The newest federal push for marijuana reform may come soon via new legislation in the Senate. Senators Cory Booker, Ron Wyden, and Chuck Schumer are expected to introduce the legislation, after earlier releasing a joint statement calling for comprehensive cannabis reform. All three supported a 2018 bill that would have decriminalized cannabis, a 2019 bill that would have legalized marijuana nationally, and the MORE Act (passed by the House) that would have descheduled and decriminalized marijuana nationwide. Both descheduling (removing marijuana from the list of drugs deemed by the DEA to “have no medicinal value” and “a high potential for abuse”) and decriminalizing (removing criminal charges or penalties for possession and use) fall short of full legalization but are still useful steps.

This legislative push comes as support for legal marijuana is at an all‐​time high. Sixty‐​eight percent of Americans are in favor, and nearly 60 percent of Americans live in a state where recreational marijuana use and possession are legal or decriminalized. State‐​level legalization has thus far been a success, with no adverse consequences and substantial tax revenue generation. Just in the past month and a half, New Jersey, New Mexico, New York, and Virginia have enacted legislation legalizing marijuana.

Passing comprehensive marijuana reform will require bipartisan cooperation. Another hurdle may be President Biden, whose administration has been reluctant to embrace federal marijuana legalization. Thus far, states have been doing the heavy lifting on marijuana reform. Federal legalization would not compel states to legalize recreational marijuana but rather would allow states to pursue their own desired policies absent the threat of federal crackdowns.

The Washington Post recently reported on an analysis by Oren Cass of corporate profits and their division between dividends, stock repurchases, and reinvestment. The report argues that profits are being dispersed to shareholders through dividends and stock repurchases rather than reinvested. The result is reduced economic growth and fewer opportunities for American workers.

Two papers I review in Regulation examine the issue. The first paper confirms that payouts to shareholders (rather than retention of earnings within the firm) are larger now than in the past. In the 2000s, annual aggregate inflation‐​adjusted payouts were three times their pre‐​2000 level and increased as a percentage of assets (2.7% for 1971–1999 versus 4.1% for 2000–2017) and as a percentage of operating income (18.9% for 1971–1999 versus 32.4% for 2000–2017).

The payouts are higher because firms now earn more and pay out more of what they earn. About 38% of the increase in payouts is from higher earnings and 62% from a higher payout rate, which is exclusively from stock repurchase instead of dividends. Dividends average 14.4% of operating income from 1971 to 1999 and 14% from 2000 to 2017. Net stock repurchases averaged 4.8% of operating income before 2000 and 18.3% from 2000 to 2017.

Higher payouts are the result of changes in the values of variables that historically have explained corporate payouts: increases in firm age, size, and cash holdings, and decreases in leverage. A traditional econometric model of payouts is estimated with data on these four variables with data from 1971–1999. The results are then used to predict current payouts. The model predicts that real aggregate payouts in 2017 should have been $784 billion; actual payouts were $734 billion, actually slightly less than predictions. But firm age, size, cash holdings and leverage continue to predict current corporate payouts.

The lifecycle model of payouts predicts that younger firms should invest heavily and have no payouts. Profitable older firms have fewer growth opportunities, and thus should pay out the funds they cannot invest profitably. We therefore expect the payout rate to increase with firm age and size. Thus, the changing composition of U.S. firms toward older firms explains the increase in payouts.

The implication of the Oren Cass analysis is that firms are investing less in order to pay out more to shareholders: firms are destroying the economy in order to reward the rich. The authors confirm that capital expenditures as a percentage of assets have decreased over time but the decrease has occurred similarly among firms that payout the most versus those that pay less and similarly among those firms that payout something versus those that payout nothing. There is no relationship between firm payouts and capital expenditures. Nonpayers use the cash released by lower capital expenditures to increase R&D. In contrast, payers (and especially the top payers) increase R&D spending, but by less than the decrease in capital expenditures; thus they have an increase in free cash flow that enables them to make larger payouts.

The second paper examines the transformation of the relationship between Tobin’s q (equity market value divided by book value) and capital flows. Capital flowed into industries with higher Tobin’s q over the period 1971–1996. But from 1997 to 2014, capital flowed out of high‐​q industries. The change is from the repurchase of stock after 1997.

These results make little sense if high‐​q industries are the ones with the best investment opportunities and competition leads them to expand through additional investment up to the point at which those opportunities for expansion no longer exist. However, these results do make sense if the dominant firms in high‐​q industries draw rents from scarce assets, so that their high q reflects their ability to collect rents rather than an investment opportunity.

Reinvestment in mature industries with those characteristics would actually reduce returns and productivity and ultimately hurt workers. Instead, such firms should fund payouts that can be used by investors to invest in new firms in which the funds assist long‐​term economic growth and worker incomes.

The Constitution requires that significant government decisions be made by principal officers who have been appointed by the president and confirmed by the Senate. In stark and ongoing violation of this constitutional requirement, the Food & Drug Administration has an entrenched process whereby mere employees sign off on major rules.

In 2016, for example, the FDA issued the Deeming Rule, which put the vaping industry under the government’s regulatory thumb. Yet no constitutionally appointed officer took responsibility for this controversial policy. Instead, the Deeming Rule bears the signature of a career civil servant.

A group of mom‐​and‐​pop vaping retailers, represented by the Pacific Legal Foundation, challenged the FDA’s Deeming Rule in a federal district court. They argued that the rule is invalid because it was finalized by someone without the constitutional authority to do so. Their lawsuit clearly had merit—as demonstrated by the FDA’s own actions. About 18 months after the litigation began, the agency had a properly appointed principal officer “ratify” the Deeming Rule, in an effort to “cure” the constitutional defect. The FDA’s cursory ratification took up a single paragraph.

The district court upheld the FDA’s “rubberstamp” ratification, and the D.C. Circuit affirmed. Now, the challengers seek Supreme Court review. Yesterday, the Cato Institute, joined by the Reason Foundation, filed a brief in support of the petitioners. We explain that there is much more at stake than vaping regulations. Due to a variety of factors (including recent Supreme Court decisions and presidential power grabs), a substantial amount of administrative action suffers an apparent defect in constitutional authority. As a result, agencies increasingly are turning to rubberstamp ratifications that deny aggrieved parties any meaningful relief for their constitutional harms. Our brief urges the Court to take the case and provide guidance on this important federal question.

As a long Covid winter gives way to spring, and businesses begin reopening for normal operations, debate around “vaccine passports” is in the air. Various stakeholders – from privately‐​owned companies to government agencies – are considering establishment of a standardized certification. Meanwhile, opponents of vaccine passports argue they would exclude those who choose not to receive the Covid‐​19 vaccine or coerce people into getting the vaccine.

One of the most vocal critics is Governor Ron DeSantis of Florida:

“We are not supporting doing any vaccine passports in the state of Florida,” DeSantis said Monday. “It’s completely unacceptable for either the government or the private sector to impose upon you the requirement that you show proof of vaccine to just simply be able to participate in normal society.”

DeSantis is right to oppose government imposition of vaccine proof in private settings; but he is wrong to oppose private development and use of such certification.

If a restaurant or an airline does not want to expose its employees or customers to an infected patron, or if they want to require vaccination before employees can return to work in person, they should be free to do so. This not only benefits the customers (and employees who should not get vaccinated for medical reasons), but also the community at large. Society benefits further if such requirements induce people at the margin to receive a vaccine, thus aiding herd immunity.

Given these potential benefits, some might argue that mandating vaccine passports is good policy. But just because something is “good” does not mean the government should subsidize or require it. A government‐​mandated vaccine passport will generate hostility and backlash – as the debate over mask mandates illustrates. Voluntary, private adoption, in contrast, will generate acceptance and innovation, or simply fade away, depending on whether the passports turn out not to be useful.

As we’ve pointed out previously, the COVID-19 pandemic has exposed and exacerbated many of the problems facing California’s poor and vulnerable, from education and criminal justice to housing and overregulation. Yet another issue that the state must address is a deep and chronic shortage of childcare options.

Even before the pandemic, childcare options in California had been steadily declining for years. Between 2014 and 2019, the number of home‐​based and center‐​based childcare options decreased by 5.5 percent, over 57,000 providers. Despite the state’s extensive efforts to keep them afloat, COVID-19 forced many more to shut down. It is likely that when the 2020 data is released, nearly 60 percent of Californians will live in a “childcare desert,” regions where there is little or no affordable childcare.

Any economic recovery from the pandemic will require a significant expansion in the availability of childcare.

So far, most efforts to plug the hole in the dike have largely involved efforts to shift costs from individual families to taxpayers through subsidies at both the state and federal levels. The COVID relief bill that just passed Congress, for example, includes roughly $10 billion in childcare subsidies. Yet, little attention has been paid to the role excessive regulations have played in needlessly restricting the number of providers and increasing childcare costs in the first place.

Moreover, the structure of subsidies often limits parental choices. Surveys have consistently shown that many parents prefer small, local, informal childcare options rather than large institutional settings. But many of those informal options are not eligible for subsidies.

Of course, few would oppose local regulations designed to ensure children’s health and safety in childcare settings. However, an increasing number of regulations have more to do with protecting large institutional childcare providers or increasing salaries for professional childcare educators than they do with legitimate health and safety concerns.

Consider, for example, child‐​to‐​staff ratios. In California, a childcare provider can have no more than four infants (ages 6 weeks to 9 months) supervised by each caregiver. In the case of children aged 18 months to 27, the ratio is 8 children to one caregiver. These limits are both arbitrary and expensive. Research from the Mercatus Center found that for every additional child supervised by a caregiver, the cost of childcare would be reduced by nearly $2,000. When the average cost of center‐​based childcare is $16,945, and the average cost of home‐​based is $11,200, that is a significant saving. Consider that the average income of a two‐​parent household in California is $68,034, which means they have no choice but to spend almost a quarter of their income on childcare.

Other regulations increase childcare providers’ overhead, such as upfront fees, furniture, and supplies required for starting a daycare which can average almost $100,000. There are also extensive education requirements for childcare workers. For example, in California, a childcare center director must complete 15‐​semester units at an approved college or university and 4 years of teaching experience in a supervised childcare center.

At the end of the day, childcare is vital for many families. Childcare allows parents to earn a living and teaches children important socio‐​emotional skills that will benefit them later in life. A pro‐​work, pro‐​economic growth, pro‐​family policy would expand childcare options, especially for low‐​income families. But rather than chase rising costs with ever‐​higher subsidies, California should examine those regulations that make it hard for the poor to find those childcare arrangements they both want and need.

UPCOMING EVENT • April 20, 2021

After COVID-19: Building an Inclusive Economy for California

COVID-19 and its fallout have been devastating for California’s economy at every level. But low‐​income and traditionally marginalized communities have been among the hardest hit. This conference brings together a diverse group of political, business, and academic leaders to discuss regulatory and other barriers to rebuilding economic opportunity in poor and minority communities ravaged by COVID-19.

Register

The New Yorker recently published a short article about environmentalists who support nuclear power because they believe it is an essential component of any strategy to reduce greenhouse gas emissions. The article discussed the risks from nuclear accidents, such as Fukushima and correctly noted that more than a thousand people died in the forced evacuation of the area, dwarfing the expected direct health effects of radiation exposure.

A recent paper extended that analysis by examining the effects of the shut‐​down of all nuclear power plants in Japan following the Fukushima accident in March 2011. The absence of nuclear power was accompanied by an increase in electricity prices (38 percent in the Tokyo region) to pay for the cost of imported fossil fuels used to substitute for nuclear generation. The increased electricity prices reduced electricity use and increased mortality from reduced heating in homes. From 2011 to 2014, higher electricity prices resulted in 1,280 additional deaths in Japan’s 21 largest cities. In contrast, the estimated cumulative deaths that will occur from excessive radiation exposure caused by the reactor meltdown is 130.

One characteristic of nuclear power conspicuously absent from the New Yorker discussion was its cost. In theory, low‐​cost nuclear power has been the answer to many energy and environmental policy questions ever since the 1950s. In practice, its costs have increased inexorably. Why?

In the Spring issue of Regulation I review a recent paper that documents the history of nuclear power plant construction in the United States and the increase in costs. From 1967 through 1978, 107 were constructed. Rather than costs going down over that time because of learning by doing, plant costs more than doubled with each doubling of cumulative U.S. capacity. The problem was declining “materials deployment productivity”—that is, the amount of concrete and steel that workers put together per unit time.

About 30 percent of the productivity reduction stems from nuclear regulatory safety concerns. According to the authors:

While our analysis identifies the rebar density in reinforced concrete as the most influential variable for cost decrease, changes to the amount and composition of containment concrete are constrained by safety regulations, most notably the requirement for containment structures to withstand commercial aircraft impacts. New plant designs with underground (embedded) reactors could allow for thinner containment walls. However, these designs are still under development and pose the risk of high excavation costs in areas or at sites with low productivity.

The sources of the other 70 percent of productivity slowdown were construction management and workflow issues, including lack of material and tool availability, overcrowded work areas, and scheduling conflicts between crews of different trades. Craft laborers, for example, were unproductive during 75 percent of scheduled working hours.

Plant builders attempted to address these problems by increasing the use of standardized prefabricated modules that could be shipped to site and installed. These were employed in later reactors, but whatever advantages they provided did not improve aggregate productivity.

Since the 1990s, two nuclear projects have begun construction in the U.S. Both are two‐​reactor expansions of existing generating stations. The VC Summer project in South Carolina was abandoned in 2017 with sunk costs of $9 billion, and the Vogtle project in Georgia is severely delayed. Recent estimates place the total price of the Vogtle expansion at $25 billion, almost twice as high as the initial estimate of $14 billion, and costs are anticipated to rise further.

These problems are not unique to the United States. Projects in Finland and France also have experienced cost escalation, cost overrun, and schedule delays, which I also described ten years ago.

The paper provides an important reality check for those who believe nuclear power is an essential component of any strategy to reduce greenhouse gas emissions.

Plastic bag bans have become a favorite tool of municipal governments. The argument made by proponents of them is seductively simple: plastic bags generate waste and other negative environmental externalities, so banning their use could improve economic welfare.

Research shows, time and again, however, that bans on single‐​use plastic bags can have unintended consequences, not least by inducing substitution towards alternatives with potentially worse environmental impacts.

A new working paper examines two plastic bag policies implemented in Chicago from 2015 onwards, using the city as a treatment group against a control of the broader suburbs. Beginning in 2015, Chicago had an ordinance banning all single‐​use thin plastic bags. In 2017 the ban was repealed and replaced with a 7‐​cent tax on disposable bags of all types and thicknesses.

Examining behaviors at grocery stores under both regimes, the researchers found that when the ban was in place, 82 percent of shoppers simply used paper or alternative thicker plastic bags that were freely distributed to them. Overall disposable bag use was a third lower under the tax than the single‐​use plastic bag ban policy.

Why does this matter? Previous research has suggested that paper bags produce substantially more landfill waste, greenhouse gas emissions, and waterborne wastes than their plastic cousins, meaning their lifecycle environmental impact can be worse, unless they are used as many as 43 times. The more expensive thicker bags falling outside of the contours of the ban use more plastic, of course, generating more waste and other environmental damage, not less, unless they too are re‐​used significantly.

This highlights an obvious truth that one of us pointed out in a paper on policy towards dealing with externalities as “market failures”:

by considering the consumption of one good in isolation, policy proponents misuse the framework of market failure with potentially damaging policy consequences. All goods and their substitutes here entail production processes using chemicals and water, and have the potential for pollution, carbon emissions, and much else besides. Advocating for taxes or bans associated with one type of product on the basis of externalities, without considering the environmental consequences of substitutes, can lead to policies that reduce economic welfare.

The problem of externalities is not new, nor is it always easy to solve. It is almost certainly the case that applying the same tax charge on all these bag types itself creates distortions given their differential environmental impacts. But one thing we know for sure is that crude bans guarantee bad economic outcomes. The marginal revolution in economics taught us that the optimal quantity of anything is rarely zero. That is especially true when the most economically viable alternatives have even bigger externalities.

–

For more on externalities and “thinking on the margin” but applied to the pandemic, you can pre‐​order Ryan Bourne’s Economics In One Virus here.