Regulatory Studies

March 20, 2020 5:08PM

Coronavirus and Regulation

Crises often illuminate “inefficient” public policies—ones with costs that outweigh their benefits. Society can tolerate (and may not even notice) them in ordinary times, allowing the policies to continue and protect and enrich special interests. But in crises, their costs become less tolerable.

Because of the coronavirus, the U.S. economy is experiencing simultaneous negative shocks to demand and supply. The demand shock is broadly understood: “social distancing” is causing people to avoid (and governments to close or curtail) mass transit, restaurants, personal services, and other businesses. The supply shock is less recognized but more troubling: quarantines and worker illness threaten to disrupt supply chains for goods that are in strong demand, including medical supplies, food, disinfectants and cleaners, and energy.

Inefficient regulations exacerbate this supply shock, limiting production and raising prices. Chris Edwards and Jeff Singer have written about some of these regulations that governments are now hastening to suspend in order to boost supply.

Cato’s policy journal Regulation examines government rules on economic activity, points out inefficient ones, and suggests reforms. In times like these, improving any regulations would be helpful; however, several articles over the last several years are especially relevant to the coronavirus crisis.

Below the jump is a list of these articles, with short summaries of each and links to the full articles. The list is divided into two sections: rules whose reform would help immediately, and rules whose reform would help in future crises. For federal and state policymakers looking for responses to the current crisis, this list is a good place to start.

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March 13, 2020 10:25AM

Are Congressional Democrats Warming Up to the Legislative Veto?

Congressional Democrats seem to be warming up to the legislative veto. If so, it would mark a welcome breakthrough in regulatory politics.

But first: What’s a legislative veto?

Basically, it’s a way for Congress to stop a regulation in its tracks. From 1932 to 1975, Congress included 292 of these veto provisions in laws that created regulatory agencies. These vetoes came in many flavors. Sometimes, it took a majority of both the House and Senate to kill a regulatory action. Other times it took passage in only one of the chambers. Less frequently, a legislative veto could be imposed by a single congressional committee.

Though employed infrequently, these provisions operated as “a central means by which Congress secure[d] the accountability of [regulatory] agencies,” according to Supreme Court Justice Byron White. Regulatory agencies feared the legislative veto and, therefore, honored objections registered by lawmakers.

Alas, the Supreme Court nixed the legislative veto in 1983.The problem, according to a majority of Justices, was that these measures had the effect of law, yet they didn’t result from the legislative process set forth in the Constitution—that is, passage by both chambers and the president’s signature.

Thirteen years later, Congress revived the concept, albeit in a lesser form, when President Clinton signed the Congressional Review Act (“CRA”). Under the act, lawmakers have a window of time to vote down new regulations. Unlike the original legislative veto, however, CRA “resolutions of disapproval” require the president’s signature.

Obviously, a sitting president is unlikely to sign a law that repeals one of his or her administration’s own rules. The upshot is that the modern legislative veto is most effective when there’s been a changeover in the party that occupies the presidency—typically, the new boss is eager to overturn rules passed by the old boss. During the first months of Trump’s term, for example, the Republican‐​controlled Congress vetoed 15 rules issued late in Obama’s second term.

This is not to say that the CRA is useless for the party that doesn’t occupy the Oval Office. To the contrary, passing a CRA sends a powerful political message. It concentrates the president’s attention—and, by extension, that of the media and public—on the regulatory measure at issue. In a time when most policy flows from an alphabet soup’s worth of regulatory agencies, a CRA resolution serves the salutary purpose of forcing elected officials to pay attention to the rules being churned out by non‐​elected officials.

Congressional Republicans understand this. President Obama had to veto at least five CRA resolutions of disapproval during the 114th Congress (S.J. Res. 8, S.J. Res. 22, S.J. Res. 23, S.J. Res. 24, & H.J. Res. 88). At least three more legislative vetoes were passed by a Republican‐​controlled House or Senate. (H.J. Res. 37, H.J. Res. 118, & S.J. Res. 28). And GOP lawmakers introduced many more throughout Obama’s tenure.

Congressional Democrats, by contrast, have been far less willing to employ the Congressional Review Act against a Republican president. According to my review of the Thomas database, a Democrat‐​controlled House or Senate passed only one legislative veto during the George W. Bush administration. That measure, moreover, was politically anodyne—it passed the Senate on a voice vote. Simply put, Democrats never played hardball with the legislative veto, unlike Republicans.

The Democrats’ inaction is puzzling, given that the legislative veto cuts both ways. Put differently, CRA resolutions apply just as readily to de-regulatory action as they do to regulatory action. Why would Democrat lawmakers reject an effective check?

In an insightful article from last Summer, congressional scholar Philip Wallach offered an answer. According to Wallach, Republicans have foolishly branded the legislative veto as anti‐​regulation, which leads to two results. First, Democrats deny themselves use of the Congressional Review Act. Second, and more generally, it’s “significantly harder to fashion bipartisan compromises that favor the first branch.”

I mostly agree with Wallach, though I’m a bit more bipartisan in my fault‐​finding. I think our contemporary politics are so impossibly Manichean that either side’s knee‐​jerk reaction is to do the opposite of what the other side is doing, even if such a reflexive response is counterproductive.

That’s the bad news. Now for the good news: Progressive lawmakers seem to be getting over their illogical rejection of the legislative veto. In late January, the House passed H.J. Res. 76, which would block a controversial student‐​aid rule promulgated by the Education Department.

The White House took note—last week, it “strongly” objected and promised to veto H.J. Res. 76 were it to reach the president’s desk. By my count, this is the first time a Democrat‐​controlled chamber of Congress has played rough with the legislative veto. I’m not saying I favor the Democrats’ policy ends, but I love their means.

There are other encouraging signs. Twice, Senate Democrats have forced roll call votes on divisive CRA resolutions during Trump’s first term. (S.J. Res. 63S.J. Res. 50). Many more such resolutions have been introduced.

Admittedly, it’s too early to tell whether congressional Democrats are truly embracing the full arsenal of legislative checks on executive action. I am, nevertheless, hopeful these examples reflect a trend.

There is precedent for Democrat leadership doing an about‐​face on an institution that they once had spurned (mistakenly) as anti‐​regulatory. In 1981, President Reagan unilaterally created a powerful management tool over the administrative state, known as White House “regulatory review.” For years, progressives were upset, because they believed that such review must be inherently de-regulatory. Yet many progressives changed their mind in 2001, when then‐​professor (and current Supreme Court Justice) Elena Kagan wrote a blockbuster article describing how the Clinton White House had leveraged regulatory review for progressive ends. Kagan’s key insight was that both parties can play the game.

Let’s all hope that congressional Democrats are coming to a similar realization about the legislative veto. The Framers separated the powers of government to protect individual liberty from an overbearing state. For too long, Congress has remained passive while the president achieves an unhealthy concentration of power over domestic policymaking. It’s well past time for Congress to reassert itself and re‐​balance the separated powers. To this end, it would be a welcome start if congressional Democrats overcame their irrational distaste for the legislative veto.

March 11, 2020 10:51AM

Certificate of Need Laws Will Impede Preparedness For The Expected Surge in COVID-19 Cases

The number of confirmed cases of COVID-19 infection in the U.S. continues to increase. All indications are that we are now just seeing the tip of the iceberg. Hospitals across the country are gearing up for an anticipated deluge of sick patients in their emergency departments, and hospital admissions that will stress—and possibly overwhelm—their intensive care units and general bed capacity. In response to the outbreak in China, a 1,000-bed isolation hospital was constructed in just 10 days—a feat that would be difficult to replicate in this country with its web of federal, state, and local regulations.

In today’s Washington Examiner, Lindsey Killen of the Mackinac Center for Public Policy and Naomi Lopez of the Goldwater Institute draw attention to the archaic Certificate of Need Laws (CON laws) that continue to exist in 38 states. These state laws, promoted by the National Health Planning and Resource Act of 1974, were intended to reduce health care costs by eliminating redundancy in health care delivery systems. They vary from state to state, but essentially require a panel to review any plans by hospitals or other health care organizations to expand, build new hospitals, or in some cases, add equipment. The review panels include incumbent health care organizations. Imagine a CON law for restaurants that empanels existing restaurant owners to review applications by persons wishing to build a new restaurant or expand the capacity or offerings of an existing one. It doesn’t take long to understand how that turns into an incumbent protection law. By the early 1980s it became clear, as in all cases of central planning, that CON laws were doing nothing to reduce health care costs and may have had the opposite effect. The federal law was repealed during the Reagan Administration.

More than 3 decades after repeal of the federal law, CON laws persist in 38 states and attempts to reform or repeal them are often met by fierce resistance from incumbents who try to make the case that they only have the interests of the general public in mind. If the expected surge in COVID-19 cases exceeds the capacity of hospitals and emergency rooms, resulting in avoidable deaths, at least some of the blame belongs to CON laws, an example of central planning reminiscent of the “5‑year plans” of the Soviet politburo.

Killen and Lopez alert readers to a paper released last week by the Goldwater Institute’s Christina Sandefur, entitled Competitor’s Veto: State Certificate of Need Laws Violate State Prohibitions on Monopolies,” that makes the case that, in addition to the economic and public health consequences of these outdated laws, CON laws violate state constitutions.

A public health crisis such as the one that now confronts us provides an opportunity to review and repeal laws and regulations that impede preparedness. Certificate of Need Laws are low hanging fruit.

January 27, 2020 2:12PM

The Folly Of Bernie Sanders’ National Rent Control Proposal

“Landlords cannot be allowed to raise rents to whatever they want, whenever they want,” Senator Bernie Sanders boomed on Twitter in November. “We need…a national rent control standard.” Now, his presidential campaign advocates one: under Sanders’ housing proposals, all landlords nationwide would only be able to increase rents annually by one and a half times the rate of inflation or 3 percent, whichever is higher. Assuming the current CPI for Urban Consumers is the inflation measure used, that would mean a rent increase cap today of just 3.4 percent.

Given the likely unconstitutionality of a truly national rent control law, one suspects Sanders should be taken seriously but not literally. What he is really doing here is endorsing a spate of new rent control laws across states, encouraging left‐​wing activists to push for more stringent restrictions elsewhere. California has already instituted a 5 percent plus inflation cap for older buildings. Oregon has passed a rent increase cap of seven percent per year above CPI. New York just expanded protections for existing rent stabilized tenants and is expected to follow the others with a proposal for a general rent cap.

But that Sanders’ national proposal probably won’t or can’t be implemented doesn’t mean his reasoning won’t damage housing policy across the country. His claim that landlords can charge “whatever they want” entrenches the idea that rents are set through greed or market power, not supply and demand. And if crude, low level rent increase caps are implemented even in individual cities, it could have disastrous consequences in “hot” markets – particularly given proposals like his are shorn of the exemptions one usually sees for small‐​time landlords, new properties or vacant units, that can provide a safety valve for the rental market.

To see the folly of a national rent policy, consider the differential state of major U.S. housing markets. According to a Demographia report last week, Rochester, New York has a median house price just two‐​and‐​a‐​half times the median income for the city. Similarly affordable housing can be found in Cleveland, Ohio and Oklahoma City (both 2.7 median multiples). On the other end of the spectrum, major Californian housing markets such as Los Angeles, San Jose, and San Francisco all have mean multiples above 8, while Seattle (5.5), Miami (5.4), and New York (5.4) are still deemed “severely unaffordable.”

Given housing affordability varies so much, we shouldn’t be surprised that rents similarly differ by locality. And if we accept that rents differ across the country for similar housing because of different household sizes, incomes, land use and zoning laws, and more, it stands to reason that average rents will change at different rates year‐​to‐​year as these supply and demand factors vary.

Looking across the last 20 years shows this clearly (see Table 1). In the broad housing markets around San Francisco, Seattle, Miami and Denver, average rent increases have exceeded what Bernie Sanders’ proposal would allow in over one of every two years. In contrast, cities such as Milwaukee, Cleveland, and St Louis have rarely seen rent increases exceed Sanders’ arbitrary cap. Within cities, we’d expect differences by neighborhood too (though perhaps with lower variance).

Years in Which Bernie Sanders' Rent Control Law Would Have Bound, On Average, By Metropolitan Area (2000-2019)

Is there any reason to suspect that landlords have been greedier in Miami than Milwaukee, or Seattle than St Louis? Or is it more likely that supply and demand trends have been different across cities over that 20 years? This evidence, plus the fact that rents within individual cities’ neighborhoods tend to quickly converge for certain property types and size, suggests that landlords cannot raise rents to “whatever they, whenever they want.” In reality, they are constrained both by tenants’ ability to pay and the availability of substitute properties. Or, to put it another way, by supply and demand.

Once one accepts that rental prices are overwhelmingly the product of market forces, not landlord greed, you see why rent control, especially as Sanders’ envisages, is such a misguided idea. It effectively seeks to drown out the message that rising rents is submitting – of an increased relative scarcity of rentable accommodation that has led rents to rise to clear the market. Instead, capping rents forces on the market the comforting lie that property is abundant. That produces a whole range of well‐​documented consequences.

Consider neighborhoods where market rents are expected to rise in the coming year beyond Sanders’ current 3.4 percent cap. The rent control will therefore bind, and if market rents continue increasing rapidly (perhaps because of an unresponsive supply of new housing to demand) then rents paid will become lower and lower relative to the underlying market rent. For hot rental markets:

  1. Once it becomes clear rent controls are likely to be implemented, some landlords may seek to raise rents today before the cap becomes law, second‐​guessing how market rents will evolve in the very near future.
  2. Once the rent control binds, there will be a shortage of property relative to the quantity demanded. Existing landlords will, on the margin, seek to find ways to convert rental accommodation into non‐​controlled forms of accommodation, such as condos, offices, use through AirBnB, owner‐​occupancy, and more.
  3. Since rents cannot adjust to the new market reality over time, and there are no exemptions for new properties, capital investment in new rentable accommodation will fall in neighborhoods affected. Existing buildings will likewise be knocked down and replaced with buildings for other uses. These effects will be exacerbated if landlords perceive rent control to be the precursor for other restrictions on how they use their buildings or choose their tenants. The overall supply of rentable accommodation in the market will therefore fall relative to where it would have been.
  4. Existing tenants who do not want to move will benefit significantly from the controls, with big rent savings. But over time that will mean many people being in accommodation that is the wrong size or location for them. Extensive wait lists for properties and black‐​market bribes will likely proliferate.
  5. Ordinarily, crude rent controls can lead to a deterioration of property quality. Landlords have incentives to either allow the property quality to deteriorate so that the market rent falls to the controlled rent or else to change the tenure type to non‐​controlled forms. In the case of Sanders’ proposal, however, landlords can apply for waivers from the controls if significant capital improvements are made. In very hot markets there are therefore big incentives for rapid gentrification – converting to very expensive, high‐​end properties and then fixing rents very high initially to reflect binding rent controls into the future.

In short, a Sanders national rent control proposal would bring a lot of economic damage. But even if implemented more locally, such a crude rent cap would bring significant downsides to local housing markets, and the economy more broadly. And all based on the misguided idea that landlords have vast market power to set rents.

January 17, 2020 4:07PM

Ninth Circuit “Reluctantly” Dismisses Kids Climate Case

Today, a split panel on the U.S. Court of Appeals for the Ninth Circuit “reluctantly” dismissed Juliana v. United States, known colloquially as the “kids’ climate case.”

We should all be thankful for the court’s avowed restraint—for much of this controversy, judges in the circuit seemingly champed at the bit to take on central planning of the American economy. A big assist is due the Supreme Court, which bench‐​slapped some sense into the Ninth Circuit.

Here’s the backstory. In 2015, a group of children filed suit in a federal district court in Oregon, alleging that the federal government infringed on on their putative constitutional right to a climate unaffected by anthropogenic global warming.

On its face, the kids’ case is silly. For starters, it’s not terribly plausible to claim there’s an unenumerated constitutional right to a specific atmospheric concentration of greenhouse gases. But let’s assume there is, for the sake of argument. What could a court do about it?

As a remedy, the Juliana plaintiffs sought for the court to order the government to draw up a comprehensive climate plan–one that is subject to judicial approval and ongoing oversight.

The requested relief, therefore, is a court‐​ordered scheme to regulate the American economy. If the plaintiffs had their druthers, a single federal district court judge would become, after the president, the most powerful official in the country. Obviously, that’s a big practical problem with the plaintiff’s argument.

From a legal perspective, the Constitution vests Article III judges with the “Judicial power.” National regulatory plans, by contrast, emanate from the “legislative” or “executive” powers that are the province of the political branches of government. Simply put, judges have no constitutional authority to initiate and oversee major climate policy. 

For these reasons, judges in other circuits have been quick to nix similar challenges. Last February, for example, U.S. Eastern District of Pennsylvania Judge Paul Diamond dismissed a near‐​identical suit. According to Judge Diamond, the Constitution does not guarantee children a right to a “life‐​sustaining climate system.” After disavowing both “the authority [and] the inclination to assume control of the Executive Branch,” he concluded that climate change regulation “is a policy debate best left to the political process.”

Yet, in Juliana, U.S. Oregon District Judge Ann Aiken entertained no such reservations. Not only did she deny two of the federal government’s procedural motions to stop the case, but she initially refused to certify her orders for interlocutory appeal—that is, she refused to allow the government to appeal her procedural orders before the case went to trial. It seemed as if she wanted to try Juliana.

The Ninth Circuit, too, seemed eager for the case to proceed. Twice, the court denied government petitions to end the case.

If all these judges in the Ninth Circuit were so eager to take the case, then how did Juliana get dismissed today?

The answer involves unmistakable signals sent from the Supreme Court. At various points during the litigation, the federal government asked the Court to pause the case. In denying these motions as untimely, the Court included language that unequivocally imparted its concern regarding the constitutional viability of the claims at issue in Juliana.

For example, in July of 2018, the Court observed that “The breadth of respondents’ claims is striking,” and further directed District Court Judge Aiken to “take [justiciability] concerns into account.” A few months later, the Supreme Court basically ordered the Ninth Circuit to hear the federal government’s appeal (on justiciability grounds).

After the Supreme Court’s second order, the Ninth Circuit leaned on Judge Aiken to certify her procedural orders and thereby permit the government’s appeal. Last June, the Ninth Circuit held oral arguments. Today, it “reluctantly” dismissed the case, holding:

We reluctantly conclude … that the plaintiffs’ case must be made to the political branches or to the electorate at large, the latter of which can change the composition of the political branches through the ballot box. That the other branches may have abdicated their responsibility to remediate the problem does not confer on Article III courts, no matter how well‐​intentioned, the ability to step into their shoes.

It bears noting that a majority on the three‐​judge panel dismissed Juliana over the impassioned (though wrong) dissent of Judge Josephine L. Staton. So a third of the panel would have allowed the case to proceed, while the rest ended Juliana only with “reluctance.” It may not be pretty, but I welcome the outcome nevertheless.

January 13, 2020 11:42AM

Labor Law: Feds Call Off Their War on Franchising and Subcontracting

The U.S. Department of Labor has announced a final rule (press release, fact sheet, FAQ) backing off one of the Obama administration’s most damaging initiatives, its attempt to redefine a wide range of franchise, subcontract, and supplier business models as “joint employment.” The effect of that move would have been to make many companies liable for breaches of labor and employment law committed by their franchisees or contractors. The final rule is set to take effect on March 16, 2020.

This is an important win for economic freedom, as well as for the legal reality that a supply or contractual relationship between two firms is by no means the same thing as a merger between them.

It is also a victory for regulatory modesty. The Obama rules had pushed hard at (and arguably overstepped) the bounds of the New Deal‐​era Fair Labor Standards Act so as to rope in as employment many relationships that Congress had never chosen to include as such. The push had been a multi‐​agency affair, extending to ostensibly independent federal bodies such as the National Labor Relations Board (NLRB) and others; and the retreat is likewise multi‐​agency, as can be seen in an NLRB case last month in which the board confirmed that McDonald’s does not, in fact, employ the employees of McDonald’s franchisees.

The new four‐​part balancing test announced by the Trump labor department assesses, to quote directly, whether the potential joint employer:

* hires or fires the employee;
* supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
* determines the employee’s rate and method of payment; and
* maintains the employee’s employment records.

Whatever else can be said about this framework, it at least seems likely to return the scope of the rules to the same general neighborhood they occupied for decades up to 2015.

Most of all, to quote our 2015 description, the new rule beats a retreat from the past administration’s aim “to force much more of the economy into the mold of large‐​payroll, unionized employers, a system for which the 1950s are often (wrongly) idealized.” That very same goal is at the root of California’s unfolding debacle with AB5, a law that tries to force many lines of freelancing into a direct‐​employment model and is already harming large numbers of workers it had purported to help.

If some progressives at the federal level continue to pursue this paradoxically backward‐​looking agenda, they will need to do so through the front door, by working in Congress to enact different standards into law.

January 9, 2020 3:29PM

Gains From Deregulation Undone by Tariffs

By Jeffrey Miron and Erin Partin

Optimism among U.S. manufacturers was near an all‐​time high in early 2017. Just eleven days into his presidency Trump signed an executive order specifically targeting overregulation. According to a survey by the National Association of Manufacturers, an advocacy group representing 14,000 U.S. companies, 93.3 percent of respondents felt optimistic about their company’s outlook. This optimism was driven by an expectation that the new administration would focus on deregulation, which would benefit the domestic manufacturing industry. The administration’s commitment to deregulation kept industry confidence high through much of 2017 and 2018 as regulations continued to be repealed.

This figure shows the results of a NAM survey with the percent of respondents expressing a positive outlook each quarter from 2016-2019

However, the escalating trade war with China is erasing many of the gains from deregulation. Small and medium sized firms are being hit hard by high tariffs on steel and other imported components. The only hope for many companies is to apply for tariff exemptions, but the process is often opaque, arbitrary, and tilted heavily in favor of larger firms with strong lobbying power.

Pro Publica reports:

“Companies with enough resources and savvy can not only push their own cases, they can work to undermine those of competitors.”

“With new tariffs being announced and lifted on a few days’ notice and trade agreements constantly being renegotiated, companies have scrambled to protect themselves. Tariff exclusions are highly sought after because they offer a huge competitive advantage — especially if a rival still has to pay. The review of exclusions is happening on a compressed time schedule, with little warning before tariffs and a complex set of rules that few people understand go into effect. And there are no second chances.”

“The Commerce Department at first had projected that it would see only about 4,500 applications — a threshold that was passed almost instantly. According to a regulatory filing, USTR estimated that each exclusion request would take applicants two hours to prepare, at a cost of $200 each, and two and a half hours for USTR to process. For the China tariffs, adjudicating cases is expected to take 175,000 staff hours over the course of a year, at a cost of $9.7 million.”

Trump’s trade war is harming U.S. manufacturers, their employees, and their customers. While it may be too soon to determine the damage to the economy, the thirty percent drop in manufacturer confidence over the past year does not bode well.