Archive for the ‘Regulatory Studies’ Category
World Bank: Anti–Money Laundering Rules Hurt the Poor
I’ve complained many times about the pointless nature of anti–money laundering laws. They impose very high costs and force banks to spy on their customers, but they are utterly ineffective as a weapon against criminal activity. Yet politicians and bureaucrats keep making a bad system worse, and the latest development is a silly scheme to ban $100 bills!
It also seems that poor people are the main victims of these expensive and intrusive laws. According to a new World Bank study, half of all adults do not have a bank account, with 18 percent of those people (click on the chart below for more info) citing documentation requirements—generally imposed as part of anti–money laundering rules—as a reason for being unable to participate in the financial system.
But this understates the impact on the poor. Of those without bank accounts, 25 percent said cost was a factor, as seen in the chart below. One of the reasons that costs are high is that banks incur regulatory expenses for every customer, in large part because of anti–money laundering requirements, and then pass those costs on to consumers.
‘May Cause Drowsiness, Use Caution Around Machinery’
Frank Harty of the Iowa law firm Nyemaster Goode describes a new kind of employer headache arising from the Obama administration’s hardline enforcement efforts on the Americans with Disabilities Act (ADA) front:
…Common sense dictates that any medication that carries with it a warning that it “may cause drowsiness” or that the patient should “use caution” if operating machinery may pose a risk in the workplace. It is for this reason that many employers adopt a policy requiring employees to self report the use of prescription pain killers. This is especially important in potentially dangerous workplaces such as manufacturing and construction.
In a recent action that defies common sense, the Equal Employment Opportunity Commission has taken the position that such policies are unlawful under the Americans With Disabilities Act. The ADA prohibits an employer from conducting “medical inquiries” without a business reason to do so. In EEOC v. Product Fabricators, Inc., an action in federal court in Minnesota, the EEOC required a manufacturing employer to abandon its policy of encouraging employees to inform supervisors if they are under the influence of narcotic pain killers such as Vicodin. The EEOC took the position that an employer cannot ask about prescription pain killer usage unless it has “objective” evidence that an employee is impaired on the job.
This places employers in a very difficult position….
In particular, it puts employers to a choice between waiting until there is an actual accident caused by an employee’s nodding off or zoning out — thus at last providing “objective” evidence of risk — and the risk of a large judgment payable to an employee who has not yet gotten into accidents and whose lawyer will claim that there was no objective evidence to support a suspicion of impairment.
The Eighth Circuit upheld the agency’s stance earlier this year and an EEOC press release from February notes that the company agreed to pay $40,000 to settle the dispute. Harty notes that one “thing is certain: it will be employers, not the Equal Employment Opportunity Commission, who deal with the fallout from the loss of life and limb in the workplace.”
How Tech Can Render Regulations Uber Obsolete
In the most recent issue of The Atlantic, Megan McArdle looks at the regulatory travails of Uber, the innovative smartphone-enabled car service that has found itself in the crosshairs of competition-averse taxi commissions from D.C. to San Francisco. For the uninitiated, Uber is the answer to the question that has occurred to every harried commuter with a smartphone at some point: If these things have GPS chips, and cabs have GPS, shouldn’t I be able to use my phone to find a cab, rather than just hoping I’m in the right place when one passes? In other words, it’s the Electronic Thumb from The Hitchhiker’s Guide to the Galaxy. Uber’s plush sedans come at a premium price, but for those in need of a pickup outside a high-traffic area, it’s the convenience factor that justifies the markup. Users register their credit cards with the service in advance, and when they need a ride, fire up a slick app that shows all the Uber cars in service on a realtime map, with an estimate of how long the closest free driver will take to reach your location. At the end of the journey, the fare and gratuity are charged automatically, with a receipt and travel map delivered via email, and the app gives passengers an opportunity to rate each driver—allowing the company to ensure that it only contracts with those who are consistently safe, reliable, and courteous. By most accounts, users adore it.
Naturally, regulators hate it. DC Taxi Commissioner Ron Linton has condemned the company as a scofflaw—and seems hell bent on finding some rule they’re violating, even though his initial complaint against Uber seems to have been legally confused. Most of Linton’s public comments on the matter leave the distinct impression that these are secondary details for him: What’s outrageous is that some upstart would dare to do something new without first coming to kiss the Don’s ring and beg permission. There’s also the inevitable element of regulatory capture: Conventional cab companies would rather not face an innovative competitor, so they’re asking the government to ensure consumers don’t have the option of taking their business elsewhere. So far, a familiar story that could be told about dozens of industries. What even many of Uber’s defenders seem slow to recognize, however, is that the company’s business model doesn’t just require regulators to catch up with the tech and the times: It eliminates the rationale for having a regulator.
The default in a free society is that you can start most kinds of business, and charge whatever rate the market will bear for your services, without the approval of some municipal bureaucrat. The argument for treating cabs differently rests on the idea that, on the conventional model, they’re not as effectively regulated by normal market pressures. Comparison shopping isn’t particularly feasible when you hail a cab the old fashioned way: You just flag down the first one that happens to pass, with the understanding that when the ride’s over, you’re unlikely to ever do business with that particular driver ever again. If you’re from out of town, odds are you won’t ever do business with the company again either, and barring an exceptionally unpleasant experience, most passengers aren’t going to take the time to call the dispatcher with a review. The opportunistic, one-off nature of traditional cab transactions, in short, makes a standardized price structure more attractive, and diminishes the reputation-based incentives to compete on price and quality. So goes the usual argument, anyway.
Uber—or rather, the Uber model—changes all of that. Read the rest of this post »
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:
Suing the IRS for Fun and Liberty
This blogpost was coauthored by Cato legal associate Chaim Gordon.
On Tuesday, the Institute for Justice brought a lawsuit to stop recent IRS regulations that require independent tax return preparers to pay a yearly registration fee, take a competency exam, complete 15 hours of IRS-approved continuing education every year, and possibly subject themselves to mandatory fingerprinting. Our colleague Dan Mitchell observed two years ago that these regulations appear to be the result of “regulatory capture.” As the Wall Street Journal explained:
Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business.
Indeed, as others have already noted, one of the architects of this licensing scheme is Mark Ernst, former CEO of H&R Block. These protectionist regulations were even cited by UBS as a reason to buy H&R Block stock, on the grounds that they will “add barriers to entry (or continuation) for small preparers.”
In defending the need for these regulations, IRS Commissioner Douglas Shulman’s most insightful explanation was that “in most states you need a license to cut someone’s hair.” This statement undoubtedly caught IJ’s attention because that “merry band of litigators” has devoted itself to fighting such senseless and corrupt regulations (including in hair salons).
But these regulations are not just misguided and corrupt. They are, as IJ’s complaint contends, simply beyond the IRS’s regulatory authority. The IRS claims the power to regulate tax return preparers under 31 U.S.C. § 330. But that statute only authorizes the IRS to regulate “the practice of representatives of persons,” and tax return preparers do not represent persons before the IRS and do not “practice” in the sense that lawyers do when they appear before a court. Taxpayers are only “represented” when they authorize someone to act on their behalf before the IRS in an exam, controversy, or litigation setting. This is especially clear in light of the statute’s plain purpose, which is to ensure that such representatives have the “competency to advise and assist persons in presenting their cases” (emphasis added).
Moreover, under the IRS’s expansive reading of the law, which puts under the agency’s purvey “all matters” connected with a “presentation” to the IRS, anyone who advises another about the tax aspects of a particular transaction could theoretically be guilty of unauthorized practice before the IRS. Congress clearly meant no such thing. In fact, Congress specifically amended 31 U.S.C. § 330 to allow the IRS to regulate the provision of written advice that the IRS “determines as having a potential for tax avoidance or evasion.” Such additional authority would be unnecessary under the IRS’s broad reading of the original statute.
IJ had previously warned the IRS that its then-proposed regulations were unfair to mom-and-pop tax return preparers and exceeded its statutory authority, but the IRS neither altered its plan nor explained why it thinks that it has the authority to regulate tax return preparers in the first instance. Now the IRS will have to explain its power grab to a federal judge.
Watch IJ’s excellent case launch video. IJ attorney Dan Alban explains the case in an editorial here and in an interview here.
Pool Closed Until Further Notice
Tomorrow is a deadline that looms large for worried pool operators at hotels and public recreation facilities across the country, as USA Today reports:
Hoteliers must have pool lifts to provide disabled people equal access to pools and whirlpools, or at least have a plan in place to acquire a lift. If they don’t, they face possible civil penalties of as much as $55,000.
As Conn Carroll at the Washington Examiner explains, the mandate has taken an even more irrational form than might have been expected. Because the elevator lifts are space-consuming, unsightly, potential hazards to curious children, and unlikely to be used very often, many pool operators assumed it would be enough to purchase a portable lift that could be wheeled over to poolside on user request and stored when not in use. No such luck: the Obama administration has announced that the lifts must not only be of permanent construction, but must apply to each separate “water feature”, so that a pool with adjoining spa would need two of them. “Each lift costs between $3,000 and $10,000 and installation can add $5,000 to $10,000 to the total.” Many budget hostelries are expected to simply shutter their pools until further notice rather than take the risk that entrepreneurial fast-buck artists will begin filing complaints against them for cash settlements, as in California’s notorious ADA filing mills.
I think Carroll probably goes too far when he suggests that the Obama administration made the rules unreasonable in order to give its friends in the ADA bar more litigation to file. The problem is more that this administration (and not just this one) has outsourced its thinking on the law to advocates in the legal academia-disabled rights-”public interest law” community, which tends to embrace interpretations and applications of the law geared to advance ambitious versions of social change. In the pool case, the federal appointee in charge (according to this blog post) was Samuel Bagenstos, who after his stint in the Obama Justice Department has now returned to legal academia, where he is perhaps the leading proponent of expansive ADA interpretation. (His view of abusive ADA suits — he puts the term “abusive” in quotation marks — is here.) Academia’s other best-known advocate of an expansively interpreted ADA (and a drafter of the law) is Chai Feldblum of Georgetown Law, who serves the Obama administration as head of the Equal Employment Opportunity Commission.
Don’t look to Republicans for relief on this. The Bush administrations both pere et fils were consistently wretched on it, and a large bloc of GOP members of Congress predictably joins the Democrats in opposing legislative ideas for even modest rollback of the ADA’s most extreme applications.
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