Topic: Regulatory Studies

Cato’s Amicus Brief Helps Persuade Supreme Court to Protect Private Property Rights

This blogpost was co-authored by Cato legal associate Anna Mackin.

Today, the Supreme Court agreed to hear Arkansas Game & Fish Commission v. United States, the Fifth Amendment Takings Clause case whose cert petition Cato supported with an amicus brief. In that brief, we joined the Pacific Legal Foundation in urging the Court to preserve a remedy long-recognized in American courts: compensation for government destruction of private property.

Over a year ago, the Federal Circuit blithely ignored this constitutionally guaranteed protection, ruling that so long as it might be characterized as “temporary,” no government flooding of private land can constitute a Fifth Amendment violation. If upheld, this sweeping opinion could prevent recovery for the destruction of private property whenever the government characterizes its own actions as “temporary,” without any assurances of the length of this “temporary” loss.

Notable Supreme Court commentators saw the importance of this case early on, and our amicus brief was featured on SCOTUSblog’s “petition of the day” page. Many thanks to Brian Hodges at PLF for working with Cato on the brief – one of just four filed in the case. Congratulations also and especially to Matthew Miller & Julie Greathouse of Perkins & Trotter, who represent AGFC, for their successful legal strategy.

It is gratifying to see the Court snap up this opportunity to protect private property rights – it is more likely than not that it will reverse the lower court – implicitly validating the position Cato and PLF advanced in this case. We’ll now be filing a brief on the merits that will urge the Court to maintain constitutional protections against government intrusions on private property. The Court will hear the case next term, probably this fall, with a final decision expected by early 2013.

For more on AGFC v. United States, check the case’s SCOTUSBlog page or its Supreme Court docket page. Jonathan Adler also blogged about the case at the Volokh Conspiracy.

Do We Need a FDA for Financial Journalists?

The normally insightful Gretchen Morgenson ran a column Saturday that I at first suspected must have been intended for April Fools’ Day.  She discusses a paper by University of Chicago professors Eric Posner and E. Glen Weyl that suggests we create an agency like the Food and Drug Administration for financial products.

I haven’t yet read the paper, but given some of the remarks, I am not sure its worth the effort.   For instance, Weyl states, ”[w]e tried an experiment with a very radical form of deregulation that has very little basis in sound economic science.”  In what universe does one live in to believe our financial system had a “very radical form of deregulation”.  Our financial markets are, and have been for a long time, massively regulated.  That’s the problem.  The moral hazard and perverse incentives created by our existing system of financial regulation should be clear to anyone with a basic understanding of “sound economic science”.

Take the example of credit default swaps (CDS). The good professors posit “[i]magining a credit default swap being brought before a financial protection agency,” Mr. Posner and Mr. Weyl wrote: “We would expect the F.P.A. to treat it skeptically.” Really?  CDS were brought before the NY Fed, who signed off on them as a great way for banks to manage their risk (and hence reduce their capital).

We had a massive financial crisis because households, banks, bureaucrats and politicians rationally responded to the perverse incentives they faced.  What’s crazy about defaulting on a mortgage when you’ve put nothing down and there’s no recourse.  (Let’s not forget it was some politician that decided that recourse was a bad thing).  If you want a better system, fix the incentives.  Thinking that the same failed regulators who missed, and contributed to, the last crisis are going to fix the next one strikes me as naive, as well as having “very little basis in sound economic science”.

Biometrics—-and the Curious Relevance of Occupational Licensing

Yesterday, I testified (by remote communications) in the Alaska House of Representatives’ Health and Social Services Committee, which is considering a bill to heavily regulate the collection and use of biometrics. The bill is inspired by a man who was denied entry into the CPA exam when he refused to have his fingerprints scanned for that purpose. You can read more about his campaign at the PrivacyNOWalaska.org site.

I’m entirely sympathetic to his concerns about potential overcollection of biometrics in digital form, and what may happen to biometric data after it is collected. As I said in my testimony, “a digital record of a biometric can be stored indefinitely, copied an infinite number of times, and transmitted around the globe at the speed of light. This creates security and privacy concerns cutting against the use of machine-biometrics.” On the other hand, the CPA exam apparently has a problem with imposter fraud and faux test-takers who go simply to memorize questions and sell them on a test-prep black market.

Unfortunately, the bill is not callibrated to balance the competing interests at stake. It would create a “notice and consent” regime for biometrics collection, an idea that has failed to produce privacy protection in other areas. It would require massive and expensive re-tooling of data systems to provide consumers a right to amend or revoke their permission to use biometrics or order destruction of biometric data. And it would flatly outlaw marketing that uses biometric information—not just the stuff we learned to be spooked about in the film Minority Report, but knowingly agreed-to tailoring of discounts at the grocery store if we used a biometrically-secured payment system, for example.

I urged the Alaska legislators to ensure that biometrics collectors account for and prevent potential harm to Alaskans when they design and use their systems, but not to constrain biometrics so much that their security benefits never materialize.

There are a number of things Alaska and other states could do to help society callibrate the use of biometrics. They could ensure that biometrics collectors are liable and subject to jurisdiction in the state of collection when contract violations and harms arise from the use or misuse of biometric data.

Alaska could also establish that there is no “third-party doctrine” under its state constitution. A person sharing data under contractual or regulatory protections should maintain his or her search-and-seizure rights in that data. The government should not be able to access such data—though shared—without proper suspicion, warrants, and subpoenas.

Alaska has rejected the REAL ID Act, and it could do more to prevent the emergence of national identity systems by rejecting any E-Verify mandate. I encouraged the Alaskans to follow the lead of New Hampshire and bar state identity data from being shared with any national ID system.

The root of the problem in Alaska, though, may be the accountancy cartel. This is an area I know precious little about, but it appears that you must take the CPA exam to act as an accountant in the state. This positions the administrators of the CPA exam to make unreasonable, privacy-invasive demands for biometric data on a take-it-or-leave-it basis.

Oh what a tangled web we weave, when first we practise to … restrict the right to earn a living!

My testimony starts with a primer on biometrics. We have much to learn yet about biometric technologies, their uses, and their consequences. Banning them would deny the public many benefits. Using them promiscuously would have many costs.

EPA and the ‘Necessary Bankrupting’ of Coal

In its proposed rulemaking on emissions from coal-fired power plants, the Environmental Protection Agency has fulfilled President Obama’s campaign statement that his administration would “essentially bankrupt” anyone who had the audacity to hope to build a new generation facility. By essentially prohibiting the production of new plants, the administration is again picking winners and losers in our energy economy, something which is best done by the market.

Supporters of this policy will claim that it is cheaper to generate electricity from natural gas, and that is true for now.  But major producers using hydraulic fracturing and new horizontal drilling techniques in shale formations have recently stopped drilling new wells because the price is so low.

If it ultimately costs more to produce electricity from gas than it does from coal, the administration will have slapped yet another energy price hike on us—in addition to what we already pay to subsidize solar power, windmills, and Chevrolet Volts while taxpayers absorb the debt from the multiple bankruptcies of other politically correct energy concerns like Solyndra, Range Fuels, and a host of others.

In Defense of ‘Stand Your Ground’ Laws

Amid the ongoing furor over “Stand Your Ground” laws, adopted in Florida and about half the other states, the New York Times invited me to take part in a “Room for Debate” round-table on the subject. An excerpt from my contribution:

Under any criminal law, injustice can result if cops get the facts wrong. The Sanford, Fla., police, accused of buying a dubious self-defense tale after the Trayvon Martin shooting, will now come under searching scrutiny for that decision. Sanford’s mayor says his town is eager to stand corrected by the evidence as a fuller story emerges.

So who’s left to disagree? Not the authors of Florida’s Stand Your Ground law, who told The Miami Herald that the law they sponsored applies only to cases of genuine self defense and won’t protect neighborhood-watcher George Zimmerman if critics of the Martin shooting are right about what he did that night. …

I go on to point out ways in which a robust right of self-defense has historically proved to protect the interests of victims of domestic violence and racial minorities. (On the latter, see, for example, cases from Ossian Sweet’s in the 1920s to the present day; more here and here, and from my Cato colleague Jonathan Blanks here.)

What really set off the NYT commenters was my observation that “Despite doomful predictions from gun foes, concealed carry (now the dominant rule) and liberalized self-defense laws (adopted by half the states) haven’t touched off the great warned-of surge of gun violence.” Here are some particulars. Between 2004 (the year before the law’s enactment) and 2010 violent crime in Florida dropped sharply, and homicides per capita also dropped, though not sharply. News stories often mention that (quoting ABC): “Since the law was enacted seven years ago, justified homicides in Florida have jumped threefold, according to the Florida Department of Law Enforcement.” But a tripling in the assertion of this defense (from a low base) tells us little in itself since the whole idea of the law was to make the defense more available. In particular it does not signify that some sort of killing began to happen three times as often, even if some seem determined to interpret it that way.

I agree that the details of Florida’s or similar laws are not to be assumed optimal and can properly be revisited to make sure they work well. But I note with alarm the number of seemingly liberal-minded persons, at the Times and elsewhere, who seem perfectly comfortable with calls for gutting self-protection as a criminal defense at the behest of prosecutors who would find their jobs easier that way. Have they now decided that the goal of punishing more guilty persons is worth relaxing our vigilance about not mistakenly punishing the innocent among them?

Lower Courts Have to Comply with Supreme Court Orders

In the 2009 case of Ricci v. DeStefano (also known as the “New Haven firefighters case,” in which Cato filed a brief), the Supreme Court declared that an employer that did not certify race-neutral promotion-exam results could be liable to the candidates who were not promoted as a result (because those candidates would have been discriminated against based on their race, or “disparate treatment” in violation of Title VII of the Civil Rights Act). A corollary to that holding is that an employer that did certify such results would be immune from liability for any resulting racial disparities in promotion (known as “disparate-impact” claims under Title VII).

As Justice Anthony Kennedy wrote for the Court majority, “If, after it certifies the results, the City faces a disparate-impact suit, then in light of our holding today it should be clear that the City would avoid disparate-impact liability based on the strong basis in evidence that, had it not certified the results, it would have been subject to disparate–treatment liability.”

Despite this clear guidance from the Supreme Court, one of the black New Haven firefighters who did not gain promotion as a result of the test certification sued the city, alleging disparate-impact discrimination. The district court dismissed his claim but the Second Circuit inexplicably reversed that ruling and reinstated the lawsuit – considering Ricci’s corollary holding (quoted above) to be non-binding.

Cato has now filed a short brief supporting New Haven’s request that the Supreme Court review that decision – and perhaps even reverse it summarily – arguing that Title VII’s provisions are complex and onerous enough, such that employers should not be subject to liability for following court orders.

The Court will decide later this spring what to do with this case of City of New Haven v. Briscoe.

What Is Causing Drug Shortages?

A number of people have asked me what is causing the current shortages in certain types of drugs. Here’s what I’ve been able to discern so far:

In general, there are two reasons why shortages might appear in a market. The first is high fixed costs. These include regulatory costs, the costs of converting a manufacturing plant to a new use, or the costs of creating a new factory. Industries with high fixed costs will see temporary shortages after either supply shocks (e.g., a factory goes offline) or demand shocks (e.g., an increase in the population needing a drug). The price mechanism eventually resolves such shortages. The duration of the shortage is related to the size of the fixed costs.

Shortages also appear when something interferes with the price mechanism’s ability to resolve a shortage. The classic example is government price controls (i.e., a binding price ceiling). Such shortages persist as long as the price controls (e.g., rent control) remain in place and binding.

From my study of the current spate of drug shortages, the best accounting for these shortages appears in this publication by the U.S. Department of Health and Human Services: “Economic Analysis of the Causes of Drug Shortages,” Issue Brief, October 2011.

I initially suspected these drug shortages were caused by Medicare’s Part B drug-payment system. Others, including Scott Gottleib and the Wall Street Journal, have made that claim. However, this study and a lengthy discussion with the U.S. Department of Health and Human Services’ assistant secretary for planning and evaluation have persuaded me that not only is Medicare’s Part B drug-payment system not the cause, that system doesn’t even impose binding price controls. Rather, it controls the margins that physicians earn for administering a drug.  (If Medicare did impose binding price controls, would we see mark-ups of 650 percent or more for the shortage drugs?)

Rather, the shortages appear to be the result of a number of dynamics in the market for rare drugs:

  1. The first dynamic is that the small number of potential manufacturers for these drugs must decide which drugs to manufacture, and they must make those decisions in part based on what they expect the demand for the drugs will be and in part based on which drugs they expect their competitors will produce. You can imagine what happens if one or more manufacturers guess “wrong”: there will be too many firms making some drugs, and too few firms making other drugs. The latter drugs exhibit shortages.
  2. A second dynamic is the high fixed costs inherent to bringing a new pharmaceutical factory online, or from converting existing factories from producing the “wrong” drug to producing the “right” drug.
  3. A third dynamic is the price rigidity introduced by the contracts with middlemen (“group purchasing organizations”) that purchase these drugs from manufacturers and then sell them to providers. These GPOs typically negotiate long-term contracts for drugs, which can temporarily prevent the price mechanism from resolving a shortage by locking manufacturers into churning out an already over-supplied drug. If shortages occurred frequently, one would expect the manufacturers and GPOs to negotiate shorter-term contracts. As I understand these shortages, they are infrequent.
  4. All that said, no doubt some of the high fixed costs in this market are iatrogenic. There are fixed costs associated with getting FDA approval to (a) market a new/substitute drug in the same class as the shortage drug, (b) switch manufacturing capacity to a shortage drug, and (c) import a shortage drug from a new foreign manufacturer. No doubt, there should be some fixed costs—principally related to quality control—associated with each of these activities. But since the FDA implicitly values lives lost to unsafe drugs more highly than it values lives lost to “drug lag,” we can be confident that the fixed costs the FDA imposes on these activities are higher than optimal, and therefore unnecessarily lengthen the duration of such drug shortages.

This analysis suggests that, rather than impose reporting new requirements on manufacturers, Congress should reduce the fixed costs that the FDA imposes on drug manufacturers. Medicare’s Part B drug-payment system is no doubt encouraging physicians to switch to higher-margin drugs, but it doesn’t seem to be playing much of a role in these shortages.

I’d be interested to know if others think I’m missing something.