Topic: Regulatory Studies

New York Airbnb Law Hurting B&Bs

The campaign against Airbnb in New York City has claimed some surprising collateral damage – actual B&Bs. According to Mary White of BnB Finder, half of all the B&Bs in the city have closed down since legislation in 2011 aimed at limiting Airbnb abuses came into effect. The statewide law prohibits building owners renting rooms in residential buildings and apartments for less than 30 days.

The law may have been aimed at preventing apartment buildings from being turned into illegal hotels, but it has resulted in fines being issued to B&B owners. The owner of one of New York City’s B&Bs launched an advocacy group in 2011 that lobbies for changes in legislation but does not list its members. Given the legislation affecting B&Bs it is understandable that BnB owners would be hesitant to increase their exposure. A Crain’s New York Business article on the decline of B&Bs in New York City quotes the owner of a Brooklyn inn, who limits the amount of attention her business receives online in order to avoid city investigators:

Most people don’t even know B&Bs exist in the city. Now many innkeepers are keeping a lower profile, hoping not to attract the city’s attention.

The owner of a European-style inn in Brooklyn, who did not want to be identified, said she limits her online exposure by not listing her property with travel sites like Expedia. The reason is twofold: She wants to speak personally with her guests before they arrive to ensure “that the people who stay with us won’t steal anything from us,” and to keep out of the crosshairs of city investigators.

Airbnb has made enough on an impact in New York City for hotel industry representatives, local officials, and activists to launch Share Better, a coalition group which claims the popular site is contributing to New York City’s affordable housing crisis and allowing tenants to violate lease agreements. Earlier this month, I wrote about Share Better’s claims and discussed the regulatory gray area Airbnb operates in with MSNBC’s Eric Ortega and The New Republic’s Noam Scheiber.

As Share Better continues to make its arguments against Airbnb, regulators and lawmakers should not forget the recent decline in New York City B&Bs, the hard hit unintended victims of anti-competitive rental restrictions.

FDA Doesn’t Want E-Cigs Marketed as Safer Than Tobacco Cigarettes

In a forthcoming article in Regulation California Polytechnic State University economics professor Michael Marlow describes the negative effects on public health of the proposed regulation of e-cigarettes. The FDA proposes to expand its authority granted under of Section 911 of the Family Smoking Prevention and Tobacco Control Act. “Section 911 bans marketing tobacco products as modified risk products without FDA approval. Moreover, manufacturers are unable to inform consumers their products do not contain tobacco.”

The prohibition on marketing e-cigarettes as safer than traditional cigarettes has not been subject to cost-benefit analysis. This is particularly significant given that the literature on e-cigarettes suggests that they help smokers quit. Even the JAMA Patient Page, published by The American Medical Association last January, highlighted a number of potential e-cigarette benefits such as their lack of tobacco and the less toxic nature of e-cigarette vapor compared to cigarette second-hand smoke.

In his back-of-the envelope calculation using quit rates from the published literature, Marlow estimates that the benefits related to e-cigarettes would be between $15.6 and $49.2 billion a year as the result of between 2.4 and 6.4 million smokers becoming former smokers every year. “Prohibiting sales to youth and requiring a clear description of product ingredients may be appropriate. But prohibiting any information regarding potential efficacy in harm reduction is hard to justify given substantial benefits reported in currently available studies.”

Financial Crisis Lessons From Experimental Economics

Economic scholarship tends to operate in silos. That is, banking scholars don’t talk to macroeconomists, etc. Sadly, this is even more so between finance, monetary and experimental economics.  In his latest book, Rethinking Housing Bubbles, Nobel Prize winner Vernon Smith, the father of experimental economics, offers a number of lessons that could greatly improve the stability of our financial system.

Some of these include:

  • Markets for perishable goods behave generally well and do not tend to display bubbles, whereas asset markets commonly display bubble behavior in experimental settings.
  • Allowing margin buying (leverage) significantly increases bubble size and duration for inexperienced buyers, but not for experienced.
  • Even sophisticated buyers, when inexperienced, display bubble behavior. 
  • Experience helps: repeated play in an experimental game brings price behavior closer to fundamentals.
  • Informed “inside traders” can reduce size of bubbles.
  • Presence of futures markets can stabilize prices in spot markets.
  • Additional liquidity increases size and duration of bubbles.
  • Bubbles can develop even when participants are fully informed as to operation of the market (they know with certainty future incomes streams and how the market functions).

In terms of policy recommendations, the list above suggests a few things to me. First, policymakers should pay close attention to asset markets. Second, higher down-payments, particularly among first-time buyers, are likely to reduce housing bubbles. Policy should be tolerant of informed buyers, such as hedge funds, buying-up foreclosed homes. 

Consumer disclosures, like Truth in Lending, are likely to be useless. Financial literacy should focus less on information and more on experience. Excess central bank liquidity is likely to contribute to asset bubbles.

Perhaps the biggest lesson is that bubbles in experimental asset markets are quite common, especially markets were buyers have little experience and engage in few transactions (sounds like the housing market). 

We will touch upon some of these issues, and others, when Vernon Smith comes to Cato next week to discuss his new book. You can register (or watch streaming) here.

 

Air Traffic Criticism

Canada, Australia, New Zealand, Britain, and Germany appear to be doing a better job than America at embracing new technologies for air traffic control (ATC). Those countries have restructured their ATC systems as self-supporting entities outside of their government bureaucracies while we still run ours as part of the civil service in the Federal Aviation Administration (FAA).

More evidence that Congress should restructure our ATC system comes from today’s Wall Street Journal:

An effort to modernize the U.S. air-traffic-control system is seeing such a bumpy rollout that costs associated with some of the core technology outweigh potential benefits, according to a report soon to be released by a federal watchdog.

An audit report by the Transportation Department’s inspector general, slated to be released in the next few days, raises new questions about the design, deployment and projected benefits of one of the Federal Aviation Administration’s futuristic ways to enhance monitoring and management of aircraft.

The document is sharply critical about early implementation of ground-based radio towers that are part of a proposed $4.5 billion network designed to track the locations of planes more precisely than current radar. The new system, dubbed ADS-B, eventually aims to rely primarily on satellite-based navigation and tracking.

Some of the general criticism mirrors reports and comments by the inspector general and his staff over the past few years directed at the FAA’s overall air-traffic-modernization initiative, which it calls NextGen.

The federal bureaucracy would not be very good at running a high-tech firm, such as Apple, so it is no surprise that FAA has major problems running the high-tech ATC business. Our ATC system needs better management, higher efficiency, and more rapid innovation. We are more likely to achieve those goals if we privatized the system, as Canada did successfully almost two decades ago.

Do the Benefits of Mandatory Disclosures Outweigh the Costs?

Current regulations, which require companies that issue stocks and bonds to publicly disclose information to investors, allegedly assist those investors in determining the appropriate price for securities as well as detecting fraud. But mandatory disclosures impose heavy costs on issuers of debt and stock. Do the benefits outweigh the costs?

In the forthcoming issue of Regulation Elisabeth De Fontenay, an associate professor at Duke University Law School, answers that question by examining a natural experiment in corporate debt markets.

Corporate bonds are treated as securities and subject to mandatory information disclosure under SEC regulations. In contrast corporate loans are not subject to SEC disclosure regulations because historically such loans were held to maturity by the issuing bank. But over the last 15 years corporate loans have become functionally equivalent to bonds especially at the “high-risk high-return end of the spectrum.” They are underwritten by many investors and securitized and traded in secondary markets.

If regulation produces net benefits for investors, then they would purchase only corporate bonds rather than syndicated loans. But “the market not subject to mandatory disclosure is not only thriving, it is surging past its regulated counterpart.”  

How is this possible? De Fontenay explains that in secondary loan markets, investors obtain all the information they need through contract. And that information is more relevant to investor needs than the information mandated by regulation.

Targeting the Constitution

[Cross-posted from The Volokh Conspiracy]

It is now well known that the IRS targeted tea party organizations. What is less well known, but perhaps even more scandalous, is that the IRS also targeted those who would educate their fellow citizens about the United States Constitution.

According to the inspector general’s report (pp. 30 & 38), this particular IRS targeting commenced on Jan. 25, 2012 — the beginning of the election year for President Obama’s second campaign. On that date: “the BOLO [‘be on the lookout’] criteria were again updated.” The revised criteria included “political action type organizations involved in … educating on the Constitution and Bill of Rights.”

Grass-roots organizations around the country, such as the Linchpins of Liberty (Tennessee), the Spirit of Freedom Institute (Wyoming), and the Constitutional Organization of Liberty (Pennsylvania), allege that they were singled out for special scrutiny at least in part for their work in constitutional education. There may have been many more.

The tea party is viewed with general suspicion in some quarters, and it is not difficult, alas, to imagine the mindset of the officials who decided to target tea party organizations for special scrutiny. But federal officers swear an oath to “support and defend the Constitution of the United States against all enemies, foreign and domestic.” It is chilling to think that these same officials who are suspicious of the tea party are equally suspicious of the Constitution itself.

What is most corrosive about this IRS tripwire is that it is triggered by a particular point of view; it is not, as First Amendment scholars say, viewpoint-neutral. It does not include obfuscating or denigrating the Constitution; only those “involved in … educating on the Constitution” are captured by this criterion. This viewpoint targeting potentially skews every national debate about politics or government. And the skew in not strictly liberal; indeed, it should trouble liberals as much as conservatives. The ultimate checks on executive power are to be found in the United States Constitution. Insidiously, then, suppressing those “involved in … educating on the Constitution” actually skews national debate in favor of unchecked executive power.

The Constitutional Dimension of Your Morning Commute

Over the last few years, D.C.-area drivers may have noticed the continual increases in toll fares on the Dulles Toll Road, the highway going through the Northern Virginia suburbs past Dulles Airport.  Indeed, since 2005, the toll for the typical round-trip commuter has more than quadrupled from $1.50 to $7.00, with more increases coming. These extra toll dollars haven’t been going for upkeep or expansion of the highway, however, but instead have been funding the over-budget and under-performing construction of the Metro’s Silver Line extension.

While originally slated to fund only 25% of that cost, commuters are now looking at paying more than half of the $5.6 billion (and counting) total cost, with years of construction still to come. The entity in charge of the construction project (and of gouging the toll road’s commuters) is the Metropolitan Washington Airports Authority, a public body established to govern Dulles and Reagan National airports at the behest of the Department of Transportation. But who’s actually in charge of the MWAA, and to whom can beleaguered commuters turn for relief? Although created by an interstate compact between D.C. and Virginia, the MWAA was granted all of its authority by an act of Congress, and the highways and airports that it oversees are federal property.

In many ways, the MWAA acts like a federal agency—in nearly all ways, in fact, except one important aspect: oversight. If federal assets and lawmaking power are being delegated to the MWAA, then there must be a means for the executive branch to “take care that the laws be faithfully executed.” The MWAA, however, is governed by a board of individuals whom the president has no meaningful ability to appoint, oversee, or control. This means that the MWAA has no political accountability for its decisions.

Having no other meaningful recourse, a group of Dulles Toll Road users sued the MWAA, arguing that its decrees violate the separation of powers. (Full disclosure: my wife and I just bought a house in Falls Church and will likely be using the road every now and again, though not on my commute to Cato.) The federal district and appeals courts—two of them, in an unusual development whereby the Federal Circuit transferred the case to the Fourth Circuit—decided that the MWAA’s nature as a state-created entity required the case to be dismissed. Moreover—get this—because the MWAA has no meaningful executive-branch control, there is no separation-of-powers issue. (This despite the federal government’s appearance as an amicus to argue that the MWAA exercises federal power and is subject to separation-of-powers scrutiny.)

Undeterred, the plaintiffs have petitioned the Supreme Court to hear their case. Cato has joined the American Highway Users Alliance and the Recreation Vehicle Industry Association on a brief supporting their petition. We argue that the Court should take the case because (1) there is a critical violation of the separation of powers, (2) there are already manifest harms resulting precisely from that violation, and (3) the federal government sees and treats the MWAA as a federal agency—but one without any meaningful accountability whatsoever.

It isn’t every day that a separation-of-powers case is as squarely presented as it is here, where commuters are being railroaded, so to speak, by a runaway agency whose conductor is absent. The executive branch has to take the blame not only for the MWAA’s policies, but its corruption, incompetence, and mismanagement.

The Supreme Court will decide whether to take Corr v. Metro. Washington Airports Authority later this fall.