Archive for the ‘Regulatory Studies’ Category
The National Equalization of Opportunity Board
The National Labor Relations Board filed a complaint last month to stop Boeing from building its new 787 in South Carolina rather than Washington State. As Arthur Laffer and Stephen Moore explain in today’s Wall Street Journal, the Board’s action stems from Boeing’s declaration that it cannot “afford a work stoppage every three years” as has been happening in Washington. The New York Times seems to endorse the NLRB complaint, implying that the federal government must force companies to do business in agency-shop states like Washington, because otherwise they couldn’t compete with more efficient right-to-work states like South Carolina.
Laffer and Moore claim that the NLRB’s move is unprecedented, but it is actually highly reminiscent of the “Equalization of Opportunity Bill.” The EOB forbade entrepreneurs from owning more than one business, in order to allow less efficient, less capable entrepreneurs to compete with them. The EOB is, of course, a measure enacted by the United States Government in Ayn Rand’s Atlas Shrugged.
Yet more evidence that the Obama administration is not only conversant with Rand’s classic, it is using the book as a policy model. It’s just a little confused as to which characters were the heroes and which the bad guys.
Obama’s GM Quagmire
Media are reporting this morning that the Treasury has decided to hold off on selling any of its remaining 500 million shares of General Motors stock until at least July. The Obama administration had hoped to divest as soon as possible after May 22, but GM’s stock price hasn’t been cooperating.
As much as the president doesn’t want the odor of nationalization following him on the campaign trail, the administration is equally concerned about having to explain why it took a $10 billion to $20 billion direct loss by divesting when it did. By deferring sales until July, the administration presumably is hoping for a stock price boost from second quarter earnings. But that is unlikely for several reasons, which I explained in the Daily Caller yesterday. Here’s the gist in a few passages from that op-ed:
The soonest the U.S. Treasury can sell the remaining 500 million shares (according to terms of the initial public offering) is May 22, but the administration would also like to “make the taxpayers whole.” The problem for the president on that score is that the stock price — even in the wake of this week’s earnings report — isn’t cooperating. As of this morning’s opening bell, GM stock was valued at $31.07 per share. If all of the 500 million remaining publicly-owned shares could be sold at that price, the Treasury would net less than $16 billion. Add that to the $23 billion raised from the initial public offering last November, and the “direct” public loss on GM is about $11 billion — calculated as a $50 billion outlay minus a $39 billion return.
To net $50 billion, those 500 million public shares must be sold at an average price of just over $53 — a virtual impossibility anytime soon. Why? The most significant factor suppressing the stock value is the market’s knowledge that the largest single holder of GM stock wants to unload about 500 million shares in the short term. That fact will continue to trump any positive news about GM and its profit potential, not that such news should be expected.
Projections about gasoline prices vary, but as long as prices at the pump remain in the $4 range, GM is going to suffer. Among major automakers, GM is most exposed to the downside of high gasoline prices. Despite all of the subsidies and all of the hoopla over the Chevy Volt (only 1,700 units have been sold through April 2011) and the Chevy Cruse (now subject to a steering column recall that won’t help repair negative quality perceptions), GM does not have much of a competitive presence in the small car market. Though GM held the largest overall U.S. market share in 2010, it had the smallest share (8.4%) of the small car market, which is where the demand will be if high gas prices persist. GM will certainly have to do better in that segment once the federally mandated average fleet fuel efficiency standards rise to 35.5 miles per gallon in 2016.
Deservedly reaping what it sowed, the administration finds itself in an unenviable position. It can entirely divest of GM in the short term at what would likely be a $10-to-$15 billion taxpayer loss (the stock price will drop if 500 million shares are put up for sale in a short period) and face the ire of an increasingly cost- and budget-conscious electorate. Or the administration can hold onto the stock, hoping against hope that GM experiences economic fortunes good enough to more than compensate for the stock price-suppressing effect of the market’s knowledge of an imminent massive sale, while contending with accusations of market meddling and industrial policy.
Or, the administration can do what it is going to do: First, lower expectations that the taxpayer will ever recover $50 billion. Here’s a recent statement by Tim Geithner: “We’re going to lose money in the auto industry… We didn’t do these things to maximize return. We did them to save jobs. The biggest impact of these programs was in the millions of jobs saved.” That’s a safe counterfactual, since it can never be tested or proved. (There are 225,000 fewer jobs in the auto industry as of March 2011 than there were in November 2008, when the bailout process began.)
Second, the administration will argue that the Obama administration is only on the hook for $40 billion (the first $10 billion having come from Bush). In a post-IPO, November 2010 statement revealing of a man less concerned with the nation’s finances than his own political prospects, President Obama asserted: “American taxpayers are now positioned to recover more than my administration invested in GM, and that’s a good thing.” (My emphasis).
The administration should divest as soon as possible, without regard to the stock price. Keeping the government’s tentacles around a large firm in an important industry will keep the door open wider to industrial policy and will deter market-driven decision-making throughout the industry, possibly keeping the brakes on the recovery. Yes, there will be a significant loss to taxpayers. But the right lesson to learn from this chapter in history is that government interventions carry real economic costs.
Grasping the Full Costs of the Auto Bailout
E.J. Dionne seems perfectly comfortable with the fact that he doesn’t understand economics—as long as the Washington Post continues to allow him to interpret economic events in a manner that comports with his political predispositions. Dionne sees GM’s recent good fortune as evidence of the propriety of government “step[ping] in when the market fails.” Dionne, like others before him, stands slack-jawed, in awe, ready and willing to buy the Brooklyn Bridge, donning narrow blinders and viewing just a narrow sliver of the world, oblivious to the fact that related events are transpiring in the other 359 degrees that surround him. Dionne is the perfect Bastiat foil.
Last week, GM reported first quarter profits of $3.2 billion—its best quarterly performance in ten years and its fifth consecutive profitable quarter. That’s good for GM (although it remains to be seen how GM performs going forward). But that is really beside the point. Dionne creates a straw man, contending that bailout critics thought that the government couldn’t resuscitate GM. But the most thoughtful criticism—my opposition to the bailout, at least—wasn’t predicated on the notion that GM couldn’t be saved by the government extinguishing debt, rewriting ownership, providing cash infusions, and underwriting sales rebates. That opposition was borne of concern that that the government would do just that. And it did.
In the process of “saving” GM (which I still contend would have survived without the intervention and the number of jobs losses in the industry would have been comparable to the job losses that occurred anyway), the government inflicted huge costs on the economy, which—rather than repeat—I cite from an earlier post. After all, my argument that IPO euphoria (from November) was misplaced is nearly identical to my argument that GM’s positive financial statement does not confer a verdict of success on the bailout.
Here’s the real issue. Today’s IPO is nothing more than testament to the fact that the government threw GM a lifeline, enabling the company to expunge most of its debts and firm up its balance sheet on terms more favorable than a normal bankruptcy process would have yielded. That enabled GM to partake of the cyclically growing U.S. auto market in 2010 and turn a profit through the first three quarters. So what? Did anyone really think that a chosen company so coddled and insulated from market realities couldn’t turn a short-run profit? Yes, even GM, under those favorable conditions should have been expected to turn a profit this year.
But at what cost? That answer—even the question—seems to be elusive in the public discussion of the IPO. The cost was not only $50 billion—the amount diverted to GM in the first place. Nor was it that $50 billion minus the proceeds raised in today’s IPO (and minus the proceeds raised later when the government divests entirely of GM — it will still hold 33% of GM after today). In other words, making taxpayers whole does not absolve the Bush and Obama administration’s for the auto intervention. Recouping the $50 billion only gets us partially out of the hole. (And I’m not even sure who “us” includes because the costs are so far reaching.)
Yes, GM is making sales and accounting for market share, but only at the expense of the other automakers. Had GM been forced to severely atrophy or liquidate, the other automakers would have had greater revenues, more market share, and probably higher profits). They would have been able to attract GM’s best engineers and line workers. They would have more money to invest in R&D and to lead the industry into the future. Instead, by keeping GM in the mix, some of those industry resources remain misallocated in a company that the evolutionary market process would have made smaller or extinct.
The auto industry wasn’t rescued with the GM bailout. GM was “rescued.” By rescuing GM, the government overrode market forces, and there are significant costs to assign for that. Witness the stagnant economy with 9.6 percent unemployment. Is it not plausible that businesses are sitting on their cash and not investing or hiring because of the fear inspired by the government interventions starting with the bank and auto bailouts? It’s more than plausible. The regime uncertainty that persists to this day was spawned by the GM bailout and other interventions.
What about the weakening of the rule of law? Doesn’t the diversion of TARP funds by the Bush administration, in circumvention of congress’s wishes and in contravention of the language of the law, represent a cost? How about the property right of preferred bondholders who were forced to take pennies on their investment dollars under the Obama bankruptcy plan? Any costs there? What about U.S. moral authority to dissuade other governments from meddling in their markets or indulging industrial policy? That may be costly to U.S. enterprises. And with the government still holding a third of GM, its hard to swallow the idea that public interest will be the driver of policies affecting the auto industry. And that suggests even more costs.
Drinking Away Your Constitutional Problems
Santa Clara law professor Brad Joondeph, who runs the very helpful — as a primary document aggregator for all the Obamacare cases – ACA Litigation Blog, thinks he’s stumbled onto something :
So after reading my roughly 500th ACA-litigation-related brief, motion, or filing of some sort, I think I have gotten a little punchy. But it occurs to me that a a great new drinking game for those ACA litigation buffs who sit around on Friday nights drinking beers — a huge cohort, I am sure — would be to read aloud briefs filed by the challengers, and take turns drinking when the word “unprecedented” is used.
Indeed, the argument that there is no Supreme Court precedent sanctioning the assertion of power the government claims – that the individual mandate is, quite literally, unprecedented — goes back to the earliest articulated constitutional arguments against Obamacare, particularly by the “intellectual godfather” of the legal challenges. I can tell you that Cato’s latest Obamacare brief, which we’ll be filing in the Eleventh Circuit — the Florida-led 26-state case – next week, uses the word three times. (We also use “novel.”)
The drinking game that Joondeph proposes, however, is not, um, unprecedented. Josh Blackman has been talking about it incessantly at least since our time writing about the Privileges or Immunities Clause. He even blogged about it last August!
I would suggest that Brad and Josh play the “unprecedented” drinking game to settle the score once and for all, but alas Josh doesn’t drink. Maybe I should step in for him; if I can bet Yale law professor Akhil Amar $100 on the outcome of the litigation, I can certainly do this.
For other connections between booze and the Commerce Clause, see my recent post on the (unfortunately not unprecedented) Care Act.
Thirty Years of Private Social Security in Chile
The big international story that broke on Sunday understandably was the death of Osama Bin Laden. But another big story was that May 1 also marked the thirtieth anniversary of the introduction of Chile’s successful private pension system. Implemented by José Piñera (now a Distinguished Senior Fellow at Cato) to replace unsustainable public pensions, private retirement accounts have averaged real annual rates of return of more than 9 percent, contributed to economic growth and the rise in savings, and helped turn working Chileans into capitalists. They’ve been a key to Chile’s economic progress and political maturity. The reform has been copied in part or in full by some 30 countries around the world. And contrary to what American critics on the left claimed at the time, private pensions weathered the global financial storm admirably. It’s only a matter of time before the United States and other rich nations begin addressing the crisis in public pensions in the same way. But the sooner the better. See this piece from Investor’s Business Daily on Chile’s system at 30.
How Not to Criticize Medicare Vouchers
Over at The Incidental Economist, Austin Frakt challenges a couple of claims I made on NPR about Medicare reform. (Here’s how NPR reported my comments in print.)
My claims are pretty simple.
- If Medicare subsidizes enrollees by giving them a fixed amount of money, much like Social Security does, they would be more cost-conscious than they are under the current open-ended subsidy, because enrollees who avoid wasteful spending would themselves get to keep the savings. Put more plainly, people spend their own money more carefully than they spend other people’s money.
- Health insurers and health care providers would compete to serve these cost-conscious Medicare enrollees on the basis of both cost and quality. Prices would fall while quality improves.
I’m not really sure to what extent all this would occur under the Medicare reforms the House passed a couple of weeks ago, because we don’t yet know to what extent each enrollee’s subsidy would resemble a fixed amount of money.
Here’s what Frakt does with my claims:
[A]s I heard these words I wondered if we had any evidence on hand about the relationship between lower premium subsidies and health care cost inflation. Indeed we do! Premiums in the commercial market are subsidized by the government at a lower rate than those in Medicare. [Emphasis added.]
He then throws up the chart, shown below the jump, showing that for common benefits, the rate of growth in per-enrollee spending is “pretty similar” in Medicare and private insurance. He concludes: “With data like this, I think we need to reexamine some of our theories about what lower premium subsidies can do.”
Hazy-Eyed Hunter Prepares to Fire on For-Profits
Yesterday, the U.S. Department of Education sent proposed — and highly controversial — “gainful employment” regulations to the Office of Management and Budget for review, the first step in the process of officially publishing them. The regulations — assuming they haven’t changed drastically from previous proposed versions — would limit the ability of students in vocational postsecondary programs to access federal financial aid if those programs produce debt burdens the regs deem too high, or salaries they deem too low. The exact details on what constitutes ”too high” and “too low” should be revealed soon.
The big problem with this is that it is aimed at easily abused for-profit schools while leaving the rest of waste-drenched higher education untouched. But another problem, the very real risk of bureaucratic bungling, also looms large. Indeed, a story out just today from California notes that the state greatly overestimated how much it would save by cutting Cal Grant eligibility for students at schools that showed up on a recent U.S. Department of Education list of institutions with high three-year loan default rates. The problem: The Education Department had accidentally calculated three-year-and-three-month rates, significantly overstating defaults. In fairness to the Department, it did say the list was unofficial, so California officials also bear a lot of the blame; but it sure doesn’t bode well that the Department would publish something so flawed.
There is a much more effective, and less dangerous, way to hold schools accountable than to have the federal government set blanket, hyper-politicized rules and try to enforce them. It is to have customers consume higher education using their own money rather than having Washington send tens-of-billions of inflation-fueling, extravagance-enabling dollars to students and schools every year. The problem is, that would just make it too hard to buy votes by falsely promising great education for all.
Good Jobs for Everyone!
In my quest to downsize the government, I’ve been looking at the Department of Labor budget recently. My vision is to cut federal spending to create a freer and more prosperous society. James Madison’s vision was for a federal government of “few and defined” powers.
I’ve discovered that the Secretary of Labor, Hilda Solis, has a different vision. In her budgets, on her speaking podiums, and in her strategic plans, she says that her “vision” for federal action is “Good Jobs for Everyone!”
She doesn’t just want open labor markets so that people can pursue their own careers. No, she wants the 17,000 administrators in her department to find a good job for every single American. “Good Jobs for Everyone . . . will guide everything we do here at the department,” she says.
That’s lovely, but where does she get the legal authority for it? Article 1, Section 8 in the Constitution allows the federal government to coin money, establish a patent system, and maintain a navy, but it doesn’t say anything about “good jobs for everyone.”
I suppose worrying about constitutional authority is passé. Political leaders today want to think big. So in the spirit of Secretary Solis, here are some ideas for other cabinet secretaries needing a new and exciting vision:
- Secretary of Agriculture: Soaring crop prices for all farmers!
- Secretary of Commerce: Huge profits for every business!
- Secretary of Defense: More wars and fat contracts for all weapons makers!
- Secretary of Education: Straight As for all students!
- Secretary of Energy: Windmills for every family!
- Secretary of Health and Human Services: Huge portions but slim waists for all!
- Secretary of Housing: Granite countertops and Jacuzzis for every home!
- Secretary of Justice: Lawsuits for all accidents!
- Secretary of Transportation: High-speed subway trains for every village!
- Secretary of the Treasury: More IRS agents because someone has to pay for all this!
Supreme Court Rules That Arbitration Provisions Should Be Enforced
A few readers have now asked me about the “libertarian” reaction to yesterday’s Supreme Court ruling that allows companies to use boilerplate contract provisions that require consumers to arbitrate any disputes individually rather than coming together as a class action for arbitration purposes (let alone being able to bring claims into court). That is, where an individual claim isn’t worth that much money (about $30 in yesterday’s case of AT&T Mobility v. Concepcion), no lawyer will take the case and so only by having a class file collectively, the argument goes, will justice be served.
The ruling broke down 5-4 on “conventional” lines, with an opinion by Justice Scalia, joined by the Chief Justice and Justices Kennedy, Thomas, and Alito, holding that the Federal Arbitration Act trumped (“preempted” by operation of the Constitution’s Supremacy Clause) California law that was more favorable to the plaintiffs. Justice Thomas also filed a concurrence, noting that “state public policy against arbitration” is not enough to revoke a contract with an arbitration agreement. Justice Breyer dissented, joined by Justices Ginsberg, Sotomayor, and Kagan, arguing that certain class action waivers are unenforceable.
Here’s some more background (edited from a useful summary I received in a Heritage Foundation email): A cellular telephone contract between the parties provided for arbitration of all disputes, but did not permit classwide arbitration. After the Concepcions were charged sales tax on the retail value of phones provided for free under their service contact, they sued AT&T, and their suit was consolidated with a class action alleging false advertising and fraud. The district court denied AT&T’s motion to compel arbitration. The Ninth Circuit affirmed, reasoning that the Federal Arbitration Act, which makes arbitration agreements valid and enforceable except on such grounds as exist to revoke any contract, did not require arbitration because the prohibition on classwide proceedings was “unconscionable” under California law. The Supreme Court reversed, stating that arbitration agreements must be placed on equal footing with other contracts and California’s rule was preempted by the FAA and its strong federal policy favoring informal arbitration.
I’ll leave it to my colleagues Walter Olson, our expert on civil litigation, and Roger Pilon, who has written and spoken extensively on preemption, to comment on the particulars of the opinion if they wish. What I will say generally is that (1) we at Cato take the enforceability of contracts quite seriously, but (2) preemption is a very technical area of law that has to be examined on a case-by-case, statutory-provision-by-statutory-provision basis. See, for example, this Cato Supreme Court Review article from a few years ago, and also the relevant section of last year’s “Looking Ahead” essay that presciently previewed the Concepcion case (kudos to Erik Jaffe!). Finally, Roger will be writing an article piece on this term’s preemption cases for the next Review — but you’ll have to wait till Constitution Day in September for that!
Deloitte Survey: Concerns about Government
A Deloitte Growth Enterprise Services survey of 527 executives at mid-market companies (annual revenues of between $50 million and $1 billion) found “tempered optimism” that the economic recovery will continue. However, the survey also found significant concern over government fiscal and regulatory policies.
A whopping 50 percent cited federal, state, and local debt as the greatest obstacle to U.S. growth in the coming year. Lack of consumer confidence (39 percent) and rising health care costs (33 percent) came in second and third. Lest anyone construe the executives’ concern about government debt as implied support for tax increases, high tax rates came in fourth at 30 percent. Government austerity, which can include tax increases, and infrastructure needs came in at 15 and 9 percent, respectively.
When asked to choose up to three items that represent their company’s main obstacle to growth, only 21 percent cited government budget cuts. I’m frankly surprised that the figure isn’t higher considering that a number of these companies probably “do business” with government. Increased regulatory compliance was only a tick higher at 22 percent. Health care costs came in third at 30 percent, and uncertain economic outlook was first at 41 percent. I would pin that uncertainty on government policies. It is likely that a substantial number of the respondents would agree given other survey results.
Reducing corporate tax rates (33 percent) was the clear winner when the executives were asked to choose up to two measures by the U.S. government that would most help mid-size businesses grow in the next year. Keeping interest rates low (32 percent) was close behind, followed by rolling back health care reform (23 percent). Keynesian measures that are popular in the White House, supporting increased infrastructure investment and stimulating private consumption, came in at 19 percent and 14 percent, respectively.
Finally, many, if not the majority, of respondents expect regulatory costs to increase next year, particularly in the area of health care reform. Respondents expect the president’s Affordable Care Act to sharply increase costs (33 percent) or slightly increase costs (33 percent). A majority (56 percent) expect tax compliance costs to increase. A near majority (49 percent) expect both economic and occupational health & safety regulatory costs to increase.
In sum, the good news is that optimism is on the rise in the business community. The bad news is that the heavy hand of government is still a dark cloud hovering over the recovery.
The CARE Act Doesn’t Care About Consumers
Last month, I described an unfortunate court ruling that let stand a Texas law designed to protect that state’s in-state liquor retailers from out-of-state competition, a holding that disregarded recent high-court precedent. This built on a podcast I had recorded about a year ago about the relationship between state alcohol regulation under the Twenty-First Amendment (which ended Prohibition) and the Commerce Clause.
As the Wall Street Journal describes today:
The federal government and states have been in a tug-of-war over alcohol regulation since the 21st Amendment passed in 1933. That amendment gave states the right to decide whether to go wet or stay dry. But the Supreme Court in 2005 came down decisively in favor of the feds in Granholm v. Heald. The Court struck down laws in New York and Michigan allowing in-state wineries to ship directly to consumers while forbidding out-of-state wineries from doing the same. The Court ruled that while the 21st amendment gives states the authority to regulate alcohol within their borders, the Constitution’s Commerce Clause bars them from erecting such protectionist barriers.
Still, many states have tried to circumvent Granholm, and the Texas law I previously wrote about is one example. Just like countries erect trade barriers to “help” domestic industries — at the expense of consumers and the economy as a whole — states engage in similar tactices. While the World Trade Organization doesn’t have any authority to police such internal matters, the U.S. Constitution sets out a perfectly good institution for dealing with these blatant Commerce Clause violations: the federal judiciary. And indeed, with some exceptions, courts since Granholm have “corked” protectionist state legislation.
But because Congress can’t leave well enough alone, and at the behest of liquor wholesalers (whose no-value-added middleman profits are obviously threatened by eliminating interstate trade barriers), we now have pending federal legislation called the Community Alcohol Regulatory Effectiveness (CARE) Act. This cutely titled bill purports to give more local control over alcohol regulation — to protect Baptists and bootleggers community values, children’s health, etc. – its actual purpose is to prevent out-of-state producers from selling directly to consumers around the country.
The CARE Act would eliminate the ability for alcohol producers and related businesses to challenge Commerce Clause violations in federal court. That’s not a good thing, as we’ve noticed in every other industry, such as insurance, where Congress has abdicated its constitutional authority to maintain the channels of interstate commerce clear of state interference. As the Journal again puts it:
You can bet your favorite case of California cabernet that Care will reduce choices and raise prices for consumers, just as McCarran-Ferguson has done in the insurance market. From what we’ve gathered through the grape vine, the main groups backing this bill are alcohol wholesalers. They serve as the middlemen in over 90% of transactions between wineries and retailers, and they account for up to 25% of the price of every bottle of wine. Wholesalers have convinced 57 Members of Congress, including 28 Republicans, to co-sponsor Care. Last year 153 Members, including 94 Democrats and 59 Republicans, co-sponsored a similar bill.
The trick here is that the wholesalers lobby is trying to play the “state sovereignty” clause, explaining that they’re just federalists trying to fight a one-size-fits-all national regulatory Leviathan. A clever maneuver in the Tea Party era, to be sure, but one that forgets that one of the main purposes of the Constitution — the very reason James Madison called the Constitutional Convention — was to eliminate interstate barriers to commerce; how else could the fledgling republic’s economy grow?
Congress would never give states the power to stop Apple or J. Crew or any other retailer from shipping its products directly to consumers. It should be no different with alcohol.
Inside Every Leftist Is a Little Authoritarian Dying to Get Out
I’ve been meaning to write about how ObamaCare’s unelected rationing board — innocuously titled the Independent Payment Advisory Board — is yet another example of the Left leading America down the road to serfdom. (Efforts to limit political speech — innocuously called “campaign finance reform” — are another.)
As Friedrich Hayek explained in The Road to Serfdom (1944), when democracies allow government to direct economic activity, the inevitable failures lead to calls for a more authoritarian form of governance:
Parliaments come to be regarded as ineffective “talking shops,” unable or incompetent to carry out the tasks for which they have been chosen. The conviction grows that if efficient planning is to be done, the direction must be taken “out of politics” and placed in the hands of experts — permanent officials or independent autonomous bodies.
The problem is well known to socialists. It will soon be half a century since the Webbs began to complain of “the increased incapacity of the House of Commons to cope with its work.”
Sound familiar? National Review‘s Rich Lowry picks up on the theme here.
Making this connection got a lot easier the other day when the University of Chicago’s Harold Pollack, a leading advocate of a “public option,” vented his frustrations over at The American Prospect blog about how Congress is likely to defang the Independent Payment Advisory Board. And he ends up just where Hayek predicted:
Despite many reasons for caution — the words George W. Bush foremost among them — I’m becoming more of a believer in an imperial presidency in domestic policy. Congress seems too screwed up and fragmented to address our most pressing problems.
This isn’t how it starts. This is how it snowballs.
Paging Dr. Hayek…
Senator Rubio, Representative Posey, and other Lawmakers Fighting to Stop Rogue IRS Proposal that Would Drive Investment from U.S. Economy
There hasn’t been much good economic news in recent years, but one bright spot for the economy is that the United States is a haven for foreign investors and this has helped attract more than $10 trillion to American capital markets according to Commerce Department data.
These funds are hugely important for the health of the U.S. financial sector and are a critical source of funds for new job creation and other forms of investment.
This is a credit to the competitiveness of American banks and other financial institutions, but we also should give credit to politicians. For more than 90 years, Congress has approved and maintained laws to attract investment from overseas. As a general rule, foreigners are not taxed on interest they earn in America. Moreover, by not requiring it to be reported to the IRS, lawmakers on Capitol Hill have effectively blocked foreign governments from taxing this U.S.-source income.
This is why it is so disappointing and frustrating that the Internal Revenue Service is creating grave risks for the American economy by pushing a regulation that would drive a significant slice of this foreign capital to other nations. More specifically, the IRS wants banks to report how much interest they pay foreign depositors so that this information can be forwarded to overseas tax authorities.
Yes, you read correctly. The IRS is seeking to abuse its regulatory power to overturn existing law.
Not surprisingly, many members of Congress are rather upset by this rogue behavior.
Senator Rubio, for instance, just sent a letter to President Obama, slamming the IRS and urging the withdrawal of the regulation.
At a time when unemployment remains high and economic growth is lagging, forcing banks to report interest paid to nonresident aliens would encourage the flight of capital overseas to jurisdictions without onerous reporting requirements, place unnecessary burdens on the American economy, put our financial system at a fundamental competitive disadvantage, and would restrict access to capital when our economy can least afford it. …I respectfully ask that Regulation 146097-09 be permanently withdrawn from consideration. This regulation would have a highly detrimental effect on our economy at a time when pro-growth measures are sorely needed.
And here’s what the entire Florida House delegation (including all Democrats) had to say in a separate letter organized by Congressman Posey.
America’s financial institutions benefit greatly from deposits of foreigners in U.S. banks. These deposits help finance jobs and generate economic growth… For more than 90 years, the United States has recognized the importance of foreign deposits and has refrained from taxing the interest earned by them or requiring their reporting. Unfortunately, a rule proposed by the Internal Revenue Service would overturn this practice and likely result in the flight of hundreds of billions of dollars from U.S. financial institutions. …According to the Commerce Department, foreigners have $10.6 trillion passively invested in the U.S. economy, including nearly “$3.6 trillion reported by U.S. banks and securities brokers.” In addition, a 2004 study from the Mercatus Center at George Mason University estimated that “a scaled back version of the rule would drive $88 billion from American financial institutions,” and this version of the regulation will be far more damaging.
Both Texas Senators also have registered their opposition. Senators Hutchison and Cornyn wrote to the Obama Administration earlier this month.
We are very concerned that this proposed regulation will bring serious harm to the Texas economy, should it go into effect. …Forgoing the taxation of deposit interest paid to certain global investors is a long-standing tax policy that helps attract capital investment to the United States. For generations, these investors have placed their funds in institutions in Texas and across the United States because of the safety of our banks. Another reason that many of these investors deposit funds in American institutions is the instability in their home countries. …With less capital, community banks will be able to extend less credit to working families and small businesses. Ultimately, working families and small businesses will bear the brunt of this ill-advised rule. Given the ongoing fragility of our nation’s economy, we must not pursue policies that will send away job-creating capital.We ask you to withdraw the IRS’s proposed REG-14609-09. The United States should continue to encourage deposits from global investors, as our nation and our economy are best served by this policy.
Their dismay shouldn’t be too surprising since their state would be especially disadvantaged. Here are key passages from a story in the Houston Chronicle.
Texas bankers fear Mexican nationals will yank their deposits if the institutions are required to report to the Internal Revenue Service the interest income non-U.S. residents earn. …such a requirement would drive billions of dollars in deposits to other countries from banks in Texas and other parts the country, hindering the economic recovery, bankers argue. About a trillion dollars in deposits from foreign nationals are in U.S. bank accounts, according to some estimates. …The issue is of particular concern to some banks in South Texas, where many Mexican nationals have moved deposits because they don’t feel their money is safe in institutions in Mexico. …”This proposal has caused a wave of panic in Mexico,” said Lindsay Martin, an estate-planning lawyer with Oppenheimer Blend Harrison + Tate in San Antonio. He has received in recent weeks more than a dozen calls from Mexican nationals and U.S.-based financial planners with questions on the rule. …Jabier Rodriguez, chief executive of Pharr-based Lone Star National Bank, said not one Mexican national he has spoken to backs the rule. “Several of them have said if it were to happen, then there’s no reason for us to have our money here anymore,” he said. Many Mexican nationals worry that the data could end up in the wrong hands, jeopardizing their safety. If people in Mexico and some South American nations find out they have a million dollars in an FDIC-insured account in the United States, “their families could be kidnapped,” added Alex Sanchez, president of the Florida Bankers Association.
For those who want more information about this critical issue, here’s a video explaining why the IRS’s unlawful regulation is very bad for the American economy.
How Russia Makes Universal Coverage Work
As everybody with a brain knows, Article 41 of Chapter 2 of the Constitution of the Russian Federation protects the universal right of every Russian citizen to health care:
Everyone shall have the right to health protection and medical aid. Medical aid in state and municipal health establishments shall be rendered to individuals gratis….
Free health protection for everyone is an impressive feat, considering Russia spends less than 4 percent of its meager GDP on health care. The Washington Post reveals how Russia makes it work:
Nationally, statistics show, almost half of Russia’s hospitals lack heat or running water.
There’s also the fact that Russians of all ages and sexes face probabilities of dying rivaled only by HIV-plagued sub-Saharan African nations. Thank God for universal coverage.
A doctor named Leonid Roshal has decided he’s mad as hell and he’s not going to take it any more. And he told Prime Minister Vladmir Putin to his face:
Russian medical care is hobbled by corruption, meager salaries, ill-conceived laws, a shortage of medical workers and an overbearing government bureaucracy, one of Russia’s most prominent doctors told a recent medical conference here. He addressed his remarks directly to Prime Minister Vladimir Putin, who was sitting just a few feet away….
In his remarks, he said too much money is being budgeted for equipment, much of it useless, because it is easy for bureaucrats to “saw off” a kickback for themselves.
Actually, that happens in the U.S. Medicare program too, though I believe we confine those rents to the private sector.
The Takings Clause Has No Expiration Date II
As I wrote last week, a decade ago in Palazzolo v. Rhode Island, the Supreme Court rejected the idea that those who buy property subject to burdensome regulations lose the right the seller otherwise has to challenge those regulations. The Court ruled that the Takings Clause does not have an “expiration date.” Sadly, not all government authorities or courts took Palazzolo to heart, and now we have a second such case meriting Cato’s involvement in the span of a week.
In 2000, after the EPA issued a Record of Decision concerning limiting access to a “slough” (a narrow strip of navigable water) on its Superfund National Priorities List, CRV Enterprises began negotiations to buy a parcel of land next to the slough across from a site once occupied by a wood-preserving plant. CRV hoped to develop that parcel and others it already controlled into a mixed-use development, including a marina, boat slips, restaurants, lodging, storage, sales, and service facilities. The company eventually bought the land with notice of the EPA’s ROD but the EPA later installed a “sand cap” and “log boom” that obstructed CRV’s access to the slough.
CRV sued the United States in the Court of Federal Claims, which dismissed the case for lack of standing. The Federal Circuit affirmed, finding that CRV’s claim “is barred because [the company] did not own a valid property interest at the time of the alleged regulatory taking.” The Federal Circuit thus turned two Supreme Court precedents on their head and put that “expiration date” on the Takings Clause. It did so despite the fact that multiple federal courts have upheld Palazzolo‘s rule and that longstanding California common law recognizes that a littoral (next to water) owner’s access to the shore adjacent to his property is a property right.
Cato, joined by Reason Foundation, the Center for Constitutional Jurisprudence, and the National Federation of Independent Business, filed an amicus brief supporting CRV’s request that the Supreme Court review the Federal Circuit’s decision and reaffirm Palazzolo. We argue the following: (1) when post-enactment purchasers are per se denied standing to challenge regulation, government power expands at the expense of private property rights; (2) a rule under which pre-enactment owners have superior rights to subsequent title-holders threatens to disrupt real estate markets; (3) the Federal Circuit abrogated the rule of Palazzolo; and (4) this case — viewed in the context of other courts’ rulings — indicates the need for the Supreme Court to settle the spreading confusion about Palazzolo. Otherwise, the existence of a “post-enactment” rule will create a “massive uncompensated taking” from small developers and investors that would preserve and enhance the rights of large corporations.
Palazzolo put to rest “once and for all the notion that title to property is altered when it changes hands.” The ability of property owners to challenge government interference with their property is essential to a proper understanding of the Fifth Amendment; the Court must reestablish the principle that transfer of title does not diminish property rights. Significantly, the Federal Circuit isn’t alone in its misapplication of Palazzolo; the Ninth Circuit in Guggenheim v. City of Goleta (in which Cato also filed a brief) recently issued an opinion severely narrowing Palazzolo‘s scope and deepening a circuit split.
Thanks to legal associate Nick Mosvick and former legal associate Brandon Simmons (acting as our outside counsel in this case) for their work on this case, CRV Enterprises v. United States.
Air Traffic Control: Too Important for Government
The government’s air traffic controllers have been sleeping on the job, watching movies rather than guiding planes, and misdirecting the First Lady’s plane over Washington. There have been soaring numbers of airplane near misses caused by ATC errors over the last year.
Yesterday, the president said that federal government technology systems are “horrible” “across-the-board,” which isn’t good news for citizens hoping that the Federal Aviation Administration’s computers will land them safely.
The government’s air traffic controllers are very highly compensated, but they are unionized and they work for a mismanaged bureaucracy. The federal ATC system has had serious labor and management problems since the 1960s. And the president’s comment on technology rings true with regard to ATC — the FAA has had huge troubles for decades efficiently implementing new technologies. And things could get worse as air traffic volumes rise and the FAA struggles to implement next generation ATC systems.
The solution is privatization, as discussed in this essay and these blogs. Privatization promises better management, a more disciplined workforce, more efficient financing, better technology, and safer skies.
If There Were An Annual ‘Regulation Day’
As Iain Murray points out at National Review‘s “Corner,” there’s no date on the calendar each year that reminds us, the way income tax filing day does, of the huge share of our economic labors that the government commands in the name of regulation. In part this is because the costs of regulation are even better disguised than those of taxation: while paycheck withholding may lull us into complacency about our income tax burden, it is downright transparent compared with the costs of regulation, which the ordinary citizen may never recognize when passed along in the form of higher utility bills or sluggish performance by some sector of the economy. Iain notes the good work done by his colleagues at the Competitive Enterprise Institute:
Regulations cost $1.75 trillion in compliance costs, according to the Small Business Administration. That’s greater than the record federal budget deficit — projected at $1.48 trillion for FY 2011 — and greater even than all corporate pretax profits. This is only one of many findings of the new edition of Wayne [Crews'] “Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State,” a survey of the cost and compliance burden imposed by federal regulations.
As is now becoming evident, the Obama Administration is presiding over one of the most extraordinary expansions of regulation in all American history, in areas from health care to consumer finance, university governance to “obesity policy,” labor and employment law to the environment. Not all these developments originated with Obama appointees — some had their start under President George W. Bush or with lawmakers in Congress — but this administration has pursued stringent regulatory measures with extraordinary zeal, notwithstanding the odd feint to soothe business-sector misgivings.
Here are three more or less random samplings from recent days of the quiet momentum that’s built up in Washington toward a much bigger regulatory state:
- Reflecting the historical development of the Food and Drug Administration, the introduction of new medical devices such as pacemakers and joint replacements is still somewhat less intensively regulated than the introduction of new pharmaceutical compounds. As Emory’s Paul Rubin relates at Truth on the Market, pressure is building in Washington to correct this supposed anomaly by intensifying the regulation of devices. As Rubin notes, “virtually all economists who have studied the FDA drug approval process have concluded that it causes serious harm by delaying drugs,” yet the premise of the new campaign for regulation “is that we should duplicate that harm with medical devices.”
- Much of the new regulation of consumer finance has taken the form of rules governing what information lenders can ask for or consider about borrowers’ situation in extending credit. One such proposed rule, from the Federal Reserve, “would require credit card issuers to consider only a person’s independent income, and not the household’s income, when underwriting credit cards in an effort to protect young adults unable to repay debt.” Great big unforeseen consequence: many stay-at-home parents will now be unable to establish credit in their own names (via).
- Among a slew of other high-profile regulations, the Environmental Protection Agency (EPA) has chosen this moment to demand very rapid new reductions in emissions from industrial boilers (“Boiler MACT” rules). Per ShopFloor, Thomas A. Fanning, who runs one of the nation’s largest electric utilities, the Southern Company, thinks trouble lies ahead:
EPA has proposed Utility MACT rules under timelines that we believe will put the reliability and affordability of our nation’s power system at risk. EPA’s proposal will impact plants that are responsible for nearly 50 percent of total electricity generation in the United States. It imposes a three-year timeline for compliance, at a time when the industry is laboring to comply with a myriad of other EPA mandates. The result will be to reduce reserve margins—generating capacity that is available during times of high demand or plant outages—and to cause costs to soar. Lower reserve margins place customers at a risk for experiencing significant interruptions in electric service, and costs increases will ultimately be reflected in service rates, which will rise rapidly as utilities press ahead with retrofitting and projects to replace lost generating capacity due to plant retirements.
At least we’ll be able to avert brownouts by switching over readily to fracked-natural-gas, Alberta tar-sands, and latest-generation-nuclear options — or we would had all those options not been put under regulatory clouds as well.
Death by Decorator
The Wall Street Journal reports on a heated battle in Florida over whether to deregulate commercial interior designers — that is, to allow just anyone to hang out a shingle and seek customers looking for office design. It turns out the question is fraught with more danger than one might have realized. Herewith, the opening of the Journal‘s comprehensive report:
MIAMI—Interior designers may seem to inhabit a genial world of pastel palettes and floral motifs. But right now in this state, their industry is locked in an indecorous pillow fight over who has the right to design.
Florida is one of only three states that require commercial interior designers to become licensed before they hang a single painting in an office building, school or restaurant. A bill making its way through the state legislature, however, would deregulate the occupation, along with more than a dozen others, including yacht brokers and hair braiders.
That possibility has the state’s licensed interior designers ruffled. They’ve hired Ron Book, one of the state’s most influential lobbyists, to fight the bill. And they’ve stormed legislative hearings to warn of the mayhem that would ensue if the measure passes.
Among the scenarios they’ve conjured: flammable carpets sparking infernos; porous countertops spreading bacteria; jail furnishings being turned into weapons.
The thought of “someone in my position that thinks they know what they’re doing because they watched HGTV for two weeks scares me,” licensed interior designer Terra Sherlock said at a hearing in March.
Another licensed designer, Michelle Earley, argued that use of the wrong fabrics in hospitals could spread infection. By deregulating, she told lawmakers, “what you’re basically doing is contributing to 88,000 deaths every year,” citing a study by the Centers for Disease Control and Prevention on deaths from hospital-acquired infections.
Though the CDC study doesn’t mention interior design as a cause of infections, Ms. Earley says that bacteria can spread if moisture-resistant fabrics aren’t used on things like chairs and mattresses. That, in turn, can lead to urinary tract infections, staph and other life-threatening conditions, she says.
Interior design “sounds like this simple hanging curtains on a wall,” said Ms. Earley in an interview. But “it only takes a couple things to go wrong for people to lose their lives.”
Scary.
For a more skeptical look at the need to protect the public from unlicensed hair braiders, ballroom-dance-studio owners, and interior designers, see this column by Cato chairman and Floridian Bob Levy. In February the Wall Street Journal reported that occupational licensing is actually spreading, despite decades of criticism from economists.
All Part of the Plan (National Security Wisdom from the Joker)
Batman’s archnemesis the Joker—played memorably by Heath Ledger in 2008′s blockbuster The Dark Knight—might seem like an improbable font of political wisdom, but it’s lately occurred to me that one of his more memorable lines from the film is surprisingly relevant to our national security policy:
You know what I’ve noticed? Nobody panics when things go “according to plan.” Even if the plan is horrifying! If, tomorrow, I tell the press that, like, a gang banger will get shot, or a truckload of soldiers will be blown up, nobody panics, because it’s all “part of the plan.”
There are, one hopes, limits. The latest in a string of videos from airport security to provoke online outrage shows a six-year-old girl being subjected to an invasive Transportation Security Administration patdown—including an agent feeling around in the waistband of the girl’s pants. I’m somewhat reassured that people don’t appear to be greatly mollified by TSA’s response:
A video taken of one of our officers patting down a six year-old has attracted quite a bit of attention. Some folks are asking if the proper procedures were followed. Yes. TSA has reviewed the incident and the security officer in the video followed the current standard operating procedures.
While I suppose it would be disturbing if individual agents were just improvising groping protocol on the fly (so to speak), the response suggests that TSA thinks our concerns should be assuaged once we’ve been reassured that everything is being done by the book—even if the book is horrifying. But in a sense, that’s the underlying idea behind all security theater: Show people that there’s a Plan, that procedures are in place, whether or not there’s any good evidence that the Plan actually makes us safer.
This mode of argument gets particularly frustrating when it comes to the vastly expanded surveillance powers our intelligence agencies have been handed over the past decade. “If these are such a threat to civil liberties,” surveillance hawks demand, “show us the abuses!” This is a somewhat disingenuous demand, since part of the problem is precisely that the powers in question are exercised behind a veil of extreme secrecy. Still, thanks to internal auditing, some fairly serious and systematic abuses of the most discretionary powers have, indeed, become public. If these can’t successfully be dismissed as mere “clerical” or “record-keeping” problems (but how will abuses ever be discovered if those rules are flouted?), there’s always the catch-all Catch-22: Since the abuses are by definition violations of the rules, they’re no evidence against the expanded powers themselves, but only show the need for better training and strict enforcement of internal guidelines.
The simplest way to ensure that there are no abuses, of course, is simply to make the rules so permissive that nothing counts as an abuse. Once upon a time, if it had been revealed that he FBI was vacuuming up the telephone, e-mail, and Internet browsing records of thousands of people who were not even suspected of being linked to terrorism—can’t be too careful, might as well check out everyone—we would have called that an abuse in itself. We wouldn’t have waited for someone to put that improperly collected information to some obviously nefarious use, since the history of American intelligence abuses suggests this wouldn’t occur through formal channels that leave a paper trail anyway. Now, however, we’ve changed the rules, and this kind of sweeping, suspicionless collection of telecommunications records is All Part of the Plan.
Terror attacks, of course, are not Part of the Plan. And we appear to be unwilling to accept that there might be limits to our ability to entirely eliminate the risk of such attacks, however much surveillance power we give government domestically, however many brave men and women we sacrifice in combat overseas. We’ll call those losses tragic—the “price of security,” we’ll say, whether or not there’s evidence they’re buying us much security—but we’ll accept them. Because they’re Part of the Plan. Even if the plan is horrifying.
GE and Obama: A Betrothal at the Altar of Industrial Policy
The angry Left has been calling for President Obama to fire Jeffrey Immelt from his position as head of the President’s Council on Jobs and Competitiveness. I think that would be a good idea, but for different reasons.
Sen. Russ Feingold, Moveon.Org, and the regular scribes at the Huffington Post see Immelt, the chairman and CEO of General Electric, as unfit to advise the president because GE invests some of its resources abroad and, despite worldwide profits of $14.2 billion, paid no taxes in 2010. No illegalities are alleged, mind you; GE — like every other U.S. multinational — responds to incentives, including those resulting from tax policy and regulations concocted in Washington.
But there are more substantive reasons for why Immelt is unfit to advise the president. In particular, GE is a major player in several industries that President Obama has been promoting as part of his administration’s cocksure embrace of industrial policy. With over $100 billion in direct subsidies and tax credits already devoted to “green technology,” President Obama is convinced that America’s economic future depends on the ability of U.S. firms to compete and succeed in the solar panel, wind harnessing, battery, and other energy storage technologies. Concerning those industries, the president said: “Countries like China are moving even faster… I’m not going to settle for a situation where the United States comes in second place or third place or fourth place in what will be the most important economic engine of the future.”
Well, just yesterday GE announced plans to open the largest solar panel production facility in the United States, which nicely complements its role as the largest U.S. producer of wind turbines (and one of the largest in the world). The 2011 Economic Report of the President describes the taxpayer largesse devoted to subsidizing these green industries:
[T]he Recovery Act directed over $90 billion in public investment and tax incentives to increasing renewable energy sources such as wind and solar power, weatherizing homes, and boosting R&D for new technologies. Looking forward, the President has proposed a Federal Clean Energy Standard to double the share of electricity produced by clean sources to 80 percent by 2035, a substantial commitment to cleaner transportation infrastructure, and has increased investments in energy efficiency and clean energy R&D.
And Box 6.2 on page 129 of the 2011 ERP conveniently breaks out those subsidies by specific industry, most of which are spaces in which GE competes.
