Topic: Regulatory Studies

Supreme Court Should End Advertiser’s Kafkaesque Nightmare

Douglas Walburg faces potential liability of $16-48 million. What heinous acts caused such astronomical damages? A violation of 47 C.F.R. § 16.1200(a)(3)(iv), an FCC regulation that enables lawsuits against senders of unsolicited faxes.

Walburg, however, never sent any unsolicited faxes; he was sued under the regulation by a class of plaintiffs for failing to include opt-out language in faxes sent to those who expressly authorized Walburg to send them the faxes. 

The district court ruled for Walburg, holding that the regulation should be narrowly interpreted so as to require opt-out notices only for unsolicited faxes. But on appeal, the Federal Communications Commission, not previously party to the case, filed an amicus brief explaining that its regulation applies to previously authorized faxes too. Walburg argued that the FCC lacked statutory authority to regulate authorized advertisements. In response, the FCC filed another brief, arguing that the Hobbs Act prevents federal courts from considering challenges to the validity of FCC regulations when raised as a defense in a private lawsuit. Although the U.S. Court of Appeals for the Eighth Circuit recognized that Walburg’s argument may have merit, it declined to hear it and ruled that the Hobbs Act indeed prevents judicial review of administrative regulations except on appeal from prior agency review. 

In this case, however, Walburg couldn’t have raised his challenge in an administrative setting because the regulation at issue outsources enforcement to private parties in civil suits! Moreover, having not been charged until the period for agency review lapsed, he has no plausible way to defend himself from the ruinous liability he will be subject to if not permitted to challenge the regulation’s validity. Rather than face those odds, Walburg has petitioned the Supreme Court to hear his case, arguing that the Eighth Circuit was wrong to deny him the right to judicial review without having to initiate a separate (and impossible) administrative review. 

Cato agrees, and has joined the National Federation of Independent Business on an amicus brief supporting Walburg’s petition. We argue that the Supreme Court should hear the case because the Eighth Circuit’s ruling permits administrative agencies to insulate themselves from judicial review while denying those harmed by their regulations the basic due-process right to meaningfully defend themselves. The Court should hear the case because it offers the opportunity to resolve lower-court disputes about when the right to judicial review arises and whether a defendant can be forced to bear the burden of establishing a court’s jurisdiction.

These are important due-process implications raised in this case, and the Court would do well to adopt a rule consistent with the Eleventh Circuit’s holding on this issue—one that protects the right to immediately and meaningfully defend oneself from unlawful regulations. Otherwise, more and more Americans will end up finding themselves at the bad end of obscene regulatory penalties by unaccountable government agencies, with no real means to defend themselves.

The Court will decide whether to take Walburg v. Nack early in the new year.

Congress Promotes Abuse and Corruption

One story after another emerges about dysfunctional federal programs plagued by waste, fraud, and abuse. The core problem is that the government has grown so large that trying to make it function with efficiency and soundness has become impossible.

But Congress compounds the problem by creating programs that are ideal targets for crooks and scammers, and they resist repealing them even after years of scandal. The Earned Income Tax Credit, for example, has long suffered from an “improper payment” rate of more than 20 percent, which translates into throwing $10 billion of our hard-earned money down the drain every year. Whatever the policy arguments in favor of the program, that level of waste is hugely unfair to taxpayers and the program ought to repealed on this basis alone.

The Washington Post discusses another long-abused activity today—contract set-asides for small businesses. The article profiles how a Virginia businessman hit the jackpot with $1 billion of federal contracts by posing as a “disadvantaged” and “small” business under the Small Business Administration’s 8(a) program. The Post found that this Mercedes-driving owner of a luxury home is certainly not “disadvantaged,” and his business empire is not “small.”   

The whole thing is disgusting, and I suspect a congressional committee will hold an oversight hearing to pretend to be concerned about the case. But the SBA 8(a) program gets abused over and over, as do other federal preference activities, such as Alaska Native Corporations. All such preferences ought to be abolished, and the government should live up to the goal of “Equal Justice Under Law” engraved on the Supreme Court building.

Indeed the entire SBA ought to be abolished. The agency’s programs distort the economy and promote crony capitalism. Americans are sick of dysfunction in Washington, but if they want the government to operate with any degree of integrity and competence they should demand much less of it.

Dallas Buyers Club Is a Terrific Libertarian Movie

Tim Lynch was right. Dallas Buyers Club is a terrific movie with a strong libertarian message about self-help, entrepreneurship, overbearing and even lethal regulation, and social tolerance. Matthew McConaughey, almost unrecognizable after losing 40 pounds, plays Ron Woodroof, a homophobic electrician in 1985 who learns he has AIDS and has 30 days to live. There’s lots of strong language in his denunciation of the kinds of people who get AIDS, which he certainly is not. But after doing some research, he asks his doctor for AZT, the only drug for HIV/AIDS then available, but he wasn’t eligible for the trials then in process. He turns to the black market, finds his way to Mexico, encounters a doctor who tells him that AZT is toxic and that there are better vitamins and drugs, and beats his original prognosis. As it occurs to him that there are plenty of other people in Dallas who could use these drugs, he sees an opportunity to make some money – if he can only learn to deal with gay people.

Soon he’s setting up a “buyers club,” in an attempt to evade FDA regulations on selling illegal or non-approved drugs. He’s got customers – oops, potential members – lining up. He’s on planes to Japan and Amsterdam to get drugs not available in the United States. And at every turn he’s impeded and harassed by the FDA, which insists that people with terminal illnesses just accept their fate. Can’t have them taking drugs that might be dangerous! You’ll be surprised to see how many armed FDA agents it takes to raid a storefront clinic operated by two dying men.

Here’s a Cato study on AIDS and the FDA from 1986. Here’s the original 1992 magazine story about the Dallas Buyers Club, published just before Ron Woodroof died.

Go see Dallas Buyers Club.

The Sugar Program Is Central Planning

House and Senate negotiators are working out details of a big farm bill that may pass this year. No industry in America is as coddled as farming, and no industry is as centrally planned from Washington. The federal sugar program is perhaps the most Soviet of all. Here’s a sketch of the sugar program, which the supposedly conservative, tea party-dominated lower chamber may soon ratify:

  • Purpose. The federal sugar program is designed to enrich sugar producers, such as the wealthy Fanjuls, and rip off sugar consumers by keeping domestic prices artificially high. In recent decades, U.S. sugar prices have often been two or more times world prices. The federal government achieves that result by price guarantees, trade restrictions, production quotas, and ethanol giveaways.
  • Guaranteed Prices. The Department of Agriculture runs a complex loan program to support sugar prices. Essentially, the government promises to buy sugar from processors at a set price per pound. Processors can sell to the government, or they can sell in the marketplace if the (manipulated) market price is higher.
  • Trade Restrictions. Complex import barriers called “tariff rate quotas” help to maintain high domestic sugar prices. Imports are restricted to about one quarter of the U.S. market, and each foreign country (except Mexico) is allocated a particular share of imports.
  • Production Quotas. The government imposes quotas, or “marketing allotments,” on U.S. producers. The United States Department of Agriculture decides what total U.S. sugar production ought to be and then allots quotas to beet and cane sugar producers. Most sugar beet production is in Minnesota, Idaho, North Dakota, Michigan, and California. Most sugar cane production is in Florida and Louisiana.
  • Ethanol Giveaway. If prices fall below certain levels, the USDA is required to fire up a sugar-for-ethanol program to channel sugar away from the food industry.

The USDA is supposed to run the sugar program at no taxpayer cost, which makes the central planning even trickier. The agency must fiddle to adjust imports, quotas, and the ethanol giveaway to optimally fatten the wallets of sugar producers, while not allowing the domestic (manipulated) market price to fall so low as to impose taxpayer costs.

A possible wrench in the works of the current farm bill is that the sugar program is on track to cost taxpayers perhaps hundreds of millions of dollars this year (see here and here). So if conservatives in Congress vote for an unreformed sugar program this year, they would be not only voting for central planning, corporate welfare, higher consumer prices, harm to U.S. food manufacturers, and environmental damage, they would be voting for higher taxes as well.

The Congressional Research Service gives a brief overview of the central planning here. You can see that sugar beets are allotted exactly 54.35 percent of production (definitely not 54.34 or 54.36), and that federal planners have decreed that the just price (“loan rate”) for sugar cane is 18.75 cents per pound (not 18.74 or 18.76). 

The USDA has more on the program here. This table shows that the Fanjuls’ Florida Crystals company received a quota in 2013 of exactly 910,521 tons. So 910,521 is certainly too little and 910,522 is absolutely too much. Now if only the planners at HHS had used such precision in designing the Obamacare website! 

For more on the sugar racket, see here and here.

Big Government Wants in Your (Spare) Bedroom

It’s very expensive to visit many cities in the United States. New York City is perhaps the most expensive, not only because of the finite space in such a densely populated city, but because of numerous taxes on lodging and regulations like rent control that artificially create lodging shortages.

Nevertheless, there is still high demand to visit cities like New York and the market has found a way to make those visits more affordable. AirBnB is an online service that allows members to stay in people’s spare rooms, apartments, and homes in cities all over the world, often much more cheaply than the average hotel stay in the area.

New York State Attorney General Eric Schneiderman, however, is challenging the entrepreneurial innovation—probably under pressure from special interests who would like the government to stifle their competition. This is crony capitalism as usual. As we’ve seen here in DC, established businesses like brick and mortar restaurants and taxicab drivers use their connections to government to squeeze out competition like food trucks and the Uber personal car service that challenge the status quo.

Cato has long supported free markets, entrepreneurship, and innovations to make goods and services more affordable. Government overreach like General Schneiderman’s campaign punishes not only AirBnB hosts and travelers, but also the New York economy as a whole as fewer people will be able to visit New York. I was on Fox Business last night talking about this protectionist government overreach. You can watch that here:

Kludgeocracy’s Lessons for Libertarians

My friend Steve Teles, a political scientist at Johns Hopkins, has an interesting new article in National Affairs entitled “Kludgeocracy in America.” His subject is the American political system’s unfortunate tendency in recent years to generate public policies marred by bewildering, dysfunctional complexity. Statutory page counts serve to illustrate the point: consider the Godzilla and Megalon of recent policy kludges, the Affordable Care Act (906 pages) and Dodd-Frank (849 pages).

Steve identifies many institutional factors that lead to Rube-Goldbergism – in particular, the multiplicity of veto points created by our basic constitutional design (presidential system, bicameral legislature, federalism) and augmented by more recent innovations (increasing use of multiple committee referrals and the Senate filibuster). “Every veto point functions more like a toll booth,” he writes, “with the toll-taker able to extract a price in exchange for his willingness to allow legislation to keep moving.”

But Steve also points the finger at American political culture. Specifically, the ambivalence of public opinion about the proper size and scope of government – captured by the oft-repeated and well-documented adage that Americans are ideological conservatives and operational liberals – drives policymaking in circuitous directions. “The easiest way to satisfy both halves of the American political mind,” according to Steve, “is to create programs that hide the hand of government, whether it is through tax preferences, regulation, or litigation, rather than operating through the more transparent means of direct taxing and spending.”

Steve argues that the rise of “kludgeocracy” is a blight that both progressives and libertarians have a shared interest in resisting. “We have arrived at a form of government,” he contends, “with no ideological justification whatsoever.”

Government Racism on Trial: Schuette and EEOC v. Kaplan

Today the Supreme Court hears argument in the Schuette case, regarding the constitutionality of Michigan voters’ decision to ban racial discrimination and preferences in public university admissions (the equivalent bans for public employment and contracting haven’t been legally challenged). In no conceivable world can the Equal Protection Clause – the constitutional provision that bans racial discrimination – prohibit a state law that bans racial discrimination. The Supreme Court should and almost certainly reverse the lower court’s ridiculous judgment to the contrary, and will likely do so with a great degree of unanimity on the “political structure” aspect of the case.

Coinciding with that oral argument, Cato is getting involved in a lower-court case called EEOC v. Kaplan Higher Education Corp. Here’s the situation: Following several incidents of employee theft, Kaplan University did what any reasonable employer might do in similar circumstances: it instituted heightened screening procedures for new hires. This process included credit checks to filter out potential employees at greater risk of committing theft. These checks made no mention of any applicant’s race and Kaplan didn’t collect any race information from applicants, thus making the hiring process both race-neutral and race-ignorant. Nevertheless, the Equal Employment Opportunity Commission, which itself uses credit checks in hiring decisions, sued Kaplan under Title VII of the Civil Rights Act, claiming that the use of credit checks has an unlawfully disparate impact on African American applicants.

Because Kaplan doesn’t keep racial data for applicants, the EEOC had to come up with its own data to prove its case. The agency thus created a team of “race raters,” a group of seemingly random people who sorted Kaplan’s job applicants into racial categories based only on the applicant’s name and DMV photo. (You can’t make this stuff up!) Because of the unscientific and unreliable nature of this data, the EEOC was soundly rebuffed in the federal district court in Ohio where it brought its case.

Now before the U.S. Court of Appeals for the Sixth Circuit, the EEOC is continuing its awkward crusade against employers’ use of credit checks. Cato, joining the Pacific Legal Foundation, the Center for Equal Opportunity, the Competitive Enterprise Institute, and Project 21, has filed a brief supporting Kaplan and arguing that the EEOC’s use of “race raters” and its incautious application of disparate-impact theory violate the Fifth Amendment’s equal protection guarantee.

Classifying people into racial categories based on their name and physical features is a demeaning violation of the Constitution’s mandate that individuals be treated as individuals and not reduced to mere members of a racial class. We also argue that the EEOC’s irresponsible use of disparate-impact theory to attack reasonable business practices contradicts the spirit of equal protection by forcing employers to consider race for all of their business-related decisions in order to avoid bureaucratic entanglement.

When combined with the ongoing Fisher v. UT-Austin saga, we see that while Jim Crow is dead, various government actors continue to offer massive resistance to the ideal of a colorblind society.