Topic: Regulatory Studies

Bureaucrats Drunk with Power?

Last month, Justin Logan blogged about the socialist alcohol controls in Montgomery County, Maryland. For those of you not in the DC area, Montgomery County is a very wealthy, very liberal Washington suburb with our nation’s only completely government-run alcohol distribution system.

Yesterday, the Washington Post ran an excellent article that describes how this system is an absolute nightmare for the county’s restaurants.

Here’s an overview of the wine distribution process:

Let’s say the restaurant orders the wine from a private distributor on Thursday. The distributor then faxes or hand-delivers the order to the Department of Liquor Control. A county employee writes up a purchase order and faxes it back to the distributor. On Monday or Tuesday, the distributor delivers the wine to the county warehouse. On Wednesday, a white or navy blue box truck bearing Montgomery’s “Gardez Bien” county seal delivers it to the restaurant.

Now contrast that with the privately-run distribution system for restaurants in neighboring jurisdictions:

Restaurants in the District and Virginia buy wine from private distributors at wholesale prices, which includes the distributors’ markup. Placing an order is as easy as making a phone call. If an order comes up short or a large party unexpectedly drinks all the Diamond Creek cabernet, the distributor can make a delivery by the next day.

The system results in major headaches for restaurants, limited wine options for oenophiles, and, of course, greater costs for consumers:

A bottle that wholesales for $100 in the District costs Montgomery restaurants $125. If a restaurant tries to double or triple the purchase price – a standard practice – a bottle priced at $200 or $300 in a District restaurant ends up on a Montgomery wine list at $250 or $375.

You might ask why a county would subject itself to such an inefficient and expensive scheme. Well…

“We benefit financially from it,” [Montgomery County Executive Isiah] Leggett Leggett said. “But more importantly, you don’t see liquor stores all over Montgomery County like you might see in other jurisdictions, and I think citizens like that.”

Call me crazy, but I’d prefer a few liquor stores in my neighborhood over outrageously priced, government-controlled wine.

Hubris Today

USA Today writes in an editorial:

That’s one reason the proposed XM-Sirius combination, announced this week, may be the rare merger that is good for consumers.

The rare merger that’s good for consumers? That’s rich coming from the flagship newspaper of Gannett, the rapacious media conglomerate that has swallowed up the major independent papers in Iowa, Mississippi, Kentucky, Tennessee, Arizona, Vermont, and other states.

Now, to be sure, USA Today did endorse the radio merger. And I don’t question the right of newspaper owners to sell their papers to Gannett. But USA Today ought to acknowledge that its parent company has been built on mergers (or takeovers) that in the eyes of critics reduced competition.

The rare merger that’s good for consumers? Mergers often benefit consumers; they can generate efficiencies and reduce costs. And the market is the best test [.pdf] of which mergers work and which don’t.

Fine-Tuning Competition

The Washington Post reports today that the Justice Department has ordered Arcelor Mittal (the world’s biggest steel company) to sell off its Sparrows Point mill in Baltimore “to preserve competition in the eastern U.S. tin mill market.” 

Prior to the Arcelor-Mittal merger last year, three firms supplied most of the tin mill products (steel used for food, paint, and aerosol cans, etc.) consumed in the eastern United States: U.S. Steel, Mittal, and a Canadian subsidiary of Arcelor.  Post-merger, only two firms supply most of the tin to that market and the Justice Department deems that to be a threat to competition. 

Interestingly, just eight months ago, the U.S. International Trade Commission voted to continue antidumping restraints against tin mill products from Japan, citing a domestic industry that was vulnerable to a recurrence of injury from imports in the foreseeable future. 

So, while the Justice Department forces companies to break up to promote competition, the ITC sanctions duties to quell it.  If both agencies took long sabbaticals, I suspect the competition thing would resolve itself.

European Nations Fail to Ease Regulatory Burdens

The European Commission is notorious for cranking out new red tape, so it is somewhat ironic that the bureaucrats have been lecturing member nations to reduce their regulatory burdens. Presumably, the Commission thinks that supra-national regulations are good, whereas national regulations are bad. This does not make much sense, but it is a bit of a moot issue since national governments are refusing to make binding commitments for deregulation. As the EU Observer reports, the economic costs of excessive regulation are substantial:

EU industry ministers have dealt a blow to the European Commission’s “better regulation” agenda by refusing binding targets to cut national bureaucracy which accounts for half of the bloc’s administrative costs. … The commission believes red tape reduction would boost the EU economy with the equivalent of 3.5 percent of GDP and free up an estimated €150 billion for investment. But although there has been a lot of rhetoric in favour of the initiative, it is proving difficult to implement both at EU and national level. … While the UK, the Netherlands, Sweden and Denmark argued in favour of the national red tape cuts, most other delegations were against any fixed goals. Mr Verheugen admitted the commission has no power to force the governments into anything more than they have agreed - given that national legislation and competences are at stake.

Travelin’ (Jet) Blues

JetBlue CEO David Neeleman issued a mea culpa yesterday in an attempt to explain why hundreds of JetBlue passengers were stuck in nine of their planes on the tarmac at John F. Kennedy International Airport for six hours last week.  He partly blamed a “shoestring communications system” that was insufficient to assist airline managers during the confusion caused by a massive ice storm.

That’s not the whole story, although you wouldn’t know if from reading most news reports of the incident.  It turns out that Federal Aviation Administration regulations had a role, too.  The FAA presides over a system of rules that virtually guarantees flight delays by encouraging pilots to stay on the tarmac instead of losing their place in the take-off queue.

As Scott McCartney of the Wall Street Journal reports today (subscription required):

Part of the problem is that airlines, pilots and often passengers are reluctant to throw in the towel. Planes wait in line hoping for a break in the weather. And wait. And wait …

The FAA’s air-traffic-control system can penalize flights that go back to a gate, even for a temporary bathroom break. Air-traffic controllers generally take flights first-come, first-serve, unless the airline can badger officials into giving a flight higher priority, or trade places in line with another of its own flights.

Indeed, last month a JetBlue flight ended up on the ground for eight hours at JFK because it returned to the gate and then was required to file a new flight plan, the FAA says.

It’s enough to make you wonder if there is a better way to allocate take-off and landing slots at our nations airports.  And, indeed, there is.  Nobel economist Vernon Smith has proposed an auction system that, like the stock market, would allocate scarce resources – like the use of a runway – much more efficiently than current practices.

As Smith explains in a 2002 interview with Reason magazine:

We’re doing work on creating a market for the exchange of landing and takeoff slots at airports. In normal circumstances, those rights have been fully allocated among the airlines at a given airport. But let’s say a bad weather front moves in, so there’s a ground delay. They’ve been doing maybe 60 landings and takeoffs per hour, but now they’ve got to reduce that to 30. What airports tend to do is just stretch out the existing schedule, which leads to cancellations and other problems. What you need is a market mechanism so that the flights that have higher priority get out. What would be a higher priority? Bigger planes, probably, but also full planes and planes with a lot of passengers who have connecting flights.

Suppose we’re talking about planes leaving LaGuardia in New York. If a plane’s going to Los Angeles, it’s probably the final destination for a lot of the passengers. Planes going to Chicago or Dallas probably have a lot of passengers who are catching connecting flights. Maybe those flights should have a higher takeoff priority in bad weather. In any case, you need a market mechanism where the airlines can compensate one another-and their passengers-to cancel their flights and trade takeoff slots.

The power of market forces unleashed by federal deregulation of the airlines has put air travel – once a luxury – within the reach of virtually everybody. Now perhaps it’s finally time to deregulate the act of actually taking off. 

Genes, Patents and Honest Dealings

Michael Crichton wrote an excellent op-ed, “Patenting Life,” in Tuesday’s New York Times.

I find it hard to disagree with Crichton’s comments, but it might be worth mentioning that his article really deals with two separate arguments. One is that taking something that belongs to others, i.e., actual physical material, without their permission is wrong. The second issue is that innovation is the proper subject of patents, not mere discovery. In the first situation, the question is whether patients should have a right to share in patents developed using their tissue or genes. In the second, the question is whether the genes themselves – not just the products created with them – should be patentable.

Self-determination and self-ownership are essential in a free society. Actual physical material such as tissue samples or actual genes taken from a person’s body should not be acquired or used without informed consent – that includes not using a patient’s tissue to develop and market cell lines or to develop and market medical therapies without the patient’s express consent. It is dishonest to provide patients with misleading consent forms. Some give the impression a patient’s tissue is medical waste that the hospital or doctor should be free to dispose of as necessary. Other consent forms acknowledge that a patient’s tissue may be used to gain knowledge but say nothing of the potential profits to be gained either from that knowledge or from the actual use of the tissue itself.

For consent to tissue acquisition to be informed it must clearly identify a patient’s options: 1) Is the patient making a gift of the tissue and expressly relinquishing any potential profits from medical products developed with that tissue? 2) Is the patient being paid for his tissue and willingly relinquishing any claim to profits from products that may be developed using that tissue? Or, 3) Is the patient being promised a percentage of the profits, should any materialize? Patients must not only be aware of these options but also understand them for there to be true informed consent. To do otherwise is to take something from them under false pretenses.

Patents on genes themselves is a different issue. I’m not a patent lawyer, but if Crichton is correct, it seems the courts have confused the discovery of something new in nature with the creation of something new, i.e., confused pure discovery with innovation. Scientists are awarded Nobel Prizes for discovering new elements, new species, or new diseases, but they usually aren’t, and shouldn’t be, awarded patents for such discoveries. Patents should only be awarded if something new is created – a new process, a new test, a new technique, a new cure, etc. Imagine if Casey and Jacobi had been awarded patents for their 1973 discovery of the Hawaiian Po’ouli Honeycreeper. Anyone who wanted to go looking for the Po’ouli bird would have to pay Casey and Jacobi a licensing fee. Innovative processes used to test for certain genes or their mutations or special processes for recording information about genes should potentially be patentable, but, not the genes themselves – no more than it makes sense to patent the rare and hard to find Po’ouli.

One further distinction is worth making. A patent might be justified if a scientist manipulated a gene to create something new. If a patent were awarded, the patent holder should be required to share his profits with the person from whom the original gene was acquired unless, after full and complete disclosure, that person had willingly and with full understanding relinquished his rights to such profits.