Topic: Regulatory Studies

Do Free Markets Tend Toward Concentration? The Case of Banking

Perhaps the most significant difference between my own views and those of my progressive friends is on the relationship between business and government, especially “big business”. I’ve on more than one occasion heard that government needs to be there to off-set the power of big business. That without government, corporations would just continue to grow. Well to me that sounds like an empirical question.

Thanks to the Economic Freedom of the World report, we have some good indicators of just how free-market oriented a country is. What we need are measures of concentration. Unfortunately, these are a little harder to come by. Fortunately, the Office of the Comptroller of the Currency (OCC) did a survey about a decade ago (1999), the data for which are reported in Barth, Caprio, and Levine’s Rethinking Bank Regulation. The measure of concentration is the percent of deposits accounted for by the five largest banks. One could argue for a better measure, but it’s all we have.

The results? It would appear that the freer an economy, the less concentrated its banking system. The chart below offers a scatter diagram, along with a regression line. The vertical Y axis measures concentration and the X axis economic freedom (the higher the number, the freer the economy). Admittedly, the relationship is not a strong one, with a correlation of only -0.11, but it is negative. If anyone knows of comparable measures for other industries, I would encourage them to either send me the data or reproduce this analysis for other industries.

Is Income Inequality Increasing? Only If You Don’t Count Health Benefits

Income inequality is not so much a problem as income opacity.

In the latest issue of Regulation magazine, editor Peter Van Doren reviews two recent studies that find income inequality is not increasing:

While it is true that the cash explicitly paid to employees has become more unequal over the last generation, the implication that labor markets are not working well and that government should alter labor market outcomes does not necessarily follow. A more benign explanation for the change in cash compensation over a generation is the dramatic increase in health insurance costs. Employers may be paying all their employees a more or less equivalent increase on a percentage basis, but for lower-paid workers much of that pay is not showing up in cash. Thus, if this view is correct, inequality in the cash component of compensation has increased while inequality in total compensation has not increased because the fixed costs of health insurance are a much larger percentage of the total compensation of lower-earnings workers…

If one analyzes data on only working-age individuals (age 25–61), inflation-adjusted real pre-tax, post-cash-transfer money income grew 1.9 percent and 10.5 percent respectively for the first (poorest) and 10th (richest) deciles from 1995 to 2008. But if one adds the value of health insurance, the first (poorest) decile grew 12.3 percent while the top decile grew 11.7 percent.

[T]he growth in compensation by earnings decile (from the 30th to the 99th) averages 35 percent [from 1999 to 2006], with 41 percent growth at the 30th percentile (workers earning $10–$14 an hour) and only 35.8 percent growth at the 99th percentile (workers earning $59–$80 an hour).

Because expenditures on health care are increasing so rapidly and because so much of the cost of health care is paid for by employers or government, discussions about rising inequality that only consider cash income provide a misleading view of trends in inequality. When health insurance expenditures are added to household cash income, the increases in inequality from 1995 to 2008 are completely offset.

In brief: government intervenes in labor and health care markets; advocates of those interventions use the resulting income opacity to argue that markets are defective.

The IRS Can’t Overrule the Supreme Court

Since the foundational administrative law case of Chevron v. Natural Resources Defense Council (1984), courts have given significant deference to executive agency interpretations of federal law. United States v. Home Concrete & Supply tests whether there are any meaningful limits on such deference.

The case involves a group of taxpayers who initiated a number of transactions designed to reduce their tax liability by allowing a financial entity they created, Home Concrete, to increase its tax basis and reduce its taxable gain from the sale of certain assets. In June 2003, the IRS ruled that the taxpayers’ use of Home Concrete in this way was improper and issued an adjustment to their tax return (requiring payment of back-taxes). Having missed the standard three-year limit for such actions, however, the IRS argued that the adjustment was timely under a tax-code provision that extends the statute of limitations to six years if the taxpayer “omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return.”

Despite the Supreme Court’s having long ago held otherwise, Colony v. Commissioner of Internal Revenue (1956), the IRS argues that an overstatement of basis qualifies as an omission under that tax provision. Further, during the course of this litigation, the Treasury Department issued a new regulation “clarifying” the provision in a way that supports the IRS’s argument. The IRS now argues that this new regulation is controlling and should be retroactively applied to Home Concrete’s 1999 returns.

After (mostly) winning at the district court, the IRS lost before the Fourth Circuit and asked the Supreme Court to review the case—which involves one of many similar applications of the relevant tax provisions. The Court took the case and now Cato has joined the National Federation of Independent Business on an amicus brief supporting the taxpayers, arguing that sanctioning this sort of ad hoc rule-making would undermine the rule of law and the separation of powers.

We note that “[t]he government’s position is that this regulation is due judicial deference” but the Supreme Court has “consistently held that where a statute has an unambiguous meaning, an agency’s contrary interpretation is not entitled to deference.” As Judge J. Harvie Wilkinson noted in his Fourth Circuit concurrence, “agencies are not a law unto themselves” and the government’s position in this case “seems to [be] something of an inversion of the universe and to pass the point where the beneficial application of agency expertise gives way to a lack of accountability and a risk of arbitrariness.”

In deciding Chevron, the Supreme Court surely never intended to undermine the very structure of the Republic and unleash an administrative state wholly a law unto itself.

The Supreme Court will hear United States v. Home Cincrete & Supply on January 17.

NTSB Misled Public On Cellphone ‘Toll’

Last week, in calling for a ban on even handsfree cellphone use behind the wheel, National Transportation Safety Board chief Deborah A.P. Hersman denounced “talking, texting and driving” and said:

it’s what happened to more than 3,000 people last year. Lives lost. In the blink of an eye. In the typing of a text. In the push of a send button.

Columnist Mona Charen:

Is that true? No. In a detailed report on distracted driving issued earlier this year, the National Highway Traffic Safety Administration found that only 995 deaths resulted from distraction by cell phones in 2010. The 3,000-person figure refers to all distracted driving.

It’s true that the problem of driver distraction due to cellphones (and radios, and other passengers, and the need to fish quarters out of one’s pocket approaching a toll booth) is a real one worth the attention of (mostly local and state) road operators. It’s also true, as columnist Charen notes, that overall highway deaths have been dropping steadily, from 44,599 in 1990 to 32,885 in 2010, even though there are now more licensed drivers and cars on the road, and of course vastly more phones. That’s no “epidemic.”

I round up some other voices at Overlawyered, including Cato’s own Radley Balko two years ago, Ira Stoll (per the Insurance Institute for Highway Safety, quoted on NPR, “states with cellphone bans have seen no real decrease in accident rates”) Marc Scribner at CEI (even bans on texting don’t seem to have worked as intended), and Instapundit Glenn Reynolds at Popular Mechanics (texting by the at-fault underage driver in the catastrophic Missouri crash was already illegal; and NTSB “seems to have deliberately downplayed” “more mundane causes” that contributed to that crash).

On this last, by the way, the NTSB’s own mission statement describes the board’s primary function as “determining the probable cause of transportation accidents” with “independence and objectivity.” If instead its leaders mislead the public about accident causes, and forsake their independence in exchange for a cheerleading role in DoT campaigns, one has to ask: is the board worth keeping?

RIP Christopher Hitchens

Christopher Hitchens, a man of great passions and great talents, perhaps the greatest essayist of our age, has died. Among his lesser-known works was a Cato Institute talk, “Mayor Bloomberg’s Nanny State,” delivered at a seminar in New York City on December 10, 2004.

Ten years before that, in his still-thoroughly-leftist era, he offered us this backhanded compliment in the Nation of December 12, 1994:

During the lunacy of the Reagan period, I was impressed by how often it was the Cato Institute that held the sane meeting or published the thoughtful position paper.

Herewith “Mayor Bloomberg’s Nanny State”:

I often take the train from Washington, D.C., to New York and back. A few years ago they put the smoking car on the end of the train so nonsmokers wouldn’t have to go through it to get to other parts of the train. And then the day came when they said, “We’re taking that car off the train altogether.” And I thought, “Now we’ve crossed a small but important line.” It’s the difference between protecting nonsmokers and state-sponsored behavior modification for smokers.

And I thought there was insufficient alarm at the ease with which that was done. Because state behavior modification, no matter what its object, should be viewed skeptically at the very least. There’s serious danger in the imposition of uniformity—the suggestion that one size must fit all.

When the complete ban on smoking in all public places was enacted in California, I called up the assemblyman who wrote the legislation and I said: “I’ve just discovered that bars are not going to be able to turn themselves into a club for the evening and charge a buck for admission for people who want to have a cigarette. You won’t be able to have a private club. You won’t even be able to have a smoke-easy, if you will, in California.”

And he said, “That’s right.”

I said, “Well, how can you possibly justify that?”

And he said, “Well, it’s to protect the staff. It’s labor protection legislation. We don’t want someone who doesn’t want to smoke, who doesn’t like it, having to work in a smoky bar.”

And I said, “You don’t think that if there were bars that allowed it and bars that forbade it, that, sooner or later people would apply for the jobs they preferred, and it would sort of shake out?”

He replied, “No. We could not make that assumption.”

So we have to postulate the existence, if you will, of a nonexistent person in a nonexistent dilemma: the person who can find only one job, and that job is as barkeep in a smoking bar. This person must be held to exist, though he or she is notional. But everyone who actually does exist must act as if this person is real.

There used to be areas, like the West Village in New York or North Beach in San Francisco, that are now dull and boring and have to be policed. And I think that’s a terrible loss. I write better when I have a cigarette and a drink. I’m more fun to be with—other people seem less boring. The life of bohemia, of the small cafe and the little bar that never quite closes, is essential to cultural production. It may seem like a small thing. It doesn’t add very much to the GNP. But if you take it away, you may not know what you’ve lost until it’s too late.

But suppose all this was really a good idea—people might live longer. Suppose all that was really true. There would still be the question of enforcement, that awkward little bit that comes between your conception of utopia and your arrival there. The enforcement bit. You could appoint regulators and inspectors to enforce the law. It would take quite a lot of them, but you could do it. There are such people. I know about them because they’ve come after me.

My editor, Graydon Carter, the splendid editor of Vanity Fair, and I were having a cigarette in his office. And someone on our staff—it’s not very nice to think about it—was kind enough to drop a dime on us. And round the guys came. “You’re busted!” These people are paid by the city, which evidently has no better use for its police.

I think that’s bad enough. But then Graydon went on holiday, and I went back to Washington. And his office was empty. But they came round again and they issued him another ticket because he had on his desk an object that could have been used as an ashtray. In his absence. With no one smoking. But there are officials who have time enough to come round and do that.

The worst part is that the staff has to become the enforcers. The waitresses have to become the enforcers. The maitre d’ has to become the enforcer. He has to act as the mayor’s representative. Because it’s he who is going to be fined, not you. If you break the law in his bar, he is going to have to pay.

So everyone is made into a snitch. Everyone is made into an enforcer. And everyone is working for the government. And all of this in the name of our health.

Now, I was very depressed by the way that this argument was conducted. There were people who stuck up for the idea that maybe there should be a bit of smoking allowed here and there. But they all said it was a matter of the revenue of the bars and the restaurants. That was the way the New York Times phrased it.

In no forum did I read: “Well, is there a question of liberty involved here at all? Is there a matter of freedom? Is there a matter of taste? Is there a matter of the relationship of citizens to one another?”

And something about it made me worry and makes me worry still. The old slogan of the anarchist left used to be that the problem is not those who have the will to command. They will always be there, and we feel we understand where the authoritarians come from. The problem is the will to obey. The problem is the people who want to be pushed around, the people who want to be taken care of, the people who want to be a part of it all, the people who want to be working for a big protective brother.

Feds Want To Ban Phone Use — Even Hands-Free — While Driving

For quite a while Obama transportation officials have been campaigning against the safety hazard of “distracted driving,” but they must regard the American public as slow learners, because now the National Transportation Safety Board (NTSB) is proposing something truly radical: a ban on drivers’ use of cellphones and other personal electronic devices even when they’re hands-free and thus don’t require taking anyone’s eyes or hands off the road or steering wheel. The only exceptions the agency would permit would be “emergency” phone use and “devices designed to assist the driving task,” such as GPS devices. NTSB chairman Deborah Hersman said the problem is “cognitive” distractions as well as the “visual” and “manual” kind. The agency cannot adopt such a ban directly, but it’s calling on the states to fall into line and to enlist in a campaign of “high-visibility enforcement.”

And there’s more. NTSB is also, to quote PC World, “encouraging electronics manufacturers – via recommendations to the CTIA-The Wireless Association and the Consumer Electronics Association – to develop features that ‘disable the functions of portable electronic devices within reach of the driver when a vehicle is in motion.’” In the perfect Nannyland of the future, your phone will turn itself off when the government wants it to – even if you were in the middle of placing one of those emergency calls (“Honey, get out of the house, the flood waters are rising”) that will supposedly still be permitted.

Tech commentators are blasting the agency for jumping the gun on the evidence, to say nothing of ignoring values of personal liberty. A PC Magazine writer points out that while there is a safety case to be made against texting behind the wheel – a practice that encourages the driver to look away from the road for extended periods – the NTSB is short of statistics (as opposed to scary anecdotes) to show that phone conversation itself is a dire problem. Ars Technica notes that even the board’s own (disputable) statistics link the hazards of “conversation with passengers” to more than twice as many fatal accidents as the hazards of device use – and no one has yet proposed banning passenger conversations with the driver. (Don’t give Washington ideas, though.) Among devices, the sort of touch-screen car entertainment systems that you can fiddle with for ten seconds at a stretch – which are apparently okay with NTSB – would seem to pose considerably more distraction than one-button phone-answering. And speaking of statistics, the Federal Highway Administration website reports the lowest per-mile auto fatality rate ever, and the lowest in absolute numbers since the year 1950 – even though, to quote the NTSB itself, device use has seen “exponential growth” in the past few years.

Something doesn’t add up here. Commercial drivers, since the early-1980s CB radio craze and long before, have been using mobile communications for purposes other than emergencies and driving assistance, and their safety record is not notably atrocious. Hang up on this bad idea now, please.

Citizens! Do You Know the Source of Your Honey?

Some disturbing news indeed reached my inbox today (HT: David Boaz). Apparently honey is entering the United States under assumed identities. Chinese honey, once ubiquitous, was largely shut out of the American market through anti-dumping measures. So, this article from NPR.org alleges, it started to be sold through a third country (perhaps Indonesia, Thailand, or Malaysia) and was falsely labelled to evade the duties. (Apparently we know this because the honey can be tested for peculiar types of pollen.) The U.S. government wasn’t having any of that of course, and so they held up suspicious shipments through regulations, inspections, and documentary requirements.  So now the Chinese honey is allegedly being sold through India.

The domestic honey industry is now starting to worry that all of this nefarious, subversive honey-related activity will suppress the market for all types of honey, including their own, and are starting a fair trade-esque system called True Source Honey, which will trace the honey to a proper, ‘merican source. None of that Chinese muck.

Eric Wenger is president of True Source Honey. Soon, he’s going to Vietnam to help with the first audit of a Vietnamese honey exporter.

“The question we want to answer is: Does that exporter only purchase honey from beekeepers in that country?” he says.

The exporter will give the True Source auditor a list of the beekeepers from whom it buys honey. “Then the auditor will randomly select a number of those beekeepers, go out to that beekeeper’s apiary, and evaluate the capacity of that beekeeper to produce the volume that that exporter claimed was purchased and shipped,” says Wenger.

If everything checks out, that exporter is certified. But even after that, True Source will take samples from every shipment of honey and send those samples to a lab in Germany to see if the pollen matches the flowers that are actually blooming in Vietnam.

True Source wants to expand this system globally. One exporter in India is already certified.

Jill Clark, from Dutch Gold Honey, says these sorts of audited, verified supply chains are getting more common throughout the food business. In some cases, governments are requiring it.

“With all the food safety and food security issues, knowing where your food comes from right now is incredibly important,” she says.

Shouldn’t consumers be the ones to decide that? Removing the anti-dumping duties and discriminatory regulations will reduce the incentive for Chinese honey to be labelled falsely, and then we can decide for ourselves what is “incredibly important.” Or maybe we don’t care, and True Source will be a massive flop.

On a positive note, there are an encouraging number of libertarian comments to the article.