Topic: Regulatory Studies

The First in a Long Series

The Washington Post offers today a critical look at independent fundraising and spending in the 2012 campaign.

The article states independent groups are raising money “in response to court decisions that have tossed out many of the old rules governing federal elections, including a century-old ban on political spending by corporations.”

But the century-old ban is on campaign contributions by corporations, and it is intact. Spending on elections was not prohibited to some corporations until much later.

Other spending by corporations, like the money spent by The Washington Post Company to produce the linked story, has never been regulated or prohibited by the federal government.

The article mentions a “shadow campaign” and refers to Watergate. It states “independent groups are poised to spend more money than ever to sway federal elections.” Surely something is amiss here! Or at least the causal reader of the Post might conclude that.

But what is going on? A spokesman for one of the independent groups says they are trying to influence the debt ceiling debate and that as far 2012 goes: “We’re definitely working to shape how the president is perceived, because how he is perceived will have a huge impact on how this issue is resolved.”

It sounds like the group is engaging in political speech on an issue, speech that could have some effect on next year’s election. What is amiss about that? Isn’t the right to engage in such speech a core political right under our Constitution?

The article also argues that independent groups, being independent, may fund speech that may harm a candidate they are trying to help. Candidates, in a sense, have lost some control over their campaigns and their messages.

Of course, absent limits on contributions to candidates and parties, the money going to independent groups might go to…candidates and parties. Liberalizing speech, not suppressing independent groups, might be a good way to prevent groups from airing ads that harm or misrepresent candidates for office. Finally, candidates do have the power to repudiate independent ads.

Expect more news stories like this one over the next 18 months. The cause of campaign finance reform is in desperate straits. Reformers in the media are going to construct a narrative that says: money is destroying democracy in 2012, all because of Citizens United. They hope thereby to set the stage to restore restrictions on campaign finance.

The Federal Government and Financial Literacy

Almost 600 pages into the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is a provision directing the Government Accountability Office to assess the feasibility of the federal government certifying organizations that provide financial literacy. The GAO released its report this week and concluded that “While a federal process for certifying financial literacy providers appears to be feasible, doing so would pose challenges.”

The challenges cited by the GAO are generally of the bureaucratic variety: What agency or agencies would be in charge? What criteria would be used? How would oversight be conducted? And most importantly, how much would it cost [taxpayers] to implement and operate a federal process for certifying financial literacy providers?

Fortunately, the GAO says that the majority of the representatives of private sector financial literacy organizations, federal agencies, and academic experts that it interviewed said that the disadvantages outweighed the advantages. Numerous concerns were cited, but one in particular stands out: Financial literacy certification may not be an appropriate role for the federal government.

Well, Hallelujah. I’ve read my share of GAO reports – almost all of which have dealt with activities that are not a proper role of the federal government – and I don’t recall that concern being mentioned.

Not only is individual financial literacy not an appropriate concern of the federal government, the federal government itself is a monument to financial illiteracy. It isn’t just that GAO report after GAO report continues to document financial mismanagement across the entire government complex. No, it’s the fact that Washington’s financial mismanagement has left us with a bloated government that’s mired in debt and crippled by massive “entitlement” programs that operate like Ponzi schemes.

The additional irony is the Dodd-Frank regulatory overhaul was passed in the wake of an economic meltdown perpetrated in large part by government failure. Alas, there might not be a lot of shame in Washington, but the hypocrisy is seemingly without limit.

So What If Corporations Aren’t People?

As Julian Sanchez detailed yesterday, those who complain about fewer restrictions on corporate political speech but celebrate the freeing of restrictions on corporate videogame speech are in a bit of a logical pretzel.  But ultimately both those who think corporations have speech rights and those who don’t miss the larger point: it’s not about corporate rights but the rights of the individuals who freely associate and thus pool their speech via the corporate legal form.

That is, it really doesn’t matter that “corporations aren’t people.”  Of course they’re not living, breathing human beings, and their ”personhood” for legal purposes is just that: a convenient legal fiction.

To elaborate on these ideas, Cato legal associate Caitlyn Walsh McCarthy and I have  written a law review article titled “So What If Corporations Aren’t People?”  Here’s the abstract:

Corporate participation in public discourse has long been a controversial issue, one that was reignited by the Supreme Court’s decision in Citizens United v. FEC, 130 S. Ct. 876 (2010). Much of the criticism of Citizens United stems from the claim that the Constitution does not protect corporations because they are not “real” people. While it’s true that corporations aren’t human beings, that truism is constitutionally irrelevant because corporations are formed by individuals as a means of exercising their constitutionally protected rights. When individuals pool their resources and speak under the legal fiction of a corporation, they do not lose their rights. It cannot be any other way; in a world where corporations are not entitled to constitutional protections, the police would be free to storm office buildings and seize computers or documents. The mayor of New York City could exercise eminent domain over Rockefeller Center by fiat and without compensation if he decides he’d like to move his office there. Moreover, the government would be able to censor all corporate speech, including that of so-called media corporations. In short, rights-bearing individuals do not forfeit those rights when they associate in groups. This essay will demonstrate why the common argument that corporations lack rights because they aren’t people demonstrates a fundamental misunderstanding of both the nature of corporations and the First Amendment.

This article is still being edited – it won’t appear in the John Marshall Law Review till the fall – so comments are welcome.  Thanks to Eugene Volokh for making suggestions on an earlier version.

Update: Larry Solum has “recommended” our article on the Legal Theory Blog.  Thanks!

100,000+ Cribs May Be Headed for Dumpsters Today

Last December the Consumer Product Safety Commission (CPSC) adopted new standards for crib design, a step mandated by the famously overreaching Consumer Product Safety Improvement Act of 2008 (CPSIA). The commission decided to go well beyond a set of voluntary design standards that had been widely adopted the year before; it also chose to make the new rules retroactive, rendering unlawful the sale of many existing cribs whose overall safety record is otherwise acceptable—no one would think of subjecting them to a recall, for instance. Commissioner Nancy Nord:

The day care industry did protest that the rule, as proposed, would result in approximately a $1/2 billion hit to a group that could not immediately absorb costs of such magnitude, especially on the heels of having just bought new cribs to meet the standards of 2009. As a result, at the last minute just before finalizing the rule, the Commission agreed to amend the proposed rule to delay the effective date for this group by 18 months. There was no analysis behind this date; basically, it was pulled out of a hat.

Manufacturers and sellers fared less well, however, and were stuck with a deadline of June 28, 2011, that is, today. Commission staff predicted that retailers would not suffer significant economic harm, which turned out to be wrong, as the commission learned when they began hearing from “small retailers who are stuck with stranded inventory that they cannot sell, also asking for a delay,” according to Nord.

How much stranded inventory? Quite a lot, says Commissioner Anne Northup:

The retailers of these cribs, which the Commission deemed were safe enough to continue to be used for another two years in day care facilities, stand to lose at least $32 million dollars when they are required to throw out noncompliant cribs on June 28.

That’s a lot of landfill space that may be needed in coming days. Nord again:

An internal survey of 5 retailers found that those companies had at least 100,000 non-complying cribs in inventory. A survey done by a trade association representing one part of the small retailer community found that 35 companies had 17,500 cribs that cannot legally be sold in two weeks.

Retailers pleading for a longer transition period got no mercy from the hard-line pro-regulation Commission majority led by Obama appointee Inez Tenenbaum. In a similar way, the much vaster stranded-inventory problems and compliance nightmares engendered by CPSIA as a whole keep getting worse rather than better, due to an equally obdurate attitude from the commission’s current leadership and its Democratic allies in Congress. Politically and with the press, there seems to be little downside in striking cost-no-object For the Children postures, even if the result is to place untenable burdens on the sorts of local shopkeepers and service providers who specialize in meeting the everyday needs of children.

Related, at my website Overlawyered: “Thanks for standing by for eight months after we told you to stop selling your infant slings pending a recall. We’ve decided no recall is needed. What, you’re out of business? Never mind.”

CBO Report Reveals Spending Disaster

New projections from the Congressional Budget Office show that without reforms rising federal spending will fundamental reshape America’s economy, and not in a good way. Under the CBO’s “alternative fiscal scenario,” the federal government will consume an 86 percent greater share of the economy in 2035 than it did a decade ago (33.9 percent of GDP compared to 18.2 percent).

The CBO report and many centrist budget wonks focus more on the problem of rising federal debt than on rising spending. As a result, many wonks clamor for a “balanced” package of spending cuts and tax increases to solve our fiscal problems. But CBO projections show that the long-term debt problem is not a balanced one—it is caused by historic increases in spending, not shortages of revenues.

This chart shows CBO’s alternative scenario projections, which assume no major fiscal policy changes. All recent tax cuts are extended and entitlement programs are not reformed.

Let’s look at federal revenues first (blue bars). In President Clinton’s last year of 2001, revenues were abnormally high at 19.5 percent of GDP as a result of the booming economy. Over the last four decades, federal revenues as share of GDP have fluctuated around about 18 percent of GDP. The tech boom a decade ago helped generate large capital gains realizations. CBO data show that capital gains tax revenues were $100 billion in 2001, or 1 percent of GDP (see page 85). By contrast, the CBO expects capital gains taxes to be $48 billion in 2011, or just 0.3 percent of GDP (see page 93).

In 2011, revenues are way down because of the poor economy. Some people complain that the Bush tax cuts drained the Treasury, but note that revenues were 18.2 percent of GDP in 2006 and 18.5 percent in 2007, when the economy was growing and the Bush cuts were in place.

Looking ahead, the CBO projects that with all current tax cuts in place and AMT relief extended, revenues will rise to 18.4 percent of GDP by 2021, or a bit above the normal levels of recent decades. For 2035, the CBO assumes that revenues would be fixed at the same 18.4 percent, but their discussion reveals that “real bracket creep” would actually keep pushing up revenues as a share of the economy beyond 2021.

In sum, CBO projections reveal no shortage of revenues. The problem is on the spending side, as the red bars in the chart illustrate. As a result of the Bush/Obama spending boom, federal outlays soared from 18.2 under President Clinton to 24.1 percent this year. With no reforms to entitlement programs, outlays will be 33.9 percent of GDP by 2035, which is 86 percent higher than the Clinton level.

By the way, the CBO nets Medicare premiums out of outlays, which makes spending look a little smaller than it really is. Using gross Medicare spending, total federal outlays will be 35 percent of GDP by 2035.

Also note that CBO data (and other U.S. government data) low-ball government spending in other ways compared to OECD measurement standards. The OECD puts federal/state/local government spending in the United States at 41 percent of GDP in 2011. More than four out of ten dollars we earn are already being gobbled up by our governments.

If the federal government grows by 10 percentage points of GDP by 2035 per CBO, American governments will be consuming more than half of everything produced in the nation.

To fix the problem, see here.

IBM as a Metaphor for Economic Success

International Business Machines Inc. is celebrating its 100th anniversary as a company today. In this time of economic worry and uncertainty, it’s worth taking a moment to consider a few policy lessons we might glean from its longevity.

Unlike government agencies and programs, private-sector companies competing in a free market come and go. In an essay posted on the IBM web site, company officials noted:

Of the top 25 industrial corporations in the United States in 1900, only two remained on that list at the start of the 1960s. And of the top 25 companies on the Fortune 500 in 1961, only six remain there today.

How did IBM not only survive but thrive during a century that took us from horses and buggies to FaceBook and iPhones? In a word, adaptability. IBM’s management has been willing to change to meet the evolving demands of a competitive and open marketplace.

When I was researching a speech last year to retired IBM employees, I was struck by how the company has transformed itself. As I shared with the audience, IBM stands as a metaphor for the positive changes under way in our more high-tech and globalized economy:

As you all know, [IBM] has re-engineered itself from a hardware company to a provider of software and services. Today, nearly 60 percent of the company’s revenue comes from services compared to 38 percent a decade ago. Revenue from hardware has been cut in half, to 17 percent.

IBM’s gone global in a big way, too. Almost two-thirds of its revenue now comes from outside the United States. That compares to an S&P average of 47 percent. Emerging markets now account for 50 percent of its revenue growth. IBM is the biggest IT services company in India. For $100 million, it’s helping the northeast China city of Shenyang—one of its most polluted—clean up its air and reduce carbon emissions.

Politicians nostalgic for an America where the dominant companies were unionized, heavy-industry behemoths producing mostly for the domestic market should take note. As I argued at length in my 2009 book Mad about Trade (see chapters 3 and 4) and more concisely in an essay for Barron’s Weekly, America has become a globalized, middle-class service economy. As the success of IBM demonstrates, this is not something we should fear, or try to resist with trade barriers and industrial policy.

Sorry About Your Burning Village, But You Released the Dragon

There’s a lot of consternation over Education Secretary Arne Duncan’s threat that if Congress doesn’t quickly create and pass a new No Child Left Behind Act he will do it himself, issuing waivers galore for states that adopt as-yet unspecified, administration-dictated reforms. As Andy Rotherham writes in Time, everyone from AEI’s Rick Hess, to angry-teachers’ hero Diane Ravitch, seems to be outraged over the notion that the executive branch would simply bypass Congress because it thinks the legislators are moving too slowly.

What did they expect when they ignored the Constitution to begin with, forgetting that it gives Washington just a few, enumerated powers, and that meddling in education (save prohibiting discrimination and controlling the District of Columbia) is not among them? When they pushed for, or acquiesced to, Washington doing all sorts of things that it has no constitutional authority to do? When they essentially accepted that the Federal Government has unlimited powers? Did they expect federal politicians to suddenly remember they are supposed to be constrained only when they want to do things the educationists don’t like?

Unfortunately, most people in education policy pick and choose when they’ll invoke the Constitution based on whether or not they like what the Feds are doing or are proposing to do. In contrast, if in their presence you consistently state that education policymaking is not among Washington’s few and defined powers, and that the Feds must get out of education, they typically either ignore you; dismiss you with a rhetorical pat and smile like you are a cute, idealistic child; or condemn you as someone who hates children, the poor, teachers, enlightenment, the nation’s economic future, progress, or some combination thereof.

Well here’s the reality: Far too many educationists have helped let the dragon out of its cage. They have only themselves to blame when it burns down their village.