Tag: regulation

U.S. Policies Deter Inward and Encourage Outward Business Investment

This morning, Cato published a new study of mine titled, “Reversing Worrisome Trends: How to Attract and Retain Investment in a Competitive Global Economy.” The thrust of the paper is that, despite still being the world’s premiere destination for foreign direct investment, the U.S. share of the global stock of direct investment fell from 39% in 1999 to 17% today.

This downward trend is attributable to two broad factors. First, developing economies – many of which have achieved greater political stability, sustained economic growth, improved infrastructure and higher-quality worker skill sets – are now viable options for pulling in the kinds of FDI that was once untenable in those locales. Second, a deteriorating business and investment climate in the United States – owing to burgeoning, burdensome, and uncertain regulations; an antiquated, punitive corporate tax system; incoherent immigration, energy, and trade policies; a wayward tort system; cronyism and perceptions thereof; and other perverse incentives and disincentives of policy have pushed investment away.

The first trend should be welcomed and embraced; the second must be reversed. From the study:

Unlike ever before, the world’s producers have a wealth of options when it comes to where and how they organize product development, production, assembly, distribution, and other functions on the continuum from product conception to consumption. As businesses look to the most productive combinations of labor and capital, to the most efficient production processes, and to the best ways of getting products and services to market, perceptions about the business environment can be determinative. In a global economy, “offshoring” is an inevitable consequence of competition. And policy improvement should be the broad, beneficial result.

The capacity of the United States to continue to be a magnet for both foreign and domestic investment is largely a function of its advantages, many of which are shaped by public policy. Considerations of taxes, regulations, trade openness, access to skilled workers, infrastructure, energy policy, and dozens of other policy matters factor into decisions about whether, where, and how much to invest. It should be of major concern that inward FDI has been erratic and relatively downward trending in recent years, but why that is the case should not be a mystery. U.S. scores on a variety of renowned business surveys and investment indices measuring policy and perceptions of policy suggest that the U.S. business environment is becoming increasingly less hospitable.

Although some policymakers recognize the need for reform, others seem to be impervious to the investment-repelling effects of some of the laws and regulations they create. Some see the shale gas and oil booms as more than sufficient for overcoming policy shortcomings and attracting the necessary investment. The most naive consider “American” companies to be tethered to the U.S. economy and obligated to invest and hire in the United States, regardless of the quality of the business and policy environments. They fail to appreciate that increasingly transnational U.S.-based businesses are not obligated to invest, produce, or hire in the United States.

It is the responsibility of policymakers, however, to create an environment that is more attractive to prospective investors. Current laws, regulations, and other conditions affecting the U.S. business environment are conspiring to deter inward investment and to encourage companies to offshore operations that could otherwise be performed competitively in the United States.

A proper accounting of these policies, followed by implementation of reforms to remedy shortcomings, will be necessary if the United States is going to compete effectively for the investment required to fuel economic growth and higher living standards.

Details, charts, and analysis, and citations are all included here.

CPSC Sues Defiant CEO Individually in Buckyball Case

A year ago I wrote: “It’s rare for a regulated company to mount open and disrespectful resistance to a federal regulatory agency, but that’s what the maker of BuckyBalls, the popular desktop magnetic toy, is doing in response to the Consumer Product Safety Commission’s effort to ban its product.” The maker in question had devised cheeky, sarcastic ads asking why other products with injurious potential (coconuts, hot dogs) weren’t banned on the CPSC’s logic. 

One reason it’s rare to mount open and disrespectful resistance to a federal agency is that agencies have so many ways to make businesspeople’s lives unhappy. This spring, breaking new legal ground, the CPSC reached out and named CEO Craig Zucker personally as a respondent in its recall proceeding. According to a Gibson Dunn commentary,

For the first time, the CPSC is pursuing individual and personal liability against an executive for a company’s alleged violations of the Consumer Product Safety Act. Although it remains to be seen whether the CPSC will adopt this approach in other cases, at minimum, this demonstrates just how far the CPSC is willing to push the envelope.

It’s just the latest example, the law firm says, of a pattern in which “the CPSC has aggressively enforced its governing statute and regulations, repeatedly pushing the limits of its expanded authority.” If the move succeeds, Zucker could be ordered to foot the bill personally for offering consumers full refunds for all products sold, reimbursing retailers for recall costs, and various other expenses potentially reaching into the millions.

The Takings Clause Has No Expiration Date

The Obama Administration has had a bad time recently in property rights cases. In particular, three cases, Arkansas Game & Fish Commision v. United States, Koontz v. St. Johns River Water Management District, and Sackett v. EPA, were big losses for the government and big wins for the private property owners who are increasingly subject to unconstitutional attempts to take land. Last week, Cato, along with the National Federation of Independent Business and the Chapman Center for Constitutional Jurisprudence, filed a brief asking the Supreme Court to review a circuit court decision that could have far-reaching implications for property owners everywhere.

The Fifth Amendment’s Takings Clause guarantees that private land cannot be taken for public use without “just compensation.” But apparently, according to the Federal Circuit, this right has an expiration date. Specifically, the Federal Circuit ruled that Mike Mehaffy purchased his land too late to claim that the government regulated away most of his property value. Mehaffy should’ve known, said the court, that the Clean Water Act had been passed and degraded the value of the land he had purchased. This is called the “Notice Rule,” and it leaves Mehaffy without a claim, unable to recoup most of his property investment.

While the Supreme Court has never given specific guidance on how a court should balance whether a regulation that takes or lowers the value of property should be compensated, in Palazzolo v. Rhode Island the Court was very specific about one thing: no one factor should decide. Despite this admonition, the Federal and Ninth Circuits focus solely on notice to effectively bar anyone from bringing suit if they bought land too late. Cato’s brief argues that Nollan v. California Coastal Commission implicitly recognized that a challenge can be brought despite the fact that property was obtained after the regulatory act in question. Later, in Palazzolo, the Court unmistakably drove this point home: “[A takings claim] is not barred by the mere fact that title was acquired after the effective date of the state-imposed restriction.” To do so, said the Palazzolo Court, would “put an expiration date on the Takings Clause” and would absolve the state of its duty to defend its actions, no matter how unreasonable.

Despite the Supreme Court’s clear rejection of a test based solely on the Notice Rule, the Federal and Ninth Circuits circumvented the Supreme Court’s holding in Palazzolo and revived the Notice Rule. This is especially far reaching, as so many takings claims are brought in the Court of Federal Claims where the Notice Rule now controls. Moreover, by solely looking at the issue of notice, the Federal Circuit gave federal agencies an incentive to run out the clock, as once all the land has been transferred, no owner can bring a takings suit. The takings problem is compounded by difficulties in determining if land is subject to the Clean Water Act in the first place—a new owner might find himself newly regulated under changing interpretations of the Clean Water Act, and yet be denied remedy by application of the Notice Rule. Most modest landowners won’t have the means to take such a case to the government but also can’t sell the property without extinguishing their claim. This manipulates the property market, with some owners avoiding transactions that might destroy their takings claims, while most will be forced to sell at a significantly depreciated rate. This burden will likely fall most heavily on groups without the time or resources to fight, like the elderly.

The Notice Rule’s resurrection is plainly at odds with the Supreme Court’s precedent, creates a near total ban on those takings claims that are economically viable, and whittles away property rights. Cato urges the Supreme Court to enforce its own precedent, and make it clear that that there is no ban on pursuing “just compensation” simply because they purchased their property a little too late.

Good, Market-Based Privacy Advocacy

Too much privacy advocacy is done by a self-appointed expert class who, believing their own preferences to be universal, beseech legislators and regulators to mold or even remake the information economy. I have nothing against self-appointed experts—I am one, and some of you have been falling for my schtick for a decade. But the hubris of claiming to know how things should come out? That’s too much.

So the Electronic Frontier Foundation’s “Who Has Your Back?” report is real stand-out. Using a clear, six-star grid, they assess how well major Internet companies and ISPs do when it comes to key dimensions of privacy protection.

This puts you, the consumer, in a position to choose with whom you want to do business. As importantly, it puts business decision-makers on notice: If they don’t satisfy actual consumer demand for privacy, they are more likely than before to lose money.

If consumers care about privacy, they will act on what’s in this report—and specifically on the dimensions of privacy protection that matter to them. If they don’t, they won’t, because they prioritize other things, and businesses can do the same. It’s an elegant system—a market-based system—for discovering and delivering what consumers want.

The alternative is a foggy war (politics being war by other means) in which the “consumer advocate” and “industry” use every artifice to persuade various authorities whether or not, and how, to intervene. The actual desire of the consumer is an afterthought in this regulatory battle.

So, Who Has Your Back?

The report is worth checking out. You might learn that a provider you trust is not so trustworthy. You might learn of services that you should try because they are good actors. You might disagree with the methodology, and that’s fine, too. The responses of businesses and consumers to this report will be far more finely tuned to actual consumer demand for privacy than the gaudy privacy show that runs ‘round the clock these days in Washington, D.C., state capitols, and Brussels.

Congratulations and thanks to the Electronic Frontier Foundation for some good, market-based privacy advocacy!

New Cato Policy Analysis on Regulatory Protectionism

Just in time for today’s release of my and Bill Watson’s new PA, “Regulatory Protectionism: A Hidden Threat to Free Trade” comes a feature article [$] in the specialist trade (in both senses of the word) publication, Inside U.S. Trade on the likely obstacles to a U.S-EU preferential trade agreement (a recent Cato event also hosted a discussion on this topic). And, in an inadvertent PR coup for us, it focusses almost entirely on how regulations and other non-tariff barriers (NTBs) in each economy might inhibit a successful result to negotiations:  

The shifting nature of domestic policies and agricultural trade between the United States and the European Union over the last several decades means that while some traditional trade irritants are no longer present, others have been introduced that will likely prove difficult to unravel in the context of trans-Atlantic bilateral negotiations. Whereas bilateral trade irritants previously centered on export subsidies and competition in third markets for commodities like wheat, now the disagreements primarily relate to non-tariff barriers (NTBs), including divergent scientific standards, food safety regulations and other issues that are hindrances to bilateral trade… But the difficulty in negotiating these issues is that, because they ostensibly relate to consumer health and safety, governments cannot easily make “trade-offs,” as they can with tariffs. Observers believe that this is the chief reason that the talks over agriculture promise to be so difficult.

Indeed. As we discuss in our paper, tariffs and other conventional trade barriers have fallen over the years, so the barriers that remain are more regulatory in nature, and more sensitive to negotiate. What we’re essentially left with is the difficult issues. They get to the heart of national sovereignty and, on a practical level, require the participation of regulatory administrators who may have very little or no trade negotiation knowledge or experience. They also have little incentive to concede their power. Whereas trade negotiators are paid to, well, negotiate, regulators are paid to inhibit commerce. They face asymmetric rewards: a huge fuss if something goes wrong, not many kudos if they remove the reins and let commerce thrive. Under those conditions, it should be no surprise that they are risk-averse. So this trade agreement will not be easy to complete. In the meantime, though, there is much the United States can do to limit the ability of regulators to shackle the economy with burdensome—and potentially illegal—requirements that limit choice and expose American businesses to retaliatory sanctions. For example, ensure WTO obligations are taken seriously and adhered to. From our paper:  

Prior to implementing a new regulation, federal agencies should be required to evaluate the possibility that less trade-restrictive alternatives could meet regulatory goals as effectively as their preferred proposal. Also, the U.S. government should not dilute or bypass the multilateral rules of the WTO through bilateral or regional negotiations that accept managed protectionism. This paper uses a number of recent examples of protectionist regulations to show that the enemies of regulatory protectionism are transparency and vigilance. Policymakers should be skeptical of regulatory proposals backed by the target domestic industry and of proposals that lack a plausible theory of market failure.

Read the whole thing here. And if you are in D.C. or near a computer next Thursday, watch our event to launch the paper.

Laws Entrench Liquor Wholesalers At Drinking Public’s Expense

As part of their regulation of alcohol sales, an estimated 33 states maintain so-called At Rest laws, which require that bottles spend time in an in-state warehouse before being sold to consumers. The laws limit competition, drive up prices to consumers, and make it harder to special-order less common labels. Now, as the New York Post revealed in a Sunday exclusive, New York may join the list following generous donations to Gotham politicians from an in-state wholesaler. State Sen. Jeff Klein (D-Bronx) alone got $33,000 from Empire Merchants LLC.

David Waldenberg, of BNP Distributing Co., said 180 small-and medium-sized New York distributors will hurt by the measure.

Those businesses have offices in New York that employ hundreds of people, he said, but use New Jersey storage facilities.

If their warehousing costs go up, these businesses will die and jobs will ultimately be lost, he said.

“The price of wine — it’ll go up $7 or $8 a bottle,” warned wine connoisseur and writer Jesse Nash. “The consumer is going to get nailed.”

In an (alas) still-relevant 1985 article (PDF) in Cato’s Regulation magazine, Federal Trade Commission attorney David Spiegel analyzed how anti-competitive state liquor laws exploit consumers. [adapted and expanded from Overlawyered]

Update: Tom Wark at WineInterview.com (via Michelle Minton, CEI) believes the New York bill as of this point is “going nowhere” following a vigorous campaign against it by small wholesalers who would be hurt by its provisions.

The Real Problem with Highly Regulated “School Choice”

A Fordham Institute paper released today seeks to answer the question: do private schools really refuse to participate in heavily regulated school choice programs? Its authors tell us that “many proponents of private school choice… take [this] for granted,” citing two examples—one of them being the Cato Institute, whose Center for Educational Freedom I direct. The authors even cite a relevant commentary by former Cato policy analyst Adam Schaeffer.

The only problem is that the cited commentary says precisely the opposite. Describing Indiana’s voucher program, Schaeffer writes: “Because participating schools will have a significant financial advantage over non-participating schools, lightly regulated [non-participating] schools will face increasing financial pressure to participate.” This captures Schaeffer’s concern as well as my own (which I expressed over a decade ago in the political economy journal Independent Review): We do not fear that private schools will refuse to participate in heavily regulated school choice programs. We know that they ultimately will participate, or be driven out of business by their subsidized counterparts.

We know this because there is extensive evidence to that effect from all over the world and across history. Everywhere that private elementary and secondary schools are eligible for government subsidies, the share of unsubsidized school enrollment falls. The higher the subsidy and the longer it has been in place, the more the unsubsidized sector is generally diminished. The Dutch enacted a heavily regulated nationwide voucher program nearly a century ago. Unsubsidized private schooling remains legal, but has been reduced to a statistical asterisk—now making up less than one percent of enrollment, compared to roughly 70 percent for subsidized private schools.

Our reason for concern over this pattern is also grounded in empirical evidence: it is the least regulated, most market-like private schools that do the best job of serving families. That is the consensus of the worldwide within-country research, which I reviewed and tabulated for a 2009 paper in the Journal of School Choice. The Fordham paper does not discuss this evidence.

Despite imputing to Cato scholars the exact opposite of the view we hold, the paper does include some interesting data. In particular, it offers a new corroboration that voucher programs are more heavily regulated than tax credit programs (a difference whose magnitude and statistical significance was previously established here). This will make it even harder for objective observers to cling to the notion that vouchers and credits are functionally equivalent.