Topic: Regulatory Studies

The Story Of Detroit, In Three Observations

1) In the city of Detroit, more than one violent crime per day now takes place at a gas station. Specifically, reports the Detroit News, “Police have investigated nearly 700 violent crimes at Detroit gas stations during the past year, prompting city officials and citizen patrol groups to try to quell the steady beat of murders, carjackings, shootings and armed robberies.”

2) The Detroit city government does an astoundingly poor job of protecting gas stations, their customers, and pretty much everyone else from crime. It suffers from notoriously poor police response times (58 minutes for serious crimes) and closure rates on crime investigations (8.7 percent rate of solving cases). According to Motor City Muckraker, the Detroit Police Department has quietly discontinued putting out its “Major Crime Summary Report” and instead now puts out a summary report of cases that have resulted in arrests, which is better for its image.

3) The city council’s response? It’s to load new legal burdens on the gas stations, specifically by way of “a recent ordinance requiring owners to install security cameras by Aug. 31.” While some stations say they’re already doing that, Auday Arabo, the head of a dealer association, says the requirement “would present a financial hardship for many station owners”: “Is this what government is supposed to do? Mandate you become the surveillance company for the government?”

That’s certainly what Detroit seems to be doing. Strange how when governments fail utterly at their claimed core function of preventing violence, they so often can be found muscling into entirely new areas of coercion at the same time.

London Cabbies Hold Uber Regulation Protest

Today, thousands of drivers of London’s iconic black cabs are taking part in a possibly illegal demonstration in response to how Transport for London (TfL), the city’s transportation agency, is treating Uber. The drivers plan to cause congestion which Kabbee, a mini cab app company, believes will cost the London economy an estimated £125 million. Licensed taxi drivers are also holding protests related to Uber across other European cities today.

The Licensed Taxi Drivers Association (LTDA) believes that Uber, the San Francisco-based transport technology company, is operating illegally in London. Thanks to the Private Hire Vehicles (London) Act 1998, it is illegal for a London vehicle with a private hire vehicle license to have a taximeter. Up until yesterday Uber’s website stated that anyone who wanted to be an Uber driver in London must have a private hire vehicle license. Today those requirements remain the same, however in response to the London protest Uber has opened to licensed black cabs.

TfL disagrees with LTDA and believes that the phones used by Uber should not be considered taximeters because they are not physically attached to the vehicle:

Smartphones used by private hire drivers – which act as GPS tracking devices to measure journey distances and relay information so that fares can be calculated remotely from the vehicle – do not constitute the equipping of a vehicle with a taxi meter.

However, TfL has asked the High Court to rule on the matter. LTDA’s secretary general, Steve McNamara, believes the court is unlikely to announce a ruling before the end of the year.

McNamara has used blunt language when discussing Uber and its presence in London:

This is not some philanthropic friendly society, it’s an American monster that has no qualms about breaching any and all laws in the pursuit of profit, most of which will never see a penny of tax paid in the UK.

Becoming a driver of one of London’s black cabs is a long process. In order to be a London black cab driver you need to pass “The Knowledge,” a rigorous test on London’s thousands of streets, roads, and landmarks, which takes years to prepare for. Not only do those hoping to become London cabbies have to spend years studying London, they also have to pay the relevant fees to complete the application process.

Speaking to the BBC, London black cab driver Lloyd Baldwin said:

Our beef with Uber is that these drivers have come straight into London, and have been licensed straight away by Transport for London. We’re regulated to within an inch of our lives.

We don’t do protests willy-nilly for petty things, we feel it’s our only course.

and,

We just want them to be treated exactly the same as we are.

Baldwin’s frustrations make sense in light of the time and money invested into becoming a driver of one of London’s iconic taxis. But, as in other jurisdictions, the answer is not to make new and innovative companies like Uber conform to already out-of-date regulations and legislation, but rather to liberalize the market Uber and London black cabs are competing in. When the Private Hire Vehicles Act was signed in 1998 the iPhone was still nine years away, and “The Knowledge” test, which began almost 150 years ago, predates cell phones (never mind smartphones). Regulations such as the ban on private hire vehicle license holders from having taxi meters are out of date, and it is long past due for them to be repealed in order to allow traditional cabs to compete with companies like Uber.

FDA Decides Not to Walk the Cheese Plank… for Now

FDA:  You know that artisanal cheese you love, that you have to age on wood planks? That’s dangerous and we don’t approve.

Fancy Cheese Lovers:  Hey, FDA, these cheese wheels will be your tombstones.

FDA:  Oh. What? Did you think we meant we were going to regulate your much loved, centuries-old practices out of existence just because we’re a regulatory agency that stops people from doing things for a living? Of course we’re not doing that… right now… while the media spotlight is so bright it’s hurting our eyes… but you’d better convince us we should allow you to do that anyway.

The latter bit is what has apparently played out this morning, according to Forbes online.

But as Cato’s Walter Olson explains, this apparent victory for sanity and liberty may simply be due to the fact that the usual advocates of regulatory encroachment in every aspect of our lives happened to have been personally inconvenienced this time around, and may have had the subject-area knowledge to realize how ridiculous this encroachment was. So, for once, they pushed back instead of rooting for leviathan.

If so, let’s hope they learn a broader lesson from this experience: maybe other people should also be left to make their own choices in the areas about which they care deeply. Maybe all that stifles is not gold.

And if you call Uber or Lyft to pick up your fancy cheese in Virginia, be prepared to get busted…they’re still banned.

Did the FDA Just Ban European Cheese?

Up till now, the biggest concern of European cheesemakers in the U.S. markets has been to establish “geographic indicators” that would keep American companies from using names like gorgonzola, feta, or parmesan.  But does it matter what the product is called if no one is allowed to eat it?  A recent decision by the U.S. Food and Drug Administration (FDA) to ban cheese aged on wooden boards could potentially shut out the bulk of imports from Europe.

The FDA’s recent move seems to be part of a bizarre crusade to ban flavorful cheese.  Last year the FDA targeted mimolette cheese, inspiring informative commentary and a video by my Cato colleagues.  The stated reason for the ban was that mimolette rinds might contain trace amounts of cheese mites, a harmless critter essential to the creation of certain cheese flavors.

Now the FDA has gone full throttle and banned all cheese aged on wood.  According to the agency:

“The porous structure of wood enables it to absorb and retain bacteria, therefore bacteria generally colonize not only the surface but also the inside layers of wood. The shelves or boards used for aging make direct contact with finished products; hence they could be a potential source of pathogenic microorganisms in the finished products.”

Cheese on Wood

Does placing food on wood really make it too dangerous for humans to eat?

While this is certainly a problem for artisanal cheese makers in the United States, it could have serious implications for cheese imports from Europe.  According to the Cheese Underground blog, most cheeses imported into the United States are aged on wood.

Businesses in the United States often complain that European regulators are overly cautious when it comes to permitting new methods of producing food products with genetic modification or growth hormones.  The most common complaint is that European regulations are based on irrational fear of new things and not based on hard science.  Practices that are common in the United States are outlawed in Europe, preventing U.S. producers from selling their products overseas.

The FDA, apparently, is interested in eradicating the more traditional methods.  Can “science” truly justify the criminalization of patently safe production techniques intentionally employed to improve product quality.

Regulatory differences are the most salient issue being addressed in ongoing negotiations toward a free trade agreement between the United States and the European Union.  As U.S. negotiators push Europeans to adopt a more scientific approach to regulation, perhaps the EU negotiators should demand a bit more common sense.

Morris Adelman, RIP

According to the New York Times Morris Adelman, professor emeritus of economics at M.I.T. died on May 8 at the age of 96.  His work, including Genie Out of the Bottle (M.I.T. Press 1995), informed the papers and articles on energy policy published by the Cato Institute over the last 30 years.  A good summary of his views can be found in this article in Regulation from 2004.

His writing was refreshingly honest and is worth quoting at some length.

…conventional wisdom (there is that term again) is that Middle Eastern nations wield an “oil weapon” that they can use to punish the United States or any other nation.  In support of this belief, many people point to the 1973 “oil embargo” against the United States by Arab members of OPEC (except Iraq — Saddam Hussein profited by it). Secretary of State Henry Kissinger cruised around the Middle East many times to negotiate an “end” to it. Ten years later, he explained that the significance of the “embargo” was psychological, not economic. Recently, the London Economist quoted approvingly what I said in July 1973: If an embargo was declared, it would have no effect because diversion would nullify it. And so it was.

The embargo against the United States never happened, and could not happen. The miserable, mile-long lines outside of U.S. gasoline stations resulted from domestic price controls and allocations, not from any embargo. We ought not blame the Arabs for what we did to ourselves.”

“The real moral is this: It does not matter how much oil is produced domestically and how much is imported. Presidents may declare that there is an “urgent need” to cut imports and boost “energy independence” — no one ever lost political support by seeing evil and blaming foreigners. The facts are less dramatic.

Is Uber Really Worth $18 Billion?

Last Friday it was reported that Uber, the transport technology company that links passengers to drivers with its smartphone app, had raised $1.2 billion in a funding round valuing it at $18.2 billion.

The valuation means that Uber is worth roughly the same as Hertz Global Holdings Inc. and Avis Budget Group Inc. combined. As The Wall Street Journalnoted, “Only Facebook Inc. in 2011 raised capital at a higher valuation from private investors — an investment from Goldman Sachs valued the social network at $50 billion—according to VentureSource data.”

The reaction to the news has been mixed. In The Guardian, James Bell, who described the valuation as a “fantasy,” wrote the following in the wake of the news of Uber’s valuation:

… when you buy a tech stock at a huge multiple – and Uber’s revenues have been (generously) estimated at around $200m a year, which makes $18bn a borderline-insane 90x valuation – you’re making a bet that its profits down the line will be vastly larger than they are today. In fact, you’re betting that they will be almost unimaginably larger.

There is absolutely no reason to believe this is true. Uber has rivals in every market it’s in – both established players fighting off the insurgents, and Uber-like rivals with similar software products. Uber and all its rivals are dueling one another for taxis – lowering fares and their percentage takes, even offering lunch or $500 bonuses to drivers.

The Wall Street Journal’s Christopher Mims has described the valuation as “nuts,” and wrote that the “moat” protecting Uber from competition is “incredibly shallow,” arguing that drivers are driven by price rather than loyalty to Uber. Mims went on to say that the market Uber works in will remain easy to enter despite any of its attempts to deal with competition:

I say ride-sharing is “frictionless” because in its price war with Lyft, both companies are forced to constantly lower prices, and riders — especially those whom the company presumes will give up their cars — are naturally price sensitive. Even if Uber uses its funds to try to crush competition such as Lyft, the Lyft model is simpler than Uber’s and built on recruiting everyday folks, not professional drivers. It isn’t hard to enter this market.

Mims also argued that even if Uber captures 50 percent of the global taxi market in five years it would still be worth less than $18.2 billion.

However, over at Vox, Matthew Yglesias correctly points out that Uber and its competitors could greatly increase the size of the market for paid rides, which seems to be what Uber CEO Travis Kalanick has in mind. In a recent interview with The Wall Street Journal Kalanick said that Uber’s vision is, “Basically make car ownership a thing of the past.”

In Forbes, Mark Rogowsky writes that Mims is wrong to treat Uber as a replacement for taxis:

So long as you look at Uber as a taxi replacement, you’ll see it as something less than it’s already becoming in its early markets: A transportation app. In San Francisco, for years the taxi commission didn’t want to issue more medallions for additional cabs because there was ostensibly no real demand for them (As of last year, the city had 1,600 taxi medallions). Yet just 4 years after Uber’s launch, there are often well over 1,000 rideshare vehicles on the road during peak times.

Rogowsky’s article highlights two important points to consider when thinking about Uber and its competitors: 1) Unsurprisingly, bodies like San Francisco’s taxi commission are evidently not very good at estimating the demand for rides, and 2) while Uber is competing with traditional taxis it would be a mistake to think of it as a taxi replacement rather than a technology company that makes it easier for passengers to find drivers, be they professional chauffeurs or car owners trying to make some extra money on the side.

What makes the huge valuation especially remarkable is that Uber and its competitors are facing numerous regulatory challenges, some of which I wrote about last week. Yet despite these challenges, investors see an opportunity in Uber. Speaking to Reuters a spokeswoman for Summit Partners, one of the investors in the funding round, said, “Uber is one of the most rapidly growing companies ever, and we believe there are opportunities for continued tremendous growth.”

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.