Topic: Regulatory Studies

Government Can’t Censor Book Promotion

This blogpost was co-authored by Cato legal associate Kathleen Hunker.

There’s a fine line between protecting the public from fraud and censoring unorthodox opinions—a line across which the government often stumbles. That was the case in September 2007, when the Federal Trade Commission filed a contempt motion against Kevin Trudeau, author of the best-selling book The Weight Loss Cure “They” Don’t Want You to Know About.

The FTC alleged that Trudeau had misrepresented the contents of his book in several “infomercials” by describing it as “easy” and claiming that dieters, by the end of the regimen, could eat anything they wanted without gaining weight. Despite the fact that Trudeau merely quoted the book when making these statements, the district court upheld the FTC’s findings and smacked Trudeau with a staggering $37.6 million fine. The court also imposed a rare “prior restraint” on speech, demanding that Trudeau post a $2 million bond before running any future infomercials.

The district court imposed these sanctions even though the FTC never proved that Trudeau misled a single consumer or violated any part of the FTC Act. On appeal, the Seventh Circuit affirmed the district court’s decision and ruled that Trudeau’s book promotion constituted misleading commercial speech and was therefore not entitled to any constitutional protection. If left unchallenged, the Seventh Circuit’s ruling would have a dire chilling effect on authors trying to promote their work and could give government officials broad censorial power, in effect permitting the FTC to tax fine through the backdoor what it could never regulate directly (sound familiar?).

Cato has thus filed an amicus brief supporting Trudeau’s request that the Supreme Court take the case and establish a constitutional standard that allows the FTC to protect consumers from fraud while respecting the First Amendment. We argue that courts should apply strict scrutiny to any government actions that restrict or punish advertisements that merely quote and summarize parts of a book (which enjoys full constitutional protection), as Trudeau’s infomercials did.

We note that the Supreme Court has held that commercial speech inextricably intertwined with otherwise protected speech deserves a high degree of First Amendment protection. Moreover, it is well-established that falsity alone may not remove speech from the shelter of the First Amendment.

Free speech loses its vitality when confronted with overzealous regulation; strict scrutiny of would-be government censors would give authors the necessary “breathing space” to publicize their work without the threat of exorbitant fines.

The Supreme Court will decide this fall whether to take the case of Trudeau v. FTC.

Obama’s Right—in a Perverse Way—about Government Playing an Important Role for Small Businesses

President Obama recently got himself in hot water with his “you didn’t build that” remark, which trivialized the hard work of entrepreneurs.

But he is right—in a perverse way—about government playing a big role in the life of small businesses. Thanks to a maze of regulations, the government is an unwelcome silent partner for every entrepreneur. And we’re not talking small numbers.

But sometimes an image helps to make things easy to understand. Here’s a chart from the Joint Economic Committee, which maps out the web of regulation imposed by Washington:

This chart does more than just show sources of red tape coming from Washington. It shows that “Washington” is really several entities, such as Congress, the executive branch, the courts, and so-called independent regulatory agencies. These entities then impose regulatory burdens in various fields, such as labor, finance, tax, and environment.

Keep in mind, by the way, that each small pink circle actually represents an entire field of regulation. So when you see, for instance, the “Obamacare” circle (below), what you’re really seeing is the nightmarish image of regulatory complexity.

And don’t forget the role of state and local government.

Last but not least, remember that each regulatory bureaucracy is capable of making individual decisions that … well, you judge for yourself:

Gee, it’s almost enough to make you think regulation might be the problem and not the solution.

Campaign Finance Proposals That Deter Speech Are Bad

Perhaps the first thing you should know about campaign finance “reform” proposals – at least those coming from the left – is that their ultimate goal is to deter speech about political issues.  Whether it’s limiting campaign donations or spending, restricting the ability of corporations or other groups to publicize their views, or imposing disclosure rules, the goal isn’t to have better-informed voters or a more dynamic political system, but to have less speech.   Those who advocate these things want the government to have the power to control who speaks and how much.

That lesson was repeated to me during two public events I participated in yesterday.  First, at a Senate hearing (which you can watch here; my opening remarks, a longer version of which you can read here, begin at 59:50) several senators seemed incredulous at my suggestion that we need more speech rather than less.  After Sen. Dick Durbin (D-IL) tried to get me to admit that I was a Koch pawn, a particularly laughable charge in a year when the Kochs sued Cato over management issues, Sens. Sheldon Whitehouse (D-RI) and Richard Blumenthal (D-CT) were incredulous that I would want fewer restrictions and less disclosures than them.  If I favor certain disclosure rules for donations to campaigns – which I do, in conjunction with eliminating donation caps, as I wrote yesterday – why am I against the DISCLOSE Act, which would impose certain further reporting requirements on independent political spending (and which failed last week after getting zero Republican votes)?

I should’ve just referred the senators to John Samples’s analysis of an earlier version of the proposed legislation, but in any event, the answer boils down to the idea that the required disclosures (of expenditures – which shouldn’t be confused with donations) are so onerous as to burden and deter speech with negligible impact on voter information.  That is, as former FEC chairman Brad Smith explains in this video, disclosing that a TV commercial was paid for by Americans for Apple Pie, one of whose donors is the local chamber of commerce, one of whose donors is the U.S. Chamber of Commerce, one of whose donors is the national widget manufacturers’ associations, one of whose donors is Acme Widgets … doesn’t tell a voter anything.  What it does do is require 20 seconds of the 30-second ad to be given over to disclosure rather than the actual political speech.  So what’s the purpose of the regulation if not to deter that speech?

Moreover, Super PACs already have to disclose their donors, and if their donors are corporations/associations rather than individuals, you can look up the people leading those entities in their corporate filings.  And if the problem is “millionaires and billionaires” – there was more than one reference to the Kochs during the hearing, and I helpfully suggested that I’m happy to defend Georges Soros and Clooney as well – then no law short of a complete ban on political speech by individuals will do.  Luckily, we have the First Amendment in place to stop self-interested incumbents from trying that.

My second public event was an unlikely appearance on the Rachel Maddow Show, where I joined Harvard law professor Larry Lessig, who also appeared at the earlier Senate hearing, to discuss campaign finance regulation.  I thought it went pretty well, and you can watch for yourself (segment titled “How to take American democracy back from the .000063 percent”).  What’s telling is that guest-host Ezra Klein was more even-handed than the senators at the earlier hearing.

Finally, here’s another nugget from yesterday: As I exited the Senate hearing room, a young “reform” activist said to me, “I think you’re a fascist.”  And here I thought that I did a decent job of getting across the point that we should have less government, not more.

Citizens United Doesn’t Mean What Campaign Finance ‘Reformers’ Think It Does

Building on the excellent fisking of Newsroom by my colleague Caleb Brown and Reason’s Scott Shackford, let me  reiterate that Citizens United has nothing to do with any problems regarding how we regulate political campaigns, perceived or real.  

Perceived: Campaign finance “reformers” think we’d be a lot better off if corporations, particularly foreign corporations, weren’t able to fund candidates and parties.  Of course, Citizens United didn’t disturb the ban on that sort of thing, which has been in place since 1907. 

Real:  Independent political speech – be it individual, corporate, union, advocacy group, neighborhood association, or informal group of friends – is largely unregulated (though you do have to register SuperPACs and disclose donors, be they individuals or corporations) but candidates and campaigns bear onerous burdens regarding contribution limits, disclosure requirements (which scare off small donors rather than large bundlers), and arcane coordination rules.  A Supreme Court ruling is indeed at fault for the bizarre and largely unworkable way in which our laws have developed in this areas, but it’s not Citizens United.  Instead, it’s the 1976 baby-splitting opinion in Buckley v. Valeo, which saw the Court rewrite the Watergate-era Federal Election Campaign Act, creating a piece of legislation much different than the global reform Congress passed (sound familiar?).

I’ve written a law review article about all this called “Stephen Colbert Is Right to Lampoon Our Campaign Finance System (And So Can You!),” which will run in the University of St. Thomas (MN) Journal of Law & Public Policy this fall. 

And Tuesday afternoon I’ll be testifying to that effect to the Senate Judiciary Committee’s Subcommittee on the Constitution (here’s the link to the hearing site, where you’ll be able to watch).  Here’s an excerpt from my written statement (which isn’t online yet):

The underlying problem, however, is not the under-regulation of independent speech but the attempt to manage political speech in the first place.  Political money is a moving target that, like water, will flow somewhere.  If it’s not to candidates, it’s to parties, and if not there, then to independent groups or unincorporated individuals acting together.  Because what the government does matters and people want to speak about the issues that concern them.  To the extent that “money in politics” is a problem, the solution isn’t to try to reduce the money—that’s a utopian goal—but to reduce the scope of political activity the money tries to influence.  Shrink the size of government and its intrusions in people’s lives and you’ll shrink the amount people will spend trying to get their piece of the pie or, more likely, trying to avert ruinous public policies.

… .

The solution is rather obvious:  Liberalize rather than further restrict the campaign finance regime.  Get rid of limits on contributions to candidates—by individuals, not corporations—and then have disclosures for those who donate some amount big enough for the interest in preventing the appearance of quid pro quo corruption to outweigh the potential for harassment.  Then the big boys who want to be real players in the political market will have to put their reputations on the line, but not the average person donating a few hundred bucks—or even the lawyer donating $2,500—and being exposed to boycotts and vigilantes.  Let the voters weigh what a donation from this or that plutocrat means to them, rather than—and I say this with all due respect—allowing incumbent politicians to write the rules to benefit themselves.

Curiously, there will be six witnesses taking the “get corporate (and maybe even all private) money out of politics” view as against one, me, for deregulation and freedom of speech.  That seems a bit unfair; I’d think that the campaign-finance-reform zealots need at least a dozen people to stand up against my very simple “remove contribution caps but require disclosure for big players” argument.  Should be fun.

In short, while there are (at least) 99 problems with how we manage elections, Citizens United ain’t one.

The Trouble with Zakaria’s Assessment of the Economy

Fareed Zakaria is a good journalist. But he’s also human. In his Washington Post column yesterday, Zakaria concludes that President Obama has a stronger case to make for his economic prescriptions than does Governor Romney. However, that conclusion—at least as presented in the column—is premised on a misreading of some recently published data.

Zakaria distills President Obama’s message down to the belief that investment in infrastructure, education, training, basic sciences, and technologies of the future are key to economic recovery, while Romney argues that relief from taxes and excessive regulatory burdens is the answer.

While both views have merit in Zakaria’s estimation, Obama has the stronger case. Why? Because Romney is barking about a relatively insignificant problem, concludes Zakaria:

We need a tax and regulatory structure that creates strong incentives for businesses to flourish. The thing is, we already have one.

To support that claim, Zakaria cites a figure from the 2011-12 edition of the World Economic Forum’s Global Competitiveness Report that ranks the United States 5th (out of 142 countries) and concludes that “whether compared with our own past—of, say, 30 years ago—or with other countries, the United States has become more business-friendly.” The problem is that he’s citing the wrong number and, thus, reaching the wrong conclusion.

The United States is ranked 5th on the overall global competitiveness index, which is a weighted value reflecting scores assigned for 12 broad criteria presumed to affect “competitiveness,” including: (1) institutions, (2) infrastructure, (3) macroeconomic environment, (4) health and primary education, (5) higher education and training, (6) goods market efficiency, (7) labor market efficiency, (8) financial market development, (9) technological readiness, (10) market size, (11) business sophistication, and (12) innovation.  U.S. scores on regulations and taxes contribute to that final ranking, but 5th is not where the United States ranks on those criteria.

To add another layer of complexity, the scores assigned to each of these 12 criteria are derived by weight-averaging the scores from individual survey questions. For example, there are 21 questions related to the first criteria, “institutions”—questions about property rights, public trust of politicians, judicial independence, transparency of government policymaking, etc. There are nine questions that feed into the infrastructure score; six that feed into the macroeconomic environment score, 16 that comprise the goods market efficiency score, and so on.

Zakaria errs by citing the overall, weighted average U.S. rank of 5th to support his assertion that we already have a tax and regulatory structure that creates strong incentives for business to flourish. That relatively high ranking reflects a few obvious U.S. advantages—tax and regulatory structure not being among them. The United States ranks fairly high with respect to some criteria, including “market size,” “university-industry collaboration in R&D” (which feeds into the innovation criterion), “strength of investor protection” (institutions), “availability of airline seats” (infrastructure), “inflation” (macroeconomic environment), “extent of marketing” (business sophistication), and a few others.

But on taxes and regulations, the U.S. ranks poorly. On the “Burden of Government Regulation,” the United States ranked 58th with a score of 3.4 on a scale from 0-to-7, slightly above the global average of 3.3. On the “Extent and Effect of Taxation,” the United States ranked 63rd out of 142 countries. On “Total Tax Rate, % Profits,” the United States came in 96th out of 142. On the issues that President Obama is pushing, the United States performs better than on those Romney advocates, which seriously weakens Zakaria’s argument.

The United States ranks 24th on quality of total infrastructure, better than on taxes and regulations. Likewise for “technological readiness” and “innovation.” “Higher education” (but not “job training”) generates bad scores for the United States, but clearly not for lack of spending. You can dig into the data here, and you’ll find that they tell a very different story than the one you may have read in yesterday’s Post.

Of course, Zakaria might still believe Obama has the stronger argument. But we should all be clear about the fact that regulations and taxes are real and growing problems, and that dismissing them as insignificant, even if inadvertent, doesn’t help policymakers find the solutions. Combine those impediments to investment and hiring with the growing perception that crony capitalism is on the rise (U.S. rank: 50th out of 142), that customs procedures present obstacles to global supply chains (rank: 58th of 142), that U.S. public debt weighs heavily on the economy (rank: 132th of 142), and that government spending is on a ruinous path (rank: 139th of 142 countries), and it becomes more apparent why an increasingly mobile business community often seeks the refuge and relatively warm embrace of foreign shores.

McConnell Had It Right: Government Should Not Pursue Universal Coverage

I’m a bit late to this party, but Senate Minority Leader Mitch McConnell (R) was of course right to tell Fox News’ Chris Wallace last weekend that the federal government should not pursue universal coverage:

Wallace: In your replacement [for ObamaCare], how would you provide universal coverage?

McConnell: Well, first let me say the single best thing we can do for the American health care system is to get rid of ObamaCare…

Wallace: But if I may sir, you talk about “repeal and replace.” How would you provide universal coverage?

McConnell: …We need to go step by step to replace it with more modest reforms…that would deal with the principal issue, which is cost…

Wallace: …What specifically are you going to do to provide universal coverage to the 30 million people who are uninsured?

McConnell: That is not the issue. The question is, how can you go step by step to improve the American health care system…

Wallace: …If you repeal ObamaCare, how would you protect those people with pre-existing conditions?

McConnell: …That’s the kind of thing that ought to be dealt with at the state level…

Naturally, the Church of Universal Coverage caught the vapors. But Time’s Mark Halperin says McConnell’s stance, while embarrassing, is “not a politically dangerous place to be”:

McConnell would have seemed less evasive and could have stopped Wallace in his tracks had he said, “We will not pursue universal coverage because that causes more people–not fewer–to fall through the cracks in our health care sector.”

Antitrust vs. Silicon Valley

As the American and European economies struggle, one of the few bright spots is the ongoing innovation and free-market expansion in technology industries. Thank goodness we have entrepreneurial companies such as Apple and Google generating economic growth and providing exciting opportunities for young people.

But that won’t last if governments have their way. The Washington Post today discusses government efforts to essentially turn the high-tech industry into another moribund regulated industry through antitrust rules:

European regulators last week imposed a $1.1 billion fine on a technology giant that “abused its dominant position.” The company was Microsoft, circa 1998. U.S. officials weren’t much faster. Last year, it officially closed its 14-year-old antitrust case against the software firm. As federal regulators launch fresh investigations into Silicon Valley, their history of drawn-out cases has companies on edge.

In taking on an industry that moves at lightening speed, federal officials risk actions that could appear to be too heavy-handed or embarrassingly outdated, some analysts and antitrust experts say. Indeed, in May, U.S. officials said they would step up their policing of Myspace’s privacy policies even though the company has long fallen out of fashion to behemoth Facebook.

In recent months, antitrust regulators around the world initiated cases involving Silicon Valley’s new guard — Google, Apple and Amazon.

Microsoft’s antitrust battle began in 1998, has stretched over three continents and cost the company more than $2 billion in fines.

These new efforts to impose antitrust rules on technology industries are idiotic. I say idiotic because there is a long history of government failure here. But that history doesn’t seem to make any impression on the proponents of aggressive antitrust action, who seem to be driven by legalistic ideologies, not by common sense economics or practical experience.

In Downsizing the Federal Government, I discussed some prior federal efforts to strangle technology firms with antitrust rules:

The American economy is so dynamic that government “solutions” are usually obsolete by the time they are imposed. Consider the antitrust case against Xerox Corporation in the 1970s. After inventing the photocopier in 1960, Xerox led the industry that it created. It still held a large market share in the early 1970s, which prompted the FTC to charge the company with monopoly. Xerox had a two-year struggle with the FTC that cost millions of dollars and ended in a settlement. As it turned out, government intervention was wholly unneeded as IBM, Eastman-Kodak, Canon, Minolta, and Ricoh surged into the market in the mid-1970s with copiers that were often superior to Xerox’s. Xerox’s market share eroded rapidly under the competition.

Government intervention was also a big waste of time and energy in the infamous IBM antitrust case that lasted from 1969 to 1982. IBM was charged with monopolizing the mainframe computer business. During the long legal battle, the industry evolved rapidly. By 1982, the government finally dropped its case and conceded that it was without merit. The case cost hundreds of millions of dollars in legal expenses, generated 66 million pages of evidence, and diverted IBM’s time and energy from more productive business endeavors.

Despite decades of such failed interventions, antitrust proponents still don’t seem to understand the dynamic nature of markets. A 2003 study by Brookings scholars Robert Crandall and Clifford Winston examined a century of antitrust policy. They found “little empirical evidence that past interventions have provided much direct benefit to consumers or significantly deterred anticompetitive behavior.” Indeed, the authors discuss numerous major cases where the government got it wrong and pursued actions that damaged the economy.

The Brookings analysis makes clear that after a century of trying, antitrust enforcers still have no clear idea when intervening in markets might be a good idea. So let’s stop bludgeoning some of the nation’s leading businesses with impractical rules based on flawed theories. If there ever was a group of One Percenters that we really don’t need, it’s high-paid antitrust lawyers.