Topic: Regulatory Studies

The Cost of Regulation

Gordon Crovitz has a nice piece in the Wall Street Journal, Monday May 5, titled “The end of the permissionless web” which sparks several thoughts.

What has made the Internet revolutionary is that it’s permissionless. No one had to get approval from Washington or city hall to offer Google searches, Facebook  profiles or Apple  apps, as Adam Thierer of George Mason University notes in his new book, “Permissionless Innovation.” [Available free and ungated here. - JC]

The central fault line in technology policy debates today can be thought of as ‘the permission question,’ ” Mr. Thierer writes. “Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?”

This brings to mind a recent discussion I’ve had with Glen Weyl and Eric Posner on their proposal for a financial FDA, in which financial companies have to get prior approval for any new products (here and here). I don’t think I ever expressed well just how much it strangles growth and innovation for companies to have to prove ahead of time, to the satisfaction of discretionary regulators and politicians, that their products are good. The following examples make the point forcefully.

The Case for Fishery Property Rights

In the last few days, some commentators have praised the role of federal regulation in enhancing the health of fishing stocks. Brad Plumer at Vox.com, Paul Krugman at the New York Times, and Kevin Grier at Cherokee Gothic, have all weighed in.

The current issue of Regulation features a cover story that offers insight into what government interventions work and what doesn’t in the management of fisheries.

Authors Jonathan Adler and Nathaniel Stewart argue that fisheries are a classic example of what economists call the “Tragedy of the Commons.” Open access resources such as fishing stocks are overharvested because no one owns the rights to the harvest. Instead, everyone has an incentive to grab what fish they can before another boat does.

The traditional policy response to the commons problem has been regulating the length of the fishing season or limiting the total amount of fish that can be caught. The problem is these policies don’t change the incentives that lead fishermen to race after and grab as many fish as they can. For example, codfish quotas in the Gulf of Maine and Georges Bank were cut 77% and 61%, respectively in 2013. Such regulations do not fix the problem because the incentives for boats to get faster or bigger remain.

A better solution would be a system of Individual Transferable Quotas. These quotas assign to individuals a right to a small portion of the total allowed catch in a fishery. This “catch share” ends the incentive to race and grab because a fisher owns the rights to a defined amount of fish, and no one can take that right from him. A 2012 study of 15 catch-share programs in the United States and Canada found that, because the programs worked so well, fishinging seasons were lengthened from 63 to 245 days. And the introduction of the catch-share systems allowed fish populations to recover from previous overharvesting. After five years of catch share implementation, catch limits increased 13 percent on average.

Fishery property rights a vast improvement over traditional fisheries regulation.

FERC’s Prosecutorial Tactics

Joseph Rago of the Wall Street Journal reports on an outrageous enforcement action by the Federal Energy Regulatory Commission against brothers, Rich and Kevin Gates.  Excerpt:

[FERC] began demanding information and taking depositions in fall 2010. At first, the Gates brothers tried to adhere to the insider playbook and hired an attorney from White & Case, a D.C.-based law firm that does frequent business in front of FERC. The insular Washington energy bar trafficks in political connections, but those aren’t so useful for clients who maintain their innocence.

Things started to turn for Kevin Gates, he recalls, during his second full-day deposition with the lead FERC enforcement lawyers on the Powhatan matter, Steven Tabackman and Thomas Olson. “I would suggest that it was intimidation tactics, aggressive behavior, which I guess is natural for a federal prosecutor, maybe what you would expect,” he says. “But there were also a lot of questions asked and behavior that suggested to me that we were seeing the world very differently and—I would suggest—they didn’t know what they were talking about.”

Mr. Gates was asked to leave the room and sat in the hallway while his lawyer conferred with the feds. The lawyer emerged to relate what the FERC enforcement team had proposed: “Kevin’s a businessman, isn’t he? He knows that it’s cheaper to settle than it is to fight this investigation.” Right then, Mr. Gates says, “I realized that we had a big problem on our hands. This was unlike anything we’d ever seen before at a regulatory agency.”

The Gates brothers fired the white-shoe practice and brought on Bill McSwain of Drinker Biddle, a Philadelphia-area lawyer who “didn’t interface much with FERC. He also used to be a Marine sniper, so he had a different approach to the world.” Mr. McSwain introduced himself to FERC by calling their conduct contrary to “established law, as well as common sense,” and that was one of his subtler letters…

[FERC’s regulators] have specialized in retroactive punishments for conduct that was legal at the time. Most of these cases never go to court and end with settlements against politically disfavored defendants like J.P. Morgan (that one, like Powhatan, was led by Mr. Olson). Most companies roll over because their future business interests depend on preserving good regulatory graces and favorable FERC rulings. The Gates brothers are unusual in that their livelihoods are elsewhere, but the illogic, intimidation tactics and erosion of due process in their investigation are typical. [Emphasis added].

Read the whole thing.  As the article notes, most business people surrender to the bullying tactics of regulators.  By taking their case public and fighting back, the Gates brothers may not only win their case, but might establish some favorable legal precedents that will help others in the future.  And for that, they deserve our thanks.

For related Cato work on the erosion of due process, go here, here, here, and here.

Courts Must Put Administrative Agencies in Their Place

In order to govern the sprawling reach of the U.S. administrative state—its countless agencies, bureaucracies, departments, and other regulatory bodies—our courts have come to rely greatly on what is called Chevron analysis. Taking its name from the 1984 Supreme Court case in which it was pronounced, Chevron v. National Resources Defense Council, this doctrine advises when and to what extent courts are to defer to agency actions.

Since agencies can only exercise the legislative powers granted to them by Congress, Chevron counsels that where Congress has spoken clearly on an issue, the statutory text controls, but where Congress is ambiguous or silent, the agency is permitted to fill the gap with its own rules and decisions.

Naturally then, agencies that want more rulemaking power than has been “clearly” granted to them by Congress—so, all of them—find ways to invent ambiguity. In a recent ruling, a panel of the U.S. Court of Appeals for the Fifth Circuit appears to be trying to help them.

Here’s the case: Seeing that the IRS’s definition of “taxable compensation” differed from Congress’s, BNSF Railway sought a refund of overpaid taxes on certain elements of its employee compensation plans—and won on all counts before the district court. On appeal, however, a Fifth Circuit panel reversed, employing the “dictionary rule”—a truncated version of the full, traditional statutory analysis typically required, and an approach that has already been rejected by an en banc (full) Fifth Circuit. This short analysis skips the important, rigorous examination into whether Congress has spoken on the issue (an examination required by Chevron) and looks merely to see if the word can have more than one dictionary meaning. As tends to be much more likely with this type of scant analysis, the Fifth Circuit panel found that Congress was ambiguous, which in turn allowed the IRS’s discretionary definition to prevail.

BNSF has now filed for a rehearing of the case before the en banc Fifth Circuit. Cato has filed a brief supporting this request, joined by tax law expert Patrick J. Smith and administrative law professors Michael Moreland, Jeffrey Pojanowski, and Nathan Sales. As the administrative state continues its unending spew of rules and regulations, the role of the courts as a gatekeeper of administrative authority becomes increasingly vital to maintaining any kind of sanity. That role requires courts to apply Chevron diligently and not to skimp on the considerable duty of determining where Congress’s authority ends and the domain of unelected bureaucrats begins.

By failing to make a rigorous examination, the Fifth Circuit panel adopted an approach that, if allowed to gain a foothold, could threaten a (further) massive shift of governing power away from our elected Congress to a faceless, hardly accountable bureaucracy. In our brief, we urge the Fifth Circuit to send the message that it takes Chevron and its job of checking agency authority seriously by rehearing the case and reversing the panel decision.

The Fifth Circuit will be deciding later this spring whether to take up BNSF Railway Co. v. United States. If it doesn’t, the next step is a petition to the Supreme Court.

This blogpost was coauthored by Cato legal associate Julio Colomba.

New Frontiers in Regulatory Overreach

In most cases, excessive regulation doesn’t surprise me all that much.  It usually focuses on familiar industries, such as automobiles.  So, for example, when the National Highway Traffic Safety Administration came up with a rule mandating that all cars and light trucks sold in the United States have rearview cameras, it wasn’t a great shock.

But every now and then, regulators do something that catches me off guard.  This is from the Economist:

Vancouver’s ban on doorknobs in all new buildings, which went into effect last month, … has provoked a strong reaction from the door-opening public and set off a chain reaction across the country as other jurisdictions ponder whether to follow Vancouver’s lead. 

Wait, what?? They are banning doorknobs? I confess that this threw me when I first read it. Were they going to require some sort of Star Trek-like eyeball scanning device, along with an automatic door?

Turns out it wasn’t anything quite so techonoligcally advanced. They just want “levered doorhandles” instead. Here’s their rationale:

The war on doorknobs is part of a broader campaign to make buildings more accessible to the elderly and disabled, many of whom find levered doorhandles easier to operate than fiddly knobs. Vancouver’s code adds private homes to rules already in place in most of Canada for large buildings, stipulating wider entry doors, lower thresholds and lever-operated taps in bathrooms and kitchens.

I would have thought doorknobs were pretty easy to deal with, but OK, maybe levers are easier. But I’m not sure how you go from “some people find levers easier” to “everyone must use levers!”

Furthermore, perhaps levers are too easy:

True, elderly and disabled people find it easier to operate doors with handles. But so do bears. In British Columbia, bears have been known to scavenge for food inside cars—whose doors have handles, knob advocates point out. Pitkin County, Colorado, in the United States, has banned door levers on buildings for this very reason. One newspaper columnist in the pro-knob camp has noted that the velociraptors in “Jurassic Park” were able to open doors by their handles.

Obviously, bears don’t vote (nor do velociraptors), so we probably can’t attribute these developments to regulatory capture by the bear lobby, which wants easier access to people food (are campers getting more careful with their “pic-a-nic” baskets these days?). Nevertheless, something seems a little off in the regulatory process in Vancouver.

Liberalizing Investment in Cuba

I’m no Cuba expert, but I have followed the events of recent years with interest. It seems that there have been tentative steps towards liberalizing the Cuban economy, as well as slightly better economic relations between the United States and Cuba. I’m hopeful the long-term trend is towards Cuba becoming a free market democracy, with normal relations with the United States.

In the short-term, though, I’m frustrated by how the “liberalization” of foreign investment is being carried out there. Here’s the Economist:

But on March 29th Cuba’s parliament approved a new foreign-investment law that for the first time allows Cubans living abroad to invest in some enterprises (provided, according to Rodrigo Malmierca, the foreign-trade minister, they are not part of the “Miami terrorist mafia”). The aim is to raise foreign investment in Cuba to about $2.5 billion a year; currently Cuban economists say the stock is $5 billion at most.

The law, which updates a faulty 1995 one, is still patchy, says Pavel Vidal, a Cuban economist living in Colombia. It offers generous tax breaks of eight years for new investments. However, it requires employers to hire workers via state employment agencies that charge (and keep) hard currency, vastly inflating the cost of labour.

Welcoming new foreign investment is great. Here’s the problem, though: In order to liberalize investment, a government really doesn’t need to do anything fancy. It can just say, “foreign investment is permitted, and will be treated like domestic investment.” Very simple. Furthermore, lower tax rates and reduced regulatory burdens can help encourage such investment. Again, very simple.

In practice, though, governments make this process difficult and less liberalizing. Here, what Cuba seems to have done is offered special tax breaks for new foreign investments, and then subjected receipt of these tax advantages to certain hiring conditions. In effect, it introduces two distortions as part of the liberalization process: favoring new foreign investors over other investors through the tax code and then subjecting the favored investors to additional regulation.

To be clear, Cuba is not the only country who does this; this is what many countries do. But there’s just no reason to approach it this way. The simpler way, with low tax rates for all investors, is the more economically beneficial way. Unfortunately, it seems as though “liberalization” is often just a catchword, and governments insist on using their power to intervene in private economic transactions, even when ostensibly moving away from interventionist policies.

More Drinking Hours, Fewer Accidents

Does restricting access to alcohol reduce traffic accidents? Not necessarily, according to a recent study by economists from the University of Lancaster: 

Recent legislation liberalised closing times with the object of reducing social problems thought associated with drinking to “beat the clock.” Indeed, we show that one consequence of this liberalization was a decrease in traffic accidents. This decrease is concentrated heavily among younger drivers. Moreover, we provide evidence that the effect was most pronounced in the hours of the week directly affected by the liberalization; late nights and early mornings on weekends.

The authors also suggest that the restrictive closing times caused more traffic congestion (everyone left the pubs at the same time), increasing the scope for accidents.

So more freedom seems to generate better outcomes, presumably because most people use increased freedom sensibly.