A Conversation with Marietje Schaake (Part 2)

Marietje Schaake is a leading and influential voice in Europe on digital platforms and the digital economy. She is the founder of the European Parliament Intergroup on the Digital Agenda for Europe and has been a member of the European Parliament since 2009 representing the Dutch party D66 that is part of the Alliance of Liberals and Democrats for Europe (ALDE) political group. Schaake is spokesperson for the center/right group in the European Parliament on transatlantic trade and digital trade, and she is Vice-President of the European Parliament’s US Delegation. She has for some time advocated more regulation and accountability of the digital platforms.

You can read Part 1 of this conversation here.

FR: I want to focus on the small players. People concerned about regulation say that if you only focus on the big players like Facebook, Google or Twitter and how to regulate them, you will make it very difficult for the small players to stay in the market because transaction costs and other costs connected to regulation will kill the small companies. Regulation becomes a way to lock in the existing regime and market shares because it takes so many resources and so much money to stay in the market and compete. And new companies will never be able to enter the market. What do say to that argument?

MS: It depends on how the regulations are made but it is a real risk. It is the risk of GDPR (general data protection regulation,https://www.wired.co.uk/article/what-is-gdpr-uk-eu-legislation-compliance-summary-fines-2018 ), and with filtering as suggested now. The size of a company is always a way to assess whether there is a problem, and I think we should do the same with these regulations so that there could be a progressive liability depending on how big the company is or there could be some kind of mechanism that would help small or medium size companies to deal with these requirements. Indeed, it is true that for companies that have billions of euros or dollars of revenue, it’s easy to deploy lots of people. A representative of Google yesterday (at a conference in the European Parliament) said they have 10.000 people working on content moderation. Those are extraordinary figures, and they are proportionate because of the big the impact of these companies, but if you are a small company you may not be able to do it, and this is always an issue. It’s not the first time we have been dealing with this. With every regulation the question is how hard it is for small and medium enterprises.


FR: The challenge or threat from misinformation is also playing a big role in the debate about regulation and liability. We will soon have an election in Denmark. Sweden recently had an election where there was a big focus on misinformation, but it turns out that misinformation doesn’t work as well in Denmark as in the US or some other countries because the public is more resilient. Why not focus more on resilience and less on regulation so people have a choice? We are up against human nature, these things are triggered by tribalism and other human characteristics. To counter it you need education, media pluralism, and so on.

MS: I think you need to focus on both. First, what is choice if you have a few near monopolies dominating the market? Second, how much can we expect from citizens? If you look at the terms of service for a common digital provider that you and I use, they are quite lengthy. Is that a choice for a consumer? I think it’s nonsense. That’s one thing. Moreover, we are lucky because we are from countries where basic trust is relatively high, media pluralism exists, there are many political parties, and our governments will be committed to investing in education and media pluralism, knock on wood. How will this play out in a country like Italy where basic trust is lower and where there is less media pluralism, how are ever going to overcome this with big tech, so I think there is a sufficient risk if you look at the entire European Union, Hungary and other countries, that governments will not commit resources to what is right and they will create the kind of resilience that our societies already have. In the Netherlands trust in the media is among the highest, and it’s probably also because of a certain quality of life and certain kind of freedom that people have enjoyed for a long time. Even in our country you see a lot of anti-system political parties rise, so it’s not a given that this balance will continue forever because it requires public resources to be spend on media and other factors. So I think both are very important and I don’t want to suggest that we should not involve people but I don’t know if we can expect of the average citizen to have the time and the ability to have access to information it would take to make them resilient enough on their own.

FR: Do you think a version of the German ”Facebook law” with the delegation of law enforcement to the digital platforms will make it to the agenda of lawmakers in the European Parliament?

MS: No, I think there are too many flaws in it. It’s bad. Some form of responsibility on behalf of companies to take down information will exist, but I hope the law will be the primary tool. The companies will take down content measured against the law with the proper safeguards and proportionality. If there are incentives like big fines to be overtly ambitious in taking down information, that’s a risk. But on the other hand, the platforms as private companies already have all the freedom they want to take down any information with a reference to their terms of use. We are assuming that they are going to take the law as guidance, but nothing indicates they will. In fact, Facebook doesn’t accept breastfeeding pictures, so they are already setting new social norms. A new generation may grow up thinking breastfeeding is obscene. The platforms are already regulating speech,  and people who are scared about regulation should understand that it is Mark Zuckerberg who is regulating speech right now.

FR: Recently the EU praised the Code of Conduct to fight hate speech online that they signed with the tech companies in 2016. A lot of speech has been taken down according to the EU: 89 percent of flagged content within 24 hours in the past year, but my question is: Do we know how much speech has been taken down that should not have been taken down?

MS: No, we don’t know.

FR: That will concern those who value free speech. You have the law and you have community standards and then you have a mob mentality, i.e. the people who are complaining most and screaming louder will have their way and they will set the standards. So if you organize people to complain about certain content, it will be taken down to make life easier for Facebook and Twitter and Google.

MS: Yes.

FR: So you agree that it’s a concern?

MS: It’s a huge concern. If you believe in freedom of expression which I know you do, and I think it’s one of the most important rights and so many people have been fighting for it, why will we give it up? Just a little bit of erosion of freedom of expression is a huge danger and therefore to put responsibility on these companies to take down content without a check against the law is a risk, to allow these companies to set their own terms of use that can be at complete odds with the law and also with social norms (consider the restrictions on the breastfeeding, on Italian Renaissance statues as pornographic, or on the photo of a naked girl hit by napalm in Vietnam). Let me give you an example from my own experience.

I gave a speech here in parliament, it was a very innocent and clearly political speech, but it was taken down by YouTube. They said it was marked as spam, which I don’t believe. I have never posted anything that was labeled spam. What I think happened was that my speech was about banning goods and trade that can be used for torture and the death penalty. I think that the machine flagged torture because torture is bad, but a political debate about torture is not bad. I took a screenshot of the fact that YouTube took it down, posted it on twitter and said “wow!, see what happened”, and they were on the phone within two hours, but that’s not the experience most people (including the people I represent) will have. That’s the danger.  We also know examples of Russians having flagged Ukrainian websites and then they were taken down. And if that happens to a political candidate in the last 24 hours before an election it could be decisive, even if the companies say they’ll restore it within 24 hours.

FR: I spoke to a representative from one of the tech companies who said that when they consult with German lawyers whether something is legal or not, they will get three different answers from three different lawyers. He said that his company would be willing to do certain things on behalf of the government, but it requires clear rules and today the rules aren’t clear.

MS: Right, so now you see incentives coming from the companies as well. It’s no longer working for them to take on all these responsibilities whether they are pushed to do so or just asked to do it. The fact that they have to do things is also a consequence of them saying “don’t regulate us, we can fix this.” I think it’s a slippery slope. I don’t want to see privatized law enforcement. What if Facebook is bought by Alibaba tomorrow? How happy would we be?

FR: I want to ask you about monopolies, competition and regulation. If you go back to 2007 MySpace was the biggest platform, then it was outcompeted by Facebook. As you say, there are concerns about the way Facebook manages our data and its business model with ads and sensational news driving traffic and getting more eyeballs. But why not let the market sort things out? If there is dissatisfaction with the way Facebook is running their business and our data, why not set up a competing company based on a different business model that will satisfy customers’ need?

MS: States don’t built companies in Europe.

FR: I was having private companies in mind. Netflix has a subscription model, wouldn’t a digital platform like Facebook be able to do the same?

MS: I think it would be difficult now, because there is a lock-in effect. In Europe we are trying to provide people with the ability to take their data out again. If you use gmail for 12 years, your pictures, your correspondance with your family and loved ones, with your boss and colleagues, it could all be in there, and you want to take all those data with you. It’s your correspondence, it’s private, you may need it for your personal records. You may have filed your taxes and saved your returns and receipts in the cloud. If you are not able to move that data to another place, then competition exist only in theory. Also, if you look at Facebook, almost everybody is on Fcebook now. For somebody else to start from scratch and reach everybody is very difficult. It’s not impossible but it’s difficult. And for those models to make money the question is how much are customers willing to pay as required by the subscription model?

Facebook and Google already have so much data about us. Even if I am not on Facebook, but all my friends are, then a sketch of my identity emerges because I am the empty spot between everybody else. If people start posting pictures of a birthday party with the 10 people who are on Facebook and the one person that is not, and then somebody says I can’t wait to go on holiday with Marietje or whatever, then at some point it would be clear who I am, even if I am not on the platform, so they already know so much and they already has access to so much data about people’s behaviour that effectively it will be very hard for any competitor to get close, and we have seen it in practice. Why hasn’t there been more competition?

FR: Do you compare notes with US lawmakers on this? And do you see that your positions are getting closer to one another?

MS: Yes.

FR: Can you say a bit more about that?

MS: First of all the talk has changed. The Europeans were dismissed as being jealous of US companies and therefore proposing regulations, i.e. we were proposing regulations in order to destroy US competitors. I don’t think that’s true, but this stereotypical view has been widespread. Also, we were being accused of being too emotional about this, so we were dismissed as being irrational which is quite insulting, but not unusual when Americans look at Europeans. I think we are in a different place now with a privacy law in California, with New York Times editorials about the need for tougher competition regulations, with senators proposing more drastic measures, with organizations like the Center for Humane Technology focusing om time well spent, and with Apple hiring people to focus on privacy issues. Recall also conversations about inequality in San Francisco. We have a flow of topics and conversations that suggest that the excessive outcomes of this platform economy need boundaries. I think this has become more and more accepted.  The election of Donald Trump was probably the tipping point. We learned later how Facebook and others had been manipulated.

FR: You said that the problem with these companies is that they have become so powerful and therefore we need to regulate them. Is the line between public and private is blurred in Europe compared to the US? You focus on power no matter whether it’s the government or a private company when it comes to protection of free speech, while in the US the First Amendment exclusively deals with the government. Do you see that as a fundamental distinction between Europe and the US?

MS: There are more articulated limitations on speech in Europe: for example, Holocaust denial, hate speech and other forms of expression may be prohibited by law. I think there is another context here that matters. Americans in general trust private companies more than they trust the government, and in Europe roughly speaking it’s the other way round, so intuitively most people in Europe would prefer safeguards coming from law than trusting the market to regulate itself. That might be more important than the line between private and public and the First Amendment compared to European free speech doctrine.

Cross-posted at Techdirt

Unanimous Supreme Court Upholds Right to Be Free of Excessive Fines

It’s gratifying that the Supreme Court unanimously agreed that the Eighth Amendment’s Excessive Fines Clause applies to the states, meaning that states can’t fine you in a way that’s wholly disproportionate to the offense you commit. As one of the long-established natural rights in the Anglo-American legal tradition, there’s no reason it wouldn’t be and the debates over the Fourteenth Amendment’s ratification support this conclusion. (Here’s Cato’s brief in Timbs v. Indiana.)

At the same time, it’s disappointing that Justices Neil Gorsuch and Clarence Thomas were the only ones who explained, in separate concurrences, that the Fourteenth Amendment’s Privileges or Immunities Clause is the more constitutionally faithful way of extending rights as against state infringement. (Justice Ruth Bader Ginsburg’s majority opinion, joined by all but Justice Thomas, used the Due Process Clause.)

We’ll have to wait for some more difficult/less clear case to see if anyone else joins that originalist refrain. For practical purposes, it may not matter which clause of the Fourteenth Amendment provides the mechanism by which the Excessive Fines Clause is applied to the states. But it certainly matters for unenumerated rights (those not listed in the Bill of Rights), the jurisprudence regarding is confusing and controversial. If the Fourteenth Amendment ratification debates elucidate which such rights are covered under which clause, that would be important.

For that matter, it could matter in cases where the meaning of even an enumerated right was different in 1868 (at the Fourteenth Amendment’s ratification) than in 1791 (when Bill of Rights was ratified). Take the right to keep and bear arms, which the Supreme Court extended to the states in McDonald v. Chicago (2010). One of the key motivations behind the Second Amendment was the Founders’ concern about government tyranny. After the Civil War, however, the right to armed self-defense took on a different dimension as the Fourteenth Amendment’s enacters were quite concerned about the disarmament of freed slaves, as well as of other people who held unpopular opinions during Reconstruction. Justice Thomas – who provided the necessary fifth vote in McDonald – pointed this out in his solo concurrence.

Moreover, because using the Privileges or immunities Clause is more textually sound, the worst that could happen from moving away from “substantive due process” analysis is that there’s no change – but the upside is that only those rights supported by the original public meaning of constitutional text would be protected. That’s the dynamic that Josh Blackman and I described in the run-up to McDonald as “Keeping Pandora’s Box Sealed.” 

And now we have two justices for that view, as Josh and I predicted in an early draft of our forthcoming George Mason Law Review article “The Once and Future Privileges or Immunities Clause.” Before final publication, we’ll have to tweak some language regarding the “prediction” there now that the Court has ruled and we know what Gorsuch thinks, but you can see our  discussion at a Fourteenth Amendment conference hosted by Scalia Law School and the Institute for Justice last October. It’s unfortunate that Justice Brett Kavanaugh didn’t join either of his colleagues’ concurrences; he had no occasion to rule on the Fourteenth Amendment on the D.C. Circuit – nor do any of his scholarly writings touch on this area – so his vote today could indicate that he simply doesn’t want to revisit this area of law. Or, of course, it could mean that he didn’t want to rock the boat in a case where it doesn’t matter. 

In any event, with two justices and near-complete (and cross-ideological) agreement in the legal academy, there is real potential for movement on the Privileges or Immunities Clause – even if that potential hasn’t yet been realized.

Jones Act Lobby Hits the Panic Button

Puerto Rico’s request for a limited Jones Act waiver to permit the importation of liquefied natural gas (LNG) from the U.S. mainland has touched off what can only be described as a near panic among the law’s supporters. Members of the House Transportation and Infrastructure Committee recently dashed off a letter to the administration expressing opposition to the move. The American Maritime Partnership and other pro-Jones Act special interests are currently urging supporters of the law to send “pre-formatted” emails to Congress. And this past weekend Matthew Paxton, the president of the Shipbuilders Council of America, published an op-ed blasting Puerto Rico’s waiver application.

Alarm bells are plainly ringing, and the Jones Act lobby is willing to do—and say—whatever it takes to prevail in this pivotal battle over the law’s future. That, at least, is the main takeaway from Paxton’s recent op-ed, which is a striking display of misdirection, half-truths, and overall paucity of argument.

Paxton begins the piece by invoking President Trump’s favored catchphrases of “America first” and “buy American and hire American.” Yet the entire point of Puerto Rico’s waiver request is that the Jones Act prevents the territory from buying American. Remember the issue here: Puerto Rico’s desire to purchase cheap natural gas from the U.S. mainland for electricity generation is frustrated by a lack of Jones Act eligible ships to transport it.

That the administration may grant a waiver to address this situation, Paxton continues, demonstrates that “special interests are prevailing over national interests, as deep-pocketed supporters in the oil and gas industry – those who epitomize the very ‘swamp’ that he vowed to drain – are swaying the debate.” Yes, you read that right—the Jones Act lobby is portraying itself as the victim here.

There’s a very simple test for assessing whether a group represents a swamp-dwelling special interest: are they trying to reach into your pockets? In this case, we have the Jones Act lobby which favors federal intervention to reduce competition and force Americans to pay inflated prices for transportation services. On the other side, meanwhile, are opponents of the law who do not ask for a single dollar from the federal government and, in the case of Puerto Rico, merely seek the opportunity to purchase a U.S.-made product. Readers can decide for themselves which is more at home in the D.C. muck.

Paxton then gets into the meat of his argument:

These special interests claim there are no ships in the world authorized to carry LNG from the U.S. to Puerto Rico.  This is patently wrong.  Legislation passed in 1996 allows for LNG carriers built anywhere before that year to transport American LNG to Puerto Rico by being brought under U.S. flag.  There are more than 50 of these ships in service throughout the world today, and a number of them are not on long-term contracts.  They are not serving in the Jones Act trade because there is not yet a firm market.

The loophole to which Paxton refers is far less noteworthy than what he lets on. While there is some number of LNG carriers in the world theoretically able to take advantage of this provision (41 according to the International Gas Union and 37 per the Government Accountability Office), the law still requires these vessels to be U.S.-registered and U.S.-crewed. This has not happened, is unlikely to ever happen, and thus U.S. LNG still effectively remains off limits for Puerto Rico. 

Paxton continues:

If the President goes through with waiving the Jones Act for 10 years for the purposes of transporting LNG along our nation’s coasts and to Puerto Rico, then his will be the administration that undermines this long-standing American law and does irreparable damage to the all-American industry it supports.

Waiving the Jones Act as planned will wipe out an emerging American LNG transportation market while signaling to all that the law will not be reliably enforced under this administration. This will have a devastating ripple effect that indubitably will serve to dry up U.S. investment in shipbuilding. Our situation will resemble that of Australia, Canada, and the United Kingdom – all struggling to revive their once-robust shipbuilding industries.

As a result, the U.S. will soon be forced to outsource shipbuilding to China and Korea. This will mean the shuttering of American shipyards and the elimination of hundreds of thousands of American jobs. It also will mean an end to our ability to respond with a domestic shipbuilding capacity in times of major war.

Let’s remember the facts of the case: the waiver request is for the ability to ship U.S. LNG to Puerto Rico alone and says nothing about “transporting LNG along our nation’s coast.” Should the Trump administration grant Puerto Rico’s waiver request not a single U.S. ship will be displaced, nor a single mariner lose their job. No shipyard will lose any business as there are currently no LNG carriers on order (and given the frightening cost of building such a carrier in a U.S. shipyard, none likely for the foreseeable future).

In fact, if anything the waiver would likely bolster the U.S. maritime sector. Cheaper energy costs for Puerto Rico means more dollars in the pockets of its residents and more money to spend on imports from the U.S. mainland. Those imports, in turn, would be carried by U.S. ships crewed by U.S. mariners.

The reality is that U.S. shipbuilding has far more to fear from the status quo than any waiver that might be granted involving a type of ship which hasn’t been domestically made since 1980. Under the Jones Act’s watch the U.S. shipbuilding industry has seen approximately 300 shipyards close since 1983. In contrast, other forms of transportation not subject to Jones Act-style protectionism such as autos and airplanes see U.S. firms playing a leading role.

As for the outsourcing of U.S. shipbuilding, that ship in many ways has already sailed. The few large oceangoing ships built today typically use foreign designs and foreign components such as the engine. Even some of the shipyards themselves, such as VT Halter and the Philly Shipyard, are foreign-owned. The idea that the Jones Act is all that stands in the way of further shipyard closures, meanwhile, betrays a lack of confidence in the American worker and American ingenuity.

Regarding the wartime utility of American shipyards, there are only three major commercial shipyards in the United States (arguably four if Keppel AmFELS, currently said to be building a containership for Pasha Hawaii, is included). Of these shipyards, only one—General Dynamics NASSCO—also produces ships for the U.S. military. All of the remaining major shipyards in the United States exclusively produce naval vessels and do not compete in the Jones Act market.

Moving along:

China is already a world leader in global shipbuilding. The Chinese crave the opportunity to take over our small but vital commercial market, which they know will hasten the end of American shipbuilding. Then we will become dependent on ocean transportation from a nation the Pentagon recently labeled “certainly an adversary of the United States.”

In other words, after a century of the Jones Act making America strong, waiving it will make China even stronger while bolstering their ability to threaten our economic and national security.

This is a red herring. Puerto Rico’s application for a Jones Act waiver to import U.S. LNG has nothing to do with China, and Paxton’s invocation of the country is a naked attempt at distracting from the issue at hand. Regarding dependence on foreign countries for ocean transportation, this is nothing more than a description of the status quo with over 98 percent of U.S. foreign trade conducted using ships registered under foreign flags.

If a national security case can be made for preventing Americans from purchasing Chinese ships for use in domestic transport, then Paxton and others should do so. But the Jones Act is a blanket prohibition against the purchase of any foreign vessel used in domestic transport, including from treaty allies such Japan, South Korea, and NATO members. Concerns about China are no reason to prevent the purchase of ships from other countries.

Because the Jones Act was instituted as a national security measure, any waiver requires a national defense emergency to be declared by the Department of Defense or the Department of Homeland Security. But no such thing is currently established in the administration’s justification. This would be a gross and blatant violation of the law.

Paxton references the “administration’s justification” but the Trump administration hasn’t justified anything yet, with no decision made on the matter. And absent such a justification with its attendant evidence and arguments he can’t possibly know whether such a waiver would violate the law.

Let’s be very clear about what is taking place. Paxton, along with the rest of the Jones Act lobby, is terrified of Puerto Rico’s application for a limited Jones Act waiver to import U.S. LNG. And they should be. For nearly 100 years Americans have operated under the Jones Act’s strictures, never knowing a world in which this law did not apply. But if this waiver is approved they could catch a tantalizing glimpse of cheap domestic ocean transport and the possibilities it could unlock. This, in turn, would likely raise questions about other aspects of the U.S. economy that are being shackled by the Jones Act and the wisdom of keeping the law in place.

Things are about to get interesting.

Elizabeth Warren’s Universal Child-Care Proposal: The Starting Point For A Government Takeover Of The Sector

Senator Elizabeth Warren is right: Child care services in America can be extremely expensive.

In certain areas, child care can be difficult to find at all. High prices have perniciously regressive effects on low-income families, causing them to miss job opportunities, use unlicensed relatives to care for their children or else forego high amounts of their hard-earned income.

So the presidential candidate’s new promise of universal child care subsidies will no doubt resonate with many families. She would have the federal government cover the costs of child-care from birth to school age entirely for any family earning below 200 percent of the federal poverty line, provided they use government-approved local providers. Federal funding would also be available above that, with a cap on out-of-pocket spending on child-care at 7% of any family’s income. According to Warren’s explanation, this would come coupled with providers being held to government educational standards and a desire to push up pay for child care workers to levels seen for public school teachers.

This would have dramatic consequences for the child-care sector. A few observations:

  1. Warren’s plan will significantly reduce out-of-pocket costs for many families. It represents a huge new subsidy. Take care for 4 year-olds as one example; at the moment, data from Child Care Aware of America show just two states (Alabama and Mississippi) have average full-time care costs below 7% of median income. For infants, no state has average costs below 7% of median income. For families with 2 or more children in these care settings, the subsidy will be massive. Such a large, universal subsidy will bring significant deadweight (people using the scheme who would otherwise have paid for their own care anyway). But it is so generous that it will encourage many new users of child care too.
  2. This is significant, because state-level government regulations – not least on staff:child ratios and qualification requirements for carers – currently make providing child-care more expensive. This reduces the number of child-care facilities available in low income markets and increases prices for families. Warren’s subsidy response amounts to a classic case of government restricting supply through policy, on the one hand, and then labelling the resulting high prices a “market failure” that needs to be corrected. In fact, Warren’s plan would worsen the supply problem through its promise to raise pay rates for carers substantially. This would restrict supply further while the subsidies induce demand, raising underlying market prices – higher prices now overwhelmingly paid by taxpayers.
  3. In the U.K., child-care subsidies drove providers in some areas out of business. Why? The government-provided subsidy rates to deliver “free” care were often lower than market prices, meaning providers had to cross-subsidize government-guaranteed places by charging more for unsubsidized families. As “free” care expanded, the opportunity to engage in this cross-subsidization fell, and some companies found the government-funding rate uneconomic as it took over more of the sector.
  4. In the U.S., the average cost of child care varies dramatically by state. For a 4 year-old, the cost of full-time center-based care ranges from $5,061 in Alabama, right through to $18,657 in D.C. Warren’s plan would cap the proportion of income any family paid on child-care. But no government would put taxpayers on the hook for a blank check for any family’s spending habits. Otherwise providers would have every incentive to provide extremely luxurious care on the basis that taxpayers would foot the bill. Instead, the federal government would either likely try to fix rates to prevent over-spending (risking big distortions in certain markets through de facto price controls, as seen in Britain), control what services child-care facilities provide very prescriptively or else cap the overall amount any family could spend while still benefiting from the subsidy.

In short, instead of reducing the costs of providing care through much-needed supply-side reform, this new demand-side scheme will further drive up the market price of child-care, with taxpayers on the hook now for increased use of formal care.

Given the cost implications of capping the per income amount spent by any family, the federal government would inevitably have to circumscribe the nature of care, fix the rates taxpayers would finance or cap the total amount families could spend on child-care within the scheme. These would fundamentally change the types of care available or used in the sector.


A Conversation with Marietje Schaake (Part I)

Marietje Schaake is a leading and influential voice in Europe on digital platforms and the digital economy. She is the founder of the European Parliament Intergroup on the Digital Agenda for Europe and has been a member of the European Parliament since 2009 representing the Dutch party D66 that is part of the Alliance of Liberals and Democrats for Europe (ALDE) political group. Schaake is spokesperson for the center/right group in the European Parliament on transatlantic trade and digital trade, and she is Vice-President of the European Parliament’s US Delegation. She has for some time advocated more regulation and accountability of the digital platforms.

Recently, I sat down with Marietje Schaake in a café in the European Parliament in Brussels to talk about what’s on the agenda in Europe when it comes to digital platforms and possible regulation.

The CFPB and Payday Lending Regulations

The Consumer Financial Protection Bureau (CFPB) recently proposed the elimination of new payday lending rules created under the Obama Administration and imposed in 2017. Payday lenders are frequently vilified—a recent New York Times editorial declared that the CFPB “betrayed financially vulnerable Americans last week by proposing to gut rules…that shield borrowers from predatory loans”—but recent evidence indicates that the predatory costs of payday loans may be nonexistent and the benefits are real and measurable. Thus, the original regulatory restrictions were unnecessary.

Most Americans take access to credit for granted, but many lower-income Americans have difficulty meeting the requirements to get a credit card or take out collateralized loans. With minimal approval requirements that are easier to meet—often just a bank account statement, a pay stub, and a photo ID—payday lenders offer short-term, uncollateralized loans. These loans are advances against a future paycheck, typically about $100-$500 per loan, and customers usually owe a fee of around $15 per $100 borrowed for two weeks.

Consumer advocates oppose these terms for two reasons. First, they argue the terms are onerous. They convert the loan terms into an annual percentage rate (APR) that would be disclosed by a conventional credit-card issuer, and the result is 391 percent. This number shocks the sensibilities of the average person and easily leads to the conclusion that the payday lender is ripping off the consumer.

The APR is misleading because the fixed costs of lending as well as the default costs must be defrayed over much smaller sums than conventional loans. According to research reviewed by Victor Stango in the fall 2012 issue of Regulation, the fixed and marginal costs of the average $300 loan are $25. Thus, with no risk of default, the break-even per-loan charge is $25. But 5 percent of customers default increasing the break-even per-loan charge to $40, or $13.33 per $100 borrowed.   

In addition, the revenues of payday lenders do not seem to lead to excess profits. Payday lending appears to be very competitive. There are more physical payday lenders (24,000) than there are banks and credit unions (16,000). And according to research cited in Stango’s article, payday lenders do not earn “excess returns” in the stock market.   

The second objection consumer advocates have against payday lenders is the inability of some consumers to pay back their loans after the initial two weeks. If borrowers rollover their loans, the fees grow larger quickly.

Two papers, which I reviewed in the spring 2017 issue of Regulation, utilize data from the military to investigate the effects of payday loans and challenge this objection. In the mid-2000s active duty military members were three times more likely than civilians to take out a payday loan, and as many as 20 percent of active duty military members had used a payday loan in the past year. The belief that payday loans were predatory and that they adversely affected young soldiers’ performance led Congress to cap the APR on loans for military servicemembers and their families at 36 percent in the Military Lending Act of 2007 (MLA), effectively banning payday lending to the military nationwide. 

The authors of both studies exploit the fact that military members are randomly assigned to bases across the nation (in states that ban payday loans and in states that do not). Thus, using the military’s rich administrative data, the studies are able to analyze differences between individuals in states with and without payday lending bans, before and after the MLA.

In the first paper, Susan Payne Carter and William Skimmyhorn of the United States Military Academy examine labor market and credit outcomes for military members. Specifically, Carter and Skimmyhorn analyze involuntary separation from the military (which may reflect financial mismanagement or stress that affects service members’ job performance) and the denial or revocation of security clearances (which, because the military considers high levels of debt as a threat to individuals with clearances, provides another indicator of negative payday loan effects). The authors find that access to payday loans did not increase involuntary separation or denial of clearances because of bad credit.  

In the second paper, Mary Zaki investigates how access to payday loans allowed service members to smooth consumption over their pay cycle by using data on sales at on-base stores to analyze consumption behavior. Exploiting the same differences between state laws and before and after enactment of the MLA, she finds that after the ban sales on paydays were 21.74 percent higher than sales on non-paydays, but sales on bases before the ban and near payday lenders were only 20.14 percent higher—a 1.6 percent smaller gap between payday and non-payday spending. The variance in spending across the pay cycle was lower (i.e., consumption was smoother) when soldiers had access to payday lending services.  

Together, these results undermine consumer advocates’ claims of the negative impacts of payday loans and demonstrate the consumption smoothing benefits. Carter and Skimmyhorn found no negative effects (as measured by involuntary separation from the military or revocation of security clearances) for members of the military even though they utilize payday lending more than civilians. And Zaki illustrates that payday loans, like all loans, allow consumers to smooth consumption.

Though often portrayed as predatory, payday lenders provide many Americans, who often don’t have access to traditional bank services, with the opportunity to smooth consumption or get cash quickly when emergencies arise. The apparently “high” fees are a natural outcome of lending small amounts to riskier borrowers. Any restrictions that limit these fees or impose increased costs on lenders may eliminate access to any loans, leaving former borrowers with less-desirable, higher-cost options.

Written with research assistance from David Kemp.

Federal Transit Aid Harms Cities

The federal government spends $13 billion a year on subsidies for local rail and bus transit systems. This spending should be zeroed out in the next federal transportation bill.

Federal transit aid prompts cities to spend on boondoggle projects that citizens do not want and cities would not spend on if they had to pay the full costs themselves. Transit aid has been mainly for capital costs, not for operations and maintenance. That has induced cities to purchase excessively costly systems ill-suited to solving local mobility needs.

A case in point: a $133 million electric bus system in Albuquerque, New Mexico, which has turned out to be a big waste of money, as revealed by the Los Angeles Times. City leaders sprang for an expensive electric bus system because federal subsidies covered more than half of the costs.

We see this pattern over and over—the lure of federal money induces state and local politicians to make dumb decisions. I discuss this folly in a forthcoming Cato study on federalism.

From the LAT:

Shortly after being elected in 2017, Albuquerque Mayor Tim Keller stood on one of the passenger platforms for ART, the city’s ambitious new $133-million all-electric bus line that cuts through a 10-mile stretch of the city.

“Drivers waved and cheered, ‘Congrats to the new mayor!’ ‘I voted for you!’ ‘Go get ’em!’” said Keller. “And then in the next breath, they would lay on the horn and give the giant ART sign the middle finger out the car window.”

Civic leaders had initially pitched Albuquerque Rapid Transit as a way to revitalize the city’s former stretch of Route 66 and make the community a national leader in sustainable mass transit. Instead, the ART project resulted in parts of what’s now Central Avenue being ripped up to host dedicated lanes for the electric buses, which are currently out of commission and have so many problems that Keller freely calls them “a bit of a lemon.”

ART was supposed to supplement Albuquerque’s regular bus system by the fall of 2017 with a fleet of 20 buses. But Keller slammed the brakes on the project in January last year, barely a month after ART’s debut.

Shiny stations along the line stand dormant. Vandals have smashed ticket dispensers. Flat-screen televisions meant to alert passengers about boarding times flash a request to get rebooted. Autos can’t use the bus lanes, which cyclists have claimed as their own.

“It’s a nightmare with nothing to show for it,” says Jonathan Hartshorn, a librarian at the University of New Mexico.

… “I don’t know anyone who’s for it,” said a local restaurant owner, adding that business had plummeted by nearly 40% since Central Avenue was constricted to make way for ART stations and the dedicated bus lane. “Who would be for a dud?”

ART has roiled Albuquerque for years. Public meetings saw citizens shout down public officials in English and Spanish over a lack of definitive answers.

… [Steve] Schroeder has owned Nob Hill Music, named after a trendy neighborhood on Central Avenue, for a decade and has been among ART’s loudest opponents. Schroeder claims he’s lost 12 pounds since 2016. That’s when the federal government announced it would award Albuquerque a $75-million grant for ART.

… The Albuquerque City Council, with the support of then-Mayor Richard Berry, eventually applied for and received the federal grant that allowed the city to begin construction in the fall of 2016. Berry found bipartisan support for the funding thanks to New Mexico’s congressional delegation.

… [Schroeder’s] website, SaveRt66.org, lists more than 50 businesses he claims have closed since construction on ART began less than three years ago. His record store has suffered, he says, with visitors complaining that GPS systems consistently tell them to bypass Central Avenue altogether because of congestion: Traffic is now reduced to one lane each way as a result of the changes wrought to design the non-running ART line.

“This is now,” he said while ringing up a customer, “the ugliest street in New Mexico.”