Topic: Regulatory Studies

Europeans Want Regulatory Harmonization at G20 Summit

Reuters has a very disturbing article about the wish list that Europeans have put together for the April G20 Summit in London. Rather than focus on the source of the financial crisis by calling for sound money and elimination of housing subsidies, the Europeans want to dramatically increase the size and power of international bureaucracies such as the International Monetary Fund. But if the IMF completely failed to predict the financial crisis, why would anyone think the bureaucrats should get more power and more tax dollars? Not surprisingly, the Europeans also want regulatory harmonization, with every jurisdiction required to impose onerous levels of red tape. Apparently, the private sector needs to be punished to atone for the mistakes of governments. Not surprisingly, the Europeans also want to regulate private-sector pay. But the most dangerous plank in their platform is the call for sanctions against jurisdictions that reject the regulatory cartel and instead maintain market-based financial systems. This panoply of bad ideas is a direct threat to American interests, so it will be interesting to see whether the U.S. delegation acquiesces to these bad ideas:

European leaders met in Berlin on Sunday to prepare a common stance on overhauling global financial rules ahead of a broader summit of G20 nations in London on April 2. Below are highlights from a “chair’s summary” of conclusions from the meeting that was seen by Reuters: …We propose that the International Monetary Fund (IMF) and the Financial Stability Forum (FSF) be charged with monitoring and promoting the implementation of the international recommendations on putting the Action Plan into practice. We have today underscored once again our conviction that all financial markets, products and participants must be subject to appropriate oversight or regulation, without exception and regardless of their country of domicile. This is especially true for those private pools of capital, including hedge funds… We also agreed that credit rating agencies should be subject to mandatory registration and oversight. …A list of uncooperative jurisdictions and a toolbox of sanctions must be devised as soon as possible. …We will strongly advocate (at the London summit)…the development of an effective early warning system by the IMF and FSF, working in close cooperation. We will strongly advocate (at the London summit)…the adoption of principles on compensation practices to prevent bonus payments that contribute to excessive risk-taking. …We have agreed today to support doubling the funds available to the IMF.

When Will Ford Defend its Interests?

Earlier this week, the Congress and President Obama authorized a $787 billion borrow-and-spend plan to create “or preserve” 3.5 million American jobs. So, could there be a better time than now for GM and Chrysler to announce they will need billions more taxpayer dollars to avoid having to let go hundreds of thousand of workers? How likely is Washington to cut off the auto producers at this particular juncture?

It shouldn’t come as a surprise that GM and Chrysler are asking for a lot more money because, well, the warnings were issued. In fact, Bush’s decision to defy Congress and provide “loans” to GM ($9.4 billion) and Chrysler ($4 billion) back in December wasn’t even intended as a cure all. It was designed to buy time for the producers to come up with detailed viability plans for their next bite at the apple. And as expected, central to both viability plans, which were unveiled yesterday, is more taxpayer money.  At the moment, a combined $22 billion is being requested, which would bring the total doled out to just under $40 billion.

Just as stunning as the implied blackmail (give us money or we’ll give you idled workers) being perpetrated by GM and Chrysler is the continued silence of Ford. There is probably no company in America that stands to lose more from taxpayer subsidization of GM and Chrysler. (The foreign nameplate producers in the United States are also penalized by subsidies to GM and Chrysler, but in the current environment it is probably wiser for them to bite their tongues. And Ford is more of a direct competitor with the other Detroit producers than are the foreign nameplates, anyway.)

If GM and Chrysler were no longer producing, Ford would be able to pick up market share and productive assets from the others, and ultimately improve its own long term prospects. By keeping GM and Chrysler afloat with subsidies, the government is implicitly taxing Ford. Ford is facing unfair, government-subsidized competition, of the sort alleged against foreign producers all the time. But in this case, the subsidies are real, direct, quantifiable, and large. Ford is relatively healthy now, but continued subsidization of the others could well drive Ford to the trough, too.

When companies are losing billions per month with sales revenues continuing to shrink, it doesn’t require a finance degree to discern an imminent cash flow crisis. Even if the demand environment were picking up, these companies would still be losing money because their cost structures are impossibly inefficient. GM and Chrysler have nibbled around the edges to cut costs. Brands are being sold off or scrapped. Factories are being closed. Dealership arrangements are being terminated. But none of those changes addresses the big issues, particularly for GM: an unmanageable capital structure (its debt burden is too heavy), unmanageable legacy costs (paying for lavish promises made in the past), and uncompetitive operating costs (including still much higher than industry-average compensation).

Reorganization or liquidation under one of the bankruptcy chapters will condense the timetable for resolving this problem, will save taxpayer money, and very importantly, will speed the return to stability in the automobile market worldwide. It’s time for Ford to speak out on behalf of this solution too.

Executive Pay Restrictions

Government-imposed pay restrictions are generally a bad idea; we have literally centuries of evidence showing that price controls always undermine economic performance.

But in the case of executives who came begging to the feds after mismanaging their companies: Sorry, guys, you asked for it.

President Obama’s proposal gets me nervous since it may lead to further meddling by government, but there is a silver lining.  Bailouts are a major threat to the economy’s long-run dynamism, so I want to discourage companies from sticking their snouts in the public trough. Restricting pay for incompetent corporate executives is not a proper role of government (by definition, successful corporate executives do not try to loot taxpayers).  But propping up poorly-run companies is so misguided that second-best (or even 50th-best) options may be palatable.  Corporate chieftains who run their companies into the ground should not be allowed to simultaneously shift the burden of their mistakes to taxpayers and expect multi-million dollar pay packages.

The Freedom to Do Business

Cato author Tim Sandefur has a video on YouTube about a truly awful business regulation in Oregon, one that prevents anyone from starting a moving company without in effect the permission of the existing moving companies. As you can probably imagine, they aren’t eager to give it.

Sandefur and his employer, the Pacific Legal Foundation, are fighting the cartel:

Good for them.

Of Cab Fares and Health Care: Markets with Uncertainty Require Competition between Payment Systems

Last week, I was late for a briefing on Capitol Hill. Some would say that was because traffic snafus caused by the March for Life blocked the usual route from the Cato Institute to Capitol Hill, requiring our cabbie to circle back to Cato and take another route. I say the real reason was the D.C. Taxicab Commission.

The D.C. Taxicab Commission requires all cabbies to use the same fare system. Until recently, the commission required cabbies to use a zone system. Under the zone system, the fare from Cato to Capitol Hill was the same flat rate, no matter what route the cabbie chose or how long the ride. If a cabbie encountered a traffic obstruction that slowed him down, then he bore the cost of that lost time. He received no additional money for waiting in traffic or taking a longer route, and the lost time meant that he would collect fewer fares. Therefore, a cabbie that charges according to zones, or any fixed price per trip, has an incentive to learn about and avoid significant traffic obstructions.

Recently, however, the D.C. Taxicab Commission required all cabs to switch from zones to meters that charge by the minute and by the mile. Under the meter system, the passenger bears the cost of delay, because meters charge additional money for every extra minute and every extra mile. Therefore, cabbies have little incentive to learn about and avoid significant traffic obstructions.

In sum, if our cabbie were paid a fixed price for taking us from Cato to Capitol Hill, he probably would have paid more attention to traffic conditions – on the radio, his mobile phone, etc.. He would have known that the usual route was blocked, because he would have borne the cost of delay. But because the D.C. Taxicab Commission requires him to use a meter, he cared a lot less about delay.

The problem is not the meter system. The old zone system probably had its own perverse outcomes, perhaps dead zones where you couldn’t catch a taxi or cabbies who drove too fast. The problem is that the DC Taxicab Commission dictates a single payment system for all taxis. Absent that mandate, cabbies would use different payment systems and competition would force each to offer better service. “Zone” taxis would slow down and pick up fares in more areas, while “meter” taxis would try to avoid unnecessary delays.

Incidentally, that’s the same reason America spends too much on health care and so few Americans have electronic medical records.

The federal government is the largest purchaser of medical services and it effectively dictates a single payment system for most providers. Medicare pays providers on a fee-for-service basis, which is akin to paying cabbies on the basis of meters. (The federal tax code further encourages fee-for-service payment by insulating consumers from the cost of their health insurance.) As a result, doctors and hospitals have little reason to invest in things (e.g., comparative-effectiveness research, electronic medical records) that help avoid unnecessary services, because Medicare pays for unnecessary services. In contrast, prepaid group plans like Kaiser Permanente receive a fixed amount per patient, which is akin to paying cabbies on the basis of zones. Kaiser conducts comparative-effectiveness research and provides electronic medical records to its enrollees because Kaiser bears the cost of unnecessary or duplicative services.

Markets use competition between different payment systems to improve quality and reduce costs, particularly in markets with uncertainty. That form of competition is usually lost when government runs the show.

Government’s Broken Promise

I don’t make it a habit of reading New York Times editorials, but I gave in to temptation when I saw the title of today’s words of wisdom from the Times: “Government’s Promise.”

The editorial leads off:

When he accepted his party’s nomination last year, Barack Obama repudiated the “you’re on your own” ethos that had come to define the government’s relationship to the people.

With total federal, state, and local government spending as a percentage of GDP trending toward 40%, up from 30% at the beginning of the decade, how can the Times possibly suggest that a “you’re on your own” ethos has defined the government’s relationship to the people?  Americans can’t even go to the bathroom without the government interfering with that most intimate of human activities.

The Times continues:

He [Obama] said government cannot do everything, but he promised one that would do what individuals cannot do for themselves: “protect us from harm and provide every child a decent education; keep our water clean and our toys safe; invest in new schools and new roads and new science and technology.”

I’ll leave it to Cato’s national security experts to decide whether the government does a good job of protecting us from harm, but as an individual I’d be much more capable of protecting myself and my family were it not for government  gun restrictions.

Provide every child a decent education?  Utopian dreaming is fine until reality forces one to recognize that every child will never receive a decent education so long as federal and state bureaucrats, in conjunction with government-protected unions, rule the education roost.  See Cato’s education experts for more.

Clean water?  A 2005 Government Accountability Office (GAO) counted 27 different federal agencies providing financial support for domestic freshwater activities.  Twenty-seven.

Safe toys?  Once again, sounds nice.  But parents who entrust the nanny-state with the protection of their children do so at their own risk.  China, not exactly an example of a minimalist state, offers a good lesson.  Poor Zheng Xiaoyu – if only you had been an American bureaucrat you’d probably now be making six-figures as a K-street lobbyist.

Individuals can’t invest in new roads and new science and technology without the guiding hand – and bottomless pockets – of Uncle Sam?  A couple weeks ago I provided an example of how politicians allocate capital (taxes, i.e., confiscated capital) when building roads.  And if it were not for the government I wouldn’t be able to create this post on a computer and broadcast it over the internet while listening to music on my iPod?  I will admit that one Donna Gamble probably wouldn’t have gotten a cool Waverunner and big-screen television were it not for the National Science Foundation.

Why Congress Should Turn Federal Lands into Fiduciary Trusts

The Forest Service, Bureau of Land Management, National Park Service, and Fish and Wildlife Service collectively manage well over a quarter of the land in the United States. Several Cato Institute studies have called for privatization of these public lands, but this idea is strongly resisted by environmentalists, recreationists, and others. A new paper from Cato scholar Randal O’Toole suggests an alternative policy: turn them into fiduciary trusts. Under this proposal, the U.S. would retain title to the lands, but the rules under which they would be governed would be very different.