Topic: Regulatory Studies

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.

More Competition Would Lower Health Insurance Premiums

I know, not exactly a shocking revelation! Nevertheless, here’s an article from today’s Washington Post:

With much of the focus on Obamacare now on how much individual premiums could increase next year, a new analysis suggests there’s one way to keep them in check — more competition. That’s the conclusion of a new report from economists Leemore Dafny, Christopher Ody and Obamacare architect Jonathan Gruber.

If every insurer that had sold individual policies in 2011 participated in Affordable Care Act insurance marketplaces this past year, average premiums for a benchmark exchange health plan would have been 11.1 percent lower in 2014, the economists found.

Big insurance companies generally took a cautious approach to the new exchanges in 2014, limiting their participation in the health-care law’s first year amid concerns about too many sick patients signing up for coverage. The Affordable Care Act exchanges were created as a way for people to buy their own insurance if they couldn’t find affordable options elsewhere, like through an employer.

The Affordable Care Act exchanges are supposed to fuel competition in the individual market, which hasn’t traditionally been all that competitive. Before the health-care law, a single insurer covered more than half of the individual market in 30 states, according to the Robert Wood Johnson Foundation.

A point I’ve been trying to make for a while is that there is a large untapped source of competition out there which could help lower prices: foreign insurance companies.  With or without ObamaCare, American consumers would be better off with more companies in the market, and the nationality of those companies does not matter.  Unfortunately, my sense is that foreign companies are not all that interested in entering the U.S. health insurance market.  Maybe it’s too daunting a prospect (it’s a highly regulated market), or maybe they just haven’t thought of it.  In case it’s the latter, I’m going to keep putting the idea out there, in the hopes that it reaches the right person.

FCC’s Net Neutrality Rules

On May 15 the FCC announced a proposed rule that would govern the relationship between content providers and internet service providers.  Consumer groups argued the proposed rule was not strong enough because it did not ban differential arrangements between them.

The underlying economic issues are several.  Should the government concern itself with the relationship between the “creators” of things and the “transporters” of them?  In particular should economic profits go just to the creators of things?  Is it “wrong” for the transporters to extract some as well?  What if a creator of content and a transporter want to vertically integrate or enter into a long-term contract to end the costly dispute between them over the division of any economic profits?  Should such arrangements be forbidden because of the possibility such an entity would refuse to transport the content of a different creator?

These issues are not new.  In fact they first arose between railroads and the creators of “content” i.e. farmers, mines, steel mills etc. in the 19th century.  The political resolution of these issues was the Interstate Commerce Act of 1887.  It took about one hundred years for the experiment in transportation common carrier rate regulation to end.  Scholars have concluded that rate regulation raised rather than lowered transportation prices.  And the public has come to the same conclusion because in the quarter century since the end of transportation rate regulation, prices have decreased dramatically.  For a discussion of the rise and fall of transportation regulation see this article by Thomas Gale Moore.

In “Antecedents to Net Neutrality” Bruce Owen explicitly makes the link between the concerns of traditional transportation common carrier regulation and the contemporary notion of “Internet neutrality.”  Net neutrality policies could be implemented only through detailed price regulation, an approach that failed to improve consumer welfare in the transportation sector. History thus counsels against adoption of most versions of net neutrality.  Christopher Yoo has written a detailed history of how difficult common carriage regulation was to implement in traditional telecommunications regulation.  A shorter version will appear in the summer issue of Regulation.

The public debate over net neutrality also does not reflect the increased variation in the price and quality of its services that already exists.  Innovations such as private peering, multihoming, secondary peering, server farms, and content delivery networks have caused the Internet’s traditional one-size-fits-all architecture to be replaced by one that is more heterogeneous. Related, network providers have begun to employ an increasingly varied array of business arrangements and pricing. These changes reflect network providers’ attempts to reduce cost, manage congestion, and maintain quality of service. Policy proposals to constrain this variation risk harming these beneficial developments.

Would You Prefer Cronyism or Paternalism With Your Government Potatoes?

Government has so many ignoble tendencies, it’s often difficult to guess which ones are driving any particular policy choice.  For example, how does the government decide which products are available for purchase using WIC benefits?  As reported today in DC political newspaper, The Hill:

A new rider to the 2014 funding bill for the Agriculture Department forbids the agency from excluding “any variety of fresh, whole, or cut vegetables, except for vegetables with added sugars, fats, or oils, from being provided as supplemental foods” under the Women, Infants and Children nutrition program

Rep. Mike Simpson (R-Idaho) is a lead sponsor of the language and can be expected to defend it from attacks during a full committee markup of the bill. 

The Agriculture Department excluded white potatoes from its list of approved items in 2009 because it argued they do not contain enough nutritional value and people shouldn’t be encouraged to buy them. Lawmakers fighting the exclusion are predominantly from the largest potato-growing areas such as Idaho and Maine.

I’m hopeful that Congress and the USDA will figure out just the right mix of paternalism and cronyism needed to ensure the effectiveness of federal food assistance programs.

Signs of Progress in Marijuana Reform

Exactly as Cato adjunct Jeffry Miron suggested, American marijuana reform has been bringing big changes to Mexico:

Farmers in the storied “Golden Triangle” region of Mexico’s Sinaloa state, which has produced the country’s most notorious gangsters and biggest marijuana harvests, say they are no longer planting the crop. Its wholesale price has collapsed in the past five years, from $100 per kilogram to less than $25.

“It’s not worth it anymore,” said Rodrigo Silla, 50, a lifelong cannabis farmer who said he couldn’t remember the last time his family and others in their tiny hamlet gave up growing mota. “I wish the Americans would stop with this legalization.”

That’s actually great news: along with the big profits, marijuana brought northern Mexico tens of thousands of murders. We can all do without those. 

One possible negative consequence has been an observed increase in Mexican opium production, although it may be too soon to say whether opiate use is really on the rise, and if so, whether it’s been driven by a greater availability of heroin, or by the government cracking down harder on prescription opiate addicts.

Of course, the answer to that problem resembles the answer to our marijuana problem, and both resemble the way we finally stopped bootleggers under alcohol Prohibition: legalize, establish relatively sensible regulations, and let addicts get treatment in an environment free of fear and threat. One doesn’t have to be a Harvard economist to see why that approach makes sense.

The Limitations of State-Level Marijuana Legalizations

Vox has a nice piece on the difficulties faced by Colorado marijuana businesses due to the continued Federal prohibition of marijuana:

Even after legalization, it’s still very difficult — and potentially dangerous — to operate a marijuana business in Colorado.

The big problem: pot shops and producers still can’t work with banks, which see marijuana as too risky of a business due to federal prohibition. This is true in Colorado, where state law says marijuana is legal but federal law says it’s not.

This means marijuana businesses can’t take conventional loans, and they have to operate with only cash. And although several levels of government have tried to address the issue, they’ve had no success so far.

None of this is surprising, but it emphasizes that true legalization requires repeal of the federal ban. State-level legalizations are valuable, partly because they put pressure on the feds, but they are not enough.  Remember that during Prohibition, many states (including New York, New Jersey, and Pennsylvania) never banned alcohol, yet the federal prohibition did substantial harm, including in those states.

The Cost of Regulation

Gordon Crovitz has a nice piece in the Wall Street Journal, Monday May 5, titled “The end of the permissionless web” which sparks several thoughts.

What has made the Internet revolutionary is that it’s permissionless. No one had to get approval from Washington or city hall to offer Google searches, Facebook  profiles or Apple  apps, as Adam Thierer of George Mason University notes in his new book, “Permissionless Innovation.” [Available free and ungated here. - JC]

The central fault line in technology policy debates today can be thought of as ‘the permission question,’ ” Mr. Thierer writes. “Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?”

This brings to mind a recent discussion I’ve had with Glen Weyl and Eric Posner on their proposal for a financial FDA, in which financial companies have to get prior approval for any new products (here and here). I don’t think I ever expressed well just how much it strangles growth and innovation for companies to have to prove ahead of time, to the satisfaction of discretionary regulators and politicians, that their products are good. The following examples make the point forcefully.