Topic: Regulatory Studies

Science Fiction Authors Lost in the Myths of the 1950s

I’ve been watching “Childhood’s End” on the SyFy channel this week. I remember the book, a 1953 novel by Arthur C. Clarke, being a big deal when I was in junior high school. My bookish friends and I all read it. But I had little memory of the plot, so watching the show is an entirely new experience. It’s well done, mysterious, maybe a little slow. But I noticed one thing that reminds me that it was written by a British author educated in the first half of the 20th century.

The technologically superior alien Overlords arrive, take control of earth, and impose their rule on us without any real challenge. They announce that they will end war, poverty, and injustice. And they do, just like that. Sure, a few cranks in the #freedomleague complain that we’re not free, but nobody denies the peace, abundance, and good health that the Overlords have delivered. Earthlings don’t even have to work any more. That is, the book and the miniseries don’t even stop to ponder whether absolute centralized government – terrestrial or alien – could deliver more peace, harmony, and abundance than a market system. It’s just taken for granted. 

And that’s a common theme in mid-century sci-fi. In his Foundation series, Isaac Asimov imagined a branch of mathematics known as psychohistory that could predict the future. Because human action, taken en masse, can be predicted for millennia.

And as I wrote on Ira Levin’s death, his wonderful libertarian novel This Perfect Day reflected similar assumptions about centralization and government planning. The novel is set 141 years after the Unification, the establishment of a world government guided by a central computer. The computer, Uni, provides all the members of the human race with everything they need - food, shelter, employment, psychotherapy, and monthly “treatments” that include vaccines, contraceptives, tranquilizers, a drug to prevent messy beard growth, and a medication that reduces aggressiveness and limits the sex drive. Everyone loves Uni, which gives them everything they could want, except for a few hardy rebels who just value freedom.

The Latest in Regulation

Would more vigorous antitrust enforcement reduce income inequalityHow should genetically modified organisms be regulatedHow should government regulate speech by professionals?

The answers to these questions can be found in the Winter issue of Regulation.

The short answer to the first question is no.  For the longer answer read Professor Dan Crane’s article.  The short answer to the second question, provided by Henry Miller and John J. Cohrssen, is that the regulation of biotechnology should be proportional to the risks it creates.  And those are generally less than the risks created by traditional cross breeding techniques that are widely accepted and unregulated.  Tim Sandefur rhetorically answers the third question by asking why can government regulate professionals’ speech, when non-professionals can freely engage in the same speech though they lack the professional expertise?

In another article on professional speech, University of Michigan, Flint professor Thomas Hemphill explores the implications of recent court rulings about what manufacturers can “say” to health professionals about so-called “off-label” uses of prescription drugs.

Many believe that early-childhood-intervention programs reduce the educational achievement gap between low-income and other children.  Many of these programs have been subject to random-assignment evaluation and the results often do not show positive effects.  Even though all policy professionals support the use of scientific evaluation of social programs in theory, many have resisted the implications of negative evidence for the particular programs they favor.  University of Missouri Law professor Philip Peters examines the evaluation of such programs and argues we should follow the evidence and terminate those programs that do not work.

Cal State, Northridge economist Robert Krol finds that transportation project projections consistently under predict costs by at least 25 percent.  They also over predict rail passenger traffic and under predict road utilization.  And these errors have not improved over time.

In “Using Delegation to Promote Deregulation” legal scholar Michael Rappaport argues that while libertarians would prefer that Congress enact statutes with explicit instructions for agencies, most laws delegate policy problem definitions and solutions to agencies.  Because efforts to fight Congressional delegation to agencies appear ill-fated, Rappaport advocates the creation of a special agency that would have the same incentives and abilities to deregulate that regulatory agencies have to regulate.

The review section contains reviews of books on a range of interesting topics. Included are reviews of Edwards Stringham’s new book Private Governance by Thomas Hemphill, Christopher and Rachel Coyne’s Flaws and Ceilings by David Henderson, and George Leef’s review of Daniel DiSalvo’s Government Against Itself.

Finally, my Working Papers column this issue describes papers on air pollution, CAFE standards, and cigarette taxation.

Read the full issue here.

You Should Be Able to Go to Federal Court with Your Federal Constitutional Claims

Thirty years ago, in the case Williamson County Regional Planning Commission v. Hamilton Bank (1985), the Supreme Court created a rule that effectively bars regulatory-takings plaintiffs from ever receiving the just compensation they are due under the Fifth Amendment. Williamson County’s noxious rule says that federal courts won’t hear Takings Clause claims until the state has not only issued a final order taking the plaintiff’s property but the plaintiff has been denied just compensation after seeking it “through the procedures the State has provided for doing so.”

This state-litigation requirement means that when the government issues a regulation that diminishes property values—for instance, by saying that the owner can’t do any excavation on rocky terrain that can’t be developed without it, as was the case in Arrigoni Enterprises v. Town of Durham—the landowner can’t file its claim in federal courts until it has lost in state court. Not only does this state-litigation rule severely delay the landowner’s remedy; in most cases, it means that the taking will go unremedied altogether.

One reason to have federal courts is to ensure that citizens whose rights have been violated by their state can have their rights vindicated by a truly impartial judge. The state-litigation requirement, however, often prevents federal courts from ever seeing such cases because a number of legal doctrines intended to promote fairness and efficiency bar the plaintiff from even seeking redress in federal court after a state court has already considered the matter. This means that the only way for many plaintiffs to get federal judicial review is to ask the U.S. Supreme Court to take their case after exhausting state courts—an uphill battle to say the least.

Arrigoni Enterprises decided not to pursue its federal Takings Clause claim in state court, and thereby presents the Supreme Court with the opportunity to overrule Williamson County’s state litigation requirement once and for all. Cato has filed a brief supporting Arrigoni’s petition. We argue that Williamson County’s rule was not tenable when written and has proven unworkable. The rule relegates Takings Clause claims to second-class status among other federal constitutional provisions, even though these claims are no more premature and state courts have no greater experience to address them than any other constitutional claims.

Four justices indicated 10 years ago in San Remo Hotel v. San Francisco (2005) that they would be willing to reconsider the wisdom of the state-litigation requirement in an appropriate case. That case has arrived, but if the Court declines to overrule the requirement outright it should at least resolve the current circuit split by ruling that the state-litigation rule is merely prudential such that federal courts can disregard it under the right circumstances and hear Takings Clause cases not litigated through state courts. 

This post, and the brief it discusses, was co-authored by Cato legal associate Jayme Weber.

Excessive Fines Are Unconstitutional

Fool me once, shame on you; fool me twice, shame on me. In this case, the Palmetto State, following the lead of other state and federal regulators, has added a new twist to that old saying: fool no one, pay $124 million to the treasury.

Ortho-McNeil-Janssen (“Janssen”) is a pharmaceutical company that distributes a popular antipsychotic drug known as Risperdal. In the 1990s and early 2000s, Risperdal was in fierce competition for market dominance and made some questionable claims about the drug’s side effects. The FDA investigated and compelled the company to correct some defective warning labels.

South Carolina regulators, however, despite the FDA’s settlement of the matter, commenced state action against Janssen under the state’s Unfair Trade Practices Act. That action worked its way up to the state supreme court, which ultimately confirmed a $124 million penalty against the company. That massive fine was sustained on the theory that each labeling violation was its own violation of the statute, worth up to $5,000 each, rather than the overall labeling violation counting as one singular misdeed.

Such a large penalty, disproportionate to the actual harm caused (none) runs afoul of the Eight Amendment requirement that “excessive fines [not be] imposed.” Cato has filed an amicus brief calling for the U.S. Supreme Court to reverse the decisions below and clarify the scope of the Excessive Fines Clause.

South Carolina’s statute, like many similar state laws, is poorly worded and fails to define whether each individual manifestation of a regulatory violation is cognizable as an offense. Taking advantage of that lack of specificity, South Carolina converted a potential $5,000 fine into a $124 million one. Because of the huge numbers that can be achieved by multiplying even modest per-violation fines, state and federal regulators are often able to secure grandiose settlements and thereby insulate their fines from judicial review.

Moreover, the state supreme court here accepted this theory in the face of no evidence of harm resulting from the allegedly improper statements. The U.S. Supreme Court has said that under the Excessive Fines clause, the monetary penalty imposed shall not be “grossly disproportional to the gravity of the defendant’s offense.” United States v. Bajakajian (1998). A finding of no harmful effect attached to 9- or 10-figure penalties blows any notion of proportionality out of the water.

And South Carolina is not the only state where this is occurring. For example, an Arkansas court imposed a $1.2 billion penalty for purported misstatements about the same drug at issue here, on the theory that the Arkansas Medicaid Fraud False Claims Act was violated each time the drug was prescribed or re-filled. Other cases have revealed penalties as high as 20 or 46 times the harm suffered by consumers.

The Supreme Court should take this opportunity to reaffirm that the Eighth Amendment’s Excessive Fines Clause imposes a judicially enforceable limit on grossly disproportional fines. It will consider next month whether to take up Ortho-McNeil-Janssen Pharmaceuticals, Inc. v. South Carolina.

Congress’s Diminishing Power of the Purse

One of the most important aspects of the separation of powers is the commitment of the power of the purse to the legislative branch. It constrains the executive and the judiciary from engaging in unilateral action without congressional approval. If there’s no approval, there will be no money to pay for the executive action, as the rule would have it. Unsurprisingly, with the advent of the administrative state and an aggressive executive, this power has been significantly diminished in modern times

Indeed, Article I, Section 8 of the Constitution provides expressly that “[t]he Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts,” to the exclusion of any other branch’s exercise of those powers. The upshot: the separation of powers, especially Congress’ power over appropriation priorities, is eroded as executive agencies and executive allies have access to funds not appropriated by Congress.

In order to keep their power of the purse intact, Congress originally enacted the Miscellaneous Receipts Statute in 1849. That law is now codified today in Title 31 of the U.S. Code. It requires all government officials in receipt of funds, such as settlements from civil or criminal enforcement, to deposit that money with the Treasury. As a structural point, the law effectively aims at stopping executive agencies from self-funding through enforcement or other receipts of money. It maintains their dependence on Congress for their annual appropriation.

However, the Justice Department has found a way around this law to fund political allies on the left or executive priorities without congressional approval: settlement agreements. As Wall Street Journal columnist Kimberley Strassel recently reported, “[i]t works like this: The Justice Department prosecutes cases against supposed corporate bad actors. Those companies agree to settlements that include financial penalties. Then Justice mandates that at least some of that penalty money be paid in the form of “donations” to nonprofits that supposedly aid consumers and bolster neighborhoods.”

The trick here is that Justice never “receives” the funds within the meaning of the Miscellaneous Receipts Statute, and thus has no requirement to deposit the funds it exacts from defendants with the Treasury—the donations are made directly without money ever being received into Justice’s hands.

Despite the fact that Justice Guidance discourages the practice because “it can create actual or perceived conflicts of interest and/or other ethical issues”—and, indeed, it was almost banned in 2008 due to perceptions of abuse—Justice continues to push this method of funding political allies and favored priorities of the executive. In fact, “[i]n 2011 Republicans eliminated the Housing Department’s $88 million for ‘housing counseling’ programs,” Strassel reports, “which spread around money to groups like La Raza. Congress subsequently restored only $45 million, and has maintained that level. . . [B]ank settlements pour some $30 million into housing counseling groups, thereby essentially restoring all the funding.”

Happy Repeal Day

Today is a great day for freedom. On this day in 1933, the 21st Amendment was ratified, thus repealing Prohibition. My former colleague Brandon Arnold wrote about it a few years ago:

Prohibition isn’t a subject that should be studied by historians alone, as this failed experiment continues to have a significant impact on our nation.

Groups like the Women’s Christian Temperance Union, a key force in the passage of Prohibition, survive to this day and continue to insist that Prohibition was a success and advocate for dry laws.

Prohibition-era state laws, many of which are still on the books today, created government-protected monopolies for alcohol distributors. These laws have survived for three-quarters of a century because of powerful, rent-seeking interest groups, despite the fact that they significantly raise costs and limit consumer options. And because of these distribution laws, it is illegal for millions of Americans to have wine shipped directly to their door.

The website RepealDay.org urges celebrations of the “return to the rich traditions of craft fermentation and distillation, the legitimacy of the American bartender as a contributor to the culinary arts, and the responsible enjoyment of alcohol as a sacred social custom.” It’s easy! You don’t have to hold a party. Just go to a bar or liquor store and have a drink.

RepealDay.org says that “No other holiday celebrates the laws that guarantee our rights.” I think that’s going too far. Constitution Day and Bill of Rights Day do exactly that. And in my view, so does Independence Day. But that’s quibbling. Today we celebrate the repeal of a bad law. A toast to that!

Cato celebrated the 75th anniversary of repeal with this policy forum featuring Michael Lerner, author of Dry Manhattan: Prohibition in New York City; Glen Whitman, author of Strange Brew: Alcohol and Government Monopoly; Asheesh Agarwal, Former Assistant Director of the Federal Trade Commission’s Office of Policy Planning; and Radley Balko, Senior Editor, Reason.

 
And last year panelists at a Cato Forum discussed modern prohibitions—from the Drug War to blue laws; tobacco regulation to transfats—drawing connections with their earlier antecedent.

Back to the IPO Doldrums?

After initial public offerings (IPOs) had a robust 2014, it looks like 2015 has been a bit quieter, according to a recent article in the Wall Street Journal.  But not because companies aren’t growing.  The companies are doing fine; they’re just not going public, opting instead to court buyers and quietly sell themselves.  The trend away from IPOs isn’t a new one; it’s been in the works at least since the late 1990s.  While some celebrated 2014 as a return to vibrant public capital markets in the United States, it may be that the year was simply an anomaly. 

The question, of course, is whether this trend is a bad one.  The answer depends on the cause.  For any one company, the decision to sell may be exactly the right one, no matter what the IPO environment.  Some business models may work better as a business line within a larger organization, or the two companies may be able to exploit synergies and create a new company that is greater than the sum of its parts.  But it’s not clear that these motives are what’s driving the current trend. 

The Journal found that at least 18 companies that had filed papers with the SEC abandoned their IPOs due to acquisition.  This suggests that companies that are otherwise interested in going public nonetheless find acquisition the more attractive option.  The process of going public and maintaining good standing as a public company has been increasingly difficult (and expensive) over the last several years, due to increasing the regulatory requirements imposed by Sarbanes-Oxley and other follow-on regulation.  Increased regulatory compliance imposes both direct and indirect costs.  Direct costs include the expense of paying internal and external experts (mostly accountants and lawyers) to provide guidance and prepare disclosures.  Indirect costs include the risk of facing either litigation or an enforcement action (or both) due to a misstep in the compliance process.