Topic: Regulatory Studies

Who Benefits from Opportunities in the Online Platform Economy?

The rise of new business models in online platforms and the sharing economy have inevitably been met with calls for more regulations. In his most recent budget, President Obama proposed to expand funding for efforts to “crac[k] down on the illegal misclassification of some employees as independent contractors.” Policymakers at the state and local levels have also called for more stringent regulations on these new business models.

Over the weekend, voters in Austin failed to overturn the city council’s ordinance that would impose a series of new regulations on ride-hailing companies operating in the city, from requiring drivers to go through fingerprint-based background checks, to restrictions detailing where drivers can stop for drop-offs and pickups. In response, Uber and Lyft announced that they had suspended operations in the city. In light of this rush to regulate, it is important to consider the people who rely on the opportunities made available by the new online platform economy. People utilize these platforms in different ways. Some participants offset fluctuations in traditional income to maintain their standard of living, while others use the platforms to rent out assets to supplement earnings from their traditional jobs. People from every age cohort and across the income distribution earn money through these new business models. New regulations that obstruct the development of the online platform economy could harm the many different people who choose to utilize those opportunities.

In one report from the JPMorgan Chase Institute, the authors analyzed anonymized data from 260,000 customers with earnings from any of 30 established online platforms and found that a growing number of people are participating, but that their reliance on these platforms has not increased. In other words, more people are using these new models, but not as full-time jobs. Earnings represented 33 percent of monthly income in labor platforms, in which participants are connected directly to customers, like Uber or Lyft. In the capital platforms where participants rent or sell to customers, like Airbnb, earnings represented only 20 percent of monthly income. So in neither component are most participants relying on earnings from these platforms as the majority of their income, for most people these aren’t full-time jobs.

Federal Courts Shouldn’t Be Creating State Law

Should a federal court in Washington be guessing what common-law property rights a person has in New York, when there is a procedure in place that allows the federal court to ask the state’s highest court what the state law actually is? In Romanoff Equities v. United States, that’s exactly what the Court of Federal Claims (CFC, a special court that deals with monetary claims against the federal government) did, a “guess” that was subsequently affirmed on appeal.

The Romanoff family, as predecessors-in-title to a 1932 common-law right-of-way easement, had granted New York Central Railroad the right to “construct, operate and maintain” an elevated viaduct for the purpose of removing trains from pedestrian traffic in New York City. By the 1980s, however, the railroad no longer maintained the structure and, under the terms of the easement, the land and title were to revert to the Romanoff family. But the City of New York—wanting to convert the abandoned railroad viaduct into a recreational area (the High Line) that now includes taco trucks, salsa dancing, stargazing, retail shops, and other activities entirely unrelated to operating a railroad—asked the federal government to invoke the National Trails System Act and convert the easement into a public park.

The federal government granted the request, so the Romanoffs filed a lawsuit, arguing that converting the railroad right-of-way into a public park is a compensable taking under the Fifth Amendment. The Justice Department argued, and the CFC agreed, that the government’s conversion of the easement was not a taking because New York property law recognizes an “easement for anything” (!), allowing the City to use the property however it liked in perpetuity.

Why Big Tobacco Loves the New FDA E-Cig Regulations

Today the FDA issued new rules regarding the sale and production of e-cigarettes and e-cigarette “juice” (the nicotine solution that e-cigs vaporize). The regulations will severely hamper a thriving and highly competitive market, and “big tobacco” is jumping for joy.

It is often difficult to explain to non-free-market types how and why big business loves big government. The song is always the same: we need big government to stop and control big business. Today’s rule offers a great lesson in why that isn’t always the case.

Like most big companies, big tobacco is stuck in a rut–namely, traditional tobacco. When billions of dollars are invested in infrastructure to produce a single product, it is very difficult to shift that behemoth to a new line of production when the product becomes obsolete or unpopular. Thus, small businesses are often, if not usually, the first movers when it comes to innovation. Blockbuster Video, with a costly commitment to brick and mortar video stores, could hardly have been expected to change its entire business model to rental-by-mail or streaming. By the time the threat of  Netflix became existential, it was too late. Many times, when big businesses are in such a situation, one of their last ditch efforts will be to use government to prohibit or hamstring their competitors.

Big tobacco has had a similar problem for some time now. They’ve seen smoking rates fall precipitously, and all future projections show smoking rates continuing to fall. Imagine running a business where the demand to “grow, grow, grow” is belied by an inevitable and irresistible decline. So what do you do? Well, you try to expand into new products such as snus and e-cigarettes.

Yet big tobacco had the same problem that Blockbuster had with Netflix. They weren’t the first movers on e-cigarettes. As they continued to try to plow a field that had grown barren, small companies began to produce e-cigarettes, and people began to use them.

Full disclosure: I’m one of those e-cigarette smokers. What some have pejoratively called a “wild west” situation in desperate need of top-down regulation is actually a thriving market concerned with safety, innovation, and satisfying rapidly changing consumer preferences. There are sub-ohm vapes (huge clouds of smoke), vaporizers that look like lightsabers, vaporizers with variable voltages, and many others, not to mention the proliferation of juice flavors. My preferred vaporizer company, Halo Cigs, is constantly altering its products for better consumer satisfaction and safety.

Administrative Law Judges Are Unconstitutional

The administrative state has ballooned in size and power—essentially having become its own branch of government—and Cato has now filed an amicus brief saying enough is enough.

The Securities and Exchange Commission, no longer content with just regulating securities, has accused a company called Timbervest of fraudulently taking undisclosed real-estate commissions. Timbervest was found liable by an SEC administrative law judge (“ALJ”), but even without getting into the merits of the allegations, there are several problems with this prosecution inquisition.

First, ALJs are executive-branch officers who nonetheless are insulated from removal by the president. Yet Article II of the Constitution, to ensure democratic accountability, vests the president with power over the executive branch—including over quasi-judicial officers like territorial judges—and requires that he “take care that the laws be faithfully executed.” The relevant statute here prevents the president from doing just that by having three levels of officials between the president and the SEC’s ALJs, each of whom can only be removed for cause.

Second, the SEC picked the ALJ who heard this case, even though the Supreme Court has held that there is a reasonable fear of bias when “a man chooses the judge in his own cause.” This problem has become so systemic that a former SEC ALJ felt compelled to speak publicly about how ALJs were pressured to rule in the agency’s favor.

Third, there is a real problem with this matter being in an administrative forum at all. After all, this is real-estate fraud case, of a sort that courts—real courts—have heard since the Founding. Congress can assign new statutory rights that didn’t previously exist for adjudication in an administrative forum (for example, Social Security disability claims), but it can’t take away long-held freedoms without the due process that that only the judiciary can provide. Here the SEC permanently banned Timbervest’s owners from associating with any investment advisers. The Supreme Court has recognized the right of association for the advancement of ideas as a protected First Amendment right, which is not something that can be taken away without at least a jury trial. If the SEC wants to try this case, it needs to do it in a proper Article III judicial proceeding.

Accountability, impartiality, and the right to a day in court before constitutional rights are taken away: is that too much to ask? We hope that the U.S. Court of Appeals for the D.C. Circuit, the court charged with reviewing most administrative-agency actions, agrees that it’s not.

Thanks to legal intern Devin Watkins for his help with Cato’s brief, and this blogpost.

Dannon’s Yogurt Shift Shows Value of Private Product Standards

The New York Times reports that yogurt giant Dannon plans to change its milk supply structure to accommodate new consumer demands for sustainable agriculture and GMO-free food. In the United States, most milk used for yogurt is produced by rural dairy cooperatives that aggregate milk from many sources and ship it to central processing centers where it then goes through the production process. Milk buyers typically have little say in the standards dairy farmers use for feed, animal treatment, and other aspects of raising cows. The company, responding to consumer demand, is looking to change this production process so it has more say on such issues.

Calls for regulation of the agricultural production process to make similar changes are common. Activists have successfully persuaded many Americans to care about the way animals are treated on the farm. Some have proposed regulations to force farmers to change their practices. The question is whether regulation is the proper method of enacting the changes activists seek.

The private sector has shown it can successfully respond to consumer demands for products produced without socially undesirable processes or ingredients. Last year, I  noted here how chicken giant Perdue shifted to antibiotic-free products. Dannon is responding to similar incentives and is undertaking a similarly costly change.  

All of this comes without the need for government regulation to force the company to comply with a particular set of standards. Dannon’s shake-up of its milk supply chain is yet another example of how private companies react to consumer demands for changes in the way food is produced.

Research assistant Nick Zaiac contributed to this piece

Who Are the Victims of the Volkswagen Scandal? Not Their Customers

Volkswagen did a very bad thing: it installed software in hundreds of thousands of cars sold in the United States designed to defeat pollution tests, and then obfuscated when confronted with the evidence.

Last Thursday a U.S. federal court said that the company would either have to fix or buy back some 500,000 cars. The judge also indicated that Volkswagen would have to make a substantial payment to the car owners, regardless of how the problem is finally resolved, to make them whole.

I am all for applying a severe punishment to the company–fraudulently manipulating its equipment to evade a test result is an outrageous act that the government must punish to ensure companies don’t feel emboldened to emulate them. However, the judge lost me when he asserted that the recipients of this essentially tortious payment should be the injured car owners. From my perspective, I’m not that sure that they are victims here.

The drivers undoubtedly saw the resale value of their cars fall owing to the scandal, but that should be something that the car buybacks can account for without too much trouble. However, the higher emissions from the cars didn’t hurt the owners–it damaged the environment, which means it affected all of us, regardless of whether we own a Volkswagen.

“Death Rays” May Take Aim at Drones Near Airports

At first glance, it might seem that eagles, net-shooting bazookas, and “death rays” don’t have much in common. However, each has been proposed as a possible way to deal with errant drones that stray where they’re not supposed to be, including airports. The issues surrounding drones at airports re-emerged earlier this month when a drone reportedly hit an Airbus A320 approaching London’s Heathrow Airport. While it is not absolutely clear that the object that hit the plane was a drone, the incident does raise questions about how lawmakers and regulators should deal with drones buzzing around near airports. 

Anti-drone “death ray” machines may sound initially like an effective way to deal with drones hampering flights. Yet, such a device would probably not have been useful in the case near Heathrow. According to the Metropolitan Police, the drone hit the plane at 1,700ft (the legal drone limit is 400ft) above Richmond Park, the largest enclosed space in London. For those unfamiliar with London’s geography, below is a map showing where Richmond Park is in relation to Heathrow Airport.