Topic: Regulatory Studies

Contrary to Trump-Sanders Theory Imports Rise in Booms and Fall in Recessions

Real GDP Growth and ImportsNearly all surviving Democrat and Republican presidential candidates (except John Kasich) have essentially endorsed the shared campaign theme of Donald Trump and Bernie Sanders that the U.S. economy is weak because we import too many goods from foreign countries.  If only we could raise the cost of imports with tariffs, according to the Trump-Sanders theory, then the U.S. economy would supposedly have more jobs and higher real wages.   

Paying more for anything (such as Fords or iPhones) is no way to get rich.  Yet that concept somehow eludes many non-economists.  Theory aside, the idea that fewer imports are good for the economy is the exact opposite of what we have experienced.  The fact is that U.S. imports always fall when the economy slips into recession and imports rise briskly whenever the economy does.

Marketplace Lending: Regulation Ahead?

The Consumer Financial Protection Bureau (CFPB) recently announced that it would start accepting consumer complaints about marketplace lending.  Marketplace lending, previously known as “peer to peer” or “P2P” lending, emerged in the aftermath of the financial crisis.  A combination of tightening credit markets and low interest rates created a perfect marriage between consumers looking for loans and investors looking for profit.  In its first incarnation, peer to peer lending served as an online matchmaking service, allowing prospective borrowers to post requests for loans to be reviewed by individuals willing to make those loans.  “Peer to peer” referred to the fact that the lenders were ordinary people, just like the borrowers.  The loans are non-recourse, meaning that if the borrower fails to repay, the lender is simply out of luck.  Although these would appear to be risky loans, in fact, the default rate has been surprisingly low: 4.9 percent at market-leader Prosper as of the end of 2014, and 5.3 percent at the other leader, Lending Club, during the period between Q1 2007 and Q1 2015.

The loans have performed so well that the market quickly attracted institutional investors and more sophisticated business models.  As the two leading providers of marketplace loans today, Prosper and Lending Club use the same (somewhat complex) model.  The companies issue notes to investors that are obligations of the issuing company. Simultaneously, WebBank, a Utah-based FDIC-insured bank, originates a loan which is sold to the company. The company pays for the loan with the proceeds from the sale of notes to investors. The loan is disbursed to the borrower. The borrower repays the funds in accordance with the terms of the loan. And the payments from the borrower are used to pay the purchasers of the company’s notes. The payment of the notes is explicitly dependent on the borrower’s repayment of the loan.

Since marketplace lending has gained momentum, there have been concerns about its regulation – expressed both by those who worry that it’s completely unregulated (not true, but there have been no new regulations specifically targeting the industry), and by those–like me–who worry that its innovation will be smothered while the industry is still in its infancy.

The Unintended Consequences of Sex Offender Registries

An article in the March 14th issue of the New Yorker describes the negative effects of sex offender laws on juveniles who get caught up in a legal system designed to protect children from adult sexual predators.  Adolescent sexual experimentation, especially when accompanied by age mismatch, and child misbehavior have become criminalized in ways that those interviewed in the article see as unintended, mistaken, and counterproductive.

The unanalyzed premise of the article, however, is that the public labeling of adult sex offenders is good public policy.  The logic underlying public notification laws for adults would seem to be sound: if a known sex offender is looking for a new victim, isn’t it useful if the offender’s neighbors know the person is a threat and can take measures to reduce their own risk of victimization?

In an article in Regulation Professor J. J. Prescott of the University of Michigan Law School examines the separate effects of police registration and public notification requirements on the incidence of sexual attacks.  He concludes that “each additional sex offender registered per 10,000 people reduces the annual number of sex offenses reported per 10,000 people on average by 0.098 crimes (from a starting point of 9.17 crimes). This sizeable reduction (1.07 percent) buttresses the idea that we may be able to use law enforcement supervision to combat sex offender recidivism.”  But the reduction is confined to friends and neighbors and has no effect on sex offenses against strangers.

In contrast public notification deters those who are not already registered but increases recidivism among those who are.  “… for a registry of average size, instituting a notification regime has the aggregate effect in these data of increasing the number of sex offenses by more than 1.57 percent, with all deterrence gains more than offset.”  “… the more difficult, lonely, and unstable our laws make a registered sex offender’s life, the more likely he is to return to crime—and the less he has to lose by committing these new crimes.”  “…if these laws impose significant burdens on a large share of former offenders, and if only a limited number of potential victims benefit from knowing who and where sex offenders are, then we should not be surprised to observe more recidivism under notification, with recidivism rates rising as notification expands.”

Are Financial Crises Now Less Likely?

According to many politicians and pundits, new financial regulation adopted since 2008 means that financial crises are now less likely than before. President Barack Obama, for example, has suggested that 

Wall Street Reform now allows us to crack down on some of the worst types of recklessness that brought our economy to its knees, from big banks making huge, risky bets using borrowed money, to paying executives in a way that rewarded irresponsible behavior.

Simliarly, Paul Krugman writes that 

financial reform is working a lot better than anyone listening to the news media would imagine…Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.

Krugman is right that, other things equal, forcing banks to issue more capital should reduce the risk of of crises.

But other things have not remained equal.  According to Liz Marshall, Sabrina Pellerin, and John Walter of the Richmond Federal Reserve Bank, the federal government is now protecting a much higher share of private financial sector liabilities than before the crisis:  

Leading Campaign Finance “Reformer” Would Stop You from Spending Money on Your Own Campaign

UC-Irvine’s Rick Hasen is undoubtedly the leading law professor who advocates restricting money spent on political speech (well, it’s between him and Harvard’s Lawrence Lessig). In an interview with Ron Collins that was posted on the popular legal-academic blog Concurring Opinions this morning, one of Hasen’s comments stuck out:

I would not allow a self-funded candidate to contribute/spend in the aggregate more than $25,000 on his or her own campaign.

This is remarkable. I mean, Hasen’s general approach of overturning Citizens United and restricting how much anyone can donate to any group that engages in election-related speech is par for the course on that side of the debate. As is, unfortunately, the exemption for “bona fide press entities” – whatever that means: I’m sure Hasen has balancing tests that distinguish Sheldon Adelson-owned Las Vegas Review Journal from the blog of Adelson’s Venetian/Palazzo casino – and government-financed campaigns (yes, the solution to the “money-in-politics problem” is to have the government control the money).

But to say that you can’t spend money on promoting yourself for public office… words fail. (This proposal likely wouldn’t even stop Donald Trump, by the way, depending on the specifics of the relevant legislation: most of his personal “contributions” have come in the form of loans that are supposed to be repaid out of the donations that he takes in.)

If the point of campaign-finance “reform” is to prevent corruption, how is it possibly corrupting to spend your own money on yourself?

Moreover, Hasen goes on to endorse overturning “the part of Buckley [v. Valeo, the 1976 case that heralded the modern camapign-finance regime] that rejected individual spending limits.” That means that campaigns would be limited in how much they could spend, regardless of how much money they raise in whatever increments from however many donors.

Unbelieveable. Wouldn’t it be healthier for our democracy just to remove all campaign-donation limits then have instant disclosure of donations beyond a certain threshold? (There needs to be a threshold because of the potential threat of intimidation and harrassment – see, e.g., the fallout from California’s Prop 8 campaign, where disclosure didn’t even make sense in the first place because a referendum initiative can’t be corrupted.)

Let the voters decide how much they care who gets how much funding from what source.

A Penalty’s Not a Tax Even if the IRS Enforces It

New IRS reporting requirements force U.S. banks to disclose interest-earning accounts of non-resident aliens to the government. (Apparently this is tax-authority mutual back-scratching: foreign nations are expected to reciprocally report this type of information about U.S. citizens with accounts abroad.) Under this regulation, refusing to disclose non-resident alien accounts results in a fine.

The Florida and Texas Bankers Associations are trying to challenge this regulation, but are being frustrated by interpretative jiggery-pokery that prevents their serious legal arguments from even being heard. While the federal district court allowed this lawsuit to proceed, the U.S. Court of Appeals for the D.C. Circuit reversed course and held that the associations couldn’t challenge the regulation because, under the Anti-Injunction Act (AIA), one can’t challenge a tax until the government has attempted to enforce the allegedly improper law and collect the attendant tax. The D.C. Circuit—seemingly imitating Chief Justice Roberts’s reasoning in NFIB v. Sebelius—held that the penalty triggered by failing to follow the new reporting requirements was a tax, thus subjecting the lawsuit to the AIA.

Cato has banded together with the National Federation of Independent Business to file an amicus brief in support of Supreme Court review. The AIA’s statutory language should be interpreted as the Supreme Court has interpreted the Tax Injunction Act (TIA)—confusing, but not the same law—because they contain almost exactly the same language. Under the TIA, one cannot challenge a regulation that deals with either the “assessment” or “collection” of taxes. Similarly, the AIA only prohibits challenges that have the “purpose” to “restrain” “assessment” or “collection” of a tax. Since the fine at issue is a penalty for regulatory non-compliance, not a tax as properly understood, the AIA shouldn’t bar judicial challenges.

Moreover, with the way in which the D.C. Circuit read the “penaltax,” it created an issue under the Administrative Procedure Act (APA). The APA contains a “strong presumption” of judicial review prior to enforcement of substantive regulations like the one at issue here. Congress intended that all agencies’ substantive regulations would be subject to such review under the APA—not that the IRS would have no accountability before federal courts. People have a right to be sure of a regulation’s meaning before engaging in costly compliance efforts—and that’s exactly what pre-enforcement judicial review provides.

Finally, the APA contains stringent procedural requirements for how regulations are to be promulgated. For example, there must be an adequate explanation of the rule, notice and an opportunity for comment, and publication of proposed rules in the Federal Register. The Treasury Department and IRS frequently ignore these requirements—recall the various Obamacare delays, waivers, rewrites, and suspensions—and these agencies must be reigned in.

The Supreme Court should take up Florida Bankers Association v. U.S. Department of Treasury and reverse the lower court’s dangerous precedent. You shouldn’t need to wait until the government attempts to enforce a penalty against you before being able to challenge it.

Seattle’s Minimum-Wage Law Is Unconstitutional (Not Just Bad Economics)

Seattle’s $15 minimum-wage law has received plenty of attention from those on both sides of the issue. What has received less attention is the way in which this ordinance distinguishes between businesses—and discriminates against interstate commerce.

The ordinance separates employers into two categories, those with 500 or more employees (Schedule One) and those with fewer (Schedule Two), and mandates that the first category implement wage increases more quickly than the second. But the law creates a special rule for Seattle franchises, placing them into the first category if the total number of employees in the franchise network is 500 or more.

A group of franchise owners, led by the International Franchise Association, challenged the ordinance, to no success in the lower courts. Cato is now supporting their petition to the Supreme Court. Seattle insists that this categorization is neutral as between in-state and interstate commerce, because a franchise network could be entirely within Washington. The reality is that all Seattle franchises that are in Schedule One have either an out-of-state franchisor or are associated with out-of-state franchises of the same brand. The law thus discriminates against interstate commerce in precisely the way the Commerce Clause was intended to prevent.

When the delegates met in Philadelphia in 1787 to revise the Articles of Confederation, one of their main concerns was the protectionism the states exhibited under the Articles. As James Madison said at the time, “Most of our political evils may be traced to our commercial ones.” The Constitutional Convention debated many things between May and September 1787, but there seems to have been general agreement that the new Constitution would give Congress power to regulate—“make regular”—interstate commerce.

Although today’s federal government has far exceeded the positive Commerce Clause power the Framers intended to give it—in terms of federal programs and regulations—the principle that states and local governments may not enact laws that discriminate against interstate commerce dates back to Chief Justice Marshall’s opinion in Gibbons v. Ogden (1824), and indeed all the way to the animating purpose of the Convention. That principle—known as the negative or Dormant Commerce Clause—applies both when Congress has passed legislation in the area and when it hasn’t. See Case of the State Freight Tax (1873).

One scholar has remarked that, under the Articles, the states were “marvelously ingenious” at designing protectionist measures. Seattle’s franchise categorization is just one such measure, which discriminates against interstate commerce in a subtler way than most of the protectionism that courts have considered.

While arguing that its law is constitutional, Seattle points to the fact that the burden of the law will fall on in-state actors (the Seattle franchises). Where the burden falls, however, is irrelevant to whether a law discriminates against interstate commerce. Just last term, in Comptroller of the Treasury of Maryland v. Wynne, the Supreme Court held that Maryland’s income tax scheme violated the Commerce Clause by taxing residents on income they earned out-of-state—even though, by definition, the burden of the income tax law fell on Maryland residents. Seattle’s franchise categorization also violates the Dormant Commerce Clause’s extraterritoriality principle because it makes the wage burden placed on Seattle franchisees dependent on the hiring decisions of independent (and most likely unknown) franchises in other states.

The Supreme Court should take up International Franchise Association v. City of Seattle and consider not the economic wisdom of minimum-wage requirements generally but the effect of this particular law on interstate commerce.