Topic: Regulatory Studies

Midterm Impact on Financial Regulation

With Republicans taking the majority (but far short of control at 60) in the Senate and increasing their majority in the House, the regulation of our financial markets may see renewed attention, with particular focus on reforming Dodd-Frank. My former employer Senator Richard Shelby takes the Chair on the Senate Banking Committee, while Congressman Jeb Hensarling retains his leadership role on House Financial Services.

In my nearly twenty years following financial services, we have not had two chairmen more skeptical of government oversight of our financial markets. While neither could be called “libertarian,” both are suspicious of big government as well as big finance.  Both agree that “Too Big To Fail” is a real issue and one created by the actions of government, not the market.

Sen. Shelby, for instance, has repeatedly said “no one is too big to fail” - what he means here is that no company should be getting a bailout.  It was for that reason he led the charge in the Senate against the TARP, and also for that reason he voted against the Chrysler Bailout in 1979.  Shelby also led the efforts to reform Fannie Mae and Freddie Mac, warning years before their failure of the various flaws inherent in a mortgage model of privatized gains and socialized losses.  Shelby also tried to bring more competition to the credit rating agencies, passing legislation in 2006 to reduce barriers to entry in that market.

The above, however, should not be read to overstate the case.  Both Rep. Hensarling (who apparently had a subscription to the Cato Journal in college) and Sen. Shelby would like to see the federal safety net behind our financial markets reduced, allowing a greater role for market discipline.  Perhaps even more rare in D.C., they both believe their chairmanships come not just with privilege but great responsibility.  If it were simply up to these two to agree, I have confidence that our system of financial regulation would be greatly improved, reducing bailouts and increasing stability.  

But it isn’t up to these two. There are numerous protectors of the status quo in both major political parties.  Both would also have to reach agreement with the Obama Administration, which seems quite comfortable with bailouts and regulatory discretion.  Ultimately, the many obstacles our Founding Fathers wisely put in place for legislation will prove too high for Shelby and Hensarling to implement all but modest reform.  

But at least financial regulation is unlikely to get any worse.

The Endangered Species Act Isn’t Meant to Ignore the Human Species

While California endures its worst drought in a century, a small, finger-sized fish with no known redeemable qualities, the delta smelt, has become the centerpiece of extensive litigation. The U.S. Fish and Wildlife Service (FWS) classifies the delta smelt as “threatened,” and since 2008 it has said that large amounts of water should not be pumped out of the delta smelt’s habitat—the wetlands north of San Francisco—and into the state’s drought-stricken central and southern regions.

That “imported” water from northern California has become vital to the state’s important agricultural business, and the FWS’s decision has substantially harmed California’s farms, farm-laborers, and millions of others dependent on the water supply. In short, in order to protect the 3-inch fish, the state has pumped billions of gallons of water straight into the ocean rather than using it to help California’s struggling farmers.

The farmers, represented by the Pacific Legal Foundation, filed a lawsuit in response to these draconian measures to save the irrelevant fish. The farmers argued that the FWS should not have ignored the harsh financial and human costs of the FWS’s “reasonable and prudent alternatives” to pumping water out of the northern wetlands. The U.S. Court of Appeals for the Ninth Circuit disagreed, holding that the FWS’s decisions deserve deference and that the “FWS is not responsible for balancing the life of the delta smelt against the impact of restrictions” on water pumping. Congress, wrote the court, has already decided that the FWS should protect endangered species “whatever the cost.”

In an attempt to get the Supreme Court to review their case, the farmers argue that the circuit court misread the history of the Endangered Species Act (ESA) and should not have ignored the economic impact of so-called “reasonable and prudent alternatives.” Cato, joining the National Federation of Independent Business, filed a brief in support of their petition. We argue that the ESA has changed since the Supreme Court ruled, in 1978, that species must be protected “whatever the cost.”

The ESA has been amended many times and now commands the FWS to take “into consideration the economic impact” of its proposals. Moreover, the 1978 case that required species to be protected “whatever the cost” has been limited by subsequent decisions.

Finally, we argue that the Ninth Circuit’s decision is in conflict with the Fourth Circuit, which in 2013, vacated an FWS determination because it failed to take into account the economic impact of the reasonable and prudent alternative. This conflict between circuits should be rectified by the Supreme Court, and the ESA should be rightly interpreted as requiring the FWS to take into account the economic impacts of its decisions.

No offense to the delta smelt, but we prefer human beings.

The Supreme Court will decide whether to take the case of Stewart & Jasper Orchards v. Jewell later this year or early in 2015.

Yes, Florida, the Constitution Protects Property Rights

David and Susan Kentner own residential lots along San Carlos Bay in Sanibel, Florida. Because their property is along the high-tide line, the Kentners enjoy an age-old common-law right to build docks over the water abutting their property, subject to reasonable regulation. But Sanibel passed an ordinance forbidding the Kentners and others from taking advantage of this common-law right. The city claimed that the ordinance was necessary to protect seagrass, which it called an “invaluable natural resource.”

Whether or not seagrass is invaluable, the city passed the ordinance without considering whether seagrass was actually present in the areas subject to the ordinance and whether modern technology could effectively be used to avoid harming the seagrass. Moreover, there is evidence that the city passed the ordinance in order to satisfy the aesthetic preferences of certain interest groups and to enhance the property values of other dock-holders. On top of that, in 2006 the city issued itself an exemption to build a dock in San Carlos Bay, explaining that it should be allowed to build a dock because no seagrass was found on the site.

The Kentners, represented by the Pacific Legal Foundation, challenged the ordinance on the ground that it did not substantially advance any legitimate government interest. In other words, the Kentners claimed that the ordinance violated the due-process rights to their property, which is lawyer-speak for laws that don’t have a good-enough justification. Both the trial and appellate judges held that property rights aren’t “fundamental rights” protected by due process, thus ruling that the government didn’t need a good reason to pass these restrictions. In other words, property rights simply don’t enjoy protection against irrational government regulations.

On appeal to the Supreme Court, the Kentners argue that the lower courts were mistaken in treating property rights as no-class—not even second-class—rights. In support of the Kentners’ petition to have the Supreme Court hear the case, Cato joined the National Federation of Independent Business, Owners Council of America, and Rutherford Institute on a brief arguing that the lower courts were gravely mistaken in classifying property rights as not deserving of due-process protections. The Fourteenth Amendment, after all, explicitly says that no state shall deny “life, liberty, or property” without due process of law.

Further, the Court should review the case to clarify and solidify longstanding precedents that treat property rights as on par with other rights. After all, if the government is allowed to violate property rights with no justification whatsoever, then any ordinance that confiscates, destroys, or restricts property will be simply unassailable, regardless of how unreasonable or shocking it may be. The high court should take this case to reaffirm that property rights are indeed constitutionally protected and cannot be abridged with impunity by opportunistic, corrupt governments.

The Supreme Court will decide later this year or early in 2015 whether to take Kentner v. City of Sanibel.

What Public Choice Theory Says about Ebola

What does public choice theory say about responding to Ebola?

That is: What are the costs and benefits of various policies – not to the public – but to self-interested politicians? Public choice theory holds that politicians’ interests don’t always coincide with the public’s, and sometimes they diverge quite sharply. When interests diverge, politicians will often side with their own self-interest, even at the expense of the public.

So what do they want? Politicians want public esteem. They want above all to be seen as heroes. If that means sacrificing civil liberties - to little or no public benefit - then they will do so.

This remains true even if the “heroic” measures at hand amount to Ebola security theater. It would appear that’s what we’re getting - a set of state-level quarantines that are actually contrary to what doctors and epidemiologists recommend. (No, the public probably won’t care what the experts say. I mean, look – the public still buys antibacterial soaps, and public health experts don’t recommend those either.)

In general, then, we can expect politicians to be eager to quarantine. This eagerness will be completely independent of the specific facts of any particular disease. Recall that lots of politicians once wanted to be able to set up an HIV quarantine, too, even long after it was well known that HIV can’t be transmitted by hugging, kissing, sharing utensils, sharing toilet seats, non-euphemistic cuddling, or what have you. (Wasn’t that a loooong time ago? No: It was just last year. And they got what they wanted.)

In short, whether or not a quarantine is right in any particular case – and it might be right in some cases, though I wouldn’t know – public choice theory says that politicians will err on the side of quarantine.

If that seems cynical, consider the flip side: Politicians also don’t want to look like the ones who let Ebola into the country. Note that one might look like the person who brought Ebola into the country even when one’s policies are responsible for exactly zero additional Ebola risk. Life is unfair sometimes. Even to politicians.

To look like a screwup, all you have to do… is nothing. The public will be left to stew in its fears, and they hate it when that happens. So they will punish you, and your party, at the next possible opportunity. (When is that again?)

The costs of doing nothing here are especially high if your constituency happens to be made up of conservatives – in whom Jonathan Chait has pointed out a strong emotional preference for purity and cleanliness. We should thus expect to find fear of contamination at or near the top of the to-do list for conservatives, who will try, first, to intensify these fears, and second, to promote their own policies as the only ones capable of relieving them.

Nevada Cracks Down on Uber

Unsurprisingly, Nevada officials are cracking down on Uber. Last Friday, the San Francisco-based transport technology company announced its launch in Sin City. On the day of the launch eight Uber drivers in Las Vegas had their cars impounded and were issued citations for providing an “unlicensed for-hire transportation service.” In addition, District Court Judge James Russell banned Uber drivers from offering ridesharing services in Nevada until at least early November.

Instead of spending time and money on impounding ridesharing vehicles Nevada officials should turn to their attention to reforming taxi regulations, which make it difficult for taxis in Las Vegas to compete with Uber.

As I noted last week, Las Vegas has especially over burdensome taxi regulations in place. Taxi drivers in Las Vegas are restricted in regards to where, how, and sometimes (depending on which medallion they have) when they pick can up passengers. Uber drivers are not nearly as restricted. Given such an environment it shouldn’t be surprising that yesterday Uber was reporting an “insane” level of demand.

According to an Uber spokeswoman, the company is financially and legally supporting drivers dealing with citations and impounded vehicles, as it has done in other jurisdictions where drivers have run afoul of regulators. According to one Uber driver in Las Vegas, five Nevada Taxicab Authority vehicles and two undercover officers with black ski masks were used to impound his Ford Focus while he was trying to drop off passengers.

In an ideal regulatory framework taxis and ridesharing driverswould fairly compete and Uber drivers would not have their cars impounded. Unfortunately, many taxi regulations in the U.S. allow for incumbent protection and do little to encourage competition and innovation that would benefit consumers.

Uber drivers’ experiences in Las Vegas highlight the regulatory grey area that Uber and other sharing economy companies occupy. Before the rise of the sharing economy the distinction between private car owners and taxis was clear. Today, Uber, Lyft, and Sidecar make that distinction more difficult to make, and regulators across the U.S. are struggling to keep up with the changes in technology that allow for the sharing economy to exist. 

Yet rather than deal with companies like Uber by reexamining and updating existing taxi regulations or taking steps to make taxis more competitive, the Nevada Taxicab Authority has deployed officials to crack down on drivers using Uber. This is an overreaction to the emergence of ridesharing. The Nevada Taxicab Authority ought to consider a range of changes to existing regulations such as not restricting how and where Las Vegas taxi drivers can pick up passengers.

The technology that allows Uber and other ridesharing companies to operate is not going anywhere. The Nevada Taxicab Authority cannot possibly expect the impounding of ridesharing vehicles to be an effective long-term strategy. In the short term, however, it shouldn’t be surprising if the Nevada Taxicab Authority continues to use the existing outdated regulatory environment to its advantage in order to protect taxi drivers from competition.

Las Vegas Is Ripe For Ridesharing

The regulations that govern taxis in the Las Vegas area impose especially heavy restrictions on consumer choice and driver availability. Such an environment is ideal for rideshare companies, which provide consumers with more choice and drivers with more flexibility. Yet perhaps unsurprisingly, regulators and market incumbents in Sin City may prove to be among ridesharing companies’ most defensive and rigid opponents.

Taxi drivers in Las Vegas are not only restricted in regards to where they can pick up passengers, they are also restricted in how they pick up passengers. For instance, individuals are unable to hail Las Vegas cabs from the street. Cabs must be called and requested or found at designated areas.

The Nevada Taxicab Authority has a web page dedicated to describing the sixteen different taxi medallions available in the state.

The “North Las Vegas” medallion allows operators to drive 24 hours a day, seven days a week. Holders of this medallion “are permitted to stage on any taxicab stand North of Owens Avenue. They can then provide an on-call service within a five-mile radius of North Las Vegas. The southern border of North Las Vegas is Flamingo Road. Taxis with the “North Las Vegas” medallion may pick up passengers when directed to do so by a dispatcher; however the ride must originate north of Flamingo Road and cannot originate on Las Vegas Boulevard or Paradise Road (in the map below Owens Avenue is blue, Flamingo Road is green, and Las Vegas Boulevard and Paradise Road are highlighted in brown). 

“Providing that adequate service is maintained” in North Las Vegas, taxis with this medallion are permitted to provide service from ten specified locations, most of which are hotels.  

Cato Conference: “Pruitt, Halbig, King & Indiana: Is ObamaCare Once Again Headed to the Supreme Court?”

On October 30, the Cato Institute will host a conference featuring leading experts on four legal challenges that critics understandably yet mistakenly describe as “the most significant existential threat to the Affordable Care Act”:

PruittHalbigKing & Indiana: Is ObamaCare Once Again Headed to the Supreme Court?

Thursday, October 30, 2014, 9:00AM – 1:30PM. 

Luncheon to follow.

Featuring: Oklahoma Attorney General Scott Pruitt; Indiana Attorney General Greg ZoellerRobert BarnesThe Washington PostJonathan Adler, Case Western Reserve University School of Law; David Ziff, University of Washington School of Law; Brianne Gorod, Constitutional Accountability Center; James Blumstein, Vanderbilt University; Michael F. Cannon, Cato Institute; Len Nichols, George Mason University; Tom Miller, American Enterprise Institute; and Robert Laszewski, Health Policy and Strategy Associates, LLC.

In Pruitt v. Burwell and Halbig v. Burwell, federal courts have ruled that the Internal Revenue Service is misinterpreting the Patient Protection and Affordable Care Act, unlawfully paying billions of dollars to private health insurance companies, and unlawfully subjecting more than 50 million individuals and employers to the Act’s individual and employer mandates. In King v. Burwell, another federal court found the IRS’s interpretation is permissible. A fourth lawsuit, Indiana v. IRS, is due a ruling at any time.

While these cases attempt to uphold the ACA by challenging the Obama administration’s interpretation, supporters and critics agree they could have as large an impact on the law as any constitutional challenge. Is the IRS acting within the confines of the law? Is the ACA unworkable as written? Is it inevitable that the Supreme Court will hear one of these cases, or a similar challenge yet to be filed? What is the impact of the IRS’s (mis)interpretation? What impact would a ruling for the plaintiffs have on the health care sector and the ACA? Leading experts, including the attorneys general behind Pruitt v. Burwell and Indiana v. IRS, will discuss these and other dimensions of this litigation.

To register to attend this event, click here and then submit the form on the page that opens, or email events [at] cato.org, or fax (202) 371-0841, or call (202) 789-5229 by 9:00 a.m. on Wednesday, October 29, 2014.