Topic: Regulatory Studies

Bootleggers & Baptists, a Welcome Correction

In my recent “Bootleggers & Baptists, Sugary Soda Edition” post, I wrote that environmentalists and agribusiness team up to support ethanol subsidies. An alert Cato@Liberty reader writes to my colleague Jerry Taylor:

[Cannon] is no doubt right that environmentalists and agribusiness worked together to promote government subsidies to ethanol through about 2006. But by 2007 (when the ethanol mandate was doubled) the environmentalists had dropped out of the pro-ethanol coalition, to be replaced by national-security hawks! If you run into him, please tell him to stop blaming environmentalists for current biofuels policies!

If environmentalists have recently dropped their support for ethanol subsidies, they deserve credit for that. Mea culpa.

I would rather have been completely wrong about the environmentalists’ support for ethanol subsidies. But I’ll settle for being partly wrong.

‘What Can We Get Away With?’

A New York Times account, based on an open-records request, sheds light on how Mayor Michael Bloomberg’s famously nannyish health department makes up its mind how far to go in food-scare advertising. In particular, a proposed YouTube campaign to scare consumers away from sweetened sodas resulted in

a protracted dispute in the department over the scientific validity of directly linking sugar consumption to weight gain — one in which the city’s health commissioner, Dr. Thomas A. Farley, overruled three subordinates, including his chief nutritionist.

Some highlights:

  • “The scientists, she said [nutritionist Cathy Nonas], ‘will make mincemeat of us.’”
  • “’Basic premise doesn’t work,’ Dr. Michael Rosenbaum, a professor of pediatrics and clinical medicine at Columbia”
  • “’The science [i.e., efforts to be more accurate and precise in conveying the science] absolutely weakens our potential for mass distribution,’ [campaign manager Sabira] Taher wrote.”
  • “’I think this is broad enough to get away with,’ [Nonas] wrote [of the final video].”

Isn’t it comforting to think that the city administration of New York – and its federal counterpart, staffed by very similar sorts of activist officials – are also in charge of regulating private advertising of food and many other products to make sure such ads are fair and not misleading?

Misleading Headline Dept.: ‘Council Aids West Side Housing’

At his must-read blog Future of Capitalism, Ira Stoll points out (reprinted by permission) an instance in which the news-side WSJ uncritically accepts at face value the claims of New York City politicos:

“Council Aids West Side Housing” is the headline over a news article in the Wall Street Journal reporting, “A change to city zoning laws aims to preserve affordable housing for a large swath of the West Side, blocking new development in the Garment District, West Chelsea and Hudson Yards….The City Council voted on Wednesday to extend a zoning-law amendment that previously has been applied to Clinton, a midtown West area also known as Hell’s Kitchen. It now will also restricts landlords or developers from changing more than 20% of any multi-family building in the additional West Side neighborhoods. Council members say the rules will allow for building renovations but not demolitions…..About 1,500 units in 108 buildings will fall under the new amendment….The vote on Wednesday was an extension of the 1974 Clinton Special District amendment, which was passed to protect that area’s low-rise character and affordable housing.”

A free-market-oriented economist with some common sense might point out that restricting new high-rise development may preserve “affordable housing” for the lucky few occupants of the 1,500 units now locked into place. But this free-market-oriented economist with some common sense might also point out that by restricting the supply of new housing units, the change in the law won’t “Aid Housing,” as the headline claims, but it will actually hurt housing by making it illegal to build much more of it. People living outside these neighborhoods who would like to move in will have a harder time doing so now that the government has artificially restricted the housing supply. The Journal article doesn’t get into this.

A commenter further points out that the land-use freeze will cut into the property tax base on which the city can draw, meaning that the city will raise funds by taxing someone else – another reason to expect that life for city newcomers will be less affordable in coming years, not more.

Bootleggers & Baptists, Sugary Soda Edition

Here’s a poor, unsuccessful letter that impressed the relevant New York Times reporters, but not their editorial overlords:

It may seem counter-intuitive that bleeding-heart anti-hunger groups and “Big Food and Big Beverage” would ally to oppose Mayor Bloomberg’s request to prevent New Yorkers from using food stamps to purchase sugary sodas [“Unlikely Allies in Food Stamp Debate,” October 16].  Yet the “bootleggers and Baptists” theory of regulation explains that this “strange bedfellows” phenomenon is actually the norm, rather than the exception.

Most laws have two types of supporters: the true believers and those who benefit financially.  Baptists don’t want you drinking on the Lord ’s Day, for example, while bootleggers profit from the above-market prices that Blue Laws enable them to charge on Sundays.  Consequently, both groups support politicians who support Blue Laws.

Baptists-and-bootleggers coalitions underlie almost all government activities. Defense spending: (neo)conservatives and defense contractors.  President Obama’s new health care law: the political left and the health care and insurance industries. Ethanol subsidies: environmentalists and agribusiness. Education: egalitarians and teachers’ unions. The list goes on.

It’s easier to illustrate the theory (and sexier) when the bootleggers are non-believers who cynically manipulate government solely for their own gain.  Yet one can be both a Baptist and a bootlegger. The Coca-Cola Company may sincerely believe that society benefits when the government subsidizes sugary sodas for poor people.  Even so, a bootlegger-cum-Baptist can still rip off taxpayers.

This morning, NPR reported on another bootleggers-and-Baptists coalition: anti-immigration zealots and the prison industry.

It Ain’t So, Joe

Vice President Joe Biden is an affable fellow, which sometimes makes his tendency to exaggerate the truth somewhat amusing. However, Biden’s latest tall tale is as unamusing as it is wrong.

From the New York Daily News:

“Every single great idea that has marked the 21st century, the 20th century and the 19th century has required government vision and government incentive,” he said. “In the middle of the Civil War you had a guy named Lincoln paying people $16,000 for every 40 miles of track they laid across the continental United States. … No private enterprise would have done that for another 35 years.”

I’ll go straight to the 19th century railroads issue by referencing the work of two Cato scholars who probably know a little bit more about the topic than Joe Biden.

First, Randal O’Toole discusses railroads and land grants in his book Gridlock: Why We’re Stuck in Traffic and What to Do About It:

Early American railroads were built almost entirely with private funds. These railroads provided such superior transportation that by 1850 they had put most toll roads and canals out of business. Individual states still competed with one another for business—and may have offered various favors to the railroads serving those states…. For the most part, however, no federal and few state subsidies went to railroads in the eastern United States.

The Pacific Railway Act provided land grants and low-interest loans to the companies completing the railroad from Council Bluffs, Iowa to California. Later laws provided land grants (but no low-interest loans) for railroads from St. Paul to the Puget Sound, Los Angeles to New Orleans, Los Angeles to St. Louis, and Portland to San Francisco. In total, about 170 million acres were granted to the railroads, but Congress eventually took back about 45 million acres for nonperformance, leaving the railroads a maximum of about 125 million acres.

Congress expected that the railroads would sell the land to help pay for construction. In many instances, there was no immediate market for the land. Much of it was not farmable, and the United States had a surplus of wood so there was little market for timberland. In the latter half of the 20th century, the energy and timber resources on lands granted to the Northern Pacific, Southern Pacific, Sante Fe, and Union Pacific railroads proved very profitable. But this did not help them build the railroads in the first place.

In January 1893, the Great Northern Railway completed its route from St. Paul to Seattle without any land grants (except a small grant to a predecessor railroad) or other federal or state subsidies. The railway competed directly with the Northern Pacific, and to some extent with the Union Pacific, which served some of the same territory. The Great Northern’s builder, James J. Hill, knew that the other railroads had been built primarily for the subsidies, and as a result, they were poorly engineered and often followed circuitous routes. Hill built the Great Northern along the most direct route his engineers could find, so his operating costs were far lower than competitors’.

When the economic crash of 1893 took place a few months later, the Northern Pacific, Union Pacific, and almost all other western railroads went into receivership…Many people predicted that the Great Northern would not be able to compete and would follow the others into bankruptcy. But Hill managed to stay out of receivership, and the Great Northern remained the only transcontinental built in North America without government subsidies that never went bankrupt.

By 1930, American railroad mileage peaked at about 260,000 miles…only 18,700 of these miles were built with land grants or other federal subsidies.

Second, Jim Powell writes about government corruption and 19th century railroad subsidies in his book on Teddy Roosevelt, Bully Boy: The Truth About Theodore Roosevelt’s Legacy:

Whenever politicians interfered in the railroad business, however, corruption and inefficiency inevitably occurred. The most dramatic case involved construction of the first intercontinental railroad. Railroad lawyer Abraham Lincoln supported the project, and he made it a priority after he became president in 1861…

Stephen Ambrose and other historians have faulted private markets for lacking the capital or the imagination to build the transcontinental railroad. Certainly it was true that private entrepreneurs and financiers did not see the point or risking huge sums to build a railroad across a vast, empty, and sometimes mountainous terrain. Private entrepreneurs and financiers added value by developing the rail network bit by bit, supporting the expanding freight business. The process was gradual. Grandiose schemes like the transcontinental railroad drained resources from some regions to benefit special interests.

There was no money to be made from operating a railroad through a desolate wasteland, yet the federal government rewarded railroad contractors with big subsidies: a thirty-year loan at below market interest rates; twenty sections (12,800 acres) of government-owned land for every mile of track; and an additional subsidy of $48,000 for every mile of track laid in mountainous regions.

Thomas Durant, Oakes Ames, and other officers of the Union Pacific Railroad, which went a thousand miles west from Council Bluffs, Iowa, started the Credit Mobilier company in 1867 and retained it to do the construction. Credit Mobilier distributed to shareholders profits estimated at between $7 million and $23 million, depleting the Union Pacific’s resources. In an effort to stop congressional investigations, the officers bribed Speaker of the House James G. Blaine and other congressmen with Credit Mobilier stock. Seldom modest about their thievery, congressmen voted themselves a 50 percent pay raise. The Union Pacific Railroad fell deep into debt, without enough revenue from passengers or shippers, and went bankrupt in 1893.

It is not surprising that Joe Biden, an individual who has spent his entire career in government, possesses a child-like devotion to the federal government’s capabilities. Biden is a major proponent behind the Obama administration’s misbegotten plan to build a national system of high-speed rail. That Biden stands to achieve historic notoriety for helping facilitate this latest government boondoggle is only fitting.

See Cato essays on federal transportation subsidies and the Department of Transportation timeline, which notes the Credit Mobilier scandal:

1872: The New York Sun exposes the Credit Mobilier scandal, perhaps the largest business subsidy scandal of the 19th century. Credit Mobilier is a construction company financially controlled by the leaders of the Union Pacific Railroad that makes huge profits at taxpayer expense. Congressman Oakes Ames (R-MA), who is an agent of Credit Mobilier and part-owner, distributes shares of the firm’s stock to members of Congress at a discounted value. In return, those members treat Credit Mobilier favorably in a variety of ways, such as by voting to appropriate funds for the firm. The scandal illustrates the corruption that usually results when the government intervenes in the economy and subsidizes businesses.

The Phantom Menaces in the ACLU’s Case for Net Neutrality

I’m accustomed to finding myself on the same page as the American Civil Liberties Union–and in particular with the razor sharp Jay Stanley, who heads their Technology & Liberty program. But their recent report urging the necessity of net neutrality regulation only makes me more skeptical. I’ve always pretty much shared the position of my colleague Tim Lee: The open, end-to-end nature of the Internet is an important driver of both innovation and free expression–important enough that if it were systematically threatened, there would be a decent case for regulatory intervention. But that end-to-end architecture is also pretty resilient, even if some ISPs might wish otherwise. And while it’s easy to think of deviations from neutrality that would be pernicious, it’s also not hard to imagine specific non-neutral practices that might benefit consumers without undermining that broader end-to-end structure. The real policy question ought to be how to get enough competition in broadband markets that consumer choice selects for the latter against the former. Since broadband isn’t all that competitive in many regions, the question is whether we can afford to wait and deal with problems as they arise in a narrowly tailored way, or whether there’s some urgent need for a broad architectural mandate.

The ACLU says there is, and cites ten terrifying “abuses” that supposedly show the need to legislate now. But as I read over the list, I found I couldn’t help but think of those old Saturday Night Life “Coffee Talk” sketches, where a farklempt Mike Meyers would throw out such food for thought as: “Grape Nuts contain neither grapes nor nuts, discuss.” Because ACLU’s list of abuses mostly consists of examples that either aren’t actually net neutrality violations, or for which there are obvious remedies that don’t require neutrality regulation. Let’s discuss:

  • AT&T’s “jamming” of a Pearl Jam concert, in which singer Eddie Vedder’s remarks attacking then-president George Bush were bleeped out of a webcast. Obviously, it would be pretty troubling if your ISP were filtering your datastream to remove political content of which it disapproved. But that’s not what happened here at all. AT&T, via a deal with the Lollapalooza music festival, was streaming the Pearl Jam concert on its own content hub. Now, obviously, whoever was editing the stream and decided to treat criticism of Bush as equivalent to profanity made a highly dubious judgment call, but the point is that AT&T was acting as a content provider here, not a carrier: The filtering happened before the content hit the network, and no proposed neutrality rules I’m aware of would have prohibited this.
  • BellSouth’s “censorship” of Myspace. According to BellSouth’s own account, a glitch in their system temporarily left their outraged users unable to access the popular social networking site. “Some suspected” that the company was actually testing some kind of tiered access system, and decided to do so by blocking a popular site without notice, antagonizing their paying customers. Some also suspect the moon landing was faked, but I wouldn’t make it the basis of legislation.
  • Verizon briefly denied the abortion-rights group NARAL access to a program whereby users who texted a dedicated “short code” could sign up for SMS updates; the company almost immediately reversed its decision. This is, obviously, not a case involving Internet neutrality, and while it’s certainly a case involving the ability of a network owner to discriminate between users of its network services, the issues involved are pretty different. These “short code” services often permit users to either sign up for fee-based updates or donate money to causes via charge added directly to their monthly phone bill. As indicated by their prompt reversal, the rationale for denying NARAL here–desire to avoid partnering with causes on either side of a “controversial” issue–was probably ill considered, but this is clearly a case where the company is partnering with the provider in a way that goes beyond carriage, because they’re also effectively acting as a payment processor. That means they’ll have an interest in vetting partners in a way you wouldn’t expect a mere carrier to vet every content provider on the network. Even if you think this particular type of discrimination ought to be prohibited, this is really a distinct case raising issues separate from those involved in the Internet Neutrality debate, and ought to be considered separately.
  • Proposed filtering for copyright infringement. This is indeed a terrible and, in practice, unimplementable idea–for one because there’s no easy way to distinguish illegal from legal copying (as when I stream music I’ve purchased from my desktop or server to a mobile device). There’s also a pretty good case that this would already be illegal under federal wiretap laws…which may be why the “proposals,” referenced in an article from January 2008, haven’t actually gotten anywhere.

There are a handful of other cases that either may or definitely do count as potentially troubling neutrality violations–the most famous being Comcast’s throttling of BitTorrent traffic. At least two involve ISPs in Canada, which I wouldn’t have thought is the FCC’s problem. In some of these cases, I’d even agree that regulatory action is justified–but by the FTC, not the FCC. If you are advertising access to “the Internet,” then choking off access to whole classes of popular services or degrading throughput well below advertised speeds, well, that’s what we call a deceptive business practice. (In a more libertarian world, this might be handled by another mechanism; in the world we’ve got, it’s the FTC’s lookout.) Maybe there’s a case to be made for more specific transparency rules to establish when and how consumers have to be informed about non-neutral routing policies–certainly no ISP should be allowed to block access to a website and conceal the policy by making it look like a technical glitch–but I have no idea why you’d make the leap to a sweeping architectural mandate before trying something along those lines.

More generally, I’m a little puzzled about why the ACLU is weighing in on this at all. It’s true that ISP routing practices, like the practices of many private firms, could have implications for “free expression” broadly conceived. But not everything that might promote or hinder expression is part of the civil liberties portfolio, which has traditionally been limited to restraints on freedom imposed by government. To the extent federal policies inhibit broadband competition, one might say the government is in some sense complicit in whatever private policies restrict expression, but here again, the obvious remedy is to look for more pro-competitive policies. In any event, this is far enough outside their usual wheelhouse that you’d think it would make more sense for them to remain, well… neutral on this one.

Chinese Drywall Maker Held Accountable without Congressional Meddling

This summer, the House Energy and Commerce Committee approved a bill that would require foreign companies that import goods to the United States to appoint a legal representative in the United States who could be sued if their products caused injury. Exhibit A in the push for the bill was the case of contaminated drywall from China.

Advocates of the bill, titled the “Foreign Manufacturers Legal Accountability Act,” say it is necessary to ensure compensation for American consumers injured by faulty foreign-made products. Without a designated domestic agent, foreign companies could escape liability by dodging efforts to serve them with papers in a lawsuit. Hearings earlier this year highlighted the case of the drywall, in which damaged homeowners were finding it difficult to sue the Chinese producer.

The trouble with this approach, as my colleague Sallie James and I pointed out in a recent Cato Free Trade Bulletin, is that it would impose an additional burden on importers without adding significantly to the ability of consumers to gain compensation. We argued that sufficient remedies exist without adding a new law that looks suspiciously like a non-tariff trade barrier designed to protect U.S. manufacturers from foreign competitors.

As Exhibit A on our side, it was announced this week that a group of affected homeowners has struck a deal with the Chinese drywall company for compensation. As The Wall Street Journal reported in today’s edition:

Knauf Plasterboard Tianjin, along with suppliers and insurers, agreed to remove and replace the company’s drywall, as well as all the electrical wiring, gas tubing and appliances from 300 homes in four states.

They also agreed to pay relocation expenses while the houses, in Alabama, Mississippi, Louisiana and Florida, are repaired. The cost of fixing the houses, expected to take several months, is estimated from $40 to $80 per square foot per home. At $60 per square foot for a 2,500 square-foot home, the cost would be about $150,000.

Although the settlement involves a fraction of the homeowners who have file claims over the past few years, it is seen as a possible model for the resolution of other pending state and federal lawsuits …

The deal for compensation shows that the existing system works reasonably well for foreign-made as well as domestic-made goods. Congress should give up its efforts to place needless obstacles in the way of imports in the name of solving a problem that does not exist.