Topic: Regulatory Studies

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.

“Fear Placebos” and Homeland Security

In the ongoing Cato Unbound discussion about how the government should respond to excessive fear of terrorism, Bernard Finel writes:

The cynical response focuses on continuing the sorts of grand, empty gestures we have already pursued since 9/11. We can continue to pack our shampoo in 3 oz bottles and ignore the color coded signs and tolerate the petty annoyances. Over time, fear will fade and it is unlikely that this unfocused motion will result in grievous consequences.

Finel rejects this approach in favor of what he calls a pragmatic one. I wonder if the cynical approach is the pragmatic one. A realist might say that we can never get the public to be rational about the odds of dying from terrorism, so let’s hold down spending and try to push it toward uses that have benefits other than counterterrorism, sort of like how fear of Soviet missiles justified spending on scientific research and highways. I called this the “fake it” option in a list of possible approaches to homeland security. This approach is dishonest and patronizing, but not necessarily wrong, especially if efforts to correct overwrought fears fail.

Apparently, Obama’s nominee to head the Office of Information and Regulatory Affairs is on the same page. Here’s the conclusion to a working paper called “Overreaction to Fearsome Risks” that Cass Sunstein wrote with Richard Zeckhauser:

Government regulation, affected as it is by the public demand for law, is likely to stumble on the challenge of low probability harms as well. The government should not swiftly capitulate if the public is demonstrating action bias and showing an excessive response to a risk whose expected value is quite modest. A critical component of government response should be information and education. But if public fear remains high, the government should determine which measures can reduce most cost effectively, almost in the spirit of looking for the best “fear placebo.” Valued attributes for such measures will be high visibility, low cost, and perceived effectiveness.

They meant, I believe, to include the word “it,” meaning “public fear” after “reduce.” So, in other words, fake it. It’s not surprising that Sunstein wrote this – his books, from which I learned a lot, head toward the same conclusion. But it will be interesting to see whether this kind of talk, shrouded though it may be in academic speak, gets him into any trouble now that he’s up for an important government job.

In other cost-of-fear-of-terrorism news, both Stephen Dubner of the Freakonomics blog and Bruce Schneier ask whether the diversion of federal attention from crime to terrorism since 9-11 helped cause an outbreak of financial fraud. They cite this New York Times article discussing the shift of FBI resources to counterterrorism. Dubner is unsure, but I say it’s a no-brainer that moving 2,400 FBI agents from crime to counterterrorism and the resulting 40 percent drop in financial crimes referred to US Attorney’s for prosecution caused more financial crime.

We will be discussing the cost of counterterrorism at the conference taking place Monday and Tuesday. Registration is closed because we’re full. But the event will be webcast live on Cato.org. C-SPAN will also be taping Monday afternoon.

Cass Sunstein and the Cato Institute

The Washington Post is reporting that Harvard law professor Cass Sunstein will be named director of the Office of Information and Regulatory Affairs, the White House’s regulatory review office. The appointment is baffling, not because the Obama administration has chosen Sunstein (he is a first-rate thinker), but because Sunstein has (apparently) accepted it. OIRA chief is one of the most thankless jobs in Washington, and the office has historically shown itself to be a victim of the political winds no matter how sharp-minded and sincere the chief is.

Sunstein would not fit the label “libertarian,” but he is, in his own way, a supporter of liberty. And he has been a good friend to the Cato Institute, speaking here and writing for Regulation (1, 2).

I wish Cass well in this difficult new job.