Topic: Regulatory Studies

Dose of Reality

From my new policy analysis (joint with Angela Dills and Sietse Goffard) on state marijuana legalizations:

In November 2012 voters in the states of Colorado and Washington approved ballot initiatives that legalized marijuana for recreational use. Two years later, Alaska and Oregon followed suit. As many as 11 other states may consider similar measures in November 2016, through either ballot initiative or legislative action. Supporters and opponents of such initiatives make numerous claims about state-level marijuana legalization.

Advocates think legalization reduces crime, raises tax revenue, lowers criminal justice expenditures, improves public health, bolsters traffic safety, and stimulates the economy. Critics argue that legalization spurs marijuana and other drug or alcohol use, increases crime, diminishes traffic safety, harms public health, and lowers teen educational achievement. Systematic evaluation of these claims, however, has been largely absent.

This paper assesses recent marijuana legalizations and related policies in Colorado, Washington, Oregon, and Alaska.

Our conclusion is that state marijuana legalizations have had minimal effect on marijuana use and related outcomes. We cannot rule out small effects of legalization, and insufficient time has elapsed since the four initial legalizations to allow strong inference. On the basis of available data, however, we find little support for the stronger claims made by either opponents or advocates of legalization. The absence of significant adverse consequences is especially striking given the sometimes dire predictions made by legalization opponents.

Did The U.S. Lose 2.4 Million Jobs from China Imports?

A major Wall Street Journal article claims, “A group of economists that includes Messrs. Hanson and Autor estimates that Chinese competition was responsible for 2.4 million jobs lost in the U.S. between 1999 and 2011.”  In a recent interview with the Minneapolis Fed, however, David Autor said, “That 2 million number is something of an upper bound, as we stress.” The central estimate was a 10% job loss which works out to 1.2 million jobs in 2011, rather than 2.4 million.  Since 2011, however, the U.S. added 600,000 manufacturing jobs – while imports from China rose by 21% – so both the job loss estimate and its alleged link to trade (rather than recession) need a second look.

“The China Shock,” by David Autor, David Dorn and Gordon Hanson examined the effect of manufactured imports from one country (China) on local U.S. labor markets. That is interesting and useful as far as it goes.  But a microeconomic model designed for local “commuting zones” cannot properly be extended to the entire national economy without employing a macroeconomic model.  

For one thing, the authors look only at one side of trade – imports – and only between two countries.  They ignore rising U.S. exports to China - including soaring U.S. service exports to China.  They are at best discussing one side of bilateral trade. And they fail to consider spillover effects of China’s soaring imports from other countries (such as Australia, Hong Kong and Canada) which were then able to use the extra income to buy more U.S. exports. 

Autor, Dorn and Hanson offer a seemingly rough estimate that “had import competition not grown after 1999” then there would have been 10% more U.S. manufacturing jobs in 2011.  In that hypothetical “if-then” sense, they suggest that “direct import competition [could] amount to 10 percent of the realized job loss” from 1999 to 2011. 

Choosing Financial Stability

Tomorrow the House Financial Services Committee moves to “mark-up” (amend and vote on) the Financial Choice Act, introduced by Committee Chair Jeb Hensarling.  The Choice Act represents the most comprehensive changes to financial services regulation since the passage of Dodd-Frank in 2010.  Unlike Dodd-Frank, however, the Choice Act moves our system in the direction of more stability and fewer bailouts.

At the heart of the Choice Act is an attempt to improve financial stability by increasing bank capital, while improving the functioning of our financial system by reducing compliance costs and over-reliance on regulatory discretion.  While I would have chosen a different level of capital, the Choice Act gets at the fundamental flaw in our current financial system: government guarantees punish banks for holding high levels of capital which, unfortunately, leads to excessive leverage and widespread insolvencies whenever asset values (such as houses) decline.  Massive leverage still characterizes our banking system, despite the “reforms” in Dodd-Frank.

The Choice Act also includes important, even if modest, improvements in Federal Reserve oversight (see Title VII).  There was perhaps no contributor to the housing boom and bust that has been as ignored by Congress as the Fed’s reckless monetary policies in the mid-2000s.  Years of negative real rates (essentially paying people to borrow) drove a boom in our property markets.  The eminent economist John Taylor has written extensively and persuasively on this topic, yet it remained ignored by legislators prior to Hensarling’s efforts.  Such reforms are too late to unwind the Fed’s current distortionary policies, but they may prove helpful in moderating future booms and busts.

Despite its daunting 500+ pages, the Choice Act is still best viewed as a modest step in the right direction.  Considerably more needs to be done to bring market discipline and accountability to our financial system.  But at least the Choice Act moves us in the right direction, for that the bill merits applause and consideration.


Using Antitrust Law to Protect the Right to Earn a Living

Teladoc, Inc. is a health services company that provides access to state-licensed physicians through telecommunications technology, usually for a fraction of the cost of a visit to a physician’s office or urgent care center. Teladoc sued the Texas Medical Board—comprised mostly of practicing physicians—because the board took steps to protect the interests of traditional physicians by imposing licensing rules such as requiring the in-person examination of patients before telephonic treatment is permitted.

Because the board isn’t supervised by the Texas legislature, executive, or judiciary, Teladoc argues that its self-dealing violates federal antitrust laws—and the federal district court agreed. The Texas Medical Board has now appealed to the U.S. Court of Appeals for the Fifth Circuit, where Cato filed an amicus brief urging the court to affirm the lower-court ruling and protect the fundamental right to earn a living.

Our brief argues that the Supreme Court has consistently held that the right to earn a living without unreasonable government interference is guaranteed by the Constitution, and that this protection dates back much earlier, to Magna Carta and the common law. Indeed, the right to earn a living is central to a person’s life and ability to pursue happiness. As Frederick Douglass wrote in his autobiography, “To understand the emotion which swelled in my heart as I clasped this money, realizing that I had no master who could take it from me—that it was mine—that my hands were my own, and could earn more of the precious coin—one must have been in some sense himself a slave… . I was not only a freeman but a free-working man.”

Licensing laws, which can be valid if protecting a legitimate public interest, are a tool of the state often employed by private market participants to restrict competition. By creating barriers to entry, existing firms or practitioners mobilize the state to wield monopoly power. This results in higher prices and fewer choices for consumers and diminished opportunities for entrepreneurs and workers.

While it may be appropriate to create a regulatory body exempt from antirust laws to achieve a specialized purpose, it’s inappropriate to grant private actors populating a licensing board limitless ability to claim such state-action immunity unless they are appropriately supervised by state officials. Without active supervision, private parties may wield state regulatory power purely for their own self-interest.

The Supreme Court has said that this active supervision standard is “flexible and context-dependent,” N.C. State Bd. of Dental Exam’rs v. FTC (2014), but not flimsy and porous. Moreover, there are other ways for states to obtain the specialized knowledge of professionals without creating regulatory bodies that rubber-stamp the assertions of active practitioners.

Teladoc offers an innovative service that makes obtaining healthcare easier and more affordable. The Fifth Circuit should protect its right to do so and the right of all persons to pursue a trade or career without onerous government-backed constraints instituted by private actors. 

Another Lesson from Bastiat: So-Called Employment Protection Legislation Is Bad News for Workers

Frederic Bastiat, the great French economist (yes, such creatures used to exist) from the 1800s, famously observed that a good economist always considers both the “seen” and “unseen” consequences of any action.

A sloppy economist looks at the recipients of government programs and declares that the economy will be stimulated by this additional money that is easily seen, whereas a good economist recognizes that the government can’t redistribute money without doing unseen damage by first taxing or borrowing it from the private sector.

A sloppy economist looks at bailouts and declares that the economy will be stronger because the inefficient firms that stay in business are easily seen, whereas a good economist recognizes that such policies imposes considerable unseen damage by promoting moral hazard and undermining the efficient allocation of labor and capital.

We now have another example to add to our list. Many European nations have “social protection” laws that are designed to shield people from the supposed harshness of capitalism. And part of this approach is so-called Employment Protection Legislation, which ostensibly protects workers by, for instance, making layoffs very difficult.

Corporate Inversions

Among industrialized countries, the United States has the highest official corporate tax rate and one of the highest effective tax rates. To take advantage of lower taxes in other countries, some U.S. firms elect to sell themselves to smaller foreign firms, a process called “inversion.”

For shareholders of those firms, the tax consequences of inversions are complicated. Some are harmed by the move while others benefit. Individual shareholders, who own shares in taxable accounts, are taxed on the increased value of their shares. This can result in different tax outcomes from inversions for shareholders who have held the stock for a long time prior to the inversion and short-term shareholders (including corporate officers exercising company stock options).

In the summer issue of Regulation, I described a new research paper that investigates 73 inversions that occurred from 1983 to 2014. For those investors who had owned stock for three years, half of the inversions resulted in a negative return. So if many long-term shareholders lose money on inversions, why do they occur?

Tentative Steps Away from the Gas Tax and towards a Better System

The state of Oregon recently began a pilot program with 1,000 drivers, which charges those drivers a fee based on the miles they drive, rather than a gas tax. Several states are looking closely at Oregon’s experiment. This could mark the beginning of a major change to a much better way to finance our roads.

The states care about Oregon’s experiment because the gas tax is a lousy user fee that doesn’t come close to capturing the true cost a driver imposes on the state when he drives, whether via the wear and tear his vehicle causes to the highway, the congestion his presence on the road exacerbates, or the pollution his car emits. An optimal user fee would attempt to capture each one of those and charge a fee based on where a person drives, how much he drives, the amount of congestion on the roads he is on, and his car’s emissions. Oregon’s simple experiment captures none of that—it consists solely of a 1.5 cent per mile charge, coupled with a fuel tax credit—but with today’s technology a more advanced system could easily be implemented.

The advantage of having a sophisticated user fee for drivers is that it could dramatically lessen congestion on a road: if you charge a high fee when roads get crowded, people will postpone trips, carpool, work at home, or take mass transit. Since the majority of auto pollution comes from cars stalled in traffic, the reduction in smog would be significant. Such a user fee would also help states reduce how much infrastructure they have to build by smoothing out demand.

The complaint against such schemes is that they have the potential to invade privacy—a valid concern, but one that can be addressed with adequate regulation, and an open source software system that can be examined by anyone to determine if it is sufficiently secure.