Topic: Regulatory Studies

Free the Inside Traders

Manhattan U.S. attorney Preet Bharara claimed another victory in his crusade against “insider trading,” a practice he once called “pervasive.”  Last week he won a conviction against Mathew Martoma, formerly at SAC Capital. 

Another big scalp was hedge fund billionaire Raj Rajaratnam, convicted in 2011 and sentenced to 11 years in prison.  A decade ago Martha Stewart was convicted of obstruction of justice in an insider trading case.

Objectively, the insider trading ban makes no sense.  It creates an arcane distinction between “non-public” and “public” information.  It presumes that investors should possess equal information and never know more than anyone else. 

It punishes traders for seeking to gain information known to some people but not to everyone.  It inhibits people from acting on and markets from reacting to the latest information. 

Martoma was alleged to have gotten advance notice of the test results for an experimental drug.  Martoma then was accused of recommending that SAC dump its stock in the firms that were developing the pharmaceutical.

If true, SAC gained an advantage over other shareholders.  But why should that be illegal?  The doctor who talked deserved to be punished for his disclosure.  However, Martoma’s actions hurt no one.

IRS Illegally Expands Obamacare

To encourage the purchase of health insurance, the Affordable Care Act added a number of deductions, exemptions, and penalties to the federal tax code. As might be expected from a 2,700-page law, these new tax laws have the potential to interact in unforeseen and counterintuitive ways. As first discovered by Michael Cannon and Jonathan Adler, one of the new tax provisions, when combined with state decisionmaking and Interal Revenue Service rulemaking, has given Obamacare yet another legal problem.

Here’s the deal: The legislation’s §1311 provides a generous tax credit for anyone who buys insurance from an insurance exchange “established by the State.” The provision was supposed to be an incentive for states to create their own exchanges, but only 16 states have opted to do so. In the other states, the federal government established its own exchange, as another section of the ACA specifies. But where §1311 only explicitly authorized a tax credit for people who buy insurance from a state exchange, the IRS issued a rule interpreting §1311 as also applying to purchases from federal exchanges.

This creative interpretation most obviously hurts employers, who are fined for every employee who receives such a tax credit/subsidy to buy an exchange plan when their employer fails to comply with the mandate to provide health insurance. But it also hurts some individuals, such as David Klemencic, a lead plaintiff in one of the lawsuits challenging the IRS’s tax-credit rule. Klemencic lives in a state, West Virginia, that never established an exchange, and for various reasons he doesn’t want to buy any of the insurance options available to him. Because buying insurance would cost him more than 8% of his income, he should be immune from Obamacare’s tax on the decision not to buy insurance. After the IRS expanded §1311 to subsidize people in states with federal exchanges, however, Klemencic could’ve bought health insurance for an amount low enough to again subject him to the tax for not buying insurance.

Klemencic and his fellow plaintiffs argue that they face these costs only because the IRS exceeded the scope of its powers by extending a tax credit not authorized by Congress. The district court rejected that argument, ruling that, under the highly deferential test courts apply to actions by administrative agencies, the IRS only had to show that its interpretation of §1311 was reasonable—which the court was satisfied it had.

Cato and the Pacific Research Institute have now filed an amicus brief supporting the plaintiffs on their appeal to the U.S. Court of Appeals for the D.C. Circuit. While it is manifestly the province of the judiciary to say “what the law is,” where the law’s text leaves no question as to its meaning—as is the case here with the phrase “established by the State”—it is neither right nor proper for a court to replace the laws passed by Congress with those of its own invention or the invention of civil servants. If Congress wants to extend the tax credit beyond the terms of the Affordable Care Act, it can do so by passing new legislation. The only reason for executive-branch officials not to go back to Congress for clarification, and instead legislate by fiat, is to bypass the democratic process, thereby undermining constitutional separation of powers.

This case ultimately isn’t about money, the wisdom of individual health care decisionmaking, or even political opposition to Obamacare. It’s about who gets to create the laws we live by: the democratically elected members of Congress or the bureaucrats charged with no more than executing the laws that Congress passes and the president signs.

Halbig v. Sebelius will be heard by the D.C. Circuit on March 25 (the same day that the Supreme Court hears the Hobby Lobby contraceptive-mandate cases).

Leaving Child Alone In Car For A Few Minutes = Abuse?

When I was small, my (conscientious, non-abusive) mother would leave me alone in the back seat of our car for brief spells while she ran into stores to do errands, an experience that’s entirely typical for most people I know from my generation. Nowadays a parent who behaves that way might risk a police record or a serious encounter with child welfare authorities. “In [a New Jersey] appeals court decision last week, three judges ruled that a mother who left her toddler sleeping in his car seat while she went into a store for five to 10 minutes was indeed guilty of abuse or neglect for taking insufficient care to protect him from harm.” The child was unharmed and an investigation of the household found it not otherwise problematic, which apparently still did not suffice to stop the abuse charge from going forward.

When the law behaves this way, is it really protecting children? What about the risks children face when their parent is pulled into the police or Child Protective Services system because of overblown fears about what conceivably might have happened, but never did?

Author Lenore Skenazy, who’s led the charge against the forces of legal and societal overprotectiveness in her book Free-Range Kids and at her popular blog of the same name, explains her doubts about the New Jersey case here and here. Tomorrow, Wed. Feb. 5, she’ll be the guest of the Cato Institute for a lunchtime talk on helicopter parenting and its near relation, helicopter governance; I’ll be moderating and commenting. The event is free and open to the public, but you need to register, which you can do here.

So Long And Thanks For All The Nannying

Rep. Henry Waxman (D-Calif.) has announced his retirement from the House of Representatives. Here’s an excerpt from my non-fan-letter from 2011, when he lost his longtime chairmanship of the Energy and Commerce Committee:

Some lawmakers can talk a decent game about lean ‘n’ smart regulation, but no one ever accused Waxman of having a light touch. (The 900-page Waxman-Markey environmental bill, mercifully killed by the Senate, included provisions letting Washington rewrite local building codes.) He’s known for aggressive micromanagement even of agencies run by putative allies: his staff has repeatedly twisted the ears of Obamanaut appointees to complain that their approach to regulation is too moderate and gradual. More than any other lawmaker on the Hill, he’s stood in the way of any meaningful reform of the 2008 CPSIA law, which piles impractical burdens on small makers of children’s products, thrift stores, bicycles and others.

Like his predecessor, Rep. John Dingell (D-Mich.), Waxman and his subcommittee chairs have famously used hearings as a club to discipline interest groups that don’t cooperate. Last spring he menaced large employers with hearings after several of them announced (contrary to some predictions) that ObamaCare was going to hurt their bottom lines. …

The committee was an unending source of ghastly new legislative proposals for regulatory manacles to be fastened on one or another sector of the economy, ideas that with any luck we may now be spared …. Thus it appears unlikely that the Republican-led committee will give its blessing to something called the Safe Cosmetics Act of 2010 (H.R. 5786), introduced by Reps. Ed Markey (D-Mass.), Jan Schakowsky (D-Ill.), and Tammy Baldwin (D-Wisc.), which – by mandating that all compounds found in personal-care items at any detectable level be expensively tested for and disclosed on labels – could have added tens of thousands of dollars of cost overhead to that little herbal-soap business your sister is trying to start in her garage. (Fragrance expert Robert Tisserand explains why most small personal-care product makers would not survive if the bill passed). Nor is it likely that the new leadership of chairman Fred Upton (R-Mich.) will be in a hurry to adopt Rep. Schakowsky’s H.R. 1408, the Inclusive Home Design Act, which would mandate handicap accessibility features in most new private homes.

(hat tip for title: Jonathan Blanks)

Cato Scholars Respond to the 2014 State of the Union

Cato Institute scholars Alex Nowrasteh, Aaron Ross Powell, Trevor Burrus, Benjamin H. Friedman, Simon Lester, Neal McCluskey, Mark Calabria, Dan Mitchell, Justin Logan, Patrick J. Michaels, Walter Olson and Jim Harper respond to President Obama’s 2014 State of the Union Address.

Video produced by Caleb O. Brown, Austin Bragg and Lester Romero.

SCOTUS: Unions Can Waive Don/Doff Pay

Earlier this month I noted that despite sporadic attacks on the present Supreme Court as supposedly gripped by a result-oriented and pro-business majority, “much of its work [in business law] consists simply of trying to keep the law on a logically coherent and predictable course,” often by unanimous vote. Today we can add another example: a unanimous Court (with Justice Sotomayor withholding consent from one footnote) ruled that U.S. Steel does not owe workers back pay for time spent donning and doffing protective gear in a context where the union representing the workers had specifically bargained away any right for them to be paid for that time. 

If it seems bizarre for employees to claim a right to pay that their union has elected to waive during contract negotiations, read on. Like some others before it, this case illustrates a tension I described in my book The Excuse Factory between the old and mostly stagnant field of labor law – in which unions and their strike threat had been envisaged as the driving and potent force, and progress is measured by contracts for future higher pay – and the newer, perennially self-energizing employment law, in which private attorneys and their lawsuits act as the driving force, with the goal being big backward-looking settlements and the associated attorneys’ fees. So the first point about Sandifer v. U.S. Steel Corp. is that the steelworkers’ union was not the plaintiff, and that we shouldn’t assume unions necessarily wish suits of this kind to succeed.

Private employment-law attorneys do well enough from discrimination and harassment law, but their fastest-growing field of activity in recent years has been wage-and-hour law. Together with several associated statutes, the New Deal-era Fair Labor Standards Act (FLSA) creates many openings to sue in class or collective actions over large retroactive pots of pay for allegedly mischaracterized work – salary vs. hourly-wage, tipped vs. off-tip, employee vs. independent-contractor, and many others. That a particular company policy was well explained to workers at the time, and met with no objection, is no defense, since contracting around the rules is mostly not allowed. For example, an up-and-coming theme in wage-hour lawsuits is that employees should be able to claim retroactive on-the-clock pay for time spent away from the workplace using (or simply being available for) company cellphones, pagers, or email – a form of liability to which many employers have begun reacting by forbidding use of company cellphones or email outside work hours. 

While many of the dictates of wage-hour law are appallingly obscure – a quarter century ago Judge Frank Easterbrook eloquently decried the high cost of its tendency to leave the fact of liability uncertain until long after employers have acted – Congress had actually come very near addressing the question at issue in 1949 when it enacted a relatively narrow legislative fix declaring that it would be up to unions to decide whether to seek or waive pay for time spent “changing clothes.”  

This still left a crack of ambiguity wide enough to try to slip a suit through (the legal, if not the apparel, kind). Lawyers for Sandifer argued that the task of donning metal-tipped boots, flame-retardant jackets and leggings, and other steel-mill gear did not qualify as “changing clothing” because, among other reasons, many of the protective garments were donned on top of (rather than substituting for) street clothes. That meant, they argued, that the union had no power to bargain away the entitlement to the time, and Sandifer and others could seek back pay. The Court unanimously disagreed. It conceded that some types of technical gear, such as safety goggles and wearable electronics, will not qualify as “clothing,” but the overall activity of donning steel-mill protection still more closely resembles “changing clothes” than anything else. 

So there’s a bit of clarity for the law, at long last. Now if only Congress felt any responsibility to clarify – or better yet, move to repeal – the hundred other ambiguous demands of wage-hour law. 

Free America’s Energy Future: Drop Washington’s Misguided Export Ban

For years people have been told to expect a dismal energy future.  But because of rapid market innovation Americans now can look forward to an abundant energy future.  The U.S. could even become a leading exporter—if Washington gets out of the way. 

An energy revolution currently is underway, with increasing supplies and falling prices.  Even more could be done if Washington expanded access to federal lands and waters and freed producers to make best use of what they extract.

Arbitrary restrictions bedevil energy exports.  For instance, natural gas licenses are granted automatically for nations with free trade agreements—in this case Canada and Mexico—but otherwise the review process is lengthy and approval is rare.  Last year Energy Secretary Ernest Moniz announced that he was delaying decisions on a score of applications for political reasons even though the department had already concluded that such exports would benefit the U.S. economy. 

The ban on oil is even tougher, with only small amounts being shipped to Canada.  Few licenses have been issued under the law’s “national interest” exception, and none since 2000.

As I point out in my latest Forbes online column:

Forbidding petroleum exports does not make additional oil available to Americans.  Rather, the ban prevents energy companies from saving money.  For instance, it would be cheaper to sell Alaskan crude to Asia and purchase more oil from Latin America.