Topic: Regulatory Studies

Another Lesson from Bastiat: So-Called Employment Protection Legislation Is Bad News for Workers

Frederic Bastiat, the great French economist (yes, such creatures used to exist) from the 1800s, famously observed that a good economist always considers both the “seen” and “unseen” consequences of any action.

A sloppy economist looks at the recipients of government programs and declares that the economy will be stimulated by this additional money that is easily seen, whereas a good economist recognizes that the government can’t redistribute money without doing unseen damage by first taxing or borrowing it from the private sector.

A sloppy economist looks at bailouts and declares that the economy will be stronger because the inefficient firms that stay in business are easily seen, whereas a good economist recognizes that such policies imposes considerable unseen damage by promoting moral hazard and undermining the efficient allocation of labor and capital.

We now have another example to add to our list. Many European nations have “social protection” laws that are designed to shield people from the supposed harshness of capitalism. And part of this approach is so-called Employment Protection Legislation, which ostensibly protects workers by, for instance, making layoffs very difficult.

Corporate Inversions

Among industrialized countries, the United States has the highest official corporate tax rate and one of the highest effective tax rates. To take advantage of lower taxes in other countries, some U.S. firms elect to sell themselves to smaller foreign firms, a process called “inversion.”

For shareholders of those firms, the tax consequences of inversions are complicated. Some are harmed by the move while others benefit. Individual shareholders, who own shares in taxable accounts, are taxed on the increased value of their shares. This can result in different tax outcomes from inversions for shareholders who have held the stock for a long time prior to the inversion and short-term shareholders (including corporate officers exercising company stock options).

In the summer issue of Regulation, I described a new research paper that investigates 73 inversions that occurred from 1983 to 2014. For those investors who had owned stock for three years, half of the inversions resulted in a negative return. So if many long-term shareholders lose money on inversions, why do they occur?

Tentative Steps Away from the Gas Tax and towards a Better System

The state of Oregon recently began a pilot program with 1,000 drivers, which charges those drivers a fee based on the miles they drive, rather than a gas tax. Several states are looking closely at Oregon’s experiment. This could mark the beginning of a major change to a much better way to finance our roads.

The states care about Oregon’s experiment because the gas tax is a lousy user fee that doesn’t come close to capturing the true cost a driver imposes on the state when he drives, whether via the wear and tear his vehicle causes to the highway, the congestion his presence on the road exacerbates, or the pollution his car emits. An optimal user fee would attempt to capture each one of those and charge a fee based on where a person drives, how much he drives, the amount of congestion on the roads he is on, and his car’s emissions. Oregon’s simple experiment captures none of that—it consists solely of a 1.5 cent per mile charge, coupled with a fuel tax credit—but with today’s technology a more advanced system could easily be implemented.

The advantage of having a sophisticated user fee for drivers is that it could dramatically lessen congestion on a road: if you charge a high fee when roads get crowded, people will postpone trips, carpool, work at home, or take mass transit. Since the majority of auto pollution comes from cars stalled in traffic, the reduction in smog would be significant. Such a user fee would also help states reduce how much infrastructure they have to build by smoothing out demand.

The complaint against such schemes is that they have the potential to invade privacy—a valid concern, but one that can be addressed with adequate regulation, and an open source software system that can be examined by anyone to determine if it is sufficiently secure.

Ending Fed Ed Would Hardly Be Pure Loss

The Center for American Progress Action Fund (CAPAF) has sounded the alarm: Donald Trump’s proposal to eliminate the U.S. Department of Education (ED) would be pure loss because a lot of people use federal education money. Lost jobs, lost college access, lost learning. Which makes sense if you assume that the federal government miracles money into existence, people can’t adjust to changing circumstances, and federal control can only help.

Of course, the federal government does not just will money into existence. It does spend far more than it has, but sooner or later someone is going to have to pay for that. And money arriving through taxation comes from people who may have used it for other, more productive things. Taxpayers may have spent it on new businesses, or housing, or food, or lots of other things that would have potentially grown the economy and created new jobs. Or heck, just made them happier. So there are costs—maybe big ones—that CAPAF ignored: opportunity costs.

Then there are costs to dealing with ED demands. Yes, as CAPAF points out, the department has a relatively small workforce—about 4,300 full-time equivalent employees—but that is in part because ED makes states do a lot of the administrative heavy lifting, forcing them to hire a lot of bureaucrats. There is also a sizeable compliance cost that goes with federal programs. The latest available numbers I could find were from a 1998 report—pretty old—but that precedes the No Child Left Behind Act, which greatly expanded federal management. That report suggested that for every dollar sent to Washington only 85 cents made it back to local districts, and noted that there were nearly three times as many state employees being funded by federal money as ED employees.

How would ED be eliminated? While it is unclear how Trump would do it—details do not seem to be his thing—he would likely phase the department out, not just kill it all at once. Of course, he could just move the programs elsewhere in the federal bureaucracy. But assuming that by killing ED he means to kill the programs, he would probably phase them out, leaving states, districts, colleges, and students time to adjust. And if he were to couple phasing out the programs with, say, proportionate tax relief, or even just block grants to states, that money could still be used for education! It would not necessarily mean any lost teacher jobs, student aid, or anything else. It could just mean that instead of losing 15 cents in bureaucratic processing for each dollar, taxpayers could keep the whole buck!

Would trimming what we spend necessarily even be bad educationally? Signs pretty clearly point to “no.” As the graph below shows, as well as this report on SAT scores, large spending increases haven’t come close to producing commensurate improvements in achievement, at least as measured by standardized tests for high school kids. Those scores have essentially sat still. Same for staffing: In roughly the same period as is covered in the graph, public schools went from about 14 students per staff member, to just 8 students, approaching a doubling of employees per child. Even the high-school graduation rate “all-time highs” that sound so nice aren’t: CAPAF cited a report based on only four years of data, and longer-term data show in 1969–70—close to when the feds first got heavily involved in education—the average freshman graduation rate for public schools was 78.7 percent. As of 2012–13—the latest data on the chart—it was 81.9 percent. Hardly a huge increase, and possibly one inflated by “credit recovery” and other dubious practices. Oh, and the feds coerced states to adopt a single curriculum standard—the Common Core—only to see tremendous backlash after the public finally became aware of what had been foisted on them. At the very least, great political acrimony and stomach-churning educational turbulence have been the result.

The evidence—more of which can be found here—suggests that in K–12 education, federal involvement may well be a loss, not a gain.

How about higher ed? Federal student aid, it is becoming increasingly certain, has largely translated into skyrocketing prices, major non-completion, credential inflation, and big student debt. Hardly the pure affordability effect that is all CAPAF discusses. You can get more in-depth on higher education here.

There is one other thing that ought to be mentioned, though it may seem passé: Washington has no constitutional authority to meddle in education outside of DC itself, federal installations, and prohibiting state and local discrimination in education provision. Yet the vast majority of what ED does goes far beyond those things. Ignoring the Constitution comes with costs all of its own, which CAPAF—and everyone else—may learn very quickly if there is a President Trump and he, among other things, unilaterally tries to change federal education policy. You know, like President Obama.

CAPAF portrays the U.S. Department of Education as all gain, and it’s possible ending all pain. But there is a whole other side to federal education meddling: costs. And they are big.

DEA Plans to Ban Kratom

Kratom is a plant that, according to users, relieves pain, reduces anxiety, and aids withdrawal from opioids like heroin.

The Drug Enforcement Administration, however, believes kratom is dangerous and has no valid medical use. So the DEA is placing kratom in Schedule I of the Controlled Substances Act, which effectively bans legal use of the drug.

The DEA’s decision prompted one user to send me this email:

I’ve read many of your posts online, and remembered you today as I heard some news that, I fear, is going to change my life for the worse. I’m sure you are aware that very soon kratom is going to be banned nationwide.

Full disclosure: I do depend on kratom for anxiety and (very) occassional pain from back spasms. About five years ago kratom gave me my life back after finally weening myself from prescription pain medication. I take it every day, and I’ve never had to increase the amount. This amazes me.

I am a successful high school teacher, husband, and father. I have a master’s degree in education and I work hard to take care of my family. I have refused, and will continue to refuse, to become a ward of the pharmaceutical industry. Which I suppose, in the eyes of the DEA, now makes me a felon.

I am writing to ask you if you have any advice at all for how to fight this. I am writing writing writing … senators and health officials … posting on forums, donating money. This all feels quite futile.

So I guess I’m also, not so subtly, asking you if you believe there is any way you could help. You are an expert in this field. Your voice would be heard much more clearly than a high school teacher in Southwest Ohio. What you might say I do not know. But I do know there are thousands of people right now who are frightened and angry, and my gut tells me this ban could cause many to suffer. But of course I am also being selfish.

MetLife v. Financial Stability Oversight Council

Under Dodd-Frank, the new Financial Stability Oversight Council (FSOC) has the authority to designate companies as “systemically important financial institutions” or “SIFIs.” By identifying and branding these companies as systemically important, we’ve been told, the government will end “too big to fail.” Dodd-Frank’s supporters claim bailouts like the one we saw in 2008 are a thing of the past, in part because of the heightened oversight of SIFIs. Except FSOC hasn’t fully thought through the whole SIFI designation concept. In March, a court found that FSOC’s designation of insurance giant MetLife failed to consider the impact the designation would have on MetLife and the U.S. financial system as a whole and therefore was “arbitrary and capricious,” that is, unlawful.

FSOC was created by Dodd-Frank and, as an agency of the federal government, it exists to “further some public interest or policy which [Congress] has embodied in law.” This interest, Dodd-Frank tells us, is to “promote the financial stability of the United States…to end too big to fail, [and] to protect the American taxpayer by ending bailouts[.]” Whether FSOC  is capable of any of these things and whether the legislation that created it will ultimately promote anything like stability is not the point (although our vote on these questions is “no”). The point is that, in exercising this delegated authority, FSOC must always act to forward the goal of promoting the financial stability of the United States.

It is surprising, then, that in determining whether MetLife should be designated as a SIFI, FSOC not only failed but flat out refused to consider whether the cost of compliance with this increased burden might actually weaken the company. If FSOC designates a company as a SIFI it means that FSOC has determined that “material financial distress” at the company “could pose a threat to the financial stability of the United States.” That is, that anything that weakens it would undermine the express goal of Dodd-Frank. It seems clear that FSOC should at least ask the question: would complying with these new rules make the company stronger or weaker?

And yet FSOC claimed that this question, which goes to the very heart of its authorizing statute, is not one it has to ask. Following its loss in the district court, FSOC appealed the case to the D.C. Circuit Court. On Monday, Cato filed an amicus brief arguing that it was unreasonable for FSOC to fail to consider whether its action in designating MetLife as a SIFI promoted or instead frustrated the goal of Dodd-Frank in promoting financial stability in the U.S. Cato also argued that, far from reducing the risk of bailout, designating MetLife as a SIFI could in fact increase the likelihood of taxpayer-funded rescue.

Ultimately the question is whether an agency must grapple with the possible negative effects of its actions, or whether it may simply wave these costs away, saying “that’s not our concern.” We hope the court decides that federal agencies, like everyone else, must consider the costs of their actions.

[Cross-posted from Alt-M.org]

Massachusetts to Impose Tax on Ride-Hailing Companies to Subsidize Their Traditional Taxi Competitors

Republican Governor Charlie Baker recently signed statewide regulations for ride-hailing platforms like Lyft and Uber and this package has the ignominy of including “a subsidy that appears to be the first of its kind in the United States,” as Reuters calls it. This comes in the form of a new 5-cent per trip tax on ride-haling companies that will be funneled to the traditional taxi company. This is part of the total 20-cent per trip fee with the rest of the revenues being split between local governments and the state transportation fund.

There are approximately 2.5 million rides per month in Massachusetts just through Uber and Lyft, with more coming through other, smaller ride-hailing companies.  This means that the 5-cent tax and subsidy will transfer at least $1.5 million to traditional taxi companies each year, and likely much more as the total number of ride-hailing trips continues to rise in the coming years.

As it is written now the “taxi tax,” as Brittany Hunter has dubbed it, is scheduled to be collected through 2021 and the entire 20 cent surcharge will be in effect through 2026. Now that traditional taxi competitors have gotten a taste of being subsidized by their more successful competitors, it seems unlikely they would let a fruitful source of new ‘revenue’ expire without a fight.

While the regulation promises “riders and drivers will not see the fee because the law bars companies from charging them” there is no way the ride-hailing companies will passively absorb all of these additional costs. Instead, the most likely scenario is that they will indeed find a way pass on these costs and the most likely channels are higher prices for consumers or lower compensation for drivers.