Topic: Regulatory Studies

Political Connections and SEC Enforcement

One problem with regulation is that regulators often have substantial latitude to choose the stringency and targets of their enforcement efforts.  This opens the door for businesses and politicians to influence that enforcement.

A recent paper by Maria Correia of the London Business School finds exactly this effect at the SEC.  Correia writes:

I examine whether firms and executives with long-term political connections through contributions and lobbying incur lower costs from the enforcement actions by the Securities and Exchange Commission (SEC). I find that politically connected firms on average are less likely to be involved in SEC enforcement actions and face lower penalties if they are prosecuted by the SEC. Contributions to politicians in a strong position to put pressure on the SEC are more effective than others at reducing the probability of enforcement and penalties imposed by an enforcement action. Moreover, the amounts paid to lobbyists with prior employment links to the SEC, and the amounts spent on lobbying the SEC directly, are more effective than other lobbying expenditures at reducing enforcement costs faced by firms.

So SEC enforcement does not necessarilly target the firms whose behavior is “worst” but instead firms whose political connections are weakest.

Virginia DMV Orders Uber and Lyft to Cease and Desist

Yesterday the Virginia Department of Motor Vehicles issued cease and desist letters to Uber and Lyft, claiming that the companies, which connect passengers to drivers via smartphone apps, are in violation of Virginia law. In the letters, DMV Commissioner Richard Holcomb wrote that Lyft and Uber’s ride-sharing operations “are not ridesharing arrangments as defined in Virginia law” because drivers receive compensation for their services.

The Arlington County Police Department will be assisting in enforcing existing legislation, although a spokesman said “it will not be a primary focus of our operations.”

In the wake of the cease-and-desist letters, Uber’s East Coast Regional General Manager Rachel Holt said,“We’re still operating as usual throughout D.C., Maryland and Virginia,” and Lyft said in a statement, “We’ve reviewed state transportation codes and believe we are following the applicable rules. We’ll continue normal operations as we work to make policy progress.”

The Virginia DMV has previously fined Uber and Lyft ($26,000 and $9,000 respectively), however the recent letters say that the DMV will issue civil penalties of up to $1,000 per violation to individual drivers caught breaking Virginia regulations.

The DMV letters are only the latest regulatory and legal hurdle that Uber and Lyft face. I have previously written on this blog about some of those challenges, which are taking place across the country.

Rather than hinder the growth of innovative livery companies that are taking advantage of new technology, lawmakers in Virginia and elsewhere across the country should consider repealing current taxi regulations that restrict innovation, strengthen established market players, and stifle competition.

Uber and Lyft are popular for a reason: they provide a reliable and desired service at prices customers have indicated that they are willing to pay. In a fair and level playing field with fewer regulations, their competitors would have to rely on improving their own services rather than on market-distorting legislation.

I discussed these issues with Caleb Brown on today’s Cato Daily Podcast that you can listen to here:

The Latest Travails of Rideshare Companies

Last week Uber CEO Travis Kalanick said that the technology company, which connects riders to drivers through its app, could enjoy a “record-breaking” valuation thanks to its latest attempt to raise money.

Yesterday, Bloomberg reported that Fidelity Investments “is competing to lead Uber Technologies Inc.’s new financing in a round that could value the ride-sharing service at about $17 billion.”

Bloomberg’s reporting went on to note that if valued at $17 billion, Uber would be more valuable than the car rental service Hertz and the technology and appliances retailer Best Buy.

The news of Uber’s possible $17 billion valuation comes in the wake of news highlighting how the company has run afoul of regulators and taxi drivers across the world.

Earlier this year in Illinois, both the state House of Representatives and Senate passed HB 4075 and HB 5331 by veto-proof margins. If signed by Gov. Pat Quinn, the bills would require that the rideshare service drivers pass a background check, have commercial liability insurance of at least $350,000, and be required to obtain a chauffeur’s license if they carry passengers for more than 18 hours a week. These chauffeurs’ licenses are not easy to get in Chicago, the only city in Illinois where rideshare companies operate. They require any driver to complete a chauffeur training course, pass a written test, and demonstrate proficiency in English. The manager of government affairs at Lyft, another company that offers a rideshare service, has claimed that the 18 hour per week regulation would affect the 63 percent of drivers who use Lyft in Chicago. Chicago lawmakers recently passed an ordinance regulating ridesharing, a move welcomed by Uber and Lyft, although the legislation will have to be brought into compliance with HB 4075 if it is signed into law.

Occupational Licensing In the New York Times

Yesterday the New York Times published an op-ed by Morris Kleiner making the case for occupational licensing reform. In it, Kleiner argues that there is a bipartisan case for reform, and that the real losers of occupational licensing are consumers. Kleiner notes that occupational licensing has noble aims, to protect the health and safety of the public from those who seek to defraud them. But the actual result provides more protection from competition for those in the professions rather than protection for consumers from low-quality providers.

Thirty percent of the work force requires some kind of occupational license today compared with ten percent in the 1970s. This raises costs to consumers, especially those with low incomes who do not wish to pay for the minimum level of “quality” that licensing boards claim to provide.

Kleiner proposes to replace licensing boards with optional certification programs. All individuals could legally practice in a particular profession, but individuals could choose to undergo certification to signal the quality of their training and service provision. Cheaper, uncertified professionals could provide services to those who are more price sensitive.

Kleiner has spent his career studying the decline of labor unions and the rise of occupational licensure as the U.S. economy has shifted from manufacturing to services. In 2006 Regulation published A License for Protection in which Kleiner describes this shift. I’ve also covered his work on dental hygienist regulation here, and the upcoming Summer issue of Regulation will look at his work on nurse practitioner regulation.

“Minnesota ‘Unsession’ Dumps 1,175 Obsolete, Silly Laws”

Wow, more of this please [St. Paul Pioneer Press]:

It’s no longer a crime in Minnesota to carry fruit in an illegally sized container. The state’s telegraph regulations are gone. And it’s now legal to drive a car in neutral — if you can figure out how to do it.

Those were among the 1,175 obsolete, unnecessary and incomprehensible laws that Gov. Mark Dayton and the Legislature repealed this year as part of the governor’s “unsession” initiative. His goal was to make state government work better, faster and smarter….

In addition to getting rid of outdated laws, the project made taxes simpler, cut bureaucratic red tape, speeded up business permits and required state agencies to communicate in plain language.

If lawmakers in Minnesota could identify 1,175 worthless or outdated laws that could be rooted out with little real political resistance, imagine how many other worthless or outdated laws there are that are not so easy to uproot because they work to the benefit of one group or other.

Are Americans Too Ignorant to Buy Good Mediterranean Food?

Dip maker Sabra claims that its competitors’ hummus is not “hummus-y” enough. To help consumers tricked by this horrible deception, Sabra has petitioned the Food and Drug Administration to regulate the definition of hummus. That definition just happens to coincide with the products that Sabra already sells.

I’m not an expert on hummus or the hummus business, but my guess is that many people like the idea of eating hummus more than they like the taste of traditional hummus. The result has been a proliferation of dips that contain some of the characteristics of hummus but otherwise appeal more to American tastes (such as Red Lentil Chipotle Hummus with Poblano Pepper & Corn Topping). Sabra wants the government to mandate what portion of a dip’s ingredients must be traditional hummus ingredients before a company can market that dip as hummus.

The move has been widely panned as a transparent attempt at regulatory protectionism.  

These development in the hummus industry are eerily reminiscent of recent attempts by the U.S. olive oil industry to “protect” consumers from its European competitors. The U.S. manufacturers have been trying to portray Italian olive oil as tainted and inherently untrustworthy. The U.S. firms want the federal government to impose new labeling and testing requirements on olive oil that would insulate the U.S. market and benefit domestic producers, who currently hold less than 2% of market share. 

Last year, Sallie James and I wrote a Cato policy analysis identifying some red flags that can help us identify protectionist regulations. Two of the most obvious ones are industry support of the proposed regulation and lack of a plausible theory of market failure. Basically, if a firm is asking the government to make the firm better serve its own customers for their own good, don’t believe it. The firm is looking for something else—probably to disadvantage its competition.

One of the best ways to get the government to stifle your competition is to frame your anticompetitive policy preference as advancing some altruistic public cause. The altruistic cause in the hummus case seems to be protection from tasty dips that are not made by Sabra.

Tim Cavanaugh at National Review astutely points out that Sabra, which is owned by PepsiCo and is by far the largest provider of retail hummus, is much more capable of dealing with the compliance burdens of FDA regulation than its competitors. He notes, “The claim that getting the FDA involved will promote a ‘spirit of fairness’ is a crock. And the crock is not filled with hummus.” 

Hopefully, Sabra will decide to dedicate itself to making and marketing competitive products–something it apparently does well–and stop trying to regulate away its competitors.