Topic: Regulatory Studies

Las Vegas’ Hepatitis-C Crisis

Las Vegans have been a little jumpy – and rightfully so – since public health officials revealed that a number of endoscopy clinics re-used syringes and medication vials, thereby infecting at least seven patients with hepatitis-C

Nevada’s physician-licensing board has proved largely inept in this matter, and a little too cozy with the profession it’s supposed to regulate.  Nevertheless, some want to give the licensing board more power.

Here’s an interview I did on Las Vegas 1’s Face to Face with Jon Ralston.  I argued that licensing laws don’t add much in the way of patient protection, and instead block innovations that would improve patient safety.  (The first interviewee provides lots of good information about the crisis, but if you want to skip to my interview, it begins about 12 minutes into the program.)

Abstract Ideas Can’t Be Patented. Or Can They?

The Supreme Court has long held that laws of nature, physical phenomena, and abstract ideas are not eligible for patent protection. Because these things are discovered rather than invented, they are “free to all men and reserved exclusively to none.” In recent years, however, the United States Court of Appeals for the Federal Circuit, which hears most patent appeals, has begun to relax the restriction on such patents. I’ve written before about the problems created by software patents. Software is is ultimately just a sequence of mathematical formulas, and in their pure form they’re not patentable. But in a series of decisions in the 1990s, the Federal Circuit opened the door to patents that cover software when it’s loaded onto a computer, which of course is the only useful thing to do with software. Since then, we’ve seen an avalanche of patents on software, which have started creating serious problems for innovators in the software industry.

The latest example of the problems on patenting abstract concepts comes via Mike Masnick of Techdirt: a company had some problems with a satellite launch, and wanted to use a maneuver called a Lunar flyby to correct it. Unfortunately, Boeing holds a patent covering the maneuver they wanted to use, and they have been unable to negotiate a license of that patent. So they’re planning to let the satellite go down in flames and try to collect the insurance money on it.

Now, as Mike points out, the maneuver in question is just an application of basic physics to spaceflight. The basic principles have been understood since Newton, and NASA has been computing these kinds of orbital trajectories since the 1960s. The patent office should have rejected the patent for trying to patent a straightforward application of basic physics. Unfortunately, thanks to the Federal Circuit’s increasingly permissive standards for patentable subject matter, Boeing was granted the patent, and this company now faces the unappetizing choice of leaving the satellite in the wrong orbit or getting embroiled in litigation with Boeing.

Crucially, the Supreme Court has never endorsed the Federal Circuit’s experiment with allowing patents on abstract ideas, and several justices have voiced concerns about the direction the Federal Circuit has taken the rules for patentability. Apparently, the widespread outrage over the abuse of such patents has gotten the Federal Circuit’s attention, as it has decided to re-hear a case called In Re Bilski that could give it an opportunity to tighten up the rules for patenting abstract concepts. Several public interest groups have filed briefs in the case urging the court to do just that.

The Federal Circuit will be hearing the case en banc next month, and it has already become one of the most closely-watched cases on the Federal Circuit’s docket. Given the Supreme Court’s heightened interest in patent issues in recent years, it’s not hard to imagine the Supreme Court deciding to review the decision as well. Given that Congress has so far ducked the issue of reining in patents on abstract concepts in its pending patent reform legislation, In Re Bilski may be our best chance of reform.

The Helping Hand of Government …

… strips away privacy before it goes to work.

Here’s a nice, discrete example: S. 2485, introduced in the U.S. Senate last week, would require asset verification of participants in State Medicaid programs, exposing the personal information held by financial institutions to government access.

This privacy loss is a natural outgrowth of entitlement programs. It’s nearly mandated by the simple and warranted effort to reduce waste, fraud, and abuse.

My 2004 Policy Analysis, “Understanding Privacy - and the Real Threats To It,” explored how entitlement programs almost always carry with them a significant privacy-cost:

To provide benefits and entitlements—and, of course, to tax—governments take personal information from citizens by the bushel. Nearly every new policy or program justifies new or expanded databases of information—and a shrunken sphere of personal privacy.

April Fools for Skilled Workers

Quite appropriately, today exposes another facet of the foolishness that is U.S. immigration policy. April 1st is the day each fiscal year when employers are allowed to begin filing petitions with the US Citizen and Immigration Services for highly skilled workers to be given what are known as H-1B visas. For the second consecutive year, the quota of these visas was reached on this first day of eligibility.

H-1Bs allow employers to hire foreign workers in certain professional occupations. They are good for three years and can be renewed for another three. Though an H-1B cannot lead to a green card, it’s still a pretty good deal.

The problem is that, even in this apparent economic downturn, there aren’t enough visas: Congress limits the number of annual H-1Bs grants, and that magic number has been set at 65,000 for five years now. Before that, and in response to the technology boom of the late ’90s, Congress temporarily raised the H-1B cap to 195,000. But that expansion expired in 2004, and the cap has been reached earlier and earlier each year since.

In 2005, that meant August. In 2006, May 26. Last year, by the afternoon of April 2, 2007 (April 1 was a Sunday), USCIS had received over 150,000 H-1B applications. Officials quickly announced that they would randomly select 65,000 petitions from all those the agency had received in the first two days of eligibility.

Last week, with demand for the prized work permits only increasing, the powers that be decreed that this year’s lottery would accept all entries received in the first five business days. USCIS simultaneously promulgated a rule prohibiting employers from trying to game the lottery by filing multiple petitions for the same employee.

As for the vast majority of employers and employees who will be out of luck, the immigration laws say, like so many “rebuilding” baseball teams this opening week, “wait till next year.” Except, in this case, next year means putting your business or career on hold until October 1, 2009—the day people who secure H-1Bs for fiscal year 2010 can start work.

If only this were all a bad April Fools’ joke.

Read more on this in the article I have up on National Review Online today.

Foolish European Union Regulations

Two stories from the British press highlight regulatory excess from the Brussels bureaucracy. The Times reports that a winemaker is being harrassed because he is selling his wares in 37.5cl bottles instead of the 50cl or 35cl sizes allowed by European regulation:

An award-winning winemaker whose wares are sold at the royal palaces is facing a £30,000 bill after European bureaucrats ruled that he was using the wrong-shaped bottles. Jerry Schooler, who sells 400,000 bottles of fruit wines and mead a year, has been threatened with prosecution over his determination to use traditional measurements. The proprietor of the Lurgashall Winery in West Sussex, has been told to halt the sale of beverages such as mead, silver birch wine and bramble liqueur in 75cl and 37.5cl bottles. If he continues to sell them, he could be taken to court under a new EU directive that permits the sale of such products in 70cl, 50cl or 35cl measures only. …Mr Schooler now faces costs of about £30,000 to change his production line. “We are going to have to change all our bottling, the labels, machinery, boxes and maybe the corks as well and it is going to cost me thousands to do it,” he said. …West Sussex County Council’s trading standards department said that the winery was bound by EU Directive 2007/45/EC, which was drawn up in September to “lay down rules on nominal quantities for prepacked products”. It said the directive meant that the use of 37.5cl bottles for liqueurs was illegal.

The absurdity of this story makes one wonder how such a regulation came into existence. Did a bureaucrat wake up on the wrong side of the bed one day and decide that wine should only be sold in bottles of certain sizes? Is there some sort of crazy health or safety rationale for the regulation? Speaking of which, that’s the alleged reason for a regulation that is forcing English bus companies to make customers disembark in the middle of routes. This foolish regulation apparently is designed to prevent driver fatigue, but, as reported by the Sun, the practical effect is to make people waste their time:

Thousands of passengers are being forced to hop off buses midway through journeys to comply with barmy EU laws. A Brussels ruling has banned local services longer than 30 miles to ensure drivers don’t spend too long at the wheel. As a result, drivers have to pull in as they hit that limit and order everyone off their bus. They then change the route number on the front and invite passengers to jump back on before resuming the trip. …Western Greyhound has split its Newquay to Plymouth route in three — even though it uses a single driver throughout. Passengers must buy three tickets and break their journey twice. Managing director Mark Howarth said: “It’s a farce. We have to kick customers off as soon as the driver hits the 30-mile limit. “Often it’s in the middle of nowhere. Passengers think we’re crazy.”

Tyler Cowen Thinks Frozen Markets Justify Tougher Regulations?

In a New York Times piece of March 23, “It’s Hard to Thaw Frozen Markets,” Tyler Cowen concludes that “regulators should apply capital requirements consistently to the off-balance-sheet activities of financial institutions.” That conclusion follows from a surprisingly innocent confidence in regulation in general and capital requirements in particular. But it also follows from a faulty analysis of the situation.

Cowen writes, “What is distinctive today is the drying up of market liquidity — the inability to buy and sell financial assets — caused by a lack of good information about asset values… .The results have been a form of financial gridlock.”

To explain this alleged “drying up” process he says, “Starting in August, many asset markets lost their liquidity, as trading in many kinds of junk bonds, mortgage-backed securities and auction-rate securities has virtually vanished.” Cowen thinks “market prices have been drained of their informational value” in “many asset markets.”

With the possible exception of mortgage-backed securities, that seems fanciful if not absurd. The spread between junk bonds and Treasury widened mainly because Treasury yields fell, but there is massive trading in such bonds. Sales of nonfinancial commercial paper have grown briskly this year, and so have sales of financial paper aside from the “asset-backed” variety. There may be little trading of mortgage-backed securities, but that just suggest many owners (unlike, say, e-Trade) are in no hurry to sell at prices low enough to attract borrowers.

This poses a temporary problem for mark-to-market accounting (and Basle’s bureaucratic capital standards), but this seems a failure of accounting rather than markets. Cowen asks “why seek ‘fire sale’ prices when you might lose your job for doing so?” I would ask, “Why seek ‘fire sale’ prices if (unlike Bear Stearns) you are in a position to wait for a better deal once the market calms down?” Cowen says, “Only so many financial institutions have the size and expertise to buy up low-quality assets in large quantities.” But large holdings can often be sold in smaller batches. And we don’t know who might have bought Bear Stearns, warts and all, were it not for favoritism the Fed and Treasury showed to a single bidder (who was shamed into quintupling the offer).

Liquidity refers to the ease with which various assets can be converted to cash without dropping the value of the asset. Hedge fund managers bought gold on margin at $1000 may find it is less liquid than they expected. But what seems terrible to sellers of marked-down assets (e.g., of Las Vegas condos) can seem wonderful to buyers.

Most people think “liquidity drying up” means banks have cut back on lending, which is demonstrably false – bank loans are growing at a 10-11% annual rate since August, and much faster for C&I loans. Consumers and small businesses were never dependent on mortgage-backed IOUs.

There is no “financial gridlock” for most assets, even real estate (31% of household wealth). Auctions for foreclosed properties are drawing plenty of bids.

Mr. Cowen thinks “investors are instead flocking to the safest of assets, like Treasury bills.” Smart investors shun long-term Treasuries and are flocking to stocks, particularly U.S. stocks. The S&P 500 is down less than 10% this year – much better (in dollars) than most other markets, including Europe and China.

Tyler says, “Every step of the way, the pricing of [Bear Stearns] stock has surprised the market.” Really? It didn’t surprise the shorts, who owned a fourth of the shares. I own the SKF exchange fund (ultra-short financials) which, ironically, fell sharply a couple of days after Bear was sold out by omniscient and kindly government regulators.

Nobody ever said housing was a liquid asset, but even housing is far more liquid than the doomsday crowd imagines. The OFHEO index shows that home prices increased in all but 11 states between the fourth quarters of 2006 and 2007. Home prices fell 4% to 7% in California, Nevada, Florida and Michigan, but home prices rose 4% to 9% in 16 other states—most of which are not even counted in the widely-cited Case-Shiller index (which gives California a 27% weight).

The only problem with financial markets is that information is never free, and it sometimes takes time to discover market-clearing prices. The solution is not more regulations, but more patience.

Capital requirements, on the other hand, can cause very serious problems. The 1988 Basle Accord on capital requirements was a heavy-handed reaction to the 1982 LDC debt crisis. It was also one reason Japan’s monetary base shrunk by 2.8% a year in 1991-92 – the start of a period some U.S. journalists are now foolishly comparing to the restoration of sanity in coastal housing prices.

As I explained ten years ago, Basle “required that by the end of 1992 banks had to maintain capital equal to a minimum of 8 percent of risk-adjusted assets, where risk just happened to be defined in a way that favored government bonds over business loans… . Did relatively higher capital ratios in the United States and Great Britain mean they were less exposed than Japan to LDC default? On the contrary, even in the late eighties outstanding LDC loans still amounted to 93-199 percent of the capital of the largest U.S. banks, and as much as 82 percent for British banks, but only 55 percent for Japan. American banks seemed to have more capital. But unlike Japan, all of the capital of U.S. banks, and sometimes much more, was exposed to LDC default.”

Even if markets for a few risky, exotic U.S. securities appears “frozen” for a short while, that is far less problematic than imposing stern, politicized regulation over a wide array of assets and institutions.