January 4, 2021 4:48PM

Take Price Controls Off the Menu

By Jeffrey Miron and Erin Partin

2020 was a challenging year for the restaurant industry. The National Restaurant Association reports that 17 percent of restaurants in America have closed, with many more on the brink of failure. Restrictions on capacity and indoor service during the coronavirus pandemic forced many restaurants to pivot to a carry‐​out or delivery model.

For restaurants without a pre‐​existing, self‐​run delivery system, delivery systems like DoorDash and GrubHub were critical to reaching customers. These services publicize restaurants, process orders, and deliver food via independent couriers. These companies remain profitable by charging restaurants and customers fees for this convenience.

However, lawmakers around the country have begun to crack down on what they consider unreasonable fees. Los Angeles, New York City, Seattle, Chicago, and Washington, DC are among the cities that have imposed caps on the fees that delivery services can charge. These caps are misguided.

Introducing price controls will disincentivize delivery services from partnering with low‐​volume or remote restaurants, from increasing contractor pay, or from improving service. To make up for the revenue shortfall from restaurant fee caps, DoorDash and GrubHub will likely increase delivery and service fees for customers, which will then reduce demand for these services and ultimately harm restaurants.

Trying to protect restaurants while increasing costs to consumers is thus short‐​sighted. Many restaurants have failed, and many more will. Fee‐​limiting policies targeting the delivery middlemen will at best prolong the inevitable and more likely hasten that outcome.

January 4, 2021 2:38PM

The Economics of Divestment

The comptroller of New York State, Thomas P. DiNapoli, recently announced that the New York State pension fund will divest itself of many fossil fuel stocks within five years. He said, “investing for the low‐​carbon future is essential to protect the fund’s long‐​term value.” He had resisted such a strategy for many years because of his fiduciary duty to fund the retirement benefits of state and local public sector workers.

Investment restrictions are increasingly common. 26 percent of all U.S. professionally managed assets—worth $12 trillion—are governed by investing limitations; $3 trillion have fossil fuel restrictions.

And some claim that the tradeoffs Di Napoli worried about have disappeared: you can sell fossil fuel assets and improve returns. The Rockefeller Brothers Fund claims to have reduced its exposure to fossil fuel companies and increased its returns relative to a benchmark investment portfolio.

How should we evaluate such claims? What can disinvestment achieve?

If investment markets are efficient, then all known factors affecting the future returns of assets are already incorporated into the values of stocks and bonds. Thus, if investors believe that future climate change policy will reduce the demand for and the future returns from fossil fuel investments, that knowledge already has been incorporated into the relevant stock and bond prices. New York State’s (or any other investor’s) decision to reduce fossil fuel investments over the next few years cannot prevent investment losses of this type because they have already occurred and will recur in the future if additional negative information arises.

What if fossil fuel demand continues for decades and fossil fuel investments generate profits for decades? How does a policy of shunning fossil fuel assets affect the returns of those assets and the other assets that remain in the portfolios of those who divest?

Before divestment occurs, assume that all investors hold the portfolios of stocks and bonds that they prefer. Many are index investors who own the entire market. Others weight assets differently because they have beliefs about future earnings of sectors or companies that are not incorporated in current asset market prices.

Now assume that some holders of fossil fuel assets want to sell them to signal their moral disapproval and/​or force the companies to change behavior. The first question is who will buy the shunned assets and at what price? The only buyers are individual investors or managed mutual funds. And both already were satisfied with their portfolio composition. To induce either to (in effect) “overweight” fossil fuels in their portfolios, the price of fossil fuel assets must fall, which compensates for the future “thinner” resale market for such stocks because of “shunning.”

The result is that whatever price would be consistent with the cash flows generated by fossil fuel stocks if they were “normal” firms must now be discounted to induce anyone to own them because the stigma associated with the industry implies that the future ability to resell the stock is lower. One receives the same expected future cash flows for a lower price to compensate investors for the “thinner” resale market.

What happens to the prices of those investments bought by those who shun (and thus sold) fossil fuel stocks? Using the same logic as before, the individual investors who purchase the fossil fuel stocks at a discount simultaneously sell other stocks at a premium to those who shun fossil fuel stocks.

By lowering the price on existing investments, disinvestment does reduce investment in future fossil fuel projects. Investors’ willingness to pay for estimated future cash flows from new fossil fuel projects decreases to be consistent with the lower price for current cash flows from existing investments. Thus, the set of projects for which investment covers costs and produce sufficient cash flows to induce investment is now smaller. Stated differently, lower prices for fossil fuel assets mean a higher cost of raising funds for new investments because, at a lower price, fossil fuel firms have to issue more shares to raise a given amount of funds, which is costly to existing owners because it dilutes their existing ownership.

Is there evidence consistent with this discussion of theory? A recent paper examines the returns of all public U.S. companies from 2005 through 2017. After controlling for variables that predict investment returns, firms with higher CO2 emissions generate higher returns. A one‐​standard‐​deviation increase in the level and change of total emissions leads to 1.8% and 3.1%, respectively, increases in annualized returns.

To summarize, disinvestment decreases the price of disfavored stocks and increases the price of all other stocks. As long as all other factors remain constant, fossil fuel stock returns increase and all other stock returns decrease. But the silver lining for those who advocate disinvestment is a higher cost of capital for and thus fewer future fossil fuel projects. Thus, disinvestment does promote the objectives of its advocates; but claims that doing so is costless do not stand up to theory or evidence.

January 4, 2021 9:47AM

The Libertarian Alternative

If you’ve routinely endorsed conservative policies and candidates, but now find that right‐​wingers have become chauvinistic, fiscally irresponsible and intolerant, consider the libertarian alternative.

If you’ve previously embraced liberal policies and candidates, but now find that left‐​wingers have pushed identity politics and socialist bromides, consider the libertarian alternative.

Libertarians have praised President Trump for progress in the Middle East, success against ISIS, reduced troop levels abroad, lower taxes, less regulation, and the confirmation of judges who appreciate individual rights and limited government. On the other hand, we have criticized Trump when he derides our intelligence agencies, cozies up to dictators, alienates our allies, and exacerbates global tensions. We’ve also been troubled by his xenophobic immigration policies, protectionist trade barriers, punitive drug policy, excessive focus on the culture wars, and exploding federal spending.

Libertarians will support President‐​Elect Biden’s plans for criminal justice reform, immigration liberalization, civil rights, social permissiveness, revitalizing American diplomacy, reducing our military commitments, and non‐​proliferation. On the other hand, we will vigorously oppose higher taxes, more regulations, affirmative action, Medicare for all, the Green New Deal, expanded welfare, free college, ballooning entitlements, a higher minimum wage, and judges who think the Constitution is a malleable document that courts can exploit as an alternative to legislation.

In essence, libertarianism is the political philosophy of personal and economic freedom. We believe that capitalism is the most efficient and morally defensible means of allocating scarce economic resources. Philosophically, we subscribe, as did Thomas Jefferson, to the idea of unobstructed liberty “within limits drawn around us by the equal rights of others.” Government’s role is to secure those rights, applying sufficient coercive power – but no more than the minimum necessary – to attain that objective.

Put somewhat differently, we should be free to live our lives as we choose, as long as we don’t interfere with other people who wish to do the same. Of course, individuals can never be completely self‐​sufficient. That’s why we sometimes need rules, enforced by government, to make peaceful cooperation possible. The risk, however, is that rules too extensive will produce a system of special favors that extracts largesse for the politically connected at the expense of the rest of us. By contrast, libertarianism relies on spontaneous ordering – minimizing the role of a commanding power that might preempt freely chosen actions.

Libertarians are not opposed to reasonable safety regulations, selective gun controls, or sensible restrictions in other areas. Moreover, we recognize that markets are not perfect. But neither is government. The relevant standard against which to compare our current framework is not a utopian world in which justice is ubiquitous and all inequities have been systemically purged. Instead, we have to look at the current environment versus one in which regulations would be more pervasive – meaning that some problems might be solved, but other problems would no doubt multiply.

Among those other problems: disincentives to innovate, favors to special interests, increased cost, reduced growth, government‐​conferred monopolies, anti‐​competitive barriers to entry, restricted consumer choices, higher prices, overlapping and confusing laws, abuses of public power, and excessive resources devoted to politicking and lobbying.

How, then, can someone who views the left as excessively collectivist and the right as excessively authoritarian join with libertarians in advancing socially liberal and fiscally conservative goals? One way is to vote for candidates who come closest to promoting pro‐​liberty policies. Given the current political mix, those candidates will not be pristine libertarians. But it’s not necessary to agree with libertarianism across‐​the‐​board in order to move public policy in the right direction.

Second, a libertarian movement might be buttressed by supporting legislation and other political actions that foster personal autonomy and limited government. Such support – policy‐​specific rather than candidate‐​specific – could be in the form of lobbying, communications with government officials, letters to the editor, or donations to like‐​minded organizations.

Finally, there’s the outside prospect of forming a viable third party. Two obvious hurdles complicate that approach. First, campaign contributions are presently limited to $2,800 per candidate per election. Effectively, that precludes all third‐​party candidates except those who can self‐​fund. Second, 48 of the 50 states award presidential electors on a winner‐​take‐​all basis. Only Maine and Nebraska assign electors, in part, district by district. Consequently, candidates who have no chance of winning a statewide popular vote will not be able to garner any electoral votes.

Regrettably, therefore, fashioning an undiluted libertarian alternative will take time and effort. But incremental progress toward favorable public policy is practicable, opportune, and indisputably worthwhile. Let’s get the ball rolling.

January 3, 2021 7:40PM

Getting The Vaccine to Those Who Want it Most

The first wave of Pfizer and Moderna COVID vaccines arriving at health facilities across the country in the past few weeks sparked optimism that we may soon see a light at the end of the tunnel. As more people get vaccinated, the goal of herd immunity—where enough of the population is immune to the virus to prevent its easy spread to the vulnerable—becomes more attainable.

Markets provide the most efficient means of distributing the vaccine to those who want and need it. Instead, policymakers on all levels of government have chosen the opposite: central planning. Now we read of reports in the news than many frontline health workers—those assigned top priority for immunization—are not following the plan. They are reluctant to take the vaccine.

On New Year’s Day, the Los Angeles Times reported that anywhere from 20 to 50 percent of Southern California health care workers are refusing immunization. The New York Post reported similar resistance in New York, Ohio, and Texas.

This is very disappointing. Frontline health workers are not only at greater risk of contracting the virus but at greater risk of spreading it around their institution or bringing it home. It is reasonable to expect that, with their background in health care, they would have a greater appreciation for the value as well as the reported safety and efficacy of the two new vaccines. The longer it takes to get an estimated 70% of the population immunized, the longer it will take to reach herd immunity. (Of course, the millions of people who have already contracted and recovered from COVID are immune as a result and contribute to the goal of herd immunity as well.)

Many people who public health officials designated as lower priority for the vaccine are particularly frustrated to learn of this news. They very much want to receive the vaccine but are currently denied the chance, while vaccine vials allocated to first priority designees may go unused since manufacturers require them, regardless of any state policies or lack thereof, to be discarded if they are stored beyond safe time periods.

This unfortunate paradox—people denied vaccination while some unused vaccines are discarded— should come as no surprise to those aware of the failures of central planning. Markets provide the most efficient and accurate way of getting goods and services to those who most value them. In the face of the national public health crisis, policymakers instead resorted to central planning.

At this juncture, the federal government is the purchaser of all COVID vaccines and distributes them to state governments according to state population requirements. The states, in turn, delegate state, county, and municipal public health agencies to work with local health care providers to immunize the population. While the U.S. Centers for Disease Control and Prevention issued guidelines to prioritize who gets vaccinated, states reserve the right to establish their own priority schedules, and some states have not followed CDC recommendations.

Central planning suffers from a lack of local knowledge along with an inability to rapidly adjust to changes in supply and demand. Therefore, it is fortunate that our federal system allows for 51 different possible central plans instead of just one. This reduces potential harm from a one‐​size‐​fits‐​all plan and allows the various states to learn from one another’s experiences. In most instances, states are establishing phased approaches to immunizing the population. Initially, the highest priority groups receive the vaccine. Lower priority groups are phased in as vaccine supplies permit.

As long as central planning remains the approach to immunizing the population, one way to mitigate the unfortunate misallocation of vaccines described above might be to follow the approach most commercial airlines use for boarding planes. States should consider announcing in advance a schedule that, say, gives the first 2–3 weeks of vaccines only to the top priority people; then the next 2–3 weeks to the top plus the next priority level; then the next 2–3 weeks to the first three priority levels, and so on. This way, if first priority people choose not to take the vaccine, lower priority people who wish to take it will not miss out on the chance to do so before the first vaccine batch needs to be discarded. It would also incentivize people in the higher priority levels to hurry up and get vaccinated before the lines get longer.

This proposal might help to reduce the waste of precious vaccine and permit more people who both want and need the vaccine to get it.

December 31, 2020 3:44PM

Trump Banned Many H-2B Workers But No More U.S. Workers Applied—Now He May Extend the Ban

The H-2B program allows nonagricultural employers to hire foreign workers when they cannot find U.S. workers to perform temporary jobs. Since 2014, employers have repeatedly hit the H-2B cap of 66,000 visas, so Congress has repeatedly authorized the Department of Homeland Security (DHS) to permit workers to enter above the cap. DHS refused to allow any additional workers to enter above the cap after the unemployment rate spiked in March.

In June, President Trump went even further by banning many H-2B workers until the end of this year, which caused visas under the cap to be wasted. Now Trump is considering extending the H-2B ban into 2021. This is a bad idea. The ban was supposed to free up jobs for U.S. workers, but government data show that almost no U.S. workers applied for H-2B jobs, despite the spike in unemployment.

As I pointed out at the time, it made no sense to ban H-2B workers because every H-2B job must be offered to U.S. workers first. The Department of Labor (DOL) oversees U.S. worker recruitment under the H-2B program, and it will not certify an employer to hire H-2B workers unless it determines that there “are not sufficient U.S. workers who are qualified and who will be available” for the job.

Starting 90 days prior to the job start date, DOL requires that employers request that State Workforce Agencies refer U.S. workers (including those on unemployment insurance) to them. DOL advertises the job on an online site. All jobs must pay an inflated wage—known as the prevailing wage. Within two weeks of applying, employers must also contact former employees and ask them to return for the job. The employer can only stop accepting applicants 20 days before the date of need—after roughly two months of recruitment.

After 15 days of posting the job offer at the job site—a requirement that DOL changed to 30 days during the pandemic—employers will submit proof in a recruitment report that they fulfilled all the requirements. Despite the increased recruitment requirements, President Trump’s H-2B ban, general COVID-19 travel restrictions, and massive increase in unemployment, very few U.S. workers applied for H-2B jobs.

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December 31, 2020 12:29PM

Market Allocation Would Treat COVID-19 Vaccines Like the Valuable Resource They Are

News reports indicate that COVID-19 vaccinations in the United States are happening more slowly than officials promised and in comparison to other countries. Some health care providers are racing — and some are failing — to administer their stock vaccines before they expire. In one case, more than 500 doses spoiled when an employee removed them from a freezer, allegedly on purpose.

These episodes highlight just some of problems inherent to using government rationing rather than market prices to distribute vaccines.

If manufacturers and retailers could charge, and consumers could pay, whatever they like, distribution of COVID-19 vaccines likely would be more rapid than today and likely none of the existing stock would expire.

Photo by Hakan Nural on Unsplash

Anecdotal reports indicate that some consumers are willing to pay $25,000 to receive the vaccine. If retailers could make thousands or even hundreds of dollars in profit from every dose they sell, they would have the incentive and the ability to invest greater resources in securing the vaccines and distributing them quickly. They would take greater steps to protect the vaccines from sabotage by deranged employees. (The law could also do so, if penalties for destroying the vaccines rose with the market valuation of each dose.) They would hire more personnel (e.g., nurses) at higher‐​than‐​usual wages to organize distribution and/​or to administer the vaccines. They could even train more personnel to administer vaccines — and form a lobby to demand that states suspend government regulations that prevent them from doing so.

If manufacturers could make thousands or even hundreds of dollars in profit from every dose they sell, they would have greater incentive and ability to expand production and produce more vaccines faster.

Would market prices guarantee that vaccines would go to the highest‐​value recipients first? Not at all. But market allocation doesn’t have to be perfect. It just has to outperform the alternative of government rationing.

In an earlier post on government vs. market distribution of COVID-19 vaccines, I wrote, “If the government could allocate vaccines in a way that gets more of them to the highest‐​value recipients than market forces would,” then government distribution would be defensible. But, “To improve on market forces, government must actually know who the highest‐​value recipients are[,] actually be able to allocate vaccines on that basis, [and] not detract from whatever good market forces would do on their own, or…diminish the incentives for pharmaceutical companies to boost production.” That does not appear to be happening.

Government rationing is detracting from the good that market forces would do, and slowing the distribution of COVID-19 vaccines, by diminishing the incentives for speed and security on the part of manufacturers and retailers. In many cases, it is resulting in low‐​value recipients receiving vaccinations before high‐​valued recipients do. It is diminishing the incentives for manufacturers to accelerate production. And in some, cases it is costing lives by allowing vaccines to spoil.

December 31, 2020 11:14AM

A Patent Violation of Separation of Powers and Due Process

The American system of government is predicated in large part on just two concepts: separation of powers and due process of law. The separation of powers requires that the execution of laws be done by the executive branch and more specifically by people who are politically responsible. For this reason, the Constitution requires that important executive decisions be made only by individuals who are nominated by the president and confirmed by the Senate, so the public knows whom to blame for the poor performance. The due process of law requires that justice be administered by neutral adjudicators whose job and salary don’t depend on political considerations—which is why most federal judges (and all Article III judges) enjoy life tenure.

But even individuals who are not judges, yet who exercise some judicial functions, enjoy a certain level of job security. In 2014 Congress passed the America Invents Act and created the Patent Trial and Appeal Board (PTAB), an administrative‐​law body housed within the Patent and Trademark Office (PTO) and vested with the extraordinary power to cancel patents.

Congress required the PTAB to be staffed by administrative patent judges (APJs) who are appointed to their position by the secretary of commerce and once appointed cannot be removed except “for cause.” Despite not having gone through the rigor of presidential vetting and Senate confirmation, APJs have the power to speak for the entire executive branch when they adjudicate patent disputes. What’s more, in so doing, they are invested with the power to essentially overrule the PTO director—who did go through the nomination and confirmation process.

Thus we have a situation where important decisions are made not by politically responsible persons but by bureaucrats not subject to anyone’s direct control. The U.S. Court of Appeals for the Federal Circuit, which has exclusive jurisdiction over patent law, correctly recognized that the arrangement where APJs can speak on behalf the entire executive branch without going through Senate confirmation is constitutionally problematic. To “fix” the problem, the Federal Circuit excised the “for cause” protection currently enjoyed by the APJs, thus converting them into “inferior officers” who can be terminated at will by the PTO director ot secretary of commerce.

Instead of solving the constitutional problem, however, the Federal Circuit only compounded it. By making APJs terminable at will, the court is allowing APJs to make executive determinations without review by any “principal officer,” as the Constitution requires. Making matters worse, the Federal Circuit’s solution allows for political actors to exert—through the threat of termination—pressure on individuals who are charged with adjudicating patentees’ private property rights.

This dynamic raises the specter of adjudication being dependent on political connections rather than on the neutral application of law to facts. A PTAB staffed by APJs who are terminable at will is fundamentally incompatible with constitutional due process requirements.

The Supreme Court took up the case to review this arrangement, which Cato argues cannot stand. Our amicus brief seeks to uphold both the proper separation of powers in staffing the Patent Office and the due process rights of patent‐​holders.

The case of United States v. Arthrex, Inc. will be argued at the high court this winter.