Archives: 12/2018

Should the Government Manufacture Generic Drugs?

Senator Elizabeth Warren says yes, because patent protection gives drug companies monopoly power that they exploit. Her suggestion raises several issues.

First, Warren is right that while patents might incentivize innovation, they also keep prices elevated while new drugs are under patent, thereby reducing utilization. Patent policy should seek to balance these two effects, and current policy might not be the right balance.

Second, Warren’s suggested policy - more government, rather than reduction or elimination of existing patent protection - fits the standard progressive approach: assume the fix to imperfect government is more government, rather than less. 

Third, libertarians are divided over government patent protection. On the one hand, libertarians endorse a government role in defining and enforcing property rights generally, so why should intellectual property be any different? (And as a bonus, intellectual property protection is an enumerated power). Further, standard economics suggests that private investment in new ideas might be insufficient without patents.

On the other hand, the current patent system generates a non-trivial frictions: patent trolls try to “hold up” firms that might use patents for new products. This causes no ineffiiciency if Coasian bargaining costs are zero, but that seems unlikely. 

Existing research, moreover, provides little evidence that patent protection spurs innovation (although pharma may be an exception).

So, Warren raises a valid concern over patents. But rather than having government manufacture generic drugs (what could possibly go wrong?), why not just scale back existing patent protections?

Who Should Moderate Content at Facebook?

By the end of 2019, Facebook promises to establish an independent body to handle appeals of its content moderation decisions. That intention follows an earlier suggestion by Mark Zuckerberg that Facebook might establish a “Supreme Court” of content moderation. Like the real Supreme Court, Facebook’s board will presumably review the meaning and application of its Community Standards, which might be considered the basic law of the platform.

There are many questions about this new institution. This post looks at how its members might be selected.

Your Constitution Is in the Mail

Return Mail, Inc. is a small technological company that developed a and patented a system for processing returned mail after a failed delivery attempt, using optical scanners, computer databases, and other mechanisms. When it sought to enforce its patent against the United States Post Service (USPS), it knew that in the wake of the 2011 America Invents Act (AIA), the U.S. Patent and Trademark Office (PTO) could change its mind and conclude that the patent was granted in error and should have no further force. It also knew, however—or so it thought—that once the government made a decision regarding a patent, the government would be expected to speak with one voice. Instead, two different governmental agencies came to different conclusions and attempted to argue amongst themselves over Return Mail’s rights.

Article II of the Constitution vests the executive power in the president alone because the president is uniquely accountable to the entire American public.  Yet the USPS, although part of the government, operates independently of direct presidential control and is able to take legal positions that conflict with presidential directives and priorities. The Supreme Court has permitted the creation of such agencies, but it has never sanctioned these agencies to directly contradict presidential decisions and to seek the resolution of such disputes in the judiciary branch.

Such a system creates significant problems for the public in general, because it can never know who is actually speaking for the government and which directives it must comply with. It’s particularly problematic in the world of patents—which Congress from very early on determined must have uniform application throughout the country and charging a single agency with reviewing applications and a single court with hearing all appeals. Allowing myriad government agencies to reach their own conclusions on the meaning and scope of patents would undermine the system that Congress has taken pains to construct over more than 200 years (regardless of the proper scope of patents and other legislative reforms that may be worth pursuing).

Further, allowing the government to disperse the executive power between the president and independent agencies has a risk of undermining the due process protections that must be afforded to patentees before their patent rights are taken away. The Supreme Court has always maintained that patentees’ rights are protected by the essential guarantees of the Due Process Clause. Under the current system for administrative patent cancellation proceedings, the director of the PTO (who is responsible to the president and terminable at will) has the power to select administrative patent judges and assign them to particular cases. In cases where an executive agency seeks review of a patent issued by the PTO, the government—through that agency—has an interest in the outcome of the proceedings, but it is also the one sitting in judgment of the case. Our system of government has rejected procedures where one can be a judge in his own case. Allowing one government agency to challenge a patent while another government agency sits in judgment of that challenge would undermine more than 400 years of Anglo-American jurisprudence.

The Cato Institute, joined by Professor Gregory Dolin of the University of Baltimore, have filed an amicus brief urging the Supreme Court to hold that fidelity to our constitutional structure requires construing the AIA to apply solely to the resolution of disputes between private parties where the PTO remains a neutral and disinterested adjudicator and where politically accountable branches remain responsible to the citizens for the decisions that they have reached.

The case of Return Mail, Inc. v. U.S. Postal Service will be argued at the Supreme Court in the new year.

Empirical Evidence for Stock-Market Short-Termism?

This blog post is part of a larger series on stock-market “short-termism”. See also my entries on share buybacks and progressive corporate governance reforms.

I. Introduction

To recapitulate the “myopia thesis”: managers of publicly traded firms are hostage to diversified shareholders who forego careful study of the firm’s fundamentals and instead respond to the latest, easily digestible quarterly earnings report. Rather than undertaking investments that might have a substantial return down the road, managers mimic the priorities of transient shareholders uninterested in a firm’s long-term strategy. Future-oriented firms that resist this temptation will find it more difficult to raise capital. This will then jeopardize their ability to survive long enough to reap the returns from long-term investments. 

The myopia hypothesis predicts that: 1) stock markets undervalue firms that sacrifice short-term profitability for longer-term growth 2) firms will therefore rationally forego long-term investments such as research and development (R&D) and capital expenditures (CAPEX). In this post, I will critically examine the evidence for such claims.

Ruling Striking Down Obamacare Comes Six Years Late and a Dollar Short

Late Friday afternoon, a federal judge in Fort Worth ruled that, because the individual mandate could no longer be upheld as a tax (because Congress in 2017 eliminated the monetary assessment for noncompliance), it was unconstitutional – and that it couldn’t be severed from the rest of the Affordable Care Act, so all of Obamacare is invalid. Fantastic, right? This is what I and many others have been working for since the law was signed in March 2010 and, while it took a while, we finally reached to the mountaintop – a second bite at the apple to undo John Roberts’s betrayal, right?

Well, not quite. Much as Judge Reed O’Connor’s ruling seemed to parallel the ruling by Judge Roger Vinson nearly eight years ago, in the litigation that culminated NFIB v. Sebelius in 2012 – Josh Blackman even evoked that early decision in a clever allusion to Groundhog Day – this time around there are different statutory facts being evaluated and so a different legal posture. 

Mind you, it’s absolutely correct that a “shared responsibility payment” that is $0 can no longer be justified as a tax, even under Chief Justice Roberts’s twistification. That is, a bare command to buy insurance is unconstitutional because it goes beyond federal power under the Commerce Clause and Necessary and Proper Clause (so ruled a majority of the Supreme Court, including Roberts).

But that’s not the end of the ball game because the question of whether the individual mandate can be severed from some or all of the rest of the ACA is a different one than whether the mandate itself is constitutionally kosher. Judicial doctrines of severability are somewhat complicated and call for judgment rather than bright lines, but they boil down to two questions: (1) Is the remainder of the statute “fully operative as a law”? and (2) Would Congress have passed the remainder? In Cato’s severability brief in NFIB, we argued that (1) “The individual mandate was essential to the Act’s scheme for achieving near-universal health care coverage at an acceptable cost” and (2) “Severing the individual mandate from its related provisions in Titles I and II will produce new comprehensive health care legislation that Congress did not enact and would never have enacted.”

But this time around, the Tax Cuts and Jobs Act of 2017 reduced the tax-penalty to $0 without eliminating so much as the guaranteed-issue and community-rating provisions (the parts most closely tied to the mandate), so (1) either the rest of the law would seem to be working (or not) irrespective of the individual mandate, and (2) we now have the scheme that Congress actually passed. In other words, Congress had the opportunity to sever as much of Obamacare as it wanted – legally speaking; there was only so much Republicans could do practically through “reconciliation” given the Democrats’ ability to filibuster more substantive legislation – and it effectively ratified the entirety of Obamacare with a $0 mandate.

So I’m quite skeptical that the severability ruling will be upheld on appeal, even by the conservative-friendly Fifth Circuit. There are also potential issues of standing, given that it’s based on compulsion to follow a law that has a $0 enforcement mechanism and no other legal consequences.

The case might not even get to the Supreme Court. And if it does, remember that the five justices who ultimately upheld the ACA are still on the Court. Plus Justice Brett Kavanaugh twice rejected challenges to the law when he was on the D.C. Circuit – albeit on technical grounds, and without engaging in severability analysis – which is why attacks on him from the left for wanting to gut Obamacare were so misguided.

In short, Friday’s ruling gave me a wistful thought about what might have been, but this case just isn’t the silver bullet that will finally kill the monster that has so damaged our health care system, economy, and rule of law. Indeed, I imagine that at a certain point we’ll stop talking about Obamacare – that point may have come when Senator John McCain voted against its “skinny repeal” last year – and just debate how best to reform “the health care system.”

For more analysis of Friday’s ruling in Texas v. United States, see Volokh Conspirators Jon AdlerIlya Somin, and special guest star Josh Blackman in two posts (with more to follow). It’s telling that I haven’t yet seen Randy Barnett, the intellectual godfather of the original individual-mandate challenge, opine on the ruling. I think he knows, as well as the rest of us, that this case isn’t the blockbuster some have made it out to be.

45,000 “Special Interest Aliens” Caught Since 2007, But No U.S. Terrorist Attacks from Illegal Border Crossers

President Trump claimed last week that “people are pouring into our country, including terrorists.” This came after his unsubstantiated claim that Middle Easterners are traveling in the caravan. Center for Immigration Studies (CIS) fellow Todd Bensman has repeatedly defended these types of claims by equating immigrants from “countries of interest” with “terrorists.” This conflation is common and rarely challenged as Homeland Security officials and members of Congress frequently describe immigrants from these countries as a terrorist threat. Despite Border Patrol apprehending tens of thousands of foreign nationals from these countries of interest and many thousands more who have undoubtedly entered illegally, not a single person has been killed by a terrorist who entered as an illegal border crosser from any of the countries of interest.

Special Interest Alien Apprehensions

The terminology used to describe these immigrants varies considerably between sources. In 2011, the Department of Homeland Security (DHS) Inspector General defined the term “specially designated countries” to mean countries “that have shown a tendency to promote, produce, or protect terrorist organizations or their members.” Border Patrol Chief David Aguilar described “Special interest countries” as “basically countries designated by our intelligence community as countries that could export individuals that could bring harm to our country in the way of terrorism.”

These definitions could apply to nearly every country in the world, as just about every major country has “produced” or “exported” at least one terrorist. With several exceptions, the lists have consisted primarily of countries with large Muslim populations. The designated countries have changed repeatedly over the years:

In 2003, DHS released a list of 52 countries. In 2004, the list included 35 countries, two of which were new. In 2007, the list was referenced in a news article, and though the full list was not quoted, it included another country (Tanzania) that was not on either of the prior two lists. In 2018, DHS released yet another list of countries where CBP “had Enforcement Actions against aliens from the following ‘Special Interest Aliens’ countries for FY18.” This partial list included yet five more countries that were not on the prior lists. Altogether, these lists have contained 63 countries. Only 14 have shown up on all the lists.

From 2007 to 2017, Border Patrol apprehended 45,006 immigrants from any of the countries ever designated as a “country of interest” (See Table 1). During the same period, it apprehended 4,109 from countries that made it onto all three lists. Given the inconsistency in these lists and for sake of completeness, Figure 1 shows the annual number of special interest aliens apprehended by Border Patrol separated by the different lists and those apprehended from countries that appeared at least once on a single list.  Fiscal Year 2007 is the earliest year that Border Patrol has made the number of apprehensions by citizenship publicly available.

Figure 1: Special Interest Alien Border Patrol Apprehensions

Is Greenland Melt “Off the Chart?”

That’s what the second author said about a new paper on Greenland’s ice, which arrived just in time for the annual meeting of the signatories of the UN’s 1992 treaty on climate change, this time in Katowice, Poland. Appearing in Nature, Rowan University Geologist Luke Trusel and several coauthors claimed ice-core data from Central-Western Greenland revealed melting in the recent two decades that has been “exceptional over at least the last 350 years.” The paper appeared in the December 6 issue of Nature.

How exceptional?

“Our results show a pronounced 250% to 575% increase in melt intensity over the last 20 years” as measured in four ice cores in west-central Greenland. Three of the cores were in the Jakobshavn Glacier, the largest-discharging glacier in the entire Northern Hemisphere. The Ilulissat icefjord, created by the glacier, some 25 miles in length, has historically calved nearly 50 cubic kilometers of ice per year into Disko Bay, near the town of Ilulissat. 

They then correlated their ice-core data with a model for ice behavior in all of Greenland. The correlations, while significant, were modest, with the explained variance of the island-wide melting maxing at around 36%. The melt reached its maximum in the very strange summer of 2012, where the amount at the Summit site, near Greenland’s highest elevation, was the largest since the summer of 1889—worth noting because that was well over 100 years ago.

There’s a long-standing quality weather station at Ilulissat, and it certainly shows summer warming of about 2⁰C from its beginning around 1850 to the 1920s.

For a broader comparison, we looked at the summer temperature anomalies for the 5 X 5 degree gridcell that includes Disko Bay and the icefjord. Because it is relatively hospitable and settled, there are a number of stations within the cell so the data is quite reliable. The data we show is from the Climate Research Unit at the University of East Anglia, version HadCRUT4.

There’s very little to see in this temperature record. The authors are well-aware of this and offer a rather unsatisfactory explanation:

The non-linear melt-temperature sensitivity also helps explain why episodes of mid-twentieth-century warmth resulted in less intense and less sustained melting compared to the last two decades, despite being only marginally cooler…Additional factors, such as recent sea-ice losses, as well as regional and teleconnected general circulation changes may also play a part in amplifying the melt response.