Archives: 04/2012

Fleecing the Taxpayer in Las Vegas

Today POLITICO Arena asks:

Are the GSA/Las Vegas spending scandals a major political headache for the Obama administration, since they happened on its watch? Or can Democrats distance themselves from the seemingly renegade agency?

My response:

What?! Government waste, fraud, and abuse?! I’m shocked! Shocked!

This could be a political headache for the Obama administration, but only if Republicans play it right – so Obama probably doesn’t have much to worry about. The basic principle could not be simpler: as Milton Friedman so often put it, no one spends someone else’s money as carefully as he spends his own. That applies in spades to government.

So here’s the political point. Democrats, unlike Republicans (at least nominally), belong to the party of government. For every problem, they see not a private but a government solution. Market competition disciplines private abuses – not perfectly, to be sure, but far better than whatever controls there may be in the public sector. That’s one reason we should turn to government not as a first but as a last resort. You don’t like being abused as a taxpayer? Then don’t vote for the party of government.

How Tech Can Render Regulations Uber Obsolete

In the most recent issue of The Atlantic, Megan McArdle looks at the regulatory travails of Uber, the innovative smartphone-enabled car service that has found itself in the crosshairs of competition-averse taxi commissions from D.C. to San Francisco. For the uninitiated, Uber is the answer to the question that has occurred to every harried commuter with a smartphone at some point: If these things have GPS chips, and cabs have GPS, shouldn’t I be able to use my phone to find a cab, rather than just hoping I’m in the right place when one passes? In other words, it’s the Electronic Thumb from The Hitchhiker’s Guide to the Galaxy. Uber’s plush sedans come at a premium price, but for those in need of a pickup outside a high-traffic area, it’s the convenience factor that justifies the markup. Users register their credit cards with the service in advance, and when they need a ride, fire up a slick app that shows all the Uber cars in service on a realtime map, with an estimate of how long the closest free driver will take to reach your location. At the end of the journey, the fare and gratuity are charged automatically, with a receipt and travel map delivered via email, and the app gives passengers an opportunity to rate each driver—allowing the company to ensure that it only contracts with those who are consistently safe, reliable, and courteous. By most accounts, users adore it.

Naturally, regulators hate it. DC Taxi Commissioner Ron Linton has condemned the company as a scofflaw—and seems hell bent on finding some rule they’re violating, even though his initial complaint against Uber seems to have been legally confused. Most of Linton’s public comments on the matter leave the distinct impression that these are secondary details for him: What’s outrageous is that some upstart would dare to do something new without first coming to kiss the Don’s ring and beg permission. There’s also the inevitable element of regulatory capture: Conventional cab companies would rather not face an innovative competitor, so they’re asking the government to ensure consumers don’t have the option of taking their business elsewhere. So far, a familiar story that could be told about dozens of industries. What even many of Uber’s defenders seem slow to recognize, however, is that the company’s business model doesn’t just require regulators to catch up with the tech and the times: It eliminates the rationale for having a regulator.

The default in a free society is that you can start most kinds of business, and charge whatever rate the market will bear for your services, without the approval of some municipal bureaucrat. The argument for treating cabs differently rests on the idea that, on the conventional model, they’re not as effectively regulated by normal market pressures. Comparison shopping isn’t particularly feasible when you hail a cab the old fashioned way: You just flag down the first one that happens to pass, with the understanding that when the ride’s over, you’re unlikely to ever do business with that particular driver ever again. If you’re from out of town, odds are you won’t ever do business with the company again either, and barring an exceptionally unpleasant experience, most passengers aren’t going to take the time to call the dispatcher with a review. The opportunistic, one-off nature of traditional cab transactions, in short, makes a standardized price structure more attractive, and diminishes the reputation-based incentives to compete on price and quality. So goes the usual argument, anyway.

Uber—or rather, the Uber model—changes all of that.

You accept a price structure in advance, when you sign up for an account, and can be clearly notified of any price changes. The app’s  review system makes it easy for the company to monitor driver quality without demanding too much effort from passengers. Customers automatically get a full and instantaneous accounting of when and where they were picked up and dropped off, and how much they paid. Because the company expects, and strives for, lots of repeat business—and on word of mouth from satisfied customers as a growth strategy—all the normal market forces and incentives that apply to any other online business are in full effect. Which means the question isn’t whether the regulations need to be updated to accommodate a new kind of cab service: It’s why this kind of service needs a regulator at all.

Judging by Linton’s own assessment of the conflict in the Washington Post, the commissioner at least vaguely understands that Uber makes him superfluous. His attempt to justify a continuing need for regulation—for consumers to be “protected” from a company they’re overwhelmingly flocking to defend—is a small masterpiece of incoherence:

[A Post contributor] suggest that taxis or limousines arranged for via smartphone technology be allowed to charge whatever they want in an all-out price war. He should be careful what he wishes for. It isn’t just riders and drivers who would be affected if such a system became the norm. Given the congestion, confusion and pedestrian hazards likely to result, those using private vehicles, buses, bicycles, trucks and even sidewalks to move about the city would be sure to share their unhappiness with public officials, leading us right back to what? Regulation, of course.

To which the sane reader can only say: What? At the risk of stating the obvious: What Linton calls “all-out price war” to make it sound radical and anarchic is what the rest of us call “competitive pricing,” and is the normal way businesses operate in this country. Absent extraordinary circumstances, which smartphones obliterate here, it turns out it works pretty well. As for congestion, confusion, and pedestrian hazards… what, exactly, makes these likely to result? And how does Linton know? Is there even one scintilla of evidence that this has happened in other cities where Uber operates? Why would anyone think professional drivers—especially ones being rated on each ride—create more “pedestrian hazards” than other motorists? Why would buying a service online at clearly posted rates yield more “confusion” when the service is transport than it does for every other type of service people can purchase online? Wouldn’t greater adoption of smartphone-enabled cabs yield less congestion by efficiently matching drivers with fares?

The answers to these questions are obvious enough: On the Uber model, any rationale for subjecting driving services to a special regulatory regime—beyond the rules that apply to every business—simply evaporates. With smartphones on a fast track to the kind of ubiquity cell phones already enjoy, that model seems likely to become the norm rather than the exception over time. But as Upton Sinclair famously said, “it is difficult to get a man to understand something, when his salary depends on his not understanding it,” which means bureaucrats like Linton are sure to keep clutching at any pretext to justify their jobs.

Data Transparency Coalition Debuts Today

Meet the Data Transparency Coalition.

The Washington Post’s Capitol Business blog reports this morning:

A small but growing collection of companies has formed a coalition that will push the federal government to establish a standard system by which agencies categorize their data. …

“Our members understand that if the government identified its data elements in consistent ways, there would be vast new opportunities for the tools that they are building,” Executive Director Hudson Hollister said.

Early supporters include Microsoft and data analysis and management firms Level One Technologies, Teradata, and BrightScope. I’m on their Board of Advisors. One of their early priorities will be to pass H.R. 2146, the DATA Act.

Cato has worked extensively on government transparency, beginning with our December 2008 policy forum entitled, “Just Give Us the Data! Prospects for Putting Government Information to Revolutionary New Uses.”

We have modeled much of the data that the government should be publishing in standardized formats (much more cheaply than CBO has estimated it would cost) and graded the quality of current data publication in the areas of congressional process and budgeting, appropriating, and spending. Expect improvements to come with this new organization joining other efforts.

Follow the coalition’s founder and executive director on Twitter @hudsonhollister, and you can Like their Facebook page, as well, to get updates that way.

The Joy of Tax

To celebrate Tax Day, NPR gives us a peppy, upbeat interview with the commissioner of the IRS, Douglas Shulman. Shulman enthuses:

“When people hear the letters, ‘I-R-S,’ sometimes they have a negative connotation,” Shulman says. “But 80 percent of Americans get an average of a $3,000 refund. So most people actually have a very pleasant experience with us.”

Alas, 80 percent of Americans are hornswoggled into giving the IRS an interest-free loan for up to 15 months, and then – or so the IRS assures us – they’re very happy to get their own money back, a year later, with no interest.

It reminds me of the maxim of Jean-Baptiste Colbert, minister of finance under the absolutist Louis XIV:

The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.

When you establish withholding so that most taxpayers don’t realize how much they’re paying, and then you “give” them a refund, apparently you can minimize the hissing. And I suppose that’s why Shulman tells NPR:

You hope every day’s going to be a good day in the morning when you wake up. When you’re IRS commissioner, most days are good days.

When you’re the taxpayer, not so much.

The TSA Won’t Be Reformed

Why is it that the head of the Transportation Security Administration comes out with his ideas for reform three years after leaving office? Is it the book he’s got coming out next week? That’s part of it. But he supplies the real answer: “TSA’s bureaucratic momentum and political pressures.”

It’s possible to imagine an agency that isn’t directed by bureaucratic momentum and political pressures, but it isn’t possible to produce one. The litany of nonsensical procedures, indignities, and privacy invasions at the airport will not go away until the TSA does.

Obamanomics on Display

Today POLITICO Arena asks:

Is the Buffett Rule a step toward tax fairness? Or, as Hill Republicans argue, is it a gimmick that would do nothing to boost job growth or make a real dent in paying down the nation’s ballooning debt? Which side of the argument will win politically in November?

My response:

Not only will the “Buffett Rule” not reduce the national debt, but because it’s meant to offset the revenue lost from changes in the Alternative Minimum Tax, the combined effect will be to increase the debt. To quote from Saturday’s Wall Street Journal: “The Joint Tax Committee—the official scoring referee on tax bills—calculates that the combination of AMT repeal for the middle class and the Buffett tax would add $793.3 billion to the debt over the next decade.”

Far worse than that, as a tax on capital, the Buffett Rule will drive investment, and jobs, overseas. But will ”fairness” win in November, even if not this week in Congress? As a Democratic wag once said, “You can fool all of the people some of the time, and some of the people all of the time, and that’s good enough.” We shall see.

Asset Forfeiture Abuse Threatens Fair Trial in Copyright Case

For many years, my colleagues at Cato have spoken out against abuse of asset forfeiture, which undermines the rule of law by depriving defendants of their property long before they have been convicted of any crime. In the past, asset forfeiture abuse has mostly occurred in drug cases. But in January, the government used it against a defendant in a criminal copyright case. The government’s tactics threaten the defendant’s right to a fair trial and highlight the problematic nature of taking the property of defendants before they are convicted of any crime.

I should acknowledge at the outset that the defendants, Megaupload and its founder Kim Dotcom, are not very sympathetic. Megaupload was an online “file locker” service that had become one of the most popular platforms for distributing illegal copies of copyrighted movies and music. Whether Megaupload is liable for this illegal activity is a complex legal question, but most of the experts I’ve talked to say that Megaupload faces long odds.

Still, at least some legal experts think Megaupload has a shot at winning the case, and in any event our constitution requires that Megaupload be considered innocent until a jury decides otherwise. So it’s problematic that, at the time the government indicted Megaupload and Dotcom, it simultaneously shut down the company’s servers and froze all of Megaupload and Dotcom’s assets. And even worse, the government has objected to releasing the frozen assets even for purposes that are essential to affording Megaupload a fair trial.

Megaupload leased servers from a company called Carpathia Hosting. There were 1103 servers, worth more than a million dollars and containing 25 petabytes—that’s 25 million gigabytes—of data. When Megaupload’s assets were seized, the company was no longer able to pay its bills and Carpathia terminated Megaupload’s hosting agreement. Megaupload says that data from the servers will be needed to prepare its defense, and has asked for permission to buy the servers from Carpathia in order to preserve the data. But the government has objected to unfreezing the necessary assets, raising a number of objections. Carpathia has said that if it can’t find someone to pay for the servers, it will be forced to delete the data so it can make the servers available for other clients. If that happens, it could seriously damage Megaupload’s opportunity to defend itself in court.

Even more troubling, the government has objected to unfreezing assets so that Megaupload can hire a lawyer. The New Zealand courts unfroze some of Kim Dotcom’s assets in New Zealand (where he is fighting extradition) to pay his living expenses there. The US government has suggested that Megaupload could use those funds to pay its legal bills. But there are several problems with this. First, the released funds were earmarked for living expenses, not legal bills. Second, the Megaupload corporation is a separate legal entity from Kim Dotcom. Yet only Dotcom—not Megaupload—has funds available.

Most importantly, while the funds that have been made available to Dotcom might be sufficient to pay the legal bills of a defendant in a typical criminal case, this case is not typical. It involves complex legal and technical issues. Properly litigating them will require extensive computer forensics work, expert witnesses, and in-depth legal research. Even if the Dotcom money were available to pay Megaupload’s US legal bills, it wouldn’t come close to covering the costs of litigating such a complex case.

The courts have yet to rule on these issues; with luck the judge will overrule the government’s objections and unfreeze sufficient funds to allow Megaupload to buy the servers and pay its legal bills. But the fact that the government is even raising these arguments suggests a troubling lack of concern for the rule of law.