Topic: Regulatory Studies

Uber Provides Case Against Occupational Licensing

By now we have all heard of the disruptive force that is the ridesharing company Uber. The company, which is beating traditional taxi companies at their own game, has caused headaches for competitors and regulators alike. Moreover, as Eduardo Porter argues in his New York Times column, Uber also brings the entire regime of occupational licensing into question.

Porter notes that Uber has made the public much more aware of the anti-consumer inefficiencies in the regulated taxicab industry. The medallion system limits the number of taxis on the roads.  Thus, the supply of cabs is much less than demand, which reduces the incentives for taxi owners to innovate and care about consumers.  Uber, outside of this licensing regime, has thrived while providing wages that are on par with (or more than) licensed taxi drivers.  This is possible because drivers (which are not in short supply) do not benefit from the limited number of medallions; only the medallion owners benefit.    

Porter cites the research of University of Minnesota economist and occupational licensing expert Morris Kleiner. Kleiner’s work describes how the labor market has changed since the early 1950s from blue collar and unionized to white collar and licensed. Protectionism has not declined. It has been transformed.   

The mischief created by occupational licensing appears to be a concern even for Democrats. The Obama administration has sought to streamline the licensing process nationwide, and the president’s Council of Economic Advisors seeks to subject licensure to cost-benefit analysis. 

For more from Morris Kleiner, see his recent essay from the Cato Reviving Economic Growth forum, or my other blog posts on his work.

Even the Benefit of the Doubt Won’t Save EPA’s Mercury Rule

Challenging an agency’s assessment of scientific research in court is typically seen as a fool’s errand. The courts may keep the regulatory state on a close leash where matters of constitutional law are concerned, and will give challenges regarding the proper interpretation of statutes a fair hearing before (usually) deferring to the government’s view. But an agency has to go seriously off the rails before the courts will second-guess its assessment of the scientific record underlying a regulation.

That’s what makes EPA’s super-expensive Mercury and Air Toxics Standards (MATS) rule so interesting: the agency’s own assessment of the scientific research shows there was no good reason to regulate in the first place. The Supreme Court is now reviewing EPA’s decision to plow ahead regardless, irrespective of the costs of doing so.

The Cato Institute’s amicus brief in Michigan v. EPA unpacks EPA’s own scientific assessment to show that regulation certainly is not (as the statute requires) “appropriate and necessary.” 

Power plants emit trace amounts of mercury, and mercury poses a risk to human neurological development when pregnant women consume fish tainted by it. But, as EPA has explained, mercury deposition in the United States “is generally dominated by sources other than U.S. [power plants].” In fact, the agency’s figures show that those plants are responsible for only about one half of one percent of airborne mercury.

Common sense would therefore suggest that reducing or even eliminating emissions from U.S. plants could have little or no appreciable effect on public health. And EPA actually agrees, finding that “even substantial reductions in U.S. [power-plant] deposition…[are] unlikely to substantially affect total risk.”

Is Ridesharing Safe?

Since the emergence of rideshare companies such as Uber and Lyft there has been a steady stream of commentary and news concerning their safety. When it comes to driver background checks, insurance, privacy, and vehicle inspections some claim that rideshare rides pose a greater threat to passengers than taxi rides.

In my Policy Analysis “Is Ridesharing Safe?” I examine the safety concerns related to ridesharing. While there are legitimate safety concerns, rideshare companies offer insurance coverage that compares favorably to the coverage for many taxis and are oftentimes more strict than taxi companies in regards to driver background checks. In fact, not only do ridesharing companies implement strict background check requirements, they also use features such as two-way rating systems that encourage good behavior on the part of both the passenger and the driver.

From the Paper:

An analysis of the safety regulations governing vehicles for hire does not suggest that ridesharing companies ought to be more strictly regulated. It does highlight, however, that in many parts of the country lawmakers and regulators have not adequately adapted to the rise of ridesharing, which fits awkwardly into existing regulatory frameworks governing taxis.

Read the full Policy Analysis here.

Judges Shouldn’t Tell Businesses Which Products to Make and Market

New York State is standing athwart medical progress yelling “STOP!” In a move straight from the pages of Atlas Shrugged, the state sued Forest Laboratories, the subsidiary of pharmaceutical giant Actavis that makes the Alzheimer’s drug Namenda IR, to force the company to continue making the drug, which was being phased out in favor of the new Namenda XR (which, among other improvements, need only be taken once a day rather than twice—a not insignificant plus when dealing with Alzheimer’s patients!).

Why would New York’s attorney general want to interfere with medical progress and the development of a better drug that would improve the lives of potentially millions of Americans? Perhaps to reduce state drug costs—maybe the state feels that the marginal benefit from switching to XR isn’t worth the marginal cost—or to provide a competitive advantage to the generic pharmaceutical industry (under New York law, when a patent expires—as IR’s will in a few months—the remaining prescriptions automatically switch to generics).

The state’s claim relies on some very dubious antitrust law and seeks to force Forest Labs to keep producing and offering IR under the same “terms and conditions” as before XR came out. Not only would this keep patients using an older, inferior drug, it would effectively compel Forest to support its competitors’ business strategy. The generics were already set to benefit from the hundreds of millions of R&D dollars Forest Labs spent developing IR, but now they get free advertising too.

Maybe the state doesn’t like the incentives created by the interplay of patent and antitrust law and FDA regulations—drug companies constantly develop and promote new drugs that monetize new patents—but no possible legal reason justifies the injunction that the state sought, which a federal district court recently granted! Even worse, the injunction is breathtakingly vague; in responding to Forest Labs’ motion for clarification, the judge acknowledged the vagueness but didn’t change his order, wishing the company “good luck”!

Setting aside the policy and ethical considerations underlying New York’s maneuver, the injunction order is a legal travesty. Cato has thus filed a brief supporting Forest Labs before the U.S. Court of Appeals for the Second Circuit. We argue that the order is impermissibly vague, that the doctrine of constitutional avoidance requires interpreting the order as not actually compelling Forest Labs to engage in speech that is protected by the First Amendment, and that to construe the order as actually imposing speech obligations would render the order unconstitutional.

The First Amendment does more than just limit the government’s power to prevent people from speaking, after all: it also prohibits the government from telling people—including companies—what they must say. That is especially the case when, as here, the speech being compelled goes against the speaker’s self-interest and sincerely held beliefs on how best to treat Alzheimer’s. If the district court below actually believes the injunction passes jurisprudential muster, well, “good luck.”

The Second Circuit will hear argument in New York v. Actavis later this month.

Cato legal associate Julio Colomba contributed to this blogpost.

FHA: On Mortgage Insurance and Adverse Selection

According to a White House release, the Federal Housing Administration (FHA), which insures lenders’ against borrower default, will be lowering its annual premiums. While I believe this to be a reckless move in the wrong direction, I am the first to say that setting the appropriate premium is a lot harder than it looks.

The fundamental problem facing any insurer, like the FHA, is that the risk profile of borrowers is influenced by the premium rates they are charged. Obviously a rate that is set too low will not cover losses and the insurance fund will lose money. But a rate set too high will drive away low-risk borrowers and leave the insurer covering only high risk borrowers (and likely also losing money). An insurance fund can easily find itself in a position where it needs to raise rates to cover losses from risky borrowers, but each rate increase only drives out the good borrowers, making the risk composition of the pool ever worse. If you want to see this spelled out with a lot of fancy math, I refer you to Joe Stiglitz and Andrew Weiss’s classic paper on the topic (which builds upon earlier work by Dwight Jaffee).

Figure 3 from Stiglitz and Weiss (below the jump) illustrates this tension. If you want to attract both low- and high-risk borrowers, you need to have a much lower rate than if you only want to attract high-risk borrowers. In fact, one of the rationales I often hear from advocates of expanding the FHA is that doing so will improve the health of the fund by attracting better quality borrowers.

The problem with this is that President Obama is quite explicit that his desire is to lower the credit quality of FHA borrowers. From the White House fact sheet: “FHA premium reduction will help hundreds of thousands of additional families own a home for the first time.” This initiative is targeted at first-time buyers, those who have not been able to get a loan previously. First-time buyers who have been previously “waiting on the sidelines” are likely to be younger and hence have lower credit scores on average, or else be older buyers who have had trouble finding credit because they are high-risk.

Such is also borne out in the FHA’s most recent origination report, which shows average FICO scores (a measure of creditworthiness) declining over recent years. Almost 60 percent of recent FHA borrowers have FICOs below 680. Almost 75 percent made a down-payment of less than 5 percent. If they would need to sell their homes within a few years of purchase, then given the transactions costs they’d need to bring cash to the table. This is not a high-quality book of business. 

As I wrote almost three years ago, if the FHA is serious about rebuilding its financial health and protecting the taxpayer, it needs to move in the direction of reducing its lending to higher-risk borrowers. If the agency is unwilling to do so, which appears to be the case, then any change in premiums should be up not down.

Challenging President Obama’s Immigration Action Even Though It’s Good Policy

Our immigration system is broken and Congress has shamelessly refused to fix it. Of course, this unfortunate circumstance doesn’t give the executive branch the power to institute reforms itself. Yet through a recently announced policy known as Deferred Action for Parental Accountability (DAPA), President Obama has given partial legal status to more than four million illegal migrants, entitling them to work authorizations and other benefits.

This unilateral action is good policy, bad law, and terrible precedent. Perhaps most importantly, it violates the separation of powers and is thus unconstitutional.

In what is becoming a routine occurrence under this administration, 25 states have sued the federal government in response to this executive action. The case is now before a federal district judge in Brownsville, Texas, who is entertaining the plaintiffs’ motion to enjoin DAPA.

Cato, joined by law professors Josh Blackman, Jeremy Rabkin, and Peter Margulies, has filed an amicus brief supporting the motion. It’s highly unusual for Cato to file at the district court level—indeed amicus briefs of any kind are unusual in this forum—but this is a highly unusual situation.

To be clear, we support comprehensive reform that would provide relief to the aliens protected by DAPA (among many other goals), but it’s not for the president to make such legislative changes alone.

President Obama has defended his action by citing past deferrals for (1) battered and abused aliens, (2) aliens involved in human trafficking, (3) foreign students affected by Hurricane Katrina, and (4) widows of U.S. citizens. But these deferred actions, to the extent they’re relevant here, served as temporary bridges from one legal status to another, not tunnels that undermine legislative structure or detours around the law to hitherto unknown destinations. Moreover, they were several orders of magnitude smaller than DAPA, in the tens of thousands not the millions. Most significantly, they were all approved by Congress.

None of these principles holds true for DAPA. The administration itself stated the applicable test in the memorandum setting out DAPA’s legal justification: “an agency’s enforcement decisions should be consonant with, rather than contrary to, the congressional policy underlying the statutes the agency is charged with administering.” This executive action represents a fundamental rewrite of the immigration laws that is inconsistent with the congressional policy currently embodied in the Immigration and Naturalization Act (INA)—a policy that, again, those who joined this brief by no means endorse.

As Prof. Blackman explains in a new law review article, DAPA is in palpable tension with the INA, implementing under the guise of executive discretion wholesale waiver/suspension/deferral that swallows the enforcement rule. Indeed, Congress rejected or failed to pass immigration-reform bills reflecting this policy several times, so executive power in this area is “at its lowest ebb,” to use Justice Robert Jackson’s famous formulation from the 1952 Steel Seizure Case.

In our constitutional architecture, executive action based solely on Congress’s resistance to presidential policy preferences has no place. While we agree that the immigration laws need to be overhauled and sympathize with the plight facing undocumented aliens, the path designed by the Framers for implementing needed reforms goes through the halls of Congress. Unilateral exercises of power such as DAPA undermine the separation of powers and ultimately the rule of law.

Judge Andrew Hanen, who was nominated by George W. Bush and unanimously confirmed by the Senate, will hold his preliminary injunction hearing in Texas v. United States on Jan. 15 in Brownsville, Texas.

Nine TEN! Questions on the House Vote to Tweak ObamaCare’s Employer Mandate

Tomorrow, the Republican-controlled House of Representatives will vote on a measure that would alter the definition of full-time work, for purposes of the Patient Protection and Affordable Care Act’s employer mandate, from 30 hours per week to 40 hours per week. The measure is likely to pass. The House approved a similar measure last Congress, but it never went anywhere in the Senate, which was then under Democratic control. Now that Republicans have a majority in the Senate, there’s a chance the measure could clear both chambers of Congress. The president threatens a veto. Yuval Levin writes this change “seems likely to be worse than doing nothing.”

I have a few questions about this supposed threat to ObamaCare:

  1. This legislation would reduce the burden of ObamaCare’s employer mandatem but it would also increase government spending by making more workers eligible for health-insurance subsidies through ObamaCare’s Exchanges. How is that a policy victory?
  2. The legislation would therefore shift part of ObamaCare’s cost from an organized and influential interest group (employers) to a disorganized and less-influential interest group (taxpayers). How is that strategically smart?
  3. The legislation would make ObamaCare more tolerable for an organized and influential interest group (again, employers), thereby reducing their incentive to lobby for full repeal. How is that strategically smart?
  4. House Republicans say they are committed to repealing ObamaCare entirely. If so, why is this bill, rather than a full-repeal bill, the first item on their agenda? 
  5. House Republicans say this bill will show they can govern. But they also acknowledge the president will veto it. How is that governing?
  6. This legislation would merely lessen the burden of the employer mandate, and only for some employers. By June, however, the Supreme Court could completely invalidate employer-mandate penalties for all employers across 36 states. (See King v. Burwell.) How is this legislation a wise use of Congress’ time, when a Supreme Court ruling could go much farther in just a few months?
  7. A King ruling could also invalidate Exchange subsidies in 36 states, thereby exposing millions of Americans to the full cost of ObamaCare’s hidden taxes. That would give Congress more leverage than ever before to reopen and repeal the law. With this legislation, House Republicans are playing small ball with no leverage. How is that strategically smart?
  8. If enacted, this legislation would actually reduce the leverage a King ruling would give Congress to reopen and repeal ObamaCare. How is that strategically smart?
  9. The president has said he would veto this legislation. Given the above, should Republicans believe him?

Note that many of these questions also apply to repeal of the employer mandate before a King ruling, and sometimes after.

Update: I forgot a question. (Ten questions!)

10. This legislation would repeal a perverse incentive for employers to cut workers’ hours from just above to below 30 hours per week. It would replace that perverse incentive with a perverse incentive to cut the hours of other workers from just above to below 40 hours per week. Those other workers would complain that Republicans just made ObamaCare worse for them. How is that a political win, or strategically smart?

(Cross-posted at Darwin’s Fool.)