Tag: regulation

How Much Profit Is There in Thwarting Financial Innovation?

Ben Lawsky is resigning as superintendent of financial services in New York. The New York Times says he plans to open his own firm and lecture at Stanford University. The Post reports that he will consult on digital currencies such as Bitcoin.

The move West suggests that Lawsky may want a piece of the action in Silicon Valley. If he does, it’s worth noting that the action is not in New York.

Lawsky was a leading Bitcoin antagonist. Bitcoin has not particularly flourished in New York, and Lawsky’s work makes it unlikely that New York will be a Bitcoin-friendly jurisdiction.

Ben Lawsky welcomed Bitcoin in August 2013 by sending out subpoenas to everyone in the Bitcoin world. He went on television talking about the “real dangers” of Bitcoin, including use by “narco-terrorists.” (Asked for evidence of Bitcoin misuse, he cited a centralized digital currency called Liberty Reserve, which is not Bitcoin.)

Around the same time, Lawsky precipitously announced a plan for a special “BitLicense.” Shortly after producing it, his office violated New York’s Freedom of Information Law by refusing to release the research and analysis that it claimed to have done to validate the regulation. The NYDFS found that the BitLicense would have no impact on employment in the state, after which investors poured hundreds of millions of dollars into Bitcoin companies outside of New York. (See my comments to the NYDFS for more.)

Insuring John Galt?

Caleb’s latest podcast is an interview with Charles Murray on his new book, By the People: Rebuilding Liberty without Permission. You can watch the podcast below or download the audio here. Be forewarned: if you’re like me, you’ll be Kindle-ing the book before the interview ends.

The word “provocative” is applied to far too many books these days, and often to books that should instead be called “wacky.” Murray’s thesis fully earns the former adjective, and perhaps a touch of the second–and I write that as high praise.

He argues that American government today is so far divorced from the nation’s founding principles of limited government and individual liberty that it can’t be returned to those principles through normal political action. No presidential administration, congressional turnover, or set of SCOTUS appointments will restore the Commerce and General Welfare clauses. Thus, he writes, supporters of liberty should try to effect change through carefully chosen but broadly adopted acts of civil disobedience against publicly unpopular regulations. Some examples that come to my mind: people could become part-time Uber drivers, or cash businesses could routinely make deposits of $9,999, or parents could include cupcakes in their schoolchildren’s packed lunches.

Innovating Within an Overregulated Alcohol Landscape: A #CatoDigital Discussion

April is Alcohol Awareness Month. What better time to take a close look at one of our nation’s most heavily regulated industries and the inventive ways entrepreneurs are innovating within this realm?

The ratification of the 21st Amendment may have officially ended this nation’s failed experiment with alcohol Prohibition, but the policy hangover has had lingering effects. From dry counties to bans on Sunday sales, the sale of alcohol is severely restricted in a confusing patchwork of local, state, and federal regulations. Homebrewing was not legal in all 50 states until 2013 (and homebrewers still cannot legally sell their product). Eighteen states maintain a state monopoly over the wholesaling or retailing of some or all categories of alcoholic beverages. But, even in this stifling economy, intrepid businesses are finding new ways to serve thirsty consumers.  

One real-world example of this is Klink, formerly known as DrinkDrivers, a rapidly growing start-up with a strong foothold in the nation’s capital. The app-based alcohol delivery company relies upon the mechanisms of the sharing economy—which has faced its own share of difficulties from overzealous regulators—to navigate the treacherous legal landscape of the American alcohol industry.

The concept behind Klink is a simple one: modern consumers want the ease of on-demand goods and services, deliverable at the touch of a button, wherever they are. Yet, Klink is not an alcohol provider in the traditional sense.

Unlike many other businesses in the sharing economy, Klink is stringent in its adherence to the laws and regulations governing alcohol sales. When you place an order, the company does not itself process your payments or deliver your alcohol. Instead, Klink plays the role of middleman, partnering with licensed liquor retailers, providing an easy-to-use online platform to connect alcohol providers with customers and occasionally running localized marketing campaigns.

Tomorrow at noon, I’ll be moderating a live-streamed lunchtime discussion featuring my colleague Matthew Feeney, who is Cato’s leading expert on the sharing economy; David Ozgo, the Distilled Spirits Council of the United States (DISCUS)’s Senior Vice President of Economic & Strategic Analysis; and Klink’s Founder and CEO, Jeffrey Nadel.

We’ll be discussing the ways in which Klink is navigating the treacherous regulatory waters of both the sharing economy and the alcohol industry, the regulatory hurdles standing in their way, and what this means for the future of tech innovation and alcohol sales. The panel will be live-streamed, and at-home viewers are encouraged to participate in the Twitter discussion—and tweet their question—using #CatoDigital.

“BitLicense” Foolishness

When New York’s Superintendent of Financial Services first encountered Bitcoin, he evidently thought it was a way to build his reputation as a hangin’ superintendent of financial services. (Doesn’t quite roll off the tongue like “hangin’ judge,” does it…) He sent subpoenas to everyone in the Bitcoin world and went on TV talking about “narcoterrorists.” That was foolishness.

Unfortunately, he also hatched the idea of creating a thing called a “BitLicense” for firms wanting to provide Bitcoin-based financial services in New York. That program is now hanging like an albatross around his neck.

I know nothing of the details, but a couple of decades in public policy make the probable outlines of what happened pretty clear. The press seized on the “BitLicense” idea. Lobbyists and business people came around to fawn over the “BitLicense” idea with Superintendent Lawsky, each hoping not to get cut too deeply by its inartful sharp edges. And Lawsky, having come around to favoring Bitcoin (it’s fairly evident from his speeches) found himself committed to coming up with this “BitLicense” thing.

When the first draft came out in July of last year, it was pretty universally panned. The Bitcoin community savaged it. Bitcoin businesses said they would not do business in New York. The idea of a second round of proposal and comment was quickly on offer.

But the second draft isn’t that much better. When comments close at the end of this week (how to comment), the “BitLicense” will again have received strong criticism. There’s always that contingent whose stock in trade is always—always—to play ball. And to others the “BitLicense” saga has gotten boring…

But the outcome is very probably set. In order to avoid backtracking, which would look foolish, the Department of Financial Services will probably continue forward on the errant path of creating a peculiar special license for Bitcoin-based financial services providers in New York.

Does Sweden’s Voucher Program Need Stricter Regulation?

Slate recently published a badly misinformed piece about Sweden’s voucher program, which I addressed here. One of the other responses to the Slate piece was written by Swedish economist Tino Sanandaji for NRO. Sanandaji did an excellent job of showing that the voucher program cannot plausibly explain Sweden’s test score decline and usefully explored some of the more likely causes.

Though I agree with much of what Sanandaji wrote, his piece occasionally endorses heavier regulation of the program for reasons that are either not apparent or inconsistent with the evidence. For instance, he rightly observes that the Swedish government requires universities to accept high school grades as a key admissions criterion but does not permit them to take into account differential grading practices across high schools. This, he notes, puts significant external pressure on high schools to inflate grades. But despite acknowledging this, he later refers to “other problems caused by the [voucher/school choice] reform … such as grade inflation,” implying that this “corruption” is “caused by the lack of [state] control.”

And yet the evidence he presents points to the opposite conclusion: that grade inflation is particularly problematic in Sweden because of imprudent government intrusion into university admissions policy. Consider as a contrast the case of the United States, where universities are free to take high schools’ grading practices into account during admissions. We still have differential grade inflation across high schools, but it is less of a concern because universities can adjust for it. As the head of admissions at Brandeis University has observed, “It’s really not that hard [for colleges] to evaluate a school bearing in mind the differences in grading and weighting processes they employ.” In the absence of government meddling, high schools cannot secure admission to good colleges for their students simply by giving them all A’s.

Still more puzzling is Sanandaji’s criticism that “some private schools broke the rules to cherry-pick students.” This is curious because Sanandaji defends free markets on a number of other occasions, and a hallmark of free markets is that they rely on mutually voluntary exchange. So, naturally, schools in a relatively free marketplace want to enroll students they think they can successfully serve, just as families seek schools they believe can successfully serve them.

This does not mean that all private schools in a relatively free market will seek to serve only high-scoring or well-behaved students. In the United States, where the vast majority of private schools are free to admit students based on any criteria they like, many exist specifically to serve difficult-to-educate students that the typical public school is not well-equipped to teach. A study conducted in the mid-1990s found that public school districts were sending hundreds of thousands of students to the private sector for just that reason. Do some other private schools focus on serving high-performing students? Of course. But the largest share seem to place little or no emphasis on students’ prior academic performance, based on survey data from Arizona that I analyzed several years ago.

FDA Decides Not to Walk the Cheese Plank… for Now

FDA:  You know that artisanal cheese you love, that you have to age on wood planks? That’s dangerous and we don’t approve.

Fancy Cheese Lovers:  Hey, FDA, these cheese wheels will be your tombstones.

FDA:  Oh. What? Did you think we meant we were going to regulate your much loved, centuries-old practices out of existence just because we’re a regulatory agency that stops people from doing things for a living? Of course we’re not doing that… right now… while the media spotlight is so bright it’s hurting our eyes… but you’d better convince us we should allow you to do that anyway.

The latter bit is what has apparently played out this morning, according to Forbes online.

But as Cato’s Walter Olson explains, this apparent victory for sanity and liberty may simply be due to the fact that the usual advocates of regulatory encroachment in every aspect of our lives happened to have been personally inconvenienced this time around, and may have had the subject-area knowledge to realize how ridiculous this encroachment was. So, for once, they pushed back instead of rooting for leviathan.

If so, let’s hope they learn a broader lesson from this experience: maybe other people should also be left to make their own choices in the areas about which they care deeply. Maybe all that stifles is not gold.

And if you call Uber or Lyft to pick up your fancy cheese in Virginia, be prepared to get busted…they’re still banned.

A Microeconomic Look at Regulatory Overkill

In this new paper, I argue that an overly burdensome U.S. regulatory state is partly responsible for the downward trend in domestic and foreign investment in U.S. factories, professional services operations, distribution centers, and research and development facilities. EPA mandates, Obamacare’s costly, complicated new health care directives, and the slowly emerging financial services restrictions stemming from Dodd Frank, are just some of the new regulations that have thickened the Federal Register to more than 80,000 pages per year and added 16,500 new pages to the Code of Federal Regulations during the Obama presidency, undoubtedly deflecting and chasing investment and business creation to foreign shores.

Oddly, this massive expansion of federal rules has evolved as President Obama has simultaneously expressed concerns about the impacts of both declining investment and regulatory overkill on economic growth. In 2011, the president issued Executive Order 13563 under the heading “Improving Regulation and Regulatory Review.” Section 1 states:

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

The president issued this EO in the wake of his party’s mid-term election rebuke, perhaps to indicate that he understood the concerns of business. He even required that his agencies formulate plans for undertaking systematic, retrospective reviews of their rules and regulations with an eye toward making them less imposing on society:

Sec. 6. Retrospective Analyses of Existing Rules. (a) To facilitate the periodic review of existing significant regulations, agencies shall consider how best to promote retrospective analysis for rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned…

In the words of a former chief economist at the Council of Economic Advisers:

The single greatest problem with the current system is that most regulations are subject to a cost-benefit analysis only in advance of their implementation. That is the point when the least is known and any analysis must rest on many unverifiable and potentially controversial assumptions.