Mercatus Site Feed en The Export-Import Bank’s Green Portfolio Benefits Familiar Firms <h5> Expert Commentary </h5> <p class="p1">The Export-Import Bank of the United States, the official export credit corporation of the federal government, is <a href="">often criticized</a> for favoring large, politically-connected corporations like Boeing and Caterpillar; for a lack of transparency and accuracy in their <a href="">data reporting</a>, <a href="">job creation methodology</a>, and <a href="">risk calculations</a>; and for <a href="">unnecessarily</a> <a href="">tilting the scales of competition</a> in the direction of favored industries.</p> <p class="p1">One industry that has enjoyed considerable growth in Ex-Im assistance is the <a href="">green energy and sustainability sector</a>. Many of the green firms that receive Ex-Im benefits have enjoyed benefits from a number of other federal programs. A comparison of only a few of these programs shows that many firms “double dip” into Uncle Sam’s many corporate welfare programs funded by US taxpayers.</p> <p class="p1">This week’s charts use data from the Export-Import Bank’s <a href="">dataset</a> on project applications and the <a href="">Department of Energy</a>’s 1603, 1703, 1705, and ATVM (Advanced Technology Vehicles Manufacturing) loan programs to display green energy- and sustainability-related projects and firms that the Bank funded from FY 2007 to FY 2014, along with the firms that received funding in at least two programs during the same time.&nbsp;</p> <p class="p2"><a href="">Continue reading</a></p> Wed, 27 May 2015 11:59:01 -0400 Why Letting Ex-Im Bank’s Charter Expire Won’t Lead to Massive Job Losses <h5> Expert Commentary </h5> <p class="p1">The charter of the Export-Import Bank is set to expire on June 30 unless it is reauthorized by Congress. Scare tactics of bank supporters aside, the end of Ex-Im would not mean the loss of thousands of American jobs.</p> <p class="p1">Economists have long understood that subsidies doled out by government credit agencies such as the Ex-Im Bank are not only unnecessary, but that they can actually harm the economy. Yet in their quest to keep the subsidies flowing, proponents of the bank are claiming that failure to reauthorize its charter would lead to massive job loss.</p> <p class="p1">This blatant fear mongering has caused concern among some lawmakers. House Speaker John Boehner only made matters worse on April 30, when he asserted that “there are thousands of jobs on the line that would disappear pretty quickly if the Ex-Im Bank were to disappear.”</p> <p class="p1">First, and fundamentally, export subsidies do not “create” or “support” jobs—they redistribute them from unsubsidized firms to subsidized ones.</p> <p class="p1">Second, the job numbers touted by bank officials are dubious, at best, and have been roundly criticized as misleading by the Government Accountability Office, among others.</p> <p class="p1">Just as important, the biggest beneficiaries of Ex-Im subsidies know full well that their employees and those of their suppliers are perfectly safe in the event the charter is not reauthorized. That’s because Boeing, Caterpillar, General Electric and the like all have billions of dollars of backorders that will keep workers busy for years to come.</p><p class="p1"><img src="" width="585" height="412" /></p> <p class="p1"><span style="font-size: 11.9999990463257px;">The chart above uses data from the Ex-Im Bank to display some of the top beneficiaries for all Ex-Im Bank transactions between 2007 and 2014, and backlog information from the companies’ annual reports. The blue bars show that the Ex-Im Bank lives up to its nickname of “Boeing’s Bank.” The aviation giant is the biggest beneficiary, by far: the bank has provided $66.7 billion in subsidized financing to foreign purchasers of Boeing planes.</span></p> <p class="p1">General Electric also ranks among the biggest beneficiaries, with $8.3 billion in export assistance, while Bechtel Corp. benefited from $5.2 billion in support. The $2.2 billion in Ex-Im Bank financing that has benefitted Caterpillar was boosted by the $2.7 billion loan guarantee to its subsidiary Solar Turbine Inc.</p> <p class="p1">The red bars show the companies’ backlogs, as reported in their latest annual report. Boeing Co. posted a “record” backlog of $441 billion (in 2013); General Electric Co. recorded a backlog of $261 billion (in 2014); Caterpillar Inc.’s backlog is $16.5 million (in the first quarter of 2015); and Bechtel Corp. posted a “strong” backlog of $70.5 billion (in 2014).</p> <p class="p1">The expiration of the Ex-Im Bank charter will have no effect—none—on the financing of deals that already have been approved. The bank will simply be unable to extend new loans—which is a win for taxpayers who are ultimately on the hook for a total of $140 billion if bank reserves fail to cover defaults.</p> Wed, 27 May 2015 11:54:33 -0400 Why State Legislatures Should Keep Taxing and Spending Committees Separate <h5> Expert Commentary </h5> <p class="p1">In inflation-adjusted terms, the U.S. economy is nearly six times larger today than it was in 1950. This is a good thing. But, over the same time period, inflation-adjusted state and local government spending <a href="">has grown</a> more<b> </b>than twelvefold. Since the ultimate source of government revenue is the private economy, this trend is not sustainable nor is it without cost.</p> <p class="p1">Compared with a half century ago, eight more states tax corporate income, 13 more tax personal income and 12 more tax sales. The average of each of these rates has also risen. Among states that tax sales, for example, the rate has more than doubled from<b> </b>2.5 percent in 1958 to more than 5.6 percent in <a href="">2014</a>. But these increases are not enough to keep up with planned spending. According to <a href="">various</a> <a href="">projections</a>, state pension promises exceed expected revenues by <a href="">between</a> $3 trillion and $4 trillion.</p> <p class="p1"><a href="">Continue reading</a></p> Wed, 27 May 2015 11:43:32 -0400 Principles for Analyzing Distribution in Regulatory Impact Analysis <h5> Publication </h5> <p class="p1">Federal regulatory agencies have been required to produce a regulatory impact analysis (RIA) for major regulations since the early 1980s. The analysis should include an estimate of the expected benefits and costs of the regulatory action (a benefit-cost analysis, or BCA) as well as a description of the parties who are likely to receive those benefits and incur those costs. The latter part of an RIA is known as a distributional analysis, and is not part of a classic BCA. Distributional analysis explores how wealth is redistributed as a result of policy decisions.</p> <p class="p2">Nevertheless, a multitude of executive orders (EOs) and laws emphasize the importance of assessing distributional consequences of policies. For example, the current executive order governing the regulatory review process explicitly mentions “distributive impacts” and “equity” as issues analysts should consider. Other EOs prompt agencies to focus on environmental justice, children, and American Indian tribes, and laws are in place to protect small entities (including small businesses and governments). Employment gains and losses are also distributional consequences of policies, and the Office of Management and Budget (OMB), which sets guidelines for how agencies conduct economic analysis of regulations, further emphasizes distributional concerns.</p> <p class="p2">With the exception of the legally required analysis for small entities (called regulatory flexibility analysis), agencies rarely conduct a general distributional analysis of the parties likely to receive benefits and bear costs. Because many regulations concentrate benefits for small groups while disbursing costs, distributional analysis can help to highlight inequities hidden in BCA. Those who incur the most net costs relative to their income are often those who are less well off, meaning that policies all too often have a regressive effect. Given the seemingly endless growth in regulations, it is time agencies focus more on the distributional repercussions of their rules.</p> <p class="p1"><b>Does Benefit-Cost Analysis Consider Equity?</b></p> <p class="p1">BCA is a tool that analysts use to assess the efficiency of various policy alternatives. A policy maximizes efficiency if the benefits of the chosen policy exceed the costs by the largest amount among all possible policy options. Many economists believe efficiency and equity are distinct concepts that should be considered separately, but in fact equity is actually an inseparable component of BCA. Just as all citizens should receive equal treatment under the law, economists producing BCAs say that all citizens with standing in a BCA receive equal treatment in that analysis. BCA is based on a normative ethical judgment that says the value of one additional dollar of income is equal to all citizens, regardless of whose pocket that dollar goes into. In economics jargon, we say there is constant marginal utility of income across citizens. In this way, equity and BCA are inexorably intertwined.</p> <p class="p2">Some analysts have sought to change the role of equity in BCA; analysts have, for example, assigned weights to different categories of people. These analysts say that if a regulation transfers money from wealthy people to less wealthy people, analysts should give each group a different weight so that even a pure transfer between two people can be seen as a benefit. Transfers of goods from one party to another are typically neutral in BCA because one person’s loss is another person’s gain, with no impact on the overall calculation of “net benefits” (i.e., benefits in excess of costs). Even some government agencies, such as HM Treasury in the United Kingdom, recommend using a weighting scale like this. One problem with weighting schemes is that identifying what the weights should be is an arbitrary decision that is hard to justify on ethical grounds because analysts must treat some citizens as deserving more weight than others.</p> <p class="p2">A better approach is for analysts to present simple, straightforward information to decision makers, i.e., who gets what and who loses what, and to allow the decision makers to make the necessary political decisions about the appropriate course of action. The following principles can help analysts achieve this neutrality when analyzing distributional concerns in RIAs.</p> <p class="p1"><b>Principles for Analyzing Distribution in Regulatory Impact Analysis</b></p> <p class="p1">First, distributional analysis should be part of an RIA but kept separate from a BCA. A BCA tells decision makers whether the benefits of a proposed policy exceed the costs, no matter how they are distributed. A distributional analysis illuminates who receives those benefits and costs (and transfers). Keeping these analyses distinct within the framework of an RIA will ensure that decision makers are aware of these different decision inputs.&nbsp;</p> <p class="p2">Second, analysts should identify groups that are likely to be impacted by the regulation. Distributional analysis may not always be necessary; however, if any of the groups identified as groups of concern in executive orders or laws are impacted by a regulation, this might signal to analysts that further distributional analysis is necessary.&nbsp;</p> <p class="p2">Third, analysts should determine the degree to which a regulation is likely to have regressive or progressive effects.<b> </b>There are several ways that regulations can be regressive. Some regulations impose costs in excess of benefits for the poor, while providing benefits in excess of costs to higher-income people (an example of this appears later in this report). Next, some regulations impose net costs on all groups, but the net costs to lower-income individuals represent a higher fraction of their incomes than the net costs to other groups. For this reason, calculating net effects of policies as a percentage of average subpopulation income is helpful.&nbsp;</p> <p class="p2">There will also be cases where regulations create net benefits to low-income individuals, but the costs the poor pay represent a disproportionate share of their income relative to the costs other groups pay. While perhaps not technically regressive, this category may be undesirable because it redistributes wealth in such a way that lower-income people disproportionately bear the cost of regulation. Similarly, when the benefits of a policy represent a larger fraction of income for wealthy households relative to other groups, regulations are being designed in a manner that caters more to the preferences of the wealthy. This too may be undesirable in some cases. There may also be progressive regulations, which force the wealthy to bear a disproportionate share of the costs, while benefits accrue primarily to the poor.&nbsp;</p> <p class="p2">Fourth, transfers should be included in a distributional analysis. While pure transfers do not affect overall benefits or costs, transfers may still have an important role to play as part of a distributional analysis, especially transfers going to groups that have been singled out for particular consideration.&nbsp;</p> <p class="p2">Fifth, analysts should consider how the tolerance to bear regulatory costs varies across subpopulations. All groups, and especially the poor, have finite resources. If agencies presume a poor person can tolerate paying the same amount for a policy as a wealthy person, policies are likely to make the poor worse off. The level of cost tolerance can be estimated by examining how willingness to pay (WTP) for regulatory benefits changes across groups. For instance, the Environmental Protection Agency and Department of Transportation use estimates of WTP that vary by income for changes that occur across time. Applying this methodology to current citizens for the purposes of distributional analysis also makes sense. In many (but not all) cases, the poor are likely to have a lower tolerance for costs than the wealthy. This is because they are less willing and less able to pay for most benefits of regulation.&nbsp;</p> <p class="p2">Some might be tempted to use population average estimates of WTP across groups in distributional analysis. This is reasonable in cases where a vulnerable population experiences benefits of a regulation, but does not bear any of the costs. Harvard law professor Cass Sunstein gives the example of a disabled worker who pays nothing to make a workplace accessible to the handicapped, but nonetheless enjoys benefits from this policy. If such a worker has a low WTP, based on a low ability to pay, using an average of the entire population’s WTP may make sense. Importantly, this is only true because the individual bears none of the cost. In cases where low-income individuals are forced to pay for regulatory benefits with their own resources, such as when a government mandate improves product quality (while also increasing the price of the product), it makes no sense to value policies higher than a person would voluntarily pay for them. Using population&nbsp;averages in this latter scenario will distort economic analysis, making it more likely that regulations will force people to pay more for policies than they value them to be worth.</p> <p class="p2">In cases where WTP across subpopulations is unclear, say due to data limitations, population average WTP might be used, but a sensitivity analysis, used to describe uncertainties in analysis, should be conducted to determine the degree to which this assumption, when relaxed, changes outcomes across subpopulations.</p> <p class="p1"><b>An Example</b></p> <p class="p1">A simplified hypothetical example of a distributional analysis illuminates these principles further. Imagine that society comprises three types of people. One group consists of high-income people, one group is low-income people, and one group is in the middle. A policymaker is considering whether to implement a regulation intended to reduce contamination in pet food. Let’s say the policy produces a single outcome: fewer pet illnesses. Now, let’s assume people in the wealthy group are willing to pay on average $150 per year to ensure their “designer dogs” don’t suffer salmonella poisoning. The middle-income group will pay on average $100 to protect their golden retrievers, and people in the low-income group will pay up to $50 per year for their mixed-breed dogs. The costs of the policy may fall on pet food producers initially, but we will assume that in the long run all costs are passed from producers to consumers and spread evenly across the three groups.</p> <p class="p1"><img height="138" width="585" src="" /></p><p class="p1"><span style="font-size: 11.9999990463257px;">As a first step, the analyst concludes that because some purchasers of pet food are low-income individuals, a distributional analysis is necessary. If these groups consist of identical numbers of individuals, the analyst determines that the total benefits of the proposed policy are likely to exceed the total costs. The analyst could simply multiply the averages for each subpopulation by the number of individuals in the group and take the sum of these values to obtain this information. In theory, the winners of this policy could compensate the losers and everyone would still be better off than they were before the policy was put in place. This type of compensation rarely, if ever, occurs. In American society with millions of individuals and businesses, transaction costs are likely to make it too difficult to identify and redistribute between the winners and losers of policies, particularly given the current number of regulations passed each year.&nbsp;</span></p> <p class="p2">As described above, a well-done distributional analysis will identify the subpopulations a policy affects and present information about their various measures of WTP for regulatory benefits. This allows analysts to determine a unique cost tolerance for each group. Notice that we do not assume that the average per capita cost tolerance across the entire population (in this case, $100) applies to low-income individuals. A poor person generally has a lower willingness and ability to bear costs than a wealthy person. In this example, the low-income group is only willing to pay up to $50 on average for the policy. This is the level at which the members of this group value the policy according to their own preferences and situations, not according to the analyst’s preferences. The typical person in this group is made worse off in our example because he or she might take the $75 spent complying with the regulation and put it toward other more highly valued uses, such as a home security system, healthier food, day care for his or her children, or whatever else he or she cares about. It is not the analysts’ job to question why people might prefer paying for some items (e.g., a home security system) and not others (e.g., complying with a regulation). Each individual in society must make these decisions for themselves and analysts simply report this behavior.</p> <p class="p2">This example is meant to be a simplified version of a distributional analysis. It is not a BCA, which looks at cumulative effects on society and would therefore rely on population average values. As mentioned above, population averages might be used in distributional analysis in instances where a subpopulation bears no cost and has a limited ability to pay for the policy. BCA also ignores transfers, which aren’t included in table 1 but generally should be considered. A more detailed distributional analysis should also convert net effects of the policy into percentages based on the average annual income of each subpopulation. This allows for more meaningful comparison across groups. Employment effects might also be considered. For example, this policy might increase employment for monitors while simultaneously reducing employment for other types of pet food workers.</p> <p class="p1"><b>The Role of Decision Makers</b></p> <p class="p1">RIAs are conducted to inform decisions made by those who are elected or appointed to make decisions. The final decision will involve considering many different factors, including economic efficiency, legal constraints, public opinion, politics, and the distribution of wealth and income.</p> <p class="p2">Decision makers might want to adhere to a decision rule that says analysts should evaluate benefits and costs to those below a particular threshold (e.g., the poverty line) distinctly from the benefits and costs to society more generally. Such a rule might state that only those policies that make both groups better off may be adopted. A similar rule might stop regulations from being adopted that exacerbate income or wealth inequality. These judgments should be made by decision makers who are accountable to the public and to elected representatives of the people, not by analysts. In order to avoid appearing politicized or biased, analysts must provide descriptive information and refrain from incorporating opinions about fair distribution of wealth into their analysis. Those decisions belong entirely to parties more accountable to the public.</p> <p class="p1"><b>Conclusion&nbsp;</b></p> <p class="p1">Recent research suggests agencies rarely conduct general distributional analysis, and when they do, it is often incomplete. Agencies fail to conduct proper analyses despite executive orders and laws that repeatedly draw attention to the importance of the distributional effects of regulations. When preparing RIAs, agency analysts should keep distributional issues separate from issues of economic efficiency, so as not to confuse decision makers about these different decision inputs. Furthermore, analysts should not forget that equity is already a foundational principle of BCA. It is their job to present information about distributional effects of policies, while leaving value judgments about what is a fair distribution of wealth to others who are more accountable to the American people.</p> Wed, 27 May 2015 10:04:06 -0400 The Future of Capitalism: A Conversation Between Tyler Cowen and Luigi Zingales ( <h5> Events </h5> <p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">This event is part of the Mercatus Center’s </span><i>Conversations with Tyler</i><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">&nbsp;event series.</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b>PARTICIPANTS:</b><br /><span style="font-size: 12px;"><a style="font-size: 12px; color: #666699;" href="">Tyler Cowen</a>, Holbert L. Harris Chair of Economics, George Mason University<br /><a href="">Luigi Zingales</a>, Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance, University of Chicago Booth School of Business</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-size: 12px;"></span><b><span style="font-size: 12px; text-decoration: underline;">**Select VIP Seating Available for Media**</span></b></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">Contact Bob Ewing, director of media relations, Mercatus Center<br /><span style="font-size: 12px;">&nbsp;703.993.4960 (office), 202.494.2567 (mobile),&nbsp;</span><a style="font-size: 12px; color: #666699;" href=""></a></p><p>Is American capitalism in crisis?</p> <p>Luigi Zingales, one of the world’s foremost thinkers on financial development and capitalism, will join Tyler Cowen for a conversation about the policies that will shape capitalism moving into the future.</p> <p>Zingales’ work sprang from personal experience. He came to the United States from Italy with the great American Dream in mind—if you work hard, you will be successful and build a better life. But his experience led him to ask many questions about the American system of capitalism. With more businesses seeking government handouts than ever before, and capitalism coming into question since the financial crisis, his work has brought to light a shift in what we have come to know as American capitalism.</p> <p>In 2003, Zingales authored the book, <i>Saving Capitalism from the Capitalists</i>, and in 2012, he followed up with <i>A Capitalism for the People</i>—a book that <i>Forbes</i> called “unquestionably insightful and thought-provoking” and the <i>Financial Times </i>noted as a “stimulating” work. Cowen, too, acclaimed Zingales’ <i>A Capitalism for the People </i>as one of the most important books for a “popular audience of non-economists.”</p> <p>Is the free market the best way to improve general welfare? What role should politics play in a free market system? And is there hope for the future? Join us for what will certainly be a personal conversation as two economists discuss these issues and more.</p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">If you have any questions about this event, please contact Bethany Stalter at&nbsp;</span><a style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; color: #666699;" href=""></a><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">&nbsp;or (703) 993-4889.</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b>About the&nbsp;<i>Conversations with Tyler</i>&nbsp;Event Series</b><br />The Mercatus Center's&nbsp;<i>Conversations with Tyler</i>&nbsp;series brings world-class thought leaders to the Arlington campus of George Mason University to discuss how ideas, cutting-edge research, and applied economics can bring solutions to society’s most pressing problems.</p> Wed, 27 May 2015 12:17:15 -0400 The Future of Globalization: A Conversation Between Tyler Cowen and Dani Rodrik ( <h5> Events </h5> <p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">This event is part of the Mercatus Center’s </span><i>Conversations with Tyler</i><span style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;">&nbsp;event series.</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b>PARTICIPANTS:</b><br /><span style="font-size: 12px;"><a style="font-size: 12px; color: #666699;" href="">Tyler Cowen</a>, Holbert L. Harris Chair of Economics, George Mason University<br /><a href="">Dani Rodrik</a>, Albert O. Hirschman Professor of Economics, Institute for Advanced Study</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b><span style="font-size: 12px; text-decoration: underline;">**Select VIP Seating Available for Media**</span></b><br />Contact Bob Ewing, director of media relations, Mercatus Center<br /><span style="font-size: 12px;">&nbsp;703.993.4960 (office), 202.494.2567 (mobile),&nbsp;</span><a style="font-size: 12px; color: #666699;" href=""></a></p><p>Does globalization—the worldwide movement toward economic, financial, trade, and communications integration—lead to a more prosperous or a more divided and unequal world?</p> <p>Dani Rodrik and Tyler Cowen are among today’s most influential voices on international economics and economic development. Join these thought leaders for a conversation about the future of globalization and whether it will be more harmful or beneficial to the economic growth of developing countries.</p> <p>As globalization has accelerated, some countries have thrived while others have continued to struggle. While globalization has brought more job opportunities in some parts of the world, it has also brought job displacement in others. While access to important medicines has increased, the spread of communicable diseases has also increased. And while the globalization of the Internet has helped bring people out of poverty, some contend that the Internet has led to an increase in cultural conformity.</p> <p>Is globalization responsible for international inequality and cultural conflict? Or is globalization responsible for greater economic prosperity around the globe? What better contributes to the general welfare: trade restrictions or free trade? Can politics be an efficient way to maximize the general welfare?</p><p>Rodrik’s and Cowen’s conversation on this topic is sure to be one of the most important and illuminating in recent years.&nbsp;</p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">If you have any questions about this event, please contact Bethany Stalter at&nbsp;</span><a style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif; color: #666699;" href=""></a><span style="font-family: Helvetica, Arial, sans-serif; font-size: 12px; font-style: normal;">&nbsp;or (703) 993-4889.</span></p><p style="font-style: normal; font-size: 12px; font-family: Helvetica, Arial, sans-serif;"><b>About the&nbsp;<i>Conversations with Tyler</i>&nbsp;Event Series</b><br />The Mercatus Center's&nbsp;<i>Conversations with Tyler</i>&nbsp;series brings world-class thought leaders to the Arlington campus of George Mason University to discuss how ideas, cutting-edge research, and applied economics can bring solutions to society’s most pressing problems.</p> Wed, 27 May 2015 00:28:50 -0400 The Sharing Economy: Issues Facing Platforms, Participants, and Regulators <h5> Publication </h5> <p class="p1"><b>I. INTRODUCTION</b></p> <p class="p2">The Mercatus Center at George Mason University is dedicated to advancing knowledge about the impact of regulation on society. As part of its mission, the Mercatus Center conducts careful and independent analyses employing contemporary economic scholarship to assess rulemaking proposals from the perspective of the public interest. Thus, this comment before the Federal Trade Commission (FTC) does not represent the views of any particular affected party or special interest group. Rather, it is designed to assist the commission as it weighs the costs and benefits of regulation that affects the sharing economy. Our comments to the commission are derived from recent Mercatus Center working papers on these issues.<sup>2</sup>&nbsp;</p> <p class="p1"><b>II. THE IMPACT OF THE SHARING ECONOMY&nbsp;</b></p> <p class="p2">In its workshop announcement, the commission asks, <b>“How have sharing economy platforms affected competition, innovation, consumer choice, and platform participants in the sectors in which they operate? How might they in the future?”&nbsp;</b></p> <p class="p2">To understand the impact that the sharing economy has had on competition, innovation, and consumer choice, it is important to define the sharing economy. In its broadest sense, we argue that the sharing economy is any marketplace that uses the Internet to bring together distributed networks of individuals to share or exchange otherwise underutilized assets.<sup>3</sup> Thus, it encompasses all manner of goods and services shared or exchanged for both monetary and nonmonetary benefit. The sectors in which the sharing economy has seen substantial growth—and has created the most disruption—include transportation, hospitality, dining, goods, finance, and personal services.&nbsp;</p> <p class="p2">We have identified five ways the sharing economy is creating value for both consumers and producers:&nbsp;</p> <ol class="ol1"> <li class="li4">By giving people an opportunity to use other people’s cars, kitchens, apartments, and other property, it allows underutilized assets or “dead capital” to be put to more productive use.<sup>4 </sup></li> <li class="li4">By bringing together multiple buyers and sellers, it makes both the supply and demand sides of its markets more competitive and allows greater specialization. </li> <li class="li4">By lowering the cost of finding willing traders, haggling over terms, and monitoring performance, it cuts transaction costs and expands the scope of trade.<sup>5 </sup></li> <li class="li4">By aggregating the reviews of past consumers and producers and putting them at the fingertips of new market participants, it can significantly diminish the problem of asymmetric information between producers and consumers.<sup>6&nbsp;</sup></li><li class="li4"><span style="font-size: 11.9999990463257px;">By offering an end run around regulators who are captured by existing producers, it allows suppliers to create value for customers long underserved by those incumbents that have become inefficient and unresponsive because of their regulatory protections.&nbsp;</span></li></ol> <p class="p2">These factors can improve consumer welfare by offering new innovations, more choices, more service differentiation, better prices, and higher-quality services. In short, as the commission’s workshop notice puts it, “The development of the sharing economy can stimulate economic growth by encouraging entrepreneurship and promoting more productive and efficient use of assets.” Irrespective of <i>how </i>the sharing economy creates value, the revealed preferences of both consumers and producers suggest that it <i>does </i>create a substantial amount of economic value. As the commission notes, “Sharing economy transactions have increased rapidly in recent years, reaching an estimated value of $26 billion globally in 2013, and some estimates predict that the sharing economy will generate as much as $110 billion annually in the near future.”&nbsp;</p> <p class="p2">Much of this value flows to individuals who would otherwise be unable to compete in these markets. For those entering the sharing economy as producers, these new platforms create opportunities to generate income from sources that were historically available only to a select few. In the recent past, only those with access to the capital necessary to build hotels could offer rooms as short-term rentals. But firms such as Airbnb and HomeAway allow individuals to penetrate markets traditionally dominated by large incumbents such as Hilton Worldwide and Marriott International. In 2014, for example, guest stays through Airbnb totaled nearly 22 percent more than Hilton Worldwide.<sup>7</sup> And recent projections estimate that the sharing economy has the potential to increase over twentyfold in terms of revenue by 2025.<sup>8</sup>&nbsp;</p> <p class="p2">As we have noted in our previous research, the increased competition from the continued growth of the sharing economy will have direct, positive effects on consumer welfare.<sup>9</sup> First, and most obviously, these firms give consumers access to a broader range of goods and services. The ease of entry and innovation in the online world mean that new entrants in the sharing economy can provide better options and address consumer needs in ways that more traditional business models cannot. According to surveys, consumers currently take advantage of sharing economy services primarily because they offer better prices, a sense of community, greater convenience, and higher quality.<sup>10</sup> In terms of greater convenience and quality, comparisons of Yelp ratings in almost any major city where ride-sharing firms operate demonstrate overwhelming consumer satisfaction.<sup>11</sup> Moreover, a recent survey of US adults familiar with the sharing economy found that 86 percent agree it makes life more affordable, and 83 percent agree that it makes it more convenient and efficient.<sup>12</sup>&nbsp;</p> <p class="p2">The sharing economy, through its use of the Internet and information technology, also offers consumers more information about products and services, and it empowers consumers to act on that information. Many economists have worried about the existence of information asymmetries between producers and consumers, and they have argued that this asymmetry justifies many consumer protection regulations. However, the Internet largely solves this problem by providing consumers with robust search and monitoring tools so that they may find more and better choices.<sup>13</sup> These tools lower the transaction costs of searching for willing trade partners, haggling with them over terms, and monitoring them for compliance. We will discuss these tools, especially reputational mechanisms, in more detail in section VI.</p><p class="p2"><a href="">Continue reading</a></p> Tue, 26 May 2015 12:17:55 -0400 The Rise of Executive Federalism <h5> Expert Commentary </h5> <p class="p1">Consider, if you will, the administration's controversial initiatives on immigration, marijuana legalization, the No Child Left Behind Act (NCLB) and Common Core academic standards, climate change and "clean power," and the implementation of Medicaid expansion and the Affordable Care Act (ACA): What do they all have in common?</p> <p class="p1">First, they are <i>federalism</i> initiatives that affect states in very significant ways (for their ostensible benefit, or to their demonstrable detriment). Second, Congress has nothing to do with any of this beyond writing checks and issuing press releases. Third, the programs operate at the absolute outer bounds of statutory law, and sometimes outside those bounds.</p> <p class="p1">To an extent, that reflects the present administration's latitudinarian approach to the law. But there's a larger, structural point: Our federalism is practically guaranteed to produce chaotic government. Generalized appeals to the rule of law cannot alone fix that problem. We have to make our federalism less "cooperative."</p> <p class="p1">With very few exceptions (such as tax collection, Social Security, and Medicare), virtually all federal domestic programs are administered by state and local governments, often under one of over 1,100 federal funding statutes (such as Medicaid or NCLB). Since its inception under the New Deal, this "cooperative" federalism has proven stupendously successful in doing what it was supposed to do: expand government at all levels. However, its stability rested on peculiar conditions: private and public affluence, tolerably homogeneous states, and a functioning Congress. Those conditions have all ceased to operate to some extent. This predicament explains the rise of an <i>executive </i>and often extra-legal federalism — a federalism that is run through waivers, edicts, and transfers payments that are barely distinguishable from bribes.</p> <p class="p1"><b>The End of Affluence</b><br /> The point of jointly funded federal conditional spending programs (such as Medicaid) is to increase the demand for government, by lowering the perceived tax price of public programs both at the federal and the state level. The programs are <i>built</i> to demand ever-increasing cash infusions. When that can no longer be done or be taken for granted, the federal-state bargain comes apart. And so it has.</p> <p class="p1">The ACA promised states a <i>100 percent</i> reimbursement for expanding Medicaid. Two dozen states litigated <i>against</i> that largess, and to this day some 20 states refuse to take the money. While ideological resistance to "Obamacare" has contributed to this unprecedented display of resistance, it is also the case that states no longer trust the federal government's promises, for the excellent reason that Medicaid's expansion at the federal level is purely debt-financed. Besides, Medicaid is ruinous to state finances with or without its expansion under the ACA. It is now the single largest state expenditure, eclipsing even spending on education, and it is projected to double again within a decade or so. That will not happen, because it cannot happen.</p> <p class="p1">All the while, the states' costs of matching federal transfers with their own revenue dollars keep rising, chiefly because budget cuts would entail a loss of federal transfers. Unable to raise those revenues, states have responded by racking up debt in off-budget places — foremost, pension and other post-employment benefit accounts. Those debts exceed $5 trillion. They will not be paid, because they cannot be paid. That problem cannot be solved through yet more generous federal transfers. In short, the "cooperative" fiscal game is just about up.</p> <p class="p1"><b>(Un)willing&nbsp;States</b><br /> Cooperative federalism requires willing states — not a few willing states, but well-nigh all of them. Without that, national objectives would go unmet. Thus, federal-state bargains are structured to produce uniform cooperation through some combination of carrots and sticks, coupled with an assurance of state "flexibility" — that is to say, statutorily guaranteed authority to shirk. But that does not work under conditions of severe state heterogeneity. In fact, ideological divisions among states have become sufficiently severe to make large numbers of states defect from existing arrangements and resist any effort to extend them. The ACA is the most obvious example, but there are others — foremost, energy-producing states' resolute resistance to the administration's climate-change programs. And increasingly, the dissident states are acting and litigating as a bloc and a coalition. There again goes "cooperative" federalism.</p> <p class="p1"><b>Congress</b><br /> "Cooperative" federalism is supposed to come from Congress and federal statutes. However, practically <i>nothing</i> comes from Congress these days. The legislature is notoriously divided. It lacks the financial resources to rope recalcitrant states in new federalism bargains (witness the ACA), and it cannot even revisit the bargains embedded in old statutes (such as education programs or the Clean Air Act). Thus, to make federal programs "work" under current conditions, agencies rewrite statutes, issue expansive waivers, and negotiate deals with individual states on a one-off basis. That is how the ACA is being "administered." That is how Secretary of Health and Human Services Sylvia Burwell is trying to expand Medicaid. That is how No Child Left Behind is run. And that is how Environmental Protection Agency is trying to impose its Clean Power Plan: "stakeholder meetings" and assurances of regulatory forbearance for cooperating states; unveiled threats against holdout states. This brand of federalism knows neither statutory compliance nor even administrative regularity. It is <i>executive</i> federalism.</p> <p class="p1">The rise of executive federalism is propelled by very potent forces, and it is robust to partisan politics. Expansive administrative waivers, for example, were pioneered by the Reagan administration (under what was then Aid to Families with Dependent Children); the practice has since spread under Democratic and Republican administrations alike. For now, complaints over lawless executive behavior are the stuff of conservative agitation. However, a Republican president would be under enormous pressure to improvise federalism solutions under unworkable, obsolete, and profligate statutes. The fronts might change quite quickly, even as executive federalism continues its ascent. Further along that path lies the fate of Argentina, which practices an advanced form of executive federalism: corrupt, ruinous, unstable.</p> <p class="p1">What can be done about it? A crucial first step is to stop fighting yesterday's federalism battles over "states' rights" or "block grants" — the latter a convenient and supposedly conservative prescription that is in reality a debt-financed, full-scale waiver policy that allows the executive to exercise yet greater authority and states to spend yet more money they haven't raised. Instead, the time has come to fight today's federalism battles over executive federalism and to prepare for tomorrow's — for example, the sure-to-come question of federal bailouts for major cities and entire states. Could the Federal Reserve recapitalize the state of Illinois? A TARP for states: Would that be constitutional? If so, who would enforce the repayment obligations or promises of fiscal discipline, and how?</p> <p class="p1">Obviously (to my mind), we should resist such novel forms of federal-state "cooperation." We have to make our federalism less ruinous and more lawful. And to that end, we have to make it less cooperative, one program at a time.</p> Tue, 26 May 2015 10:04:06 -0400 Certificate-of-Need Laws: Implications for Kentucky <h5> Publication </h5> <p class="p1">Thirty-six states and the District of Columbia currently limit entry or expansion of health care facilities through certificate-of-need (CON) programs. These programs prohibit health care providers from entering new markets or making changes to their existing capacity without first gaining the approval of state regulators. Since 1972, Kentucky has been among the states that restrict the supply of health care in this way, with 18 devices and services—including acute hospital beds, magnetic resonance imaging (MRI) and positron emission tomography (PET) scanners—requiring a certificate of need from the state before the device may be purchased or the service offered.</p> <p class="p1">CON restrictions are in addition to the standard licensing and training requirements for medical professionals, but are neither designed nor intended to ensure public health or ensure that medical professionals have the necessary qualifications to do their jobs. Instead, CON laws are specifically designed to limit the supply of health care and are traditionally justified with the claim that they reduce and control health care costs. The theory is that by restricting market entry and expansion, states will reduce overinvestment in facilities and equipment. In addition, many states—including Kentucky—justify CON programs as a way to cross-subsidize health care for the poor. Under these “charity care” requirements providers that receive a certificate of need are typically required to increase the amount of care they provide to the poor. These programs intend to create <i>quid pro quo</i> arrangements: state governments restrict competition, increasing the cost of health care for some, and in return medical providers use these contrived profits to increase the care they provide to the poor.</p> <p class="p2">However, these claimed benefits have failed to materialize as intended. Recent research by Thomas Stratmann and Jacob Russ demonstrates that there is no relationship between CON programs and increased access to health care for the poor. There are, however, serious consequences for continuing to enforce CON regulations. In particular, for Kentucky these programs could mean approximately 5,782 fewer hospital beds, between 9 and 18 fewer hospitals offering MRI services, and between 22 and 31 fewer hospitals offering computed tomography (CT) scans. For those seeking quality health care throughout Kentucky, this means less competition and fewer choices, without increased access to care for the poor.</p> <p class="p1"><b>The Rise of CON Programs</b></p> <p class="p1">CON programs were first adopted by New York in 1964 as a way to strengthen regional health planning programs. Over the following 10 years, 23 other states adopted CON programs. Many of these programs were initiated as “Section 1122” programs, which were federally funded programs providing Medicare and Medicaid reimbursement for certain approved capital expenditures. Kentucky enacted its first CON program in 1972, two years before the passage of the National Health Planning and Resources Development Act of 1974, which made certain federal funds contingent on the enactment of CON programs, and provided a strong incentive for the remaining states to implement CON programs. In the seven years following this mandate, nearly every state without a CON program took steps to adopt certificate-of-need statutes. By 1982 every state except Louisiana had some form of a CON program.</p> <p class="p1">In 1987, the federal government repealed its CON program mandate when the ineffectiveness of CON regulations as a cost-control measure became clear. Twelve states rapidly followed suit and repealed their certificate-of-need laws in the 1980s. By 2000, Indiana, North Dakota, and Pennsylvania had also repealed their CON programs. Since 2000, Wisconsin has been the only state to repeal its program.</p> <p class="p4">Kentucky remains among the 36 states, along with the District of Columbia, that continue to limit entry and expansion within their respective health care markets through certificates of need. On average, states with CON programs regulate 14 different services, devices, and procedures. Kentucky’s CON program currently regulates 18 different services, devices, and procedures, which is more than the national average. As figure 1 shows, Kentucky’s certificate-of-need program ranks the 16th most restrictive in the United States.</p> <p class="p5"><a href=""><img src="" width="585" height="420" /></a></p> <p class="p6">Note: Fourteen states either have no certificate-of-need laws or they are not in effect. In addition, Arizona is typically not counted as a certificate-of-need state, though it is included in this chart because it is the only state to regulate ground ambulance services.</p> <p class="p1"><b>Do CON Programs Control Costs and Increase the Poor’s Access to Care?</b></p> <p class="p1">Many early studies of CON programs found that these programs fail to reduce investment by hospitals. These early studies also found that the programs fail to control costs. Such findings contributed to the federal repeal of CON requirements. More recently, research into the effectiveness of remaining CON programs as a cost-control measure has been mixed. While some studies find that CON regulations may have some limited cost-control effect, others find that strict CON programs may in fact increase costs by 5 percent. The latter finding is not surprising, given that CON programs restrict competition and reduce the available supply of regulated services.</p> <p class="p1">While there is little evidence to support the claim that certificates of need are an effective cost-control measure, many states continue to justify these programs using the rationale that they increase the provision of health care for the poor. To achieve this, 14 states make some requirement for charity care within their respective CON programs. This is what economists refer to as a “cross subsidy.”</p> <p class="p1">The theory behind cross-subsidization through these programs is straightforward. By limiting the number of providers that can enter a particular practice and by limiting the expansion of incumbent providers, CON regulations effectively give a limited monopoly privilege to providers that receive approval in the form of a certificate of need. Approved providers are therefore able to charge higher prices than would be possible under truly competitive conditions. As a result, it is hoped that providers will use their enhanced profits to cover the losses from providing otherwise unprofitable, uncompensated care to the poor. Those who can pay are supposed to be charged higher prices to subsidize those who cannot.</p> <p class="p1">In reality, however, this cross-subsidization is not occurring. While early studies found some evidence of cross-subsidization among hospitals and nursing homes, the more recent academic literature does not show evidence of this cross-subsidy taking place. The most comprehensive empirical study to date, conducted by Thomas Stratmann and Jacob Russ, finds no relationship between certificates of need and the level of charity care.</p> <p class="p1"><b>The Lasting Effects of Kentucky’s CON Program</b></p> <p class="p1">While certificates of need neither control costs nor increase charity care, they continue to have lasting effects on the provision of health care services both in Kentucky and in the other states that continue to enforce them. However, these effects have largely come in the form of decreased availability of services and lower hospital capacity.</p> <p class="p1">In particular, Stratmann and Russ present several striking findings regarding the provision of health care in states implementing CON programs. First, CON programs are correlated with fewer hospital beds. Throughout the United States there are approximately 362 beds per 100,000 persons. However, in states such as Kentucky that regulate acute hospital beds through their CON programs, Stratmann and Russ find 131 fewer beds per 100,000 persons. In the case of Kentucky, with its population of approximately 4.4 million, this could mean about 5,782 fewer hospital beds throughout the state as a result of its CON program.</p> <p class="p1">Moreover, several basic health care services that are used for a variety of purposes are limited because of Kentucky’s CON program. Across the United States, an average of six hospitals per 500,000 persons offer MRI services. In states such as Kentucky that restrict hospitals’ capital expenditures (above a certain threshold) on MRI machines and other equipment, the number of hospitals that offer MRIs is reduced by between one and two per 500,000 persons. This could mean between 9 and 18 fewer hospitals offering MRI services throughout Kentucky. The state’s CON program also affects the availability of CT services. While an average of nine hospitals per 500,000 persons offer CT scans, CON regulations are associated with a 37 percent decrease in these services. For Kentucky, this could mean between 22 and 31 fewer hospitals offering CT scans.</p> <p class="p1"><b>Conclusion</b></p> <p class="p1">While CON programs were intended to limit the supply of health care services within a state, proponents claim that the limits were necessary to either control costs or increase the amount of charity care being provided. However, 40 years of evidence demonstrate that these programs do not achieve their intended outcomes, but rather decrease the supply and availability of health care services by limiting entry and competition. For policymakers in Kentucky, this situation presents an opportunity to reverse course and open the market for greater entry, more competition, and ultimately more options for those seeking care.</p> Tue, 26 May 2015 15:04:31 -0400 The Tip of the Regulatory Iceberg <h5> Expert Commentary </h5> <p class="p1">In 2014, the government issued 2,400 new regulations, including 27 major rules that may cost $80 billion or more annually. They range from forcing restaurants to list the number of calories in food — even though past experiments have revealed that such measures fail to change consumers' behavior — to reducing consumer choices and increasing energy prices by imposing tighter energy efficiency mandates on the plugs that we use to charge cellphones, laptops and even electric toothbrushes.</p> <p class="p1">These figures can be found in a new paper by Heritage Foundation scholars Diane Katz and James L. Gattuso, in which they tally the number and cost of government regulations over the past six years of President Barack Obama's administration — and show that Washington's control over the economy and Americans' lives is intensifying. According to their count, during the first six years of the Obama administration, the number of new major rules reached 184, but another 126 are in the pipeline. That's more than twice the number imposed by President George W. Bush, who wasn't shy about regulating the economy.</p> <p class="p1">Katz and Gattuso explain, "The cost of just these 184 rules is estimated by regulators to be nearly $80 billion annually." But this is only the tip of the iceberg. Official regulatory costs are vastly underestimated, among other things, because of the large number of rules for which costs have not been fully quantified.</p> <p class="p1">More importantly, it doesn't appropriately account for the businesses, innovations and economic growth that will never exist because of the incessant accumulation of regulations. Take the bureaucrats at the Federal Aviation Administration, who have effectively banned the use of commercial unmanned aerial vehicles, commonly referred to as drones. This and the myriad other questionable drone regulations proposed by the FAA have been widely criticized as arbitrary and nontransparent.</p> <p class="p2">Another example was the FAA's proposal to require drone pilots to obtain the same license as old-school airplane pilots. Thank goodness it appears that the FAA is walking away from this bad idea. But the bottom line is that the FAA has demonstrated its penchant for imposing destructive constraints on this new technology.</p> <p class="p1">Meanwhile, a more hands-off approach to regulating drones in other countries has led to new, exciting commercial uses for drones all over the world. For instance, a startup called Matternet uses drones to deliver critical supplies in places where roads can keep people isolated for months at a time. The potential is huge, considering that over 1 billion people live in such places. Germany's DHL already uses drones to deliver medicine to the small city of Juist on a small island in the North Sea. And a few weeks ago, we saw how the charity GlobalMedic was using drones to help aid relief operations in Nepal after the country was ravaged by earthquakes.</p> <p class="p1">Yet the FAA continues its destructive approach with new proposed rules to further constrain drones that are less than 55 pounds. The rules would, among other things, prohibit them from conducting deliveries and prohibit operation outside the hours of official sunrise and sunset.</p> <p class="p1">In other words, forget about sending medication or food to people in areas where ground travel is not possible, and forget about the 30-minute delivery service Amazon Prime Air — in the United States, that is.</p> <p class="p1">But that's a drop in the bucket compared with dozens of other costly rules, including 13 regulations of the financial system that saw the light of day in 2014. According to Katz and Gattuso, eight of those were the product of Dodd-Frank, an act that was supposed to reduce the risk of a major bank failure but is actually a regulatory burden that cripples small banks while further protecting even larger institutions. In other words, Katz and Gattuso conclude, the need for reform of the regulatory system has never been greater.</p> Thu, 21 May 2015 11:40:08 -0400 Export Jobs Won’t Disappear Absent Ex-Im Bank <h5> Publication </h5> <p><span style="font-size: 12px;">The charter of the US Export-Import Bank is set to expire on June 30 unless it is reauthorized by Congress. Scare tactics aside, the end of Ex-Im would not mean the loss of thousands of American jobs.</span></p><p><span style="font-size: 12px;">Economists have long understood that subsidies doled out by government credit agencies such as the Ex-Im Bank are not merely unnecessary: they can actually harm the economy. In their quest to keep the subsidies flowing, proponents of the bank are claiming that failure to reauthorize its charter would lead to massive job losses. This blatant fearmongering has succeeded in causing concern among some lawmakers. House Speaker John Boehner only made matters worse on April 30, when he asserted that “there are thousands of jobs on the line that would disappear pretty quickly if the Ex-Im Bank were to disappear.”</span></p><p><span style="font-size: 12px;">First, and fundamentally, export subsidies do not “create” or “support” jobs—they redistribute them from unsubsidized firms to subsidized ones. Second, the job numbers touted by Ex-Im Bank officials are dubious at best and have been roundly criticized as misleading by the Government Accountability Office, among others.</span></p><p><span style="font-size: 12px;">But, just as important, the biggest beneficiaries of the Ex-Im Bank know full well that their employees and those of their suppliers are perfectly safe in the event the charter is not reauthorized. That’s because Boeing, Caterpillar, General Electric, and the like all have billions of dollars of backorders that will keep their workers busy for years to come.<br /></span><br /><span style="font-size: 12px;">This week’s charts use data from the Ex-Im Bank to display the top 10 beneficiaries for all Ex-Im Bank transactions between 2007 and 2014 and the backlog information from the companies’ annual reports. As the data show, the Ex-Im Bank lives up to its nickname of “Boeing’s Bank.” The aviation giant is the biggest beneficiary by far: the bank has provided $66.7 billion in subsidized financing to foreign purchasers of Boeing planes. General Electric also ranks among the biggest beneficiaries, with $8.3 billion in export assistance, and Bechtel Corp. benefitted from $5.2 billion in support. The $2.2 billion in Ex-Im Bank financing that has benefitted Caterpillar was boosted by the $2.7 billion loan guarantee to its subsidiary, Solar Turbine Inc. (also on the top 10 list).</span></p><p><a href=""><img src="" width="585" height="722" /></a></p><p><a href="" style="font-size: 13.5135135650635px;"><i>Click here to download full chart&nbsp;</i></a></p><p><span style="font-size: 12px;">The data also show the companies’ backlogs, as reported in their latest annual reports. Boeing Co. posted a “record” backlog of $441 billion (in 2013); General Electric Co. recorded a backlog of $261 billion (in 2014); Caterpillar Inc.’s backlog is $16.5 million (in the first quarter of 2015); and Bechtel Corp. posted a “strong” backlog of $70.5 billion (in 2014).</span></p><p><a href=""><img height="387" width="585" src="" /></a></p><p><a style="font-size: 11.9999990463257px;" href=""><i>Click here to download full chart&nbsp;</i></a></p><p><span style="font-size: 12px;">The expiration of the Ex-Im Bank charter will have no effect—none—on the financing of deals that already have been approved. The bank will simply be unable to extend new loans, which would be a win for taxpayers who are ultimately on the hook for a total of $140 billion if bank reserves fail to cover defaults.</span></p><p><span style="font-size: 12px;">Absent subsidies from the Ex-Im Bank, these corporations have production backlogs that will take years to fulfill—some with Ex-Im Bank financing in place and others without. This means that shutting down the Ex-Im Bank will not result in job losses—except, perhaps, among the ranks of lobbyists who are trying to scare members of Congress into maintaining this fount of corporate welfare.</span></p> Tue, 26 May 2015 17:52:09 -0400 How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the “Lemons Problem” <h5> Publication </h5> <p class="p1">Government regulation is often explained as consumer protection in cases involving asymmetric information: situations when sellers know more about their product than potential buyers do. Proponents of consumer protection regulations argue that if buyers know sellers can withhold key information about a product, meaning buyers are unable to distinguish between good and bad purchases ahead of time, lower-quality products will dominate the market because consumers will be less willing to make purchases. The fear is that without regulations buyers and sellers will not make beneficial exchanges.&nbsp;</p> <p class="p1">A new study conducted for the Mercatus Center at George Mason University shows that reputational feedback mechanisms—buyers’ and sellers’ abilities to rate one another and share information about their interactions—can help correct these information deficiencies better than traditional regulatory approaches. The Internet and the expansion of the “sharing economy” have provided a solution to the information deficiency problem where regulations have been ineffective. The continued use of outdated regulatory approaches may in fact prove detrimental to consumers.&nbsp;</p> <p class="p2">To read the study in its entirety and learn more about its authors, scholars Adam Thierer, Christopher Koopman, Anne Hobson, and Chris Kuiper, see “<a href="">How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem</a>.’”&nbsp;</p> <p class="p1"><b>THE LEMONS PROBLEM&nbsp;</b></p> <p class="p1">George A. Akerlof, winner of the Nobel Prize for his contributions to the economics of information, argued in a 1970 paper that information asymmetries between producers and consumers can lead to the “lemons problem,” in which lower-quality products crowd out higher-quality products because of uncertainty among consumers.&nbsp;</p> <p class="p1">For example, in the used car market, used cars tend to command a low market price because potential buyers are unable to tell whether a used car is good or bad.&nbsp;</p> <ul class="ul1"> <li class="li3">Since buyers are unable to differentiate higher-quality cars (plums) from lower-quality cars (lemons), they are unwilling to pay above the average value. As a result, higher-valued used cars exit the market, the average price declines, and buyers’ willingness to pay decreases as well. </li> <li><span style="font-size: 12px;">Eventually, as the process continues, only a few lemons remain on the market.&nbsp;</span></li></ul><p><span style="font-size: 12px;"><b>CAN GOVERNMENT REGULATION SOLVE THE LEMONS PROBLEM?&nbsp;<br /></b></span><br /><span style="font-size: 12px;">While he admitted that private solutions may emerge to solve information deficiencies, Akerlof argued that government regulation was still necessary. This argument, however, ignores two key facts:</span></p> <ul class="ul1"> <li class="li3"><i></i><i>Regulations can harm consumers. </i>Regulatory measures such as food labels or product safety warnings may seem like fail-safe mechanisms to correct information-based uncertainty. Regulations, however, are not as effective as market solutions, and may harm consumers instead of helping them. Regulators can be influenced by regulated industries, erecting bar- riers to keep out new competition, stifling innovation, and imposing higher prices and reduced quality on consumers. By making it more difficult to do business, regulations can have the unintended consequence of entrenching already-established businesses while closing the market to entrepreneurs with innovative ideas. </li> <li class="li3"><i></i><i>Private institutions can use trust and reputation to help consumers. </i>Akerlof is correct that human nature can produce suboptimal behavior in the absence of effective and efficient mechanisms to induce cooperation among buyers and sellers. But his model fails to account for the use of mechanisms such as trust and reputation, as well as social norms, to boost information-sharing. Centuries of history demonstrate that trust and reputation have been crucial to productive exchanges between consumers and producers.&nbsp;</li></ul><p><span style="font-size: 12px;"><b> KEY FINDINGS: INTERNET AND INFORMATION SYSTEMS SOLVE THE LEMONS PROBLEM&nbsp;<br /><br /></b></span><span style="font-size: 12px;">Modern reputational feedback mechanisms are becoming more sophisticated and, in the process, are offering consumers a louder voice in transactions and improving trust between strangers. These reputational tools can help create more effective, and largely self-regulating, markets that provide more information to more individuals at a lower cost than ever before. The Internet has opened the door to developing and dispersing better information by a variety of methods:</span></p><ul class="ul1"> <li class="li3"><i></i><i>Professional online reviews and ratings. </i>With the advent of the Internet, professional product and service reviews, ratings, and awards, such as those provided by <i>Consumer Reports</i>, shifted to publication online. Specialty product review sites, such as <i>CNET</i>, which reviews technology products, also arose to take advantage of widespread information access via the Internet. </li> <li class="li3"><i></i><i>Average consumer ratings and reviews of businesses. </i>Consumers began to use the Internet for their own reviewing and rating. For example, the significant use of Amazon’s customer feedback and rating system eventually evolved into separate service review platforms such as Yelp, which allow customers to review and rate local businesses.&nbsp;</li> <li><i style="font-family: inherit; font-weight: inherit;">Two-way or interactive review and rating. </i><span style="font-size: 12px;">When two parties that don’t know each other inter- act, such as when an individual sells an item on eBay, a two-way review system is very useful. Both buyers and sellers can leave feedback after every transaction, meaning each gradually develops a feedback profile—a reputational score—based on comments and ratings.&nbsp;</span></li></ul> <p class="p1">The sharing economy, which includes any marketplace that uses the Internet to bring people together to share or exchange otherwise underutilized assets, has taken these reputational feed- back mechanisms to a new level. Sharing economy platforms rely primarily on two types of online reputational feedback mechanisms:&nbsp;</p> <ul class="ul1"> <li class="li3"><i></i><i>Centralized mechanisms. </i>Centralized mechanisms build trust in a third-party platform but not necessarily between the two transacting parties. Examples of such platforms include eBay, which offers a money-back guarantee and a payment clearing system to facilitate transactions, and Airbnb—a website that allows people to rent short-term lodging from private individuals—which tracks all elements of every transaction to develop a trust score for each reservation, flagging suspicious transactions for further review by the company. </li> <li class="li3"><i></i><i>Peer-to-peer mechanisms. </i>Even though a third-party platform may exist, peer-to-peer mechanisms build trust between the two transacting parties directly. In addition to ratings and reviews, technological developments such as blogs, social networking, smartphones, and mobile apps, including geolocation, have made it even easier for all people to have a voice in e-commerce. As a result, companies have become more responsive to consumer demand, establishing their own presence on social media and quickly responding to com- plaints. There are many examples of peer-to-peer interactions in the sharing economy today, where buyers and sellers can rate and review each other and share that information with other parties.&nbsp;</li></ul><p><span style="font-size: 12px;"><b> CONCLUSION <br /></b></span><br style="font-family: inherit; font-style: inherit; font-weight: inherit;" /><span style="font-size: 12px;"> Reputational feedback mechanisms are crucial to the success of the sharing economy. When consumers are empowered to rate providers, they get more and better-quality services than regulation ever offered them. Policymakers should reevaluate traditional regulations aimed at addressing information deficiencies, as the sharing economy has done what regulation could not: improve consumer welfare while encouraging innovation and economic growth.&nbsp;</span></p><ul class="ul1"> </ul> Wed, 27 May 2015 10:02:17 -0400 Federalism and the Constitution: Competition versus Cartels <h5> Publication </h5> <p class="p1"><i>This book is available for purchase at <a href=""></a> and <a href=""></a>.</i></p><p class="p1"><span style="font-size: 11.9999990463257px;">Federalism questions are at the heart of today’s intensely controversial policy debates. From education to disaster relief to health care and insurance, federal arrangements are failing, and the federal structure itself has reemerged as a subject of public debate. Bloated bureaucracies defy reform and governments pursue ever-deeper debt. These debilities loom especially large in times of economic stress and widespread public disaffection.</span></p> <p class="p2">This essay examines the sources and the scope of federalism’s failures. It provides a trenchant, constitutionally grounded analysis with profound implications for a range of current policy debates. Federalism’s restoration requires not merely rebalancing the federal-state relationship through decentralization. Rather, we must restore the structure of federalism to <i>competitive</i> federalism—which encourages states to compete to enhance freedom and economic growth—in response to the rise of <i>cartel</i> federalism, which squashes competition between the states and makes states dependent on the federal government.</p><p class="p1"><b>About the Author</b></p> <p class="p1">Michael S. Greve is a professor of law at George Mason University. Previously, he served as John G. Searle Scholar at the American Enterprise Institute, where he specialized in constitutional law, courts, and business regulation. Before joining AEI, Greve was founder and co-director of the Center for Individual Rights, a public interest law firm specializing in constitutional litigation.</p> <p class="p1">Greve has served as an adjunct or visiting professor at a number of universities, including Cornell, Johns Hopkins University, and Boston College. He was awarded a PhD and an MA in government by Cornell University. Greve also earned a diploma from the University of Hamburg in Germany.</p> <p class="p1">A prolific writer, Greve is the author of numerous scholarly articles and nine books, including <i>The Upside-Down Constitution</i> (Harvard University Press, 2012), <i>Real Federalism: Why It Matters, How It Could Happen </i>(AEI, 2000), and <i>The Demise of Environmentalism in American Law</i> (AEI, 1996). He blogs at</p> Tue, 26 May 2015 16:06:16 -0400 The Time Has Come for the End of the Ex-Im Bank <h5> Expert Commentary </h5> <p class="p1">Have you noticed that everyone in the top tier ofRepublican presidential candidates — Ted Cruz,Marco Rubio, Rand Paul, Scott Walker and Jeb Bush— has gone on record against a small New Deal-era crony agency called the Export-Import Bank of the United States?</p> <p class="p1">In fact, Rubio recently came out with all guns blazing against the bank, arguing that it picks winners and losers and shouldn’t be reauthorized once its charter expires June 30. Maybe their commitment to end Ex-Im cronyism and corruption will rub off on their colleagues.</p> <p class="p1">There are several reasons one might want to let the bank expire. First, the Ex-Im Bank exemplifies the kind of government program that benefits well-connected companies by harming unseen victims. Over 60 percent of its activities benefit 10 large and politically connected companies — including Boeing, General Electric and Caterpillar.</p> <p class="p1">Ex-Im credit subsidies have the economic effect of redistributing jobs and prosperity away from the 98 percent of unsubsidized firms, employers and workers and toward large corporations that do not lack for financing opportunities. This means that the bank does not actually increase the net dollar amount of exports.</p> <p class="p1">Ex-Im also imposes damage on 189 American industries by directly subsidizing foreign competition. Consider the list of Ex-Im’s top 10 foreign beneficiaries. We find several rich, state-owned airlines. Emirates, the top airline recipient of Ex-Im largesse, is a state-owned company that uses Ex-Im savings to compete with unsubsidized U.S. airlines. Examples of Ex-Im transactions such as these contributed to an estimated loss of 7,500 U.S. airline jobs.</p> <p class="p1">But it gets worse. The top beneficiary of Ex-Im abroad is Pemex, a Mexican government-owned oil and gas company with a market capitalization of $490 million. Even as the Obama administration does everything it can to penalize U.S. energy companies, Ex-Im extended $7 billion in cheap credit over seven years to the conglomerate. In addition, Pemex has admitted to serious corruption issues, including a contracting process co-opted for the benefit of organized crime.</p> <p class="p1">Questionable Ex-Im deals are quite common. For instance, a Wall Street Journal article recently highlighted two deals totaling over $1 billion for the benefit of the state-owned Russian bank Vnesheconombank. VEB maintains a close business relationship with a major Russian arms dealer responsible for more than 80 percent of Russia’s weapon exports, including shipments to Bashar Assad’s regime in Syria. Because money is fungible, lowering VEB’s financing costs to buy Boeing planes can easily facilitate sales of more weapons to hostile regimes.</p> <p class="p1">Russian companies can no longer receive new Ex-Im subsidies, though taxpayers are still on the hook for $1.5 billion in pre-existing Russian loans. But in order to know whether the bank is actually complying with such country limitations, we need to be able to check its data.</p> <p class="p1">Good luck with that. One-third of Ex-Im foreign transactions are labeled “unknown” in the dataset. This makes it impossible to know whether Ex-Im loans are going to companies in restricted countries committing human rights abuses, such as North Korea and Iran.</p> <p class="p1">It’s hard to trust Ex-Im’s data. The bank has a history of intentionally mislabeling data to artificially increase “small business” numbers. Last year, the bank pulled down the public dataset that I and other watchdogs used to analyze its transactions. The new dataset, posted months later, was scrubbed of critical fields at Chairman Fred Hochberg’s direction. Now we cannot even tell whether companies such as VEB are purchasing bank-financed Boeing jets.</p> <p class="p1">Ex-Im cronyism is unjust and inefficient. But rampant Ex-Im Bank corruption and secrecy are absolutely unacceptable. It remains to be seen whether Republicans in the House of Representatives will use their largest majority since 1928 to stop the bank once and for all as their presidential candidates would like.</p> Wed, 20 May 2015 09:56:56 -0400 Five Years Later, Dodd-Frank Is Looking Pretty Haggard <h5> Expert Commentary </h5> <p class="p1">Dodd-Frank is rounding the bend to its five-year mark. Its vocal cheering section does not seem to notice that it's looking a bit haggard. One area in which its weakness is evident is over-the-counter derivatives reform, which accounts for approximately 20 percent of Dodd-Frank's pages and much of its rhetoric. Dodd-Frank relies on central counterparty clearinghouses to bring order to over-the-counter derivatives-financial contracts that help companies manage their risks. Although Title VIII of the Act gives a nod to clearinghouses as a potential <i>source</i> of new risk, that concern gets lost in all the cheering for clearing.</p> <p class="p1">Before the crisis, large financial firms entered into many derivatives transactions directly with one another and with their customers. These contracts bound firms into long-term relationships, which meant that a failure by one large firm would directly affect all the firms with which it had relationships.</p> <p class="p1">By contrast, other types of derivatives trade on exchanges and are centrally cleared; once a transaction is executed, each original party to the trade replaces the contract with its original counterparty with a new contract with the clearinghouse. As many others have explained, the clearinghouse becomes the buyer to the seller and the seller to the buyer.</p> <p class="p1">Dodd-Frank's drafters decided to impose this central counterparty clearinghouse model on the over-the-counter derivatives markets. Under Dodd-Frank, standardized derivatives contracts must be centrally cleared. The rationale is that moving as many derivatives transactions into clearinghouses as possible makes it easier for financial firms and their regulators to comprehend and manage risk.</p> <p class="p1">That hardly sounds radical when one considers that clearinghouses have been around for centuries with a relatively-although certainly not completely-unsullied record. Moreover, the United States is not alone in moving to mandatory clearing. And, because of certain efficiencies that clearinghouses can offer, the industry was working voluntarily before the crisis to move more standardized derivatives into clearinghouses. What harm could there be in a little regulatory shove?</p> <p class="p1">Regulatory mandates like this look better on paper than they do in practice. Now that the plans sketched out on Dodd-Frank's pages are coming to life, lots of people are getting scared. Big financial firms are trying to understand their risk exposures to clearinghouses. They are demanding that clearinghouses be clear about how they plan to handle member defaults and ready to pony up their own money in the event of a default. A banking industry association warned the Financial Stability Oversight Council earlier this year that, if clearinghouses don't whip their risk management programs into shape, they "could become a source of contagion to their clearing members and customers during periods of market stress."</p> <p class="p1">Regulators are worried, too. The Office of Financial Research issued two papers this month on central clearing and discussed central clearinghouses in its last <a href=""><b>annual report</b></a>. The report argued that the "new central clearing system concentrates risks in a small number of large central counterparties, transforming the network to a hub-and-spoke system that can better manage a larger number of dealer failures but is highly vulnerable to the failure of a [clearinghouse] that can transmit risk to all members." The report warned specifically of the trouble that could follow a "joint default" of a clearinghouse "and one or more clearing members." The director of the Office of Financial Research echoed these concerns in a recent <a href=""><b>Reuters Financial Regulation Summit</b></a>.</p> <p class="p1">At a hearing last week, Commodity Futures Trading Commission Chairman Timothy Massad similarly <a href=""><b>pointed out</b></a> that "a small number of clearinghouses are becoming increasingly important single points of risk in the global financial system." His colleague Commissioner Mark Wetjen brought that concern home in a recent <a href=""><b>speech</b></a> highlighting a December 2013 scare at a South Korean clearinghouse when one of its members defaulted. Building on that speech's cautionary tone, Commissioner Wetjen held a clearing roundtable last week.</p> <p class="p1">Clearinghouses protect themselves in a number of ways: First, they establish membership standards to keep weak firms out. Second, members contribute to a guaranty fund, which can be tapped if the clearinghouse gets into trouble. Third, members pay initial margin at the beginning of a trade and variation margin through the life of the derivatives contract to reflect changes in the markets. Clearinghouses set these margin payments at a level to ensure that the member will be able to meet its responsibilities to the clearinghouse and limits the types of collateral members can provide. Fourth, clearinghouses only accept contracts they can understand and manage. They try to avoid taking on complex or illiquid contracts. Finally, clearinghouses establish committees to manage risk and plan for defaults.</p> <p class="p1">Getting all of these aspects of risk management right is difficult. The regulatory interest in central clearing completely alters the dynamics. Regulators are conflicted. They are likely to view all risk management measures skeptically. They may assume a decision not to clear a contract is a way to avoid the clearing mandate.</p> <p class="p1">Once a clearing mandate is in place, regulators need to make sure that firms have easy access to clearinghouses and don't have to pony up too much in guaranty fund contributions or margin. The Justice Department's antitrust lawyers even <a href=""><b>weighed in</b></a> to warn the Commodity Futures Trading Commission that existing clearing members might restrict "access to new clearing members in an effort to insulate themselves from competition in making markets" all in the name of sound risk management. Such regulatory conflicts could inhibit legitimate risk management efforts.</p> <p class="p1">Central clearing has a valuable place in the derivatives markets, but regulatory attempts to force it come at a cost. These clearinghouses will not only be big and important, but will be managed with one eye toward placating pro-clearing regulators and another toward managing risk. As former Fed Chairman Ben Bernanke <a href=""><b>cautioned</b></a> four years ago, although clearinghouses "generally performed well in the highly stressed financial environment of the recent crisis ... we should not take for granted that we will be as lucky in the future." Dodd-Frank's clearing mandate and other regulatory inducements to clear might bring that lucky streak to an abrupt and painful end.</p> Wed, 20 May 2015 09:50:24 -0400 In Memoriam: Dr. John Templeton <h5> Expert Commentary </h5> <p>The Mercatus Center at George Mason University notes with great sadness <a href="">the passing of John M. (“Jack”) Templeton, Jr</a>., M.D., the president and chairman of the John Templeton Foundation.<span style="font-size: 12px;">&nbsp;</span></p><p>“Dr. Templeton’s philanthropy has had world-changing effects on our understanding of the role that formal and informal institutions play in society,” said Mercatus Center Senior Vice President and Chief Operating Officer Daniel Rothschild. “His generosity will continue to pay dividends at Mercatus and elsewhere for generations to come.”</p><p>Dr. Templeton’s interest in this area led him to approve two multi-year, multi-million dollar investments in the Mercatus Center from the John Templeton Foundation. The Templeton research grant for Mercatus Center’s F. A. Hayek Program is fueling interdisciplinary scholarship on the causes of economic progress and the institutional arrangements that support free and prosperous societies. The Templeton Foundation’s support is also helping expand the Mercatus Center’s “Counting the Cost” Healthcare Project, which is working to understand the economic implications of the Affordable Care Act and examining ways to secure better health for the American people.</p><p>“The compassion and purpose that marked Dr. Templeton’s career in medicine drove him to consider how to best increase prosperity and freedom for all people,” said Peter Boettke, Mercatus Center Vice President and Director of the Hayek Program. “He advanced research in this area significantly, and we are so honored and tremendously grateful to carry on his legacy through our work at Mercatus that is generously supported by the John Templeton Foundation.”</p><p>All of us at the Mercatus Center at George Mason University join together to extend our sincere condolences to Dr. Templeton’s family. He will be greatly missed.</p><p><i>Photo courtesy of the John Templeton Foundation</i></p> Wed, 20 May 2015 09:50:32 -0400 Federal Funding Received by Amtrak <h5> Publication </h5> <p class="p1">The cause of last week’s tragic crash of Amtrak train 188 in Philadelphia remains unknown. Some policymakers and pundits immediately pinned the blame on a lack of federal funding for the government-owned and -managed passenger rail operator. This week’s chart shows the annual amount of federal operating and capital funding that Amtrak has received since it was created by the Rail Passenger Service Act of 1970, including a generous allocation in 2009, as part of the American Recovery and Reinvestment Act (ARRA).</p> <p class="p1"><a href=""><img src="" width="585" height="398" /></a></p> <p class="p1">Amtrak has received almost $44 billion—almost $70 billion in inflation-adjusted 2015 dollars—from federal taxpayers since its creation. That amount is considerable, since Amtrak was intended to subsist on its own profits. However, Amtrak has lost money every year of its existence despite repeated claims from government officials through the years that profitability was on the horizon.&nbsp;</p> <p class="p1">A fundamental problem remains: because Amtrak is managed by the government, operational decisions are often made on the basis of political concerns rather than sound economic and financial reasoning. For example, all of Amtrak’s long-distance routes lose money and make little economic sense, but they continue to exist because a national network of rail lines engenders more political support.</p> <p class="p1">Even in the northeast corridor, where the population density might be sufficient to operate a profitable rail line, government management has led to financial mismanagement. A 2014 <a href="">report</a> on Amtrak’s management challenges produced by the Amtrak inspector general’s office makes that clear:</p> <blockquote><p class="p2">The company has not consistently used sound business practices in each phase of the capital planning process, including developing sound project proposals with performance measures, learning from the execution and outcome of projects, and controlling unauthorized expenditures.</p></blockquote> <p class="p1">Although technology apparently exists that would help prevent crashes such as the most recent tragedy, Amtrak and its bosses in Washington have repeatedly chosen to allocate money elsewhere. That includes $8 billion in the 2009 ARRA “stimulus” package for a dubious system of high-speed rail. It’s worth noting that the “stimulus” package also included an additional $1.3 billion in capital grants to Amtrak, which is reflected in the chart.&nbsp; While we do not know as yet what specifically caused the crash of Amtrak 188, it is not clear that giving Amtrak more taxpayer dollars would have prevented it.</p> Wed, 20 May 2015 08:38:12 -0400 Electronic Distribution of Prescribing Information for Human Prescription Drugs, Including Biological Products <h5> Publication </h5> <p class="p1">The proposed rule titled “Electronic Distribution of Prescribing Information for Human Prescription Drugs, Including Biological Products” would require that prescribing information intended for medical professionals no longer be distributed in paper form. Instead, this information would be disseminated electronically, except in limited circumstances. Prescribing information is intended to help health care professionals make more informed decisions concerning prescriptions and thereby improve the safety of their patients. Prescribing information distributed in paper form may not be current because it may have been printed before more recent labeling changes. The Food and Drug Administration (FDA) argues that requiring electronic dissemination of prescribing information will allow for real-time updates and improve the safety and effectiveness of prescription medications. In addition, the FDA argues that the electronic distribution of prescribing information will lead to substantial cost savings in the form of reduced printing costs.</p> <p class="p2">The FDA’s claim that access to up-to-date information on prescription drugs can help both physicians and pharmacists avoid dangerous prescribing errors is not contested here. However, this comment argues that the agency fails to adequately make the case that the proposed regulation is needed and that it best accomplishes the goals of improved patient health and lower costs of distributing prescribing information. This argument is founded on three observations.</p> <p class="p2">First, in order to present the case in favor of the proposed regulation, the agency must establish that there exists a systemic failure owing to either market imperfections or ineffective past policies or regulations. The analysis presented in the proposed regulatory impact analysis (PRIA) falls far short of doing so. Beyond discussing printing costs, the PRIA includes no assessment of the status quo. Specifically, it makes no attempt to determine the extent to which the risk to patient health is increased owing to the potentially outdated prescribing information inserts. Given that “most physicians do not use the paper form of the prescribing information but instead use compendiums containing information supplied by third parties,” the risks may be negligible, particularly if the information provided by third parties is up to date. Unfortunately, the PRIA makes no attempt to assess current risk exposure. Instead it assumes the risk to patient health to be substantial, and uses this assumption as justification for regulatory action.</p> <p class="p2">Second, the FDA’s assessment of the net benefits of the proposed regulation is incomplete. The FDA makes no attempt to measure the benefits of the proposed regulation beyond the potential savings related to reduced paperwork costs if prescribing information were no longer required in paper form. It is unclear how many prescribing errors could be prevented by the electronic distribution of prescribing information on a centralized FDA webpage.</p> <p class="p2">Third, the PRIA does not consider any substantial alternatives to the proposed regulatory action. The one alternative presented is to effectively eliminate the six-months-after-publication-of-final-rule effective date in the proposed rule, delaying the implementation of the rule until two years after the publication of the final rule. If the agency had assessed the net benefits of approaches other than the proposed command-and-control option, the public could have more confidence in the proposed regulation’s merits. For example, if the adoption of the proposed regulation does not lead to reduced health risks relative to the status quo—in which health professionals rely on third-party compendiums, including many electronic ones—then the appropriate action may be to eliminate the existing paper-form requirement and not dictate any specific centralized repository of prescribing information.</p> <p class="p2">Given the potential impact a prescribing error can have on a patient’s health, this issue deserves a more thoughtful and rigorous analysis than has thus far been offered. Before the FDA takes any regulatory action, it must make a convincing argument establishing the existence of a systemic problem, one that causes patients to face an avoidable risk from prescribing errors. If a systemic problem does exist, then the FDA must present a more comprehensive assessment of the net benefits of the proposed regulation relative to the status quo and then compare and contrast the merits of the proposed regulation with those of other reasonable alternatives. Only after addressing these concerns is it possible to make an educated decision regarding the appropriateness of the proposed rule.</p> <p class="p1"><b>FAILURE TO ESTABLISH REGULATORY NEED</b></p> <p class="p1">In order to establish the need for regulatory action, a regulator must identify a systemic failure. The FDA attempts to apply a public goods argument to support regulatory action: “A single electronic labeling repository for prescribing information accessible to all users is a public good.” Standard economics textbooks define public goods as goods which are both nonrival in consumption—meaning that multiple users can consume the same unit of production without reducing the benefits enjoyed by other users—and nonexcludable—meaning that once the good is provided, it is prohibitively costly to prevent nonpaying consumers from obtaining the good. While a repository of prescribing information is nonrival in consumption, it does not meet the conditions of nonexcludability. Indeed, prescribing information is already provided by private, for-profit organizations to those who pay a subscription fee. Prescribing information is excludable and is therefore a mixed good.</p> <p class="p2">Because prescribing information is a mixed good, economic theory cannot predict whether it would be more efficiently provided privately or publicly. Answering this question demands a comprehensive analysis to determine how an information repository is best produced. Instead, the FDA simply assumes that there is a market failure requiring regulatory action, though its justification for the proposed rule ironically highlights the failure of regulatory action to evolve seamlessly with technology. On the other hand, entrepreneurs have thrived, creating third-party compendia of prescribing information in more accessible formats than the government-provided information. Significant numbers of third-party compendia even offer applications for mobile devices.</p> <p class="p2">The fact that the FDA-mandated paper-form prescribing information may be out of date is not sufficient to warrant new regulation that prohibits issuing the information in paper form. Given that pharmacies reported that they rely on corporately curated prescribing information and manufacturer websites while physicians and nurses generally rely on third-party compendia, the relevant questions are whether the privately provided sources of prescribing information are out of date and how frequently prescribing errors occur owing to out-of-date prescribing information. The FDA should assess the degree to which commonly referenced third-party sources of prescribing information are out of date and the frequency of resulting prescribing errors. While determining the causes of prescribing errors may not be feasible, it is certainly possible to assess the degree to which third-party sources are out of date. One method is to track new boxed warnings and contraindications and determine the average number of days before the information on the most common third-party sources is updated. Another method is to select a number of medications and determine what percentage of common third-party sources are out of date in ways that are likely to lead to prescribing errors.</p> <p class="p2">The FDA admits the difficulty of determining “how often health care professionals rely on the prescribing information as well as different information sources.” Yet the FDA refers to results of an industry survey that suggest such information has already been collected. The FDA reports that “pharmacists refer to product labeling less than 1 percent of the time when filling prescriptions.” Given the FDA’s assessment that physicians and nurses rely on third-party compendia and pharmacists rely almost exclusively on third-party sources of prescribing information, the fact that current FDA-mandated paper-form prescribing information is out-of-date may be irrelevant. The relevant questions are the following: (1) How often is the third-party prescribing information out-of-date? (2) What percentage of the out-of-date information is relevant to boxed warnings and contraindications? and (3) What are the primary sources for the information collected by the third-party sources?</p> <p class="p2">If third-party information is rarely out of date or rarely concerns boxed warnings and contraindications, then prescribing errors may not be a systemic problem and there may be no need for additional command-and-control action. If third-party sources are out of date in ways that are likely to lead to prescribing errors, then policymakers must understand <i>why </i>this occurs in order to prescribe an adequate solution.</p> <p class="p1"><b>FAILURE TO PROPERLY ASSESS BENEFITS</b></p> <p class="p1">Physicians’ and pharmacists’ access to updated information on prescription drugs can surely assist in minimizing the occurrence of prescribing errors and, in the process, lead to improved patient care. Unfortunately, the FDA does not assess the potential benefits the proposed regulation might have for patient health.</p> <p class="p2">Such an assessment should include two steps. First, it should calculate the potential number of prescribing errors caused by out-of-date prescribing information. The baseline could be an estimate of the total number of prescribing errors during a typical year as an upper limit to the number of errors that could be prevented. Estimates of medical errors because of out-of-date package inserts indicate that they are quite rare, accounting for only 0.3 percent of all medication errors. Currently, the PRIA includes no such assessment of the potential size of the problem.</p> <p class="p2">Second, the assessment should calculate the number of prescribing errors that could be eliminated by means of a centralized repository. If third-party sources of prescribing information are rarely out of date in ways that are likely to lead to prescribing errors, then there may be little benefit to be gained from a centralized repository provided by the FDA. If third-party boxed warnings and contraindications information is out of date, then further analysis is required. First, what percentage of physicians and pharmacists will choose to directly access the repository, and in what percentage of decisions? Second, will the repository improve the speed at which third-party sources of prescribing information update their systems? Given the third-party development of accessible and easily searchable mobile applications, it may be reasonable to conclude that few health care professionals will directly access the FDA repository. If that is the case, it is vital for regulators to determine how the repository would affect the information provided by third parties in order to ascertain its impact on the number of prescribing errors. To do so, the FDA will need to involve the third-party information providers in the regulatory impact analysis process.</p> <p class="p2">Even ignoring the role of third-party compendia, the FDA-claimed benefits of the electronic repository are very likely exaggerated. In a 2013 report, the Government Accountability Office (GAO) states that relying on electronic labeling as a complete substitute for paper labeling “could adversely impact public health by limiting the availability of drug labeling for some physicians, pharmacists, and patients by requiring them to access drug labeling through a medium with which they might be uncomfortable, they might find inconvenient, or that might be unavailable.” The GAO mentions Internet availability in rural areas and during power outages as particularly concerning to stakeholders. For instance, in a 2012 report the Federal Communications Commission notes that roughly 14 million Americans lack adequate broadband capabilities. Further, stakeholders reported to the GAO that many pharmacies, “in order to protect their systems from potential threats like computer viruses, do not have Internet access.” Indeed, 27 percent of pharmacists surveyed by NERA Economic Consulting report that they either do not have Internet access or cannot browse the Internet and 82 percent of those with access report having experienced a loss of Internet connectivity during business hours. Internet connectivity issues have the potential, at least in certain regions and during power outages, to erode if not entirely dissipate the advantages a centralized electronic repository has over paper-form information. Accordingly, only 25 percent of surveyed pharmacists agree that electronic labeling would provide more accurate information than the status quo.</p> <p class="p2">Lastly, the net benefits of the proposed and alternative solutions must be evaluated with the understanding that medicine is constantly evolving toward ever more individualized care based on genetic markers. As indicated by Peter Huber, such advancements have important implications for the usefulness of the FDA-mandated labeling:</p> <blockquote><p class="p1">But the FDA-approved label is history, or soon will be. That scrap of paper is Washington’s attempt to tell you and your doctor whether your body is bioequivalent to other bodies in which the drug has performed well in the past. Except in the simplest cases, paper can’t convey even a tiny fraction of the information that we should be using to fit drugs to patients. The accurate fitting will emerge from pattern-matching search engines powered by constantly growing databases. They will contain far more information than is currently collected in FDA-scripted clinical trials.</p></blockquote> <p class="p1">If the proposed regulation were an advancement toward the development and distribution of more patient-centered prescribing information, then it would be a step in the right direction—toward improving patient health. Unfortunately, the proposed regulation may stifle innovation involving patient-centered prescribing information, since individualized information would not be offered on the repository without another rulemaking authorizing such information.</p> <p class="p2">Given the competition for subscribers in the market for third-party compendia, the incentives to develop patient-centered prescribing information may still exist. However, the proposed centralized repository would, at best, lag behind competing third-party compendia in providing individualized information, making it of diminished value relative to the third-party compendia. As such, it is unlikely that individualized information can adequately be offered in a centralized repository. If it cannot, then any FDA repository—whether it be in paper or electronic form—will soon become obsolete, as prescribers and pharmacists access the information distributed via third-party compendia instead. If this is the case, the long-run benefits of a centralized repository are highly limited.</p> <p class="p1"><b>NO CONSIDERATION OF ALTERNATIVES</b></p> <p class="p1">The proposed rule has been deemed to be “an economically significant regulatory action under Executive Order 12866.” As such, the regulatory analysis must follow the guidelines set forth in that executive order. These guidelines state that “each agency shall identify and assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public.” Unfortunately, the PRIA fails to consider any alternatives other than an 18-month difference in the regulation’s effective date.</p> <p class="p2">To assure the public of the merits of the proposed regulation, the FDA needs to explore other alternatives. In this case, the FDA has ignored at least one alternative that is very likely better than the proposed regulation: simply removing the paper requirement. Manufacturers and repackagers would still be required to disseminate minimum standard content of prescribing information. The requirement could be to include the information in the packaging or to refer the user to an online resource that, similarly to the requirement in the proposed regulation, must be updated within a specified amount of time after FDA label approval. This would give manufacturers and repackagers the flexibility to determine the lowest-cost means of providing assessable information that third-party sources can reference without involving the extra administrative step of interacting with an FDA office.</p> <p class="p2">The analysis included in the PRIA presents a stronger argument for the above-described alternative than for the proposed regulation. Both alternatives would reduce the cost of printing the currently mandated paper-form prescribing information. The FDA-proposed regulation is only preferable if it can be shown to lead to quicker updates to prescribing information provided by third parties at a reasonable cost. The FDA does not provide such evidence. Since the FDA demonstrates only that the proposed regulation would reduce printing costs—an effect that would also follow the removal of the current in-print requirement—the less restrictive alternative that would allow third-party firms the greatest degree of flexibility to adjust to medical and technological advancements may be preferable.</p> <p class="p1"><b>CONCLUSIONS</b></p> <p class="p1">For the reasons discussed above, the argument in favor of implementing the “Electronic Distribution of Prescribing Information for Human Prescription Drugs, Including Biological Products” is flawed and incomplete. The FDA does not demonstrate that the regulation solves a significant problem, and it fails to estimate the benefits of the regulation for patient health. Ultimately, a more complete analysis of both the costs and, particularly, the benefits of the proposed regulation and of reasonable alternatives is needed before the FDA can claim that this particular regulation is in the best interests of the public.</p> Tue, 19 May 2015 10:14:25 -0400 Opportunity and Mobility in the Sharing Economy <h5> Expert Commentary </h5> <p class="p1">Much of the news surrounding the rapid growth of the sharing economy seems to focus exclusively on the headline-grabbing, billion-dollar valuations that companies like <a href="">Uber</a> and <a href="">Airbnb</a> received. More recently, the ride-sharing app and Uber-competitor <a href="">Lyft</a> was valued at $2.5 billion. These stories <a href="">fuel</a> a rather popular narrative that the sharing economy is a thinly veiled attempt to profit by cheating the system, circumventing taxes, evading safety regulations, and flouting labor laws.</p> <p class="p1">Yes, these new firms are challenging the traditional approaches taken by both incumbents and regulators. Focusing exclusively on this part of the story, however, actually misses the true value of these new, innovative services. And for the <a href="">80 million Americans</a> who transact through the sharing economy, it represents so much more.</p> <p class="p1">In fact, a recent survey of consumers across the America found that <a href="">86 percent of adults</a> believe the sharing economy makes life more affordable. This is true for individuals on both sides of the transaction: producers and consumers. For consumers, the sharing economy provides access to goods and services that have been too expensive for many in the past.</p> <p class="p1">For those looking to produce within the sharing economy, opportunities are now available that simply didn’t exist a decade ago. A young, cash-strapped couple may not have seen their spare bedroom as way to afford their apartment until the&nbsp;<a href="">Airbnb</a> platform provided them with a way to rent it out to vacationers. A single mother working toward her degree who wants to supplement her income, but is unable to commit to a second job, may not have viewed her extra hour between classes as a profit opportunity until&nbsp;<a href="">Instacart</a>&nbsp;and <a href="">TaskRabbit</a>&nbsp;allowed her to put that time to use shopping for others. A retiree with a garage full of power tools may not have viewed it as a way to supplement his pension checks until&nbsp;<a href="">1000 Tools</a>&nbsp;connected him with people in his area wanting to rent his tools.</p> <p class="p1">Averaging <a href="">425,000 guests per night</a>, and more than 155 million guest stays in 2014, a firm like Airbnb is creating real value for individuals to generate income in ways otherwise unavailable a decade ago. But this isn’t limited to those directly engaged in these services. An entire ecosystem is emerging around the growth of these firms.</p> <p class="p1">As author <a href=";_r=0">Thomas Friedman</a> explains it, Airbnb isn’t simply creating opportunities for hosts and guests within their platform, but for all types of work surrounding these rentals. People are offering <a href="">home cleaning and repairs</a> between rentals, as well as coordinating <a href="">key exchanges</a>. Services such as <a href="">Feastly</a> will connect guests with local chefs who will cook for them, and <a href="">Kitchensurfing</a> will bring chefs right into the home they are renting. Guests can also <a href="">connect with locals</a> who will help them find destinations in the area and even make the necessary reservations.</p> <p class="p1">Some <a href="">criticize</a> this as being a “share-the-scraps economy.” Former Secretary of Labor <a href="">Robert Reich</a> has described the sharing economy as a world where work is unpredictable, workers have no power or legal rights, labor bears all the risks, and people work all hours for almost nothing. His criticisms, however, seem to ignore some basic realities about the way that the sharing economy is evolving in real time.</p> <p class="p1">The sharing economy is a route rather than a destination—creating mobility that its critics fail to recognize. For many, these firms are <a href="">generating streams of income</a> that were historically available only to the wealthy. In the past, rooms were only offered for rent by those wealthy enough to build hotels. Airbnb allows anyone with extra space to penetrate a market traditionally dominated by the likes of Conrad Hilton and a few others. In 2014, private, short-term rentals through Airbnb totaled nearly <a href="">22 percent more</a> than Hilton Worldwide.</p> <p class="p1">The sharing economy also mobilizes workers in a way traditional business models simply could not. Moving between Uber and Lyft, or from Instacart to TaskRabbit, is much easier than trying to transition from one traditional full-time job to another. And with services such as <a href=""></a>, workers not only have the freedom but also the information to seek the work that matches their abilities and schedules, as well as the best platforms for them.</p> <p class="p1">This freedom and flexibility gives workers leverage they don’t have elsewhere. For many of these new firms, their value is based on the size of their networks. Ride-sharing firms like Uber and Lyft, for example, are only as valuable as the number of passengers and drivers they connect. Not only are the firms competing for customers, but for drivers as well. In fact, Lyft, with its $2.5 billion&shy; valuation, is planning for a <a href="">$30 million loss</a> in 2015 due to both promotions and also guarantees regarding driver compensation. This is paying dividends for those looking to turn their cars into streams of income.</p> <p class="p1">From this perspective, when the sharing economy is allowed to grow, the story isn’t “<a href="">big business taking advantage of local government</a>.” Nor is it a story of billion-dollar startups <a href="">undermining local business</a> (although hotels and taxis are certainly feeling the pressure). The growth of the sharing economy is a story of real opportunity being created for real people: the young, cash-strapped couple, the single mother, and the retirees taking what they have and putting it to work for them. It is a story economic empowerment today, occurring in ways unavailable and unimaginable in yesterday’s economy. It’s Horatio Alger, reborn.</p> Tue, 19 May 2015 10:02:38 -0400 How the Affordable Care Act Empowers HHS to Cartelize the Health Care Industry <h5> Publication </h5> <p class="p1">The Patient Protection and Affordable Care Act (ACA) has brought enormous change to the health care industry. It reinvents one-sixth of the US economy through its bundle of new regulations, fees, grants, and other incentives. The affected parties, including consumers, hospitals, insurers, and pharmaceutical companies, have all positioned themselves to meet what will be a significant change in the mode of health care delivery.</p> <p class="p2">At the heart of this new direction is a reorientation of the health care sector guided and designed by the administration of President Barack Obama and the Department of Health and Human Services (HHS). The media has focused more on the bureaucratic pitfalls coinciding with the launch of the department’s health care exchange website (<a href="" title=""></a>) and less on the monumental changes occurring in the industries most directly affected: hospitals, pharmaceutical companies, and insurers. These industries are undergoing major transformations in how they provide services as a result of HHS guidelines.</p> <p class="p2">Although disillusionment with the existing health care system in the United States is widespread, the ACA addresses this issue using top-down, heavy-handed bureaucratic solutions. Essentially, it has enabled HHS to organize the industry as it sees fit. Whether this approach will change the industry for the better is an open question; whether it will largely replace consumer preferences with bureaucratic ones is not. Unfortunately, consumer preferences are host to a number of problems that could easily move health outcomes in a negative direction.</p> <p class="p2">I use Yandle’s classic Bootleggers and Baptists theory (Yandle 1983; Smith and Yandle 2014) to explain the ongoing dynamic within the health care industry. HHS has increasingly coordinated both Bootleggers (economic interests) and Baptists (moral interests). Although the ultimate effect of this change is uncertain, distinct patterns can be discerned using contemporary and historical analysis of trends in the affected industry. In particular, I show how the ACA largely empowers HHS as a vehicle for centralized coordination of the health care industry.</p> <p class="p2">This paper outlines the machinations of HHS in bringing together the major health care industries and consumer groups to coordinate national health care. I use the coordinated Bootlegger and Baptist model as a framework to show how these efforts by HHS largely serve to cartelize the health care industry in a way that places the preferences of government bureaucrats and interests of Bootleggers and Baptists above those of the public.</p> <p class="p1"><b>Bootleggers, Baptists, and Televangelists</b></p> <p class="p1">Yandle (1983) first introduced the concept of Bootleggers and Baptists to describe how economic and moral interests team up to generate favorable political outcomes. In his original work, he highlights how regulation so often seems to benefit the producers it is supposed to constrain. As he explains, this outcome is a natural result of an environment where public choice considerations dominate public interest concerns. His theory provides a supplement to public choice analysis by exposing how moral interests so often enable the very Bootlegger special interests they are often trying to hinder.</p> <p class="p2">The decades-long fight waged by health proponents against Big Tobacco is an example. Although efforts to reduce the number of smoking-related illnesses have been partially successful, many of these activities have done more to serve the tobacco companies than the consumers. One of the more memorable examples occurred in 1960 when health advocates successfully lobbied to ban certain forms of advertising, which resulted in a reduction in operating costs (and accompanying higher profits) for larger firms and proved a significant obstacle for new entrants, thus benefiting Big Tobacco (see Kluger 1996; Smith and Yandle 2014, 91–92).</p> <p class="p2">Bootlegger special-interest groups are often successful because they have a much greater economic stake in the trajectory of legislation and so bring much to bear in guiding policy outcomes. Building on the classic public choice works of Olson (1965), Stigler (1971), and Becker (1983, 1985), the argument rests on the assumption that special-interest groups will seek to further their interests through political channels by being both better informed and better motivated to affect political outcomes in a direction they find favorable. Baptist groups may attempt to oppose Bootlegger efforts, but more often they settle for outcomes that appear to be in the public interest but, in actuality, fund Bootlegger profits.</p> <p class="p2">Of course, not all Bootlegger efforts are successful. (An example of how the insurance industry failed to block a financially painful provision in the ACA is shown later.) Two factors weigh against Bootlegger efforts. First, the more Bootleggers can hide behind Baptist support, the better are their chances of success. By extension, the less Baptist support available, the greater the chances are that Bootleggers will fail to acquire legislative benefits or, in some cases, attract rent-extracting penalties. This points to the second factor—government is not simply a neutral broker. In many cases, government is more interested in taking gains away from economic interests to support its pet projects. The seminal work of Fred McChesney (1987, 1997) illustrates this propensity for rent extraction. I illustrate this propensity in this paper using recent efforts of HHS to encourage funding enrollment in the new health care exchanges under the group Enroll America. Indeed, the line between rent extraction and rent-seeking is often a thin one.</p><p class="p2"><a href="">Continue reading</a></p> Mon, 25 May 2015 00:26:06 -0400