Topic: Regulatory Studies

Did the FDA Just Ban European Cheese?

Up till now, the biggest concern of European cheesemakers in the U.S. markets has been to establish “geographic indicators” that would keep American companies from using names like gorgonzola, feta, or parmesan.  But does it matter what the product is called if no one is allowed to eat it?  A recent decision by the U.S. Food and Drug Administration (FDA) to ban cheese aged on wooden boards could potentially shut out the bulk of imports from Europe.

The FDA’s recent move seems to be part of a bizarre crusade to ban flavorful cheese.  Last year the FDA targeted mimolette cheese, inspiring informative commentary and a video by my Cato colleagues.  The stated reason for the ban was that mimolette rinds might contain trace amounts of cheese mites, a harmless critter essential to the creation of certain cheese flavors.

Now the FDA has gone full throttle and banned all cheese aged on wood.  According to the agency:

“The porous structure of wood enables it to absorb and retain bacteria, therefore bacteria generally colonize not only the surface but also the inside layers of wood. The shelves or boards used for aging make direct contact with finished products; hence they could be a potential source of pathogenic microorganisms in the finished products.”

Cheese on Wood

Does placing food on wood really make it too dangerous for humans to eat?

While this is certainly a problem for artisanal cheese makers in the United States, it could have serious implications for cheese imports from Europe.  According to the Cheese Underground blog, most cheeses imported into the United States are aged on wood.

Businesses in the United States often complain that European regulators are overly cautious when it comes to permitting new methods of producing food products with genetic modification or growth hormones.  The most common complaint is that European regulations are based on irrational fear of new things and not based on hard science.  Practices that are common in the United States are outlawed in Europe, preventing U.S. producers from selling their products overseas.

The FDA, apparently, is interested in eradicating the more traditional methods.  Can “science” truly justify the criminalization of patently safe production techniques intentionally employed to improve product quality.

Regulatory differences are the most salient issue being addressed in ongoing negotiations toward a free trade agreement between the United States and the European Union.  As U.S. negotiators push Europeans to adopt a more scientific approach to regulation, perhaps the EU negotiators should demand a bit more common sense.

Morris Adelman, RIP

According to the New York Times Morris Adelman, professor emeritus of economics at M.I.T. died on May 8 at the age of 96.  His work, including Genie Out of the Bottle (M.I.T. Press 1995), informed the papers and articles on energy policy published by the Cato Institute over the last 30 years.  A good summary of his views can be found in this article in Regulation from 2004.

His writing was refreshingly honest and is worth quoting at some length.

…conventional wisdom (there is that term again) is that Middle Eastern nations wield an “oil weapon” that they can use to punish the United States or any other nation.  In support of this belief, many people point to the 1973 “oil embargo” against the United States by Arab members of OPEC (except Iraq — Saddam Hussein profited by it). Secretary of State Henry Kissinger cruised around the Middle East many times to negotiate an “end” to it. Ten years later, he explained that the significance of the “embargo” was psychological, not economic. Recently, the London Economist quoted approvingly what I said in July 1973: If an embargo was declared, it would have no effect because diversion would nullify it. And so it was.

The embargo against the United States never happened, and could not happen. The miserable, mile-long lines outside of U.S. gasoline stations resulted from domestic price controls and allocations, not from any embargo. We ought not blame the Arabs for what we did to ourselves.”

“The real moral is this: It does not matter how much oil is produced domestically and how much is imported. Presidents may declare that there is an “urgent need” to cut imports and boost “energy independence” — no one ever lost political support by seeing evil and blaming foreigners. The facts are less dramatic.

Is Uber Really Worth $18 Billion?

Last Friday it was reported that Uber, the transport technology company that links passengers to drivers with its smartphone app, had raised $1.2 billion in a funding round valuing it at $18.2 billion.

The valuation means that Uber is worth roughly the same as Hertz Global Holdings Inc. and Avis Budget Group Inc. combined. As The Wall Street Journalnoted, “Only Facebook Inc. in 2011 raised capital at a higher valuation from private investors — an investment from Goldman Sachs valued the social network at $50 billion—according to VentureSource data.”

The reaction to the news has been mixed. In The Guardian, James Bell, who described the valuation as a “fantasy,” wrote the following in the wake of the news of Uber’s valuation:

… when you buy a tech stock at a huge multiple – and Uber’s revenues have been (generously) estimated at around $200m a year, which makes $18bn a borderline-insane 90x valuation – you’re making a bet that its profits down the line will be vastly larger than they are today. In fact, you’re betting that they will be almost unimaginably larger.

There is absolutely no reason to believe this is true. Uber has rivals in every market it’s in – both established players fighting off the insurgents, and Uber-like rivals with similar software products. Uber and all its rivals are dueling one another for taxis – lowering fares and their percentage takes, even offering lunch or $500 bonuses to drivers.

The Wall Street Journal’s Christopher Mims has described the valuation as “nuts,” and wrote that the “moat” protecting Uber from competition is “incredibly shallow,” arguing that drivers are driven by price rather than loyalty to Uber. Mims went on to say that the market Uber works in will remain easy to enter despite any of its attempts to deal with competition:

I say ride-sharing is “frictionless” because in its price war with Lyft, both companies are forced to constantly lower prices, and riders — especially those whom the company presumes will give up their cars — are naturally price sensitive. Even if Uber uses its funds to try to crush competition such as Lyft, the Lyft model is simpler than Uber’s and built on recruiting everyday folks, not professional drivers. It isn’t hard to enter this market.

Mims also argued that even if Uber captures 50 percent of the global taxi market in five years it would still be worth less than $18.2 billion.

However, over at Vox, Matthew Yglesias correctly points out that Uber and its competitors could greatly increase the size of the market for paid rides, which seems to be what Uber CEO Travis Kalanick has in mind. In a recent interview with The Wall Street Journal Kalanick said that Uber’s vision is, “Basically make car ownership a thing of the past.”

In Forbes, Mark Rogowsky writes that Mims is wrong to treat Uber as a replacement for taxis:

So long as you look at Uber as a taxi replacement, you’ll see it as something less than it’s already becoming in its early markets: A transportation app. In San Francisco, for years the taxi commission didn’t want to issue more medallions for additional cabs because there was ostensibly no real demand for them (As of last year, the city had 1,600 taxi medallions). Yet just 4 years after Uber’s launch, there are often well over 1,000 rideshare vehicles on the road during peak times.

Rogowsky’s article highlights two important points to consider when thinking about Uber and its competitors: 1) Unsurprisingly, bodies like San Francisco’s taxi commission are evidently not very good at estimating the demand for rides, and 2) while Uber is competing with traditional taxis it would be a mistake to think of it as a taxi replacement rather than a technology company that makes it easier for passengers to find drivers, be they professional chauffeurs or car owners trying to make some extra money on the side.

What makes the huge valuation especially remarkable is that Uber and its competitors are facing numerous regulatory challenges, some of which I wrote about last week. Yet despite these challenges, investors see an opportunity in Uber. Speaking to Reuters a spokeswoman for Summit Partners, one of the investors in the funding round, said, “Uber is one of the most rapidly growing companies ever, and we believe there are opportunities for continued tremendous growth.”

Political Connections and SEC Enforcement

One problem with regulation is that regulators often have substantial latitude to choose the stringency and targets of their enforcement efforts.  This opens the door for businesses and politicians to influence that enforcement.

A recent paper by Maria Correia of the London Business School finds exactly this effect at the SEC.  Correia writes:

I examine whether firms and executives with long-term political connections through contributions and lobbying incur lower costs from the enforcement actions by the Securities and Exchange Commission (SEC). I find that politically connected firms on average are less likely to be involved in SEC enforcement actions and face lower penalties if they are prosecuted by the SEC. Contributions to politicians in a strong position to put pressure on the SEC are more effective than others at reducing the probability of enforcement and penalties imposed by an enforcement action. Moreover, the amounts paid to lobbyists with prior employment links to the SEC, and the amounts spent on lobbying the SEC directly, are more effective than other lobbying expenditures at reducing enforcement costs faced by firms.

So SEC enforcement does not necessarilly target the firms whose behavior is “worst” but instead firms whose political connections are weakest.

Virginia DMV Orders Uber and Lyft to Cease and Desist

Yesterday the Virginia Department of Motor Vehicles issued cease and desist letters to Uber and Lyft, claiming that the companies, which connect passengers to drivers via smartphone apps, are in violation of Virginia law. In the letters, DMV Commissioner Richard Holcomb wrote that Lyft and Uber’s ride-sharing operations “are not ridesharing arrangments as defined in Virginia law” because drivers receive compensation for their services.

The Arlington County Police Department will be assisting in enforcing existing legislation, although a spokesman said “it will not be a primary focus of our operations.”

In the wake of the cease-and-desist letters, Uber’s East Coast Regional General Manager Rachel Holt said,“We’re still operating as usual throughout D.C., Maryland and Virginia,” and Lyft said in a statement, “We’ve reviewed state transportation codes and believe we are following the applicable rules. We’ll continue normal operations as we work to make policy progress.”

The Virginia DMV has previously fined Uber and Lyft ($26,000 and $9,000 respectively), however the recent letters say that the DMV will issue civil penalties of up to $1,000 per violation to individual drivers caught breaking Virginia regulations.

The DMV letters are only the latest regulatory and legal hurdle that Uber and Lyft face. I have previously written on this blog about some of those challenges, which are taking place across the country.

Rather than hinder the growth of innovative livery companies that are taking advantage of new technology, lawmakers in Virginia and elsewhere across the country should consider repealing current taxi regulations that restrict innovation, strengthen established market players, and stifle competition.

Uber and Lyft are popular for a reason: they provide a reliable and desired service at prices customers have indicated that they are willing to pay. In a fair and level playing field with fewer regulations, their competitors would have to rely on improving their own services rather than on market-distorting legislation.

I discussed these issues with Caleb Brown on today’s Cato Daily Podcast that you can listen to here:

The Latest Travails of Rideshare Companies

Last week Uber CEO Travis Kalanick said that the technology company, which connects riders to drivers through its app, could enjoy a “record-breaking” valuation thanks to its latest attempt to raise money.

Yesterday, Bloomberg reported that Fidelity Investments “is competing to lead Uber Technologies Inc.’s new financing in a round that could value the ride-sharing service at about $17 billion.”

Bloomberg’s reporting went on to note that if valued at $17 billion, Uber would be more valuable than the car rental service Hertz and the technology and appliances retailer Best Buy.

The news of Uber’s possible $17 billion valuation comes in the wake of news highlighting how the company has run afoul of regulators and taxi drivers across the world.

Earlier this year in Illinois, both the state House of Representatives and Senate passed HB 4075 and HB 5331 by veto-proof margins. If signed by Gov. Pat Quinn, the bills would require that the rideshare service drivers pass a background check, have commercial liability insurance of at least $350,000, and be required to obtain a chauffeur’s license if they carry passengers for more than 18 hours a week. These chauffeurs’ licenses are not easy to get in Chicago, the only city in Illinois where rideshare companies operate. They require any driver to complete a chauffeur training course, pass a written test, and demonstrate proficiency in English. The manager of government affairs at Lyft, another company that offers a rideshare service, has claimed that the 18 hour per week regulation would affect the 63 percent of drivers who use Lyft in Chicago. Chicago lawmakers recently passed an ordinance regulating ridesharing, a move welcomed by Uber and Lyft, although the legislation will have to be brought into compliance with HB 4075 if it is signed into law.