitous growth in regulation from CFTC, with the word count reaching 480,544 in 2012. This is most likely the result of new regulations caused by the Dodd-Frank Act of 2010.</p> <p class="p1"><img src="" /></p> <p class="p1">RegData also permits the examination of restrictions. <a href=";regulator%5b%5d=295">Restrictions</a> are words that create binding legal obligations to engage in some activity or prohibition from doing so. Lawyers will recognize these restrictions — they are words like "shall," "must," and "may not." Just as regulators differ in terms of how much text they produce, some regulators' text may be more restrictive than others'. A RegData user can look at restriction data for entire departments, such as the Department of Transportation, or for smaller units within departments. RegData defines a regulator according to the <a href="">Office of Management and Budget (OMB) MAX budget system</a>, with the exception of the Environmental Protection Agency (EPA). The EPA (which is treated as one single regulator by OMB MAX) was divided into different agencies according to the names of the chapters of regulatory text EPA publishes, such as "Air Programs," "Water Programs," and "Pesticide Programs." Figure 2 shows the 10 regulators that published the most restrictions in 2012. These 10 regulators accounted for about 31 percent of all restrictions published in the CFR in 2012.</p> <p class="p1"><img src="" width="585" height="449" /></p> <p class="p1"><i><sup>Source: Accessed Aug. 18, 2014.<br /></sup></i><i style="font-family: inherit; font-weight: inherit;"><sup>Produced by Patrick McLaughlin and Rizqi Rachmat, Mercatus Center at George Mason University.</sup></i></p> <p class="p1">Perhaps the most innovative feature of RegData is its industry-specific measurements of regulation. Using search terms that are derived from industry descriptions given in the North American Industry Classification System, RegData can paint a picture of which industries are mentioned most often in regulatory text and by which regulator, as well as how that changes over time. For example, rail transportation is a major industry in the United States. RegData offers data on how often rail transportation-related search terms were found each year in the regulatory text of all federal regulators. Figure 3 offers a sample of just five of these regulators. Each of these series spans 1997 to 2012, with the exception of FMSCA — an agency that did not exist until the year 2000. It is not surprising to see the Federal Railroad Administration (FRA) mention railroads relatively often. But perhaps it is informative to learn that the Pipelines and Hazardous Materials Safety Administration (PHMSA) actually mentions them even more.<br /><br /></p> <p class="p1"><img src="" width="585" height="422" /></p> <p class="p1"><br />As with all exercises in measurement, RegData is not perfect. There are other ways that restrictions can be created, for example, than those indicated by words like "shall" and "must." We also don't know the object of the restriction, or its severity. Similarly, there are sections of regulatory text that apply to specific industries without using any of RegData's industry-specific search terms.</p> <p class="p1">Nonetheless, some of the largest gains in research come from the creation of new data and measurement techniques. Nate Silver <a href="">compares</a> new data's first pass to "the way a vacuum's first sweep of the living-room floor picks up a lot more dust and dirt than the second and third attempts." The questions are: How much signal is RegData picking up, and how much noise? The answer will be told as researchers use the database to delve into questions such as whether and how regulation affects labor productivity, whether lobbying affects regulatory production, and how long-term regulatory trends might play into economic growth patterns. In turn, policymakers can learn from this research and hopefully improve future choices according to what we learn.</p> Mon, 18 Aug 2014 21:22:26 -0400 End Toxic Alliance with Big Business <h5> Expert Commentary </h5> <p class="p1">Great leaders make the right decisions, even when they are inconvenient. Serious policy analysts understand that not reauthorizing the New Deal-era corporate welfare program known as the Export-Import Bank is good economics. Leaders in Congress should let the government bank’s charter expire.</p> <p class="p1">It is also good politics. Ohioans and Americans in general are tired of the toxic alliance between big business and big government. Whether through the Occupy Wall Street or the Tea Party movements, more people are expressing opposition to noxious cronyism, of which the Ex-Im Bank is the epitome. Americans simply will not stand for it anymore.</p> <p class="p1">The Ex-Im Bank uses its special borrowing privileges with the Treasury Department to finance foreign purchases from a chosen few U.S. exporters. It provides taxpayer-backed loans, insurance, and loan guarantees for foreign companies, like Air China, to buy products from select U.S. exporters, like Boeing. In other words, it picks winners and losers by manipulating credit markets with below-market lending.</p> <p class="p1">The program's cheerleaders, like beneficiary lobbyists and the Chamber of Commerce, claim it is critical to sustain exports. Economists disagree. Export-subsidy schemes like Ex-Im Bank have a negligible effect on national trade.</p> <p class="p1">The data are clear. Ex-Im Bank backs less than 2 percent of total U.S. exports and less than 1 percent of small business exports each year. More than 60 percent of its activities benefit a handful of politically connected firms.</p> <p class="p1">In Ohio, Ex-Im Bank is even more insignificant. It backed only 0.73 percent of all exports and less than 0.4 percent of small business exports from 2007 to 2014. Don’t buy the spin: Most of Ex-Im Banks’s benefits in Ohio only benefit General Electric subsidiaries at the expense of everyone else.</p> <p class="p1">The Ex-Im Bank is a fat treat for General Electric in Ohio, but it hurts average citizens in the Buckeye State.</p> <p class="p1">Consumers in Ohio wind up paying higher final prices for Ex-Im Bank’s subsidized goods. Workers in unsubsidized Ohio companies may find their hours reduced, raises dampened, or their jobs threatened because of Ex-Im Bank. Small business owners in Ohio can attract less capital because Ex-Im Bank gave their competitors an unfair government boost. All taxpayers bear the outlandish $140 billion in risk that rightfully belongs to subsidized firms.</p> <p class="p1">There are no grounds to claim that closing Ex-Im Bank would be catastrophic for exports or small businesses in Ohio or nationwide. Rather, it would end political privilege, encourage firms to compete on their merits, and ensure that corporations – not taxpayers – bear their own market risks.</p> <p class="p1">By opposing the Ex-Im Bank’s reauthorization, leaders in Congress would firmly express their loyalty to average Americans and businesses and lead the country toward a fairer, less corporatist future.</p> Wed, 20 Aug 2014 10:53:50 -0400 Unsustainable Platitudes <h5> Expert Commentary </h5> <p class="p1">Platitudes are a poor basis for policy. The reason is that, no matter how melodious they sound, platitudes are practically meaningless. People who utter platitudes often seem to be saying something meaningful when in fact they're merely stating the obvious.</p> <p class="p2">A good way to test if someone is speaking in platitudes is to ask yourself if you can imagine a normal human adult believing the opposite.</p> <p class="p2">Suppose someone informs you that he favors policies that promote human happiness. Can you imagine, say, your neighbor responding, “I disagree. I favor policies that promote human misery”? Probably not.</p> <p class="p2">If you cannot imagine any normal person disagreeing with some proclamation, then that proclamation is a platitude. It tells you nothing of substance.</p> <p class="p2">Consider today's fashionable calls for “sustainability.” The academy, media, cyberspace are full of people proclaiming support for policies that promote economic and environmental “sustainability.” So whenever you hear such proclamations, ask if you can envision a sane adult sincerely disagreeing.</p> <p class="p2">You'll discover, of course, that you can't imagine anyone seriously supporting “unsustainability.” Therefore, you should conclude that mere expressions of support for “sustainability” are empty. And they can be downright harmful if they mislead people into supporting counterproductive government policies.</p> <p class="p2">Substantive issues involving sustainability invoke questions that have non-obvious answers. For example: At what rate must the supply of a resource fall before we conclude that continued use of that resource is unsustainable? Fifty percent annually? Ten percent? One percent?</p> <p class="p2">Because the correct answer to this question depends (among other factors) on how much humans care about the future — and because there's no good reason why we humans should care about the world as it might be many years from now as much as we care about the world as it might be a few days from now — policies and activities that will eventually result in the depletion of some resource are not necessarily unsustainable in any sense that really matters to humans today. If the appropriate human time horizon is, say, 500 years, then activities that will cause petroleum supplies to be exhausted in 550 years are “sustainable” within our relevant time horizon.</p> <p class="p2">Economically sophisticated readers will respond, “Not so fast! Even if we won't completely run out of petroleum until well past the time that is relevant for human beings alive today, falling supplies of petroleum will start to raise the price of petroleum long before 500 years from now.” This claim is true — but it's a reason to worry less, not more, about “sustainability.”</p> <p class="p2">A rising price of petroleum serves as a spur to sustainable practices. First, the rising price prompts consumers voluntarily to cut back on the use of petroleum. Second, this rising price creates incentives for entrepreneurs to find or create petroleum substitutes. And the steeper the price rise, the stronger are these incentives.</p> <p class="p2">Nearly every resource commonly used today likely has potential substitutes — recall that newly discovered petroleum in the 19th century quickly substituted for wood, coal and whale oil. So to focus only on “sustainability” of resources commonly used today is to lose sight of the fact that these resources likely have substitutes that will become available if supplies of today's resources fall below critical levels.</p> Thu, 14 Aug 2014 14:35:12 -0400 OIRA Regulatory Review: Responding to Agency Avoidance <h5> Events </h5> <p>One of the President’s major regulatory oversight offices is the Office of Information and Regulatory Affairs. Agencies can take a “cooperate with OIRA” approach or an “avoid OIRA” approach when they pursue new regulatory initiatives. Understanding agency avoidance tactics is an important step in deciding whether and how to shift agency incentives away from avoidance and toward cooperation.</p> <p>This Regulation University program by Professors of Law Nina Mendelson of University of Michigan Law School and Jonathan Wiener of Duke University will:</p> <ul><li>Give an overview of the system of presidential regulatory oversight through OIRA review;</li><li>Review the broad array of agency avoidance tactics and corresponding response options available to OIRA, the President, Congress, and the courts, and</li><li>Suggest ways to identify avoidance tactics that require closer scrutiny.</li></ul><div><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">Space is limited. Please register online for this event.</p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">This event is free and open to all congressional and federal agency staff. This event is not open to the general public. Food will be provided. Due to space constraints, please no interns.&nbsp;<i>Questions? Please contact Caitlyn Van Orden, Event Coordinator, at&nbsp;</i><a href="" target="_blank" style="font-size: 12px; color: #666699;"></a>&nbsp;<i>or (703) 993-4925.</i></p></div> Thu, 14 Aug 2014 14:27:53 -0400 'Living Wills' for Banks are Pointless Without Market Discipline <h5> Expert Commentary </h5> <p class="p1">Last week's rejection of 11 large financial institutions' living wills was a dramatic gesture by the Federal Deposit Insurance Corporation and the Federal Reserve. The living wills are supposed to be a roadmap for the orderly resolution of these companies, should they run into trouble. Living wills make good sense, but until markets are forced to live by them, there is little incentive to get them right.</p> <p class="p1">The Fed and FDIC rejected the living wills, which were filed in October 2013, for falling short in a number of areas. Regulators took <a href=""><b>issue</b></a>, among other things, with the banks' "assumptions about the likely behavior of customers, counterparties, investors, central clearing facilities, and regulators" and their "failure to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution."</p> <p class="p1">The banking agencies sent the affected firms back to the drawing board and threatened to take matters into their own regulatory hands if the plans do not pass muster the next time around. Dodd-Frank empowers regulators to impose growth, leverage, capital, activity, and other restrictions on companies that do not produce credible living wills. If, after such a regulatory reprimand, a firm still fails to produce a credible living will, the regulators can force it to sell assets.</p> <p class="p1">The FDIC should not be surprised that the firms employed unduly rosy assumptions. After all, the FDIC's own <a href=""><b>assessment</b></a> of how it would have resolved Lehman under its new Dodd-Frank orderly liquidation authority was grounded in similar wishful thinking. The FDIC assumed, for example, that in an FDIC-run resolution Barclays would have acquired Lehman's assets and some of its liabilities without inciting concern from regulators in the United Kingdom and with only "minimal ... disruptions to the market." And Lehman's general unsecured creditors would have received 97 cents on the dollar because of how well the FDIC would run the bidding process.</p> <p class="p1">Living wills are a good idea. They help firms think through their organizational structures and points of vulnerability. A well-crafted living will provides useful insight to a firm's managers, shareholders, and creditors. As FDIC Director Thomas Hoenig explained in a statement last week, a credible living will is a powerful <a href=""><b>rejoinder</b></a> to the false notion that bankruptcy is not a viable option for large financial firms.</p> <p class="p1">Mr. Hoenig also argued that "a greater part of these plans should be made available to the market, providing it an opportunity to judge whether progress is being made toward having credible plans." Letting markets judge the credibility of living wills would not only harness the market's broad expertise, but also would send a message that regulators are serious about allowing firms to fail without government support. Speak now, bank creditors and shareholders, or forever hold your peace.</p> <p class="p1">The existence of Dodd-Frank's orderly liquidation authority undercuts that tough message and diminishes the urgency of crafting a credible plan. When push comes to shove, regulators accustomed to micromanaging financial firms likely will want to micromanage resolution. Title II of Dodd-Frank gives them the power to do so.</p> <p class="p1">When a friend of mine was set to deliver twins, she presented her birth plan-complete with musical choices and pain-killer preferences-to the doctor. "Birth plan!" he proclaimed with disdain as he shredded the carefully crafted plan. "We'll do things according to <i>my</i> plan." Good plans will only emerge if markets and regulators believe that resolution plans would actually be used in a time of crisis.</p> <p class="p1">As the big banks consider how to redo their living wills, policymakers should take parallel efforts to revamp the bankruptcy code and eliminate regulators' ability to skirt bankruptcy in a time of crisis.</p> Thu, 14 Aug 2014 14:27:16 -0400 Comments to the New York Department of Financial Services on the Proposed Virtual Currency Regulatory Framework <h5> Publication </h5> <p class="p1">On July 17, the New York Department of Financial Services (DFS) released its proposed BitLicense regulatory framework for virtual currency firms. We congratulate Superintendent Benjamin M. Lawsky and the entire department for the forward thinking they have demonstrated by making New York the first state to carefully consider the need to accommodate virtual currency firms in its regulatory system. This is a historic occasion in the evolution of money, and it may well be remembered for centuries to come. On July 23, the proposed rules were published in the New York State Register, setting off a 45-day period for public comment.</p> <p class="p2">The Technology Policy Program (TPP) of the Mercatus Center at George Mason University is dedicated to advancing knowledge of the impact of regulation on society. As part of its mission, TPP conducts careful and independent analyses employing contemporary economic scholarship to assess rulemaking proposals from the perspective of the public interest. Therefore, this comment on the DFS’s proposed regulatory framework does not represent the views of any particular affected party or special interest group, but is designed to assist the department as it continues to lead the world in supporting the responsible adoption of this important new technology.<span style="font-size: 12px;">&nbsp;</span></p> <p class="p5">INTRODUCTION</p> <p class="p6">As the Treasury Department’s Financial Crimes Enforcement Network has found, certain virtual currency businesses are money service businesses.<sup>1</sup> Typically such money service businesses engage in money transmission and as a result must acquire a money transmitter license in each state in which they do business. State financial regulators around the country have been working to apply their existing money transmission licensing statutes and regulations to new virtual currency businesses.<sup>2</sup> In many cases, existing rules do not take into account the unique properties of recent innovations like cryptocurrencies. With this in mind, the department sought to develop rules that were “tailored specifically to the unique characteristics of virtual currencies.”<sup>3</sup></p> <p class="p7">As Superintendent Lawsky has stated, the aim of this project is “to strike an appropriate balance that helps protect consumers and root out illegal activity—without stifling beneficial innovation.”<sup>4</sup> This is the right goal and one we applaud. It is a very difficult balance to strike, however, and we believe that the BitLicense regulatory framework as presently proposed misses the mark, for two main reasons.</p> <p class="p8">First, while doing much to take into account the unique properties of virtual currencies and virtual currency businesses, the proposal nevertheless fails to accommodate some of the most important attributes of software- based innovation. To the extent that one of its chief goals is to preserve and encourage innovation, the BitLicense proposal should be modified with these considerations in mind—and this can be done without sacrificing the protections that the rules will afford consumers. Taking into account the “unique characteristics” of virtual currencies is the key consideration that will foster innovation, and it is the reason why the department is creating a new BitLicense. The department should, therefore, make sure that it is indeed taking these features into account.</p> <p class="p9">Second, the purpose of a BitLicense should be to take the place of a money transmission license for virtual currency businesses. That is to say, but for the creation of a new BitLicense, virtual currency businesses would be subject to money transmission licensing. Therefore, to the extent that the goal behind the new BitLicense is to protect consumers while fostering innovation, the obligations faced by BitLicensees should not be any more burdensome than those faced by traditional money transmitters. Otherwise, the new regulatory framework will have the opposite effect of the one intended. If it is more costly and difficult to acquire a BitLicense than a money transmission license, we should expect less innovation. Additional regulatory burdens would put BitLicensees at a relative disadvantage, and in several instances the proposed regulatory framework is more onerous than traditional money transmitter licensing.</p> <p class="p9">As Superintendent Lawsky has rightly stated, New York should avoid virtual currency rules that are “so burdensome or unwieldy that the technology can’t develop.”<sup>5</sup> The proposed BitLicense framework, while close, does not strike the right balance between consumer protection and innovation. For example, its approach to consumer protection through disclosures rather than prescriptive precautionary regulation is the right approach for giving entrepreneurs flxibility to innovate while ensuring that consumers have the information they need to make informed choices. Yet there is much that can be improved in the framework to reach the goal of balancing innovation and protection. Below we outline where the framework is missing the mark and recommend some modifications that will take into account the unique properties of virtual currencies and virtual currency businesses.</p> <p class="p10"><a href="">Continue reading</a></p> Thu, 14 Aug 2014 15:32:10 -0400 End the Ex-Im Bank? <h5> Expert Commentary </h5> <p class="p1">Margaret Harding’s July 23 Point of View, “ <a href="">A good-for-business bank</a>,” omits several important facts. Not only does the Export-Import Bank subsidize a negligible number of Tar Heel firms and workers, it does so at the expense of the vast majority of North Carolinians.</p> <p class="p1">Here are the facts: From 2007 to 2014, North Carolina exported $115.6 billion in goods, $2.5 billion of which were supported by Ex-Im subsidies or less than 2.3 percent. Only 0.89 percent of North Carolina exports were managed by small businesses receiving Ex-Im assistance. Furthermore, Ex-Im does not earn profits for taxpayers.</p> <p class="p1">The nonpartisan Congressional Budget Office recently projected that Ex-Im will lose $2 billion over the next decade. Economists have long known that export credit subsidies boost profits for subsidized firms at the expense of everyone else. Unsubsidized firms, workers and consumers are placed at a competitive disadvantage by their own government.</p> <p class="p1">It is the Ex-Im itself that “hurts the U.S. economy and jeopardizes the jobs of hundreds of thousands of Americans.” Ninety-eight percent of North Carolina businesses should not matter less than the other 2 percent because they lack friends in Washington. It is high time to end Ex-Im corporatism.</p> Wed, 13 Aug 2014 16:18:34 -0400