Topic: Regulatory Studies

Why Did Western Nations Continue to Prosper in the 20th Century even though Fiscal Burdens Increased?

In the pre-World War I era, the fiscal burden of government was very modest in North America and Western Europe. Total government spending consumed only about 10 percent of economic output, most nations were free from the plague of the income tax, and the value-added tax hadn’t even been invented.

Today, by contrast, every major nation has an onerous income tax and the VAT is ubiquitous. Those punitive tax systems exist largely because—on average—the burden of government spending now consumes more than 40 percent of GDP.

historical-size-of-govt

To be blunt, fiscal policy has moved dramatically in the wrong direction over the past 100-plus years. And thanks to demographic change and poorly designed entitlement programs, things are going to get much worse, according to Bank of International Settlements, Organization for Economic Cooperation and Development, and International Monetary Fund projections.

While those numbers, both past and future, are a bit depressing, they also present a challenge to advocates of small government. If taxes and spending are bad for growth, why did the United States (and other nations in the Western world) enjoy considerable prosperity all through the 20th century? I sometimes get asked that question after speeches or panel discussions on fiscal policy. In some cases, the person making the inquiry is genuinely curious. In other cases, it’s a leftist asking a “gotcha” question.

Long-Run GDP

I’ve generally had two responses.

International Regulatory Conflict

My colleague Peter Van Doren posted here yesterday about a new National Highway Traffic Safety Administration (NHTSA) rule which mandates that “all cars and light trucks sold in the United States in 2018 have rearview cameras installed.” I’m going to leave the analysis of the domestic regulatory aspects of this issue to experts like Peter. I just wanted to comment briefly on some of the international aspects.

In particular, what if other governments decide to regulate in this area as well and they all do it differently?  That would mean significant costs for car makers, as they would have to tailor their cars to meet the requirements of different governments. Note that the U.S. regulation doesn’t just say, “cars must have a rear-view camera.”  Rather, it gets very detailed:

The final rule amends a current standard by expanding the area behind a vehicle that must be visible to the driver when the vehicle is shifted into reverse. That field of view must include a 10-foot by 20-foot zone directly behind the vehicle. The system used must meet other requirements as well, including the size of the image displayed for the driver. 

In contrast to a market solution, which provides flexibility as to what will be offered, the regulatory approach has very specific requirements.

As far as I have been able to find out, the United States is the first to regulate here, but others are likely to follow. When the EU or Japan turn to the issue, for example, will they develop regulations that are incompatible with the U.S. approach? Will there be a proliferation of conflicting regulations?

In theory, it’s easy to avoid these problems. Smart regulators would recognize that their foreign counterparts’ regulations are equally effective. But in other areas of automobile regulation, we haven’t seen enough of this cooperation. The rear-view camera issue provides an opportunity for regulators from different countries to work together to avoid making regulation even more costly than it already is.

NHTSA’s Rearview Camera Mandate

Last week the National Highway Traffic Safety Administration (NHTSA) completed rulemaking that mandated that all cars and light trucks sold in the United States in 2018 have rearview cameras installed.

In 2008 Congress enacted legislation that mandated that the NHTSA issue a rule to enhance rear view visibility for drivers by 2011.  Normally, such a delay would be held up as an example of bureaucratic ineptitude and waste. But in this case, NHTSA was responding to its own analysis that determined (p. 143) that driver error is the major determinant of the effectiveness of backup assist technologies including cameras.

In addition, NHTSA concluded that the cost per life saved from installation of the cameras ranged from about 1.5 times, to more than 3 times the 6.1 million dollar value of a statistical life used by the Department of Transportation to evaluate the cost effectiveness of its regulations.  NHTSA waited until the possibility of intervention by the courts forced it to issue the rule.  The problem in this case is Congress overreacting to rare events rather than the agency.

For more on auto safety regulation, see Kevin McDonald’s piece in Regulation here.

FSOC’s Failing Grade?

All the recent hype over the legitimacy of high frequency trading has overshadowed another significant event in financial regulation: In a speech in Washington, D.C., yesterday Securities and Exchange Commissioner Luis Aguilar offered some fairly strong criticisms of recent actions by the Financial Stability Oversight Council (FSOC). The speech was significant because it is the first time that a Democratic commissioner has criticized the actions of one of the Dodd-Frank Act’s most controversial creations. (To date, only the Republican commissioners have criticized the FSOC, and we all know that Republicans don’t much like Dodd-Frank.) Indeed, Aguilar’s statements indicate just how fractured and fragmented the post-Dodd-Frank “systemic risk monitoring” system is.

At issue is the FSOC’s recent foray into the regulation of the mutual fund industry. Aguilar described the FSOC’s actions as “undercut(ting)” the SEC’s traditional authority and described a major report on asset management by the FSOC’s research arm, the Office of Financial Research, as “receiv(ing) near universal criticism.”

He went on to note that “the concerns voiced by commenters and lawmakers raise serious questions about whether the OFR’s report provides (an) adequate basis for the FSOC to designate asset managers as systemically important … and whether OFR is up to the tasks called for by its statutory mandate.”

For those of us who have been following this area for a while, the answer to the latter question is a resounding “no”. The FSOC claims legitimacy because the heads of all the major financial regulatory agencies are represented on its board. Yet it has been clear for a while that the FSOC staff has been mostly off on a frolic of its own.

Aguilar notes that the SEC staff has “no input or influence into” the FSOC or OFR processes and that the FSOC paid scant regard to the expertise or industry knowledge of the traditional regulators. Indeed, the preliminary actions of the FSOC in determining whether to “designate” mutual funds as “systemic” echoes the Council’s actions in the lead-up to its designation of several insurance firms as “Systematically Important Financial Institutions” that are subject to special regulation and government protection. It should be remembered that the only member of the FSOC board to vote against the designation of insurance powerhouse Prudential as a “systemic nonbank financial company” was Roy Woodall, who is also the only board member with any insurance industry experience. And in the case of mutual funds and asset managers, the quality of the information informing the FSOC’s decisions—in the form of the widely ridiculed OFR study—is even weaker. The process Aguilar describes, where regulatory agencies merely rubber stamp decisions made by the FSOC staff, is untenable (in part because the FSOC staff itself has no depth of experience, financial or otherwise).

Aguilar’s comments could be viewed as the beginning of the regulatory turf war that was an inevitable outcome of Dodd-Frank’s overbroad and contradictory mandates to competing regulators. But the numerous and well documented problems with the very concept of the FSOC means that it is time for Congress to pay some attention to Aguilar’s comments and rein in the FSOC’s excessive powers. 

IRS Shouldn’t Force Taxpayers Into Tax-Maximizing Transactions

While tax evasion is a crime, the Supreme Court has long recognized that taxpayers have a legal right to reduce how much they owe, or avoid taxes all together, through careful tax planning. Whether that planning takes the form of an employee’s deferring income into a pension plan, a couple’s filing a joint return, a homeowner’s spreading improvement projects over several years, or a business’s spinning-off subsidiaries, so long as the actions are otherwise lawful, the fact they were motivated by a desire to lessen one’s tax burden doesn’t render them illegitimate.

The major limitation that the Court (and, since 2010, Congress) has placed on tax planning is the “sham transaction” rule (also known as the “economic substance” doctrine), which, in its simplest form, provides that transaction solely intended to lessen a commercial entity’s tax burden, with no other valid business purpose, will be held to have no effect on that entity’s income-tax assessment. The classic sham transaction is a deal where a corporation structures a series of deals between its subsidiaries, producing an income-loss on paper that is then used to lower the parent company’s profits (and thus its tax bill) without reducing the value of the assets held by the commercial entity as a whole.

We might quibble with a rule that effectively nullifies perfectly legal transactions, but a recent decision by the U.S. Court of Appeals for the Eighth Circuit greatly expanded even the existing definition of “economic substance,” muddying the line between lawful tax planning and illicit tax evasion. At issue was Wells Fargo’s creation of a new non-banking subsidiary to take over certain unprofitable commercial leases. Because the new venture wasn’t a bank, it wasn’t subject to the same stringent regulations as its parent company. As a result, the holding company (WFC Holdings Corp.) was able to generate tens of millions of dollars in profits.

FBI Seizes Antiquities First, Asks Questions Later

An extraordinary and disturbing story just out from the Indianapolis Star/USA Today

WALDRON, Ind. — FBI agents Wednesday seized “thousands” of cultural artifacts, including American Indian items, from the private collection of a 91-year-old man who had acquired them over the past eight decades.

An FBI command vehicle and several tents were spotted at the property in rural Waldron, about 35 miles southeast of Indianapolis.

The Rush County man, Don Miller, has not been arrested or charged.

So if the owner hasn’t been arrested or charged, what’s the basis of the raid? 

Robert A. Jones, special agent in charge of the Indianapolis FBI office, would not say at a news conference specifically why the investigation was initiated, but he did say the FBI had information about Miller’s collection and acted on it by deploying its art crime team.

FBI agents are working with art experts and museum curators, and neither they nor Jones would describe a single artifact involved in the investigation, but it is a massive collection. Jones added that cataloging of all of the items found will take longer than “weeks or months.”…

The aim of the investigation is to determine what each artifact is, where it came from and how Miller obtained it, Jones said, to determine whether some of the items might be illegal to possess privately.

Jones acknowledged that Miller might have acquired some of the items before the passage of U.S. laws or treaties prohibited their sale or purchase.

Might be illegal. Or might have been acquired lawfully. They’re not saying! But to satisfy its curiosity the government gets to seize everything and sort through at its leisure over longer than “weeks or months.” 

It doesn’t sound as if the artifacts were in some sort of immediate danger:

In addition to American Indian objects, the collection includes items from China, Russia, Peru, Haiti, Australia and New Guinea, he said. 

The objects were not stored to museum standards, Jones said, but it was apparent Miller had made an effort to maintain them well.

I’ve written previously, elsewhere and in this space, about 

the rise of a new “antiquities law” in which museums and private collectors have come under legal pressures to hand over (“repatriate”) ancient artifacts and archaeological finds to governments, Indian tribes and other officially constituted bodies, even when those artifacts have been in legitimate collector hands for 100 or more years with no hint of force or fraud.

Further regulatory regimes covering exotic and endangered animal and plant material make it dangerous to let the feds anywhere near your high-end guitar or other wooden artifact, and will soon make it unlawful to sell or move across state lines your family’s antique ivory-keyed piano (more here).

P.S. Coverage at broadcaster WISH-TV makes the SWAT-like federal occupation of Don and Sandra Miller’s property (an FBI “command center” and “massive tents” now surround the family’s home) seem even more appalling. Locally famous for his collecting, Miller has been anything but secretive about his holdings, which were featured in a four-part series in a local newspaper. 

Is Religious Liberty an “Exception” to Government Rule?

In a free society, employers would be at liberty to offer their employees group health insurance, if they wished, and to offer whatever coverage they wished to offer. In the Supreme Court today, however, so basic a premise barely surfaced during oral argument in Sebelius v. Hobby Lobby, the Obamacare “contraceptive mandate” case. Rather, Justices Sotomayor, Kagan, and Ginsburg, clearly supporting the mandate, pressed Hobby Lobby’s attorney Paul Clement as to whether an “exception” should be provided for religious employers who are otherwise required by regulation to offer contraceptive coverage, and whether such an exception could be limited or instead would have no principled bounds. By contrast, Chief Justice Roberts, Justice Kennedy, and even Justice Breyer were at pains to show how such a religious “accommodation” could in fact be limited.

Thus have we come to a point at which religious liberty is recognized, if it is, as an exception to the general rule that government may require us to act as it dictates—and we have to be careful not to extend that accommodation too far lest it gobble up the rule.

That’s a remarkable inversion of First Principles: government first, liberty second, as a limited exception. True, we don’t allow the religious, in the name of religious liberty, to proselytize by the sword. And we don’t because that “exception” is perfectly consistent with a general rule in favor of liberty and against forced association—as in murder. Here, however, religious employers are asking simply to be free from a rule that would otherwise restrict their liberty or require forced association, a rule that would force them to choose between not offering their employees insurance, and paying the Obamacare penalty for so choosing, and offering their employees coverage that offends the employers’ religious beliefs. And it’s no answer to say that, absent the mandate, the employees’ liberty is restricted. They’re at perfect liberty to obtain contraceptives, but not free to force their employer to provide them.

In other words, if you start with freedom of association, then it’s association that must be justified, by mutual consent, not individual liberty. But if “we’re all in this together”—as President Obama so often says and as Obamacare so clearly manifests—then liberty has to be treated as an “exception,” an “accommodation,” carved out from that general rule. For more on this see here and here.