Posts Tagged ‘Regulation’

All things considered, I like small businesses more than big businesses.

Not because I’m against large companies, per se, but rather because big businesses often use their political influence to seek unearned and undeserved wealth. If you don’t believe me, just look at the big corporations lobbying for bad policies such as the Export-Import Bank, Dodd-Frank, Obamacare, bailouts, and the green-energy scam.

It’s almost as if cronyism is a business model.

By contrast, the only bad policy associated with modest-sized firms is the Small Business Administration. And I suspect the majority of little firms wouldn’t even notice or care if that silly bit of intervention was shut down.

Rather than seeking handouts, small businesses generally are more focused on fighting back against excessive government.

That’s because taxes and red tape can be a death sentence for a mom-and-pop firm. Literally, not just figuratively.

The Daily News reports on the sad closing of popular restaurant in New York City.

For 25 years, China Fun was renowned…the restaurant’s sudden Jan. 3 closing, blamed by management on suffocating government demands. …“The state and municipal governments, with their punishing rules and regulations, seems to believe that we should be their cash machine to pay for all that ails us in society.” …Albert Wu, whose parents Dorothea and Felix owned the eatery, said the endless paperwork and constant regulation that forced the shutdown accumulated over the years. …Wu cited one regulation where the restaurant was required to provide an on-site break room for workers despite its limited space. And he blamed the amount of paperwork now required — an increasingly difficult task for a non-chain businesses. “In a one-restaurant operation like ours, you’re spending more time on paperwork than you are trying to run your business,” he griped. Increases in the minimum wage, health insurance and insurance added to a list of 10 issues provided by Wu. “And I haven’t even gone into the Health Department rules and regulations,” he added. …“For smaller businesses like China Fun, each little thing that occurs makes it harder,” said Malpass. “Each regulation, each tax — you put it all together and it’s just a hostile business environment.”

This is rather unfortunate, but perhaps it is a “teachable moment.”

There are two things that came to mind as I read this story.

  • First, at some point a camel’s back is broken by too much straw. Politicians often claim that a particular tax or regulation imposes a very small burden. Perhaps that is true, but when you have dozens of taxes and hundreds of regulations, those various and sundry small burdens become very onerous. I’ve made the point before that you don’t need perfect policy for the economy to function. You just need “breathing room.” Well, China Fun ran out of breathing room. A casualty of big government, though it remains to be seen if anyone learns from this experience.
  • Second, complicated taxes and regulations are a much bigger burden for small companies compared to big corporations. Every large firm has teams of lawyers and accountants to deal with tax and regulatory compliance. That’s expensive and inefficient, of course, but such costs nonetheless consume only a very small fraction of total revenue. For small businesses, by contrast, those costs consume an enormous percentage of time, energy, and resources for owners. For all intents and purposes, bad government policy creates a competitive advantage for big firms over small firms.

The moral of the story is that we should have smaller government. Not just lower taxes (and simpler taxes), but also less regulation and red tape.

Not just because such policies are good for overall economic performance, but also because small businesses shouldn’t be disadvantaged.

P.S. Since we’re on the topic of how government tilts the playing field in favor of big companies (at least the corrupt big companies), let’s enjoy some humor on that topic.

Starting with Uncle Sam’s universal bailout application form. And we also have the fancy new vehicle from Government Motors.

Read Full Post »

More than two years ago, I shared a couple of humorous images showing the languorous lifestyle of lazy bureaucrats.

While those images were amusing, they didn’t really capture the true nature of bureaucracy.

For a more accurate look at life inside Leviathan, here’s a video showing an unfortunate woman trying to get a permit from a government agency.

It should probably be accompanied by a trigger warning lest it cause flashbacks for readers who have been in the same situation.

Very well done, I think you’ll agree. I especially like the subtle features of the video, such as the bureaucrat’s competitive desire to show his coworker that he won’t let a mere citizen prevail. And the part at the end showing the disappointment by all the bureaucrats also was a good touch.

Sadly, the story in the video isn’t just satire.

First, there are many absurd rules that require people to get permission from bureaucrats in order to work. All those laws and rules should be repealed. If consumers value certification and training, that can be handled by the private sector.

Second, it does seem as if bureaucrats relish the opportunity to torment taxpayers. I recall having to make four trips to the DMV when helping my oldest kid get his learner’s permit. Each time, I was told an additional bit of paperwork that was required, but at no point was I told all the forms and paperwork needed. Hence I had the pleasure of waiting in lines over and over again.

Though I did learn as time passed. By the time my last kid needed his permit, it only took two trips.

Since we’re on the topic of bureaucrat humor, regular readers know about the Bureaucrat Hall of Fame. Well, just as the Baseball Hall of Fame has a committee that looks back in time to find players who were overlooked and deserve membership, we need something to recognize deserving bureaucrats who somehow escaped my attention.

And if we travel back in time to 2013, John Beale of the Environmental Protection Agency clearly can make a strong case that he belongs in the Hall of Fame.

The EPA’s highest-paid employee and a leading expert on climate change was sentenced to 32 months in federal prison Wednesday for lying to his bosses and saying he was a CIA spy working in Pakistan so he could avoid doing his real job. …Beale told the court…that he got a “rush” and a “sense of excitement” by telling people he was worked for the CIA. …He perpetrated his fraud largely by failing to show up at the EPA for months at a time, including one 18-month stretch starting in June 2011 when he did “absolutely no work,” as his lawyer acknowledged in a sentencing memo filed last week.

Though, in his defense, he wasn’t goofing off all the time.

He also spent time trying to learn about new ways to hinder the private sector.

…he used the time “trying to find ways to fine tune the capitalist system” to discourage companies from damaging the environment. “I spent a lot of time reading on that,” said Beale.

For what it’s worth, he probably spent most of his time figuring out how to bilk colleagues.

Nor was that Beale’s only deception, according to court documents. In 2008, Beale didn’t show up at the EPA for six months, telling his boss that he was part of a special multi-agency election-year project relating to “candidate security.” He billed the government $57,000 for five trips to California that were made purely “for personal reasons,” his lawyer acknowledged. (His parents lived there.) He also claimed to be suffering from malaria that he got while serving in Vietnam. According to his lawyer’s filing, he didn’t have malaria and never served in Vietnam. He told the story to EPA officials so he could get special handicap parking at a garage near EPA headquarters. …Beale took 33 airplane trips between 2003 and 2011, costing the government $266,190. On 70 percent of those, he traveled first class and stayed at high end hotels, charging more than twice the government’s allowed per diem limit. But his expense vouchers were routinely approved by another EPA official

Not surprisingly, the EPA took years to figure out something was amiss.

After all, why care about malfeasance when you’re spending other people’s money?

Beale was caught when he “retired” very publicly but kept drawing his large salary for another year and a half.

Heck, I’m surprised the EPA’s leadership didn’t award themselves bonuses for incompetence, like their counterparts at the VA and IRS.

P.S. Here’s a new element discovered inside the bureaucracy, and a letter to the bureaucracy from someone renewing a passport.

Read Full Post »

It’s time to channel the wisdom of Frederic Bastiat.

There are many well-meaning people who understandably want to help workers by protecting them from bad outcomes such as pay reductions, layoffs and discrimination.

My normal response is to remind them that the best thing for workers is a vibrant and growing economy. That’s the kind of environment that produces tight labor markets and more investment, both of which then lead to higher pay.

Even statists sort of understand that this is true, but it’s sometimes difficult to get them to grasp the implications. They oftentimes are drawn to specific forms of government intervention, even if you explain that there are adverse unintended consequences.

Let’s explore this issue further.

In a column for the New York Times, Megan McGrath writes about a big new mining project in a remote part of Australia that “has the potential to create 10,000 jobs.” While that’s obviously good news, she worries that the company “will repeat the mistakes made by companies during the last mining boom by using workplace practices that hurt workers and their families.”

And what are these mistaken “workplace practices”? Apparently she thinks it is terrible that workers don’t want to move to the outback and instead prefer to continue living in cities and suburbs. So she think it is bad that they fly in for multi-week shifts, stay in temporary housing, and then fly back (at company expense) to their homes.

Employees…fly to remote mines from major cities to work weeks at a time, and fly home for several days off before starting the cycle again. These so-called fly-in, fly-out jobs, which offer hefty pay, are widely known here as “fifo.” At the peak of the boom in 2012, …more than 100,000 of these held fifo positions.

Though it seems these workers are making very rational decisions on how to maximize the net benefits of these positions.

…fifo workers in the last boom were young, undereducated men lured by salaries that far surpassed what they could earn for similar work outside the industry — up to $100,000 a year to shift earth and drive trucks. The average full-time mining employee in 2016 earned $1,000 more per week than other Australians.

So what’s the downside? Why are workers supposedly being exploited by these lucrative jobs?

According to McGrath, the mining camps don’t have a lot of amenities.

…fifo life comes at a steep price. The management in many mines controls the transient workers’ schedules — setting times for meals, showers and sleep. The workers often can’t visit nearby towns and recreational facilities such as gyms and swimming pools because of a lack of transportation. Many employees have to share beds. They work 12-hour shifts, seven days a week, up to three weeks at a time.

That doesn’t sound great, but this also explains why the mining companies have to pay a boatload of money to attract workers. This is a well-established pattern that is familiar to labor economists. If working conditions are unpalatable, then employers have to compensate with more remuneration.

But Ms. McGrath doesn’t think workers should get extra cash. She would rather the mining company compensate workers indirectly.

A lot can be done to improve life in the camps. Shorter swings would help workers maintain bonds with their families. More stable living situations, with less sharing of living spaces, would increase a sense of value and belonging. Workers should be encouraged to visit nearby towns to reduce their isolation. The Adani megamine could be in operation for 60 years, experts say. Roads for the mine and the region should be improved so employees can move with their families to existing townships and drive to work.

Of course, she doesn’t admit that she wants workers to get less cash compensation, but that would be the real-world impact of her proposed policies.

She says that the mining companies should “put people ahead of profits.” But that’s a vacuous statement. Projects like this new mine only exist because investors expect to earn a return. Otherwise, they wouldn’t take the enormous risk of sinking so much capital into such endeavors.

All this new investment is good news for unemployed or under-employed Australians since they’ll now have an opportunity to compete for jobs that pay very well, particularly for workers without a lot of education.

By the way, if workers really valued all the things that are on Ms. McGrath’s list, the company would offer those fringe benefits instead of higher wages. But that’s obviously not the case. The market has spoken.

By the way, I can’t resist pointing out that she also does not understand tax policy. In a sensible system, companies calculate their taxable profit by adding up their total revenue and then subtracting all their costs. What’s left is profit, a slice of which is then grabbed by government.

But that’s not enough for Ms. McGrath. She apparently believes that mining companies shouldn’t be allowed to subtract many of the costs associated with so-called fifo workers when calculating their annual profit. I’m not joking.

Mining companies are encouraged through tax incentives to use the transient workers. Some costs associated with a fifo worker — meals, transportation and airline tickets — can be claimed as production expenses, helping to lower a company’s tax bill.

I hope the Australian government isn’t dumb enough to buy this argument. Allowing a firm to subtract costs when calculating profit is simply common sense. And if doesn’t matter if those costs reflect fifo costs, investment expenditures, luxury travel, or band costumes.

For what it’s worth, if the government does get pressured into forcing companies to pay tax on these various business expenses, one very safe prediction is that the net effect will be to lower the wages offered to workers. Or, if the mandates, taxes, and regulations reach a certain level, the business will simply close down or new projects will be abandoned.

And those options obviously are not good news for workers.

Let’s now shift from the specific example of fifo workers to the broader issue of labor regulation. What happens if governments listen to people like Ms. McGrath and impose all sorts of rules that prevent flexible labor markets? According to recent scholarly research from three European economists, the consequence is more unemployment.

They start by pointing out that European nations with mandates and red tape have a lot more unemployment (particularly when the economy is weak) than countries with lightly regulated labor markets.

The Great Recession has brought a substantial increase in unemployment in Europe. Overall, unemployment rate in the euro area has grown from 8 percent in 2008 to 12 percent in 2014. The change in unemployment has been very heterogenous. In northern Europe, unemployment did not grow substantially or even fell: in Germany, for example, unemployment rate has actually declined from 7 to 5 percent. At the same time, in Greece unemployment has grown from 8 to 26 percent, in Spain — from 8 to 24 percent, and in Italy — from 6 to 13 percent. Why has unemployment dynamics been so different in European countries? The most common explanation is the difference in labor market institutions that prevents wages from adjusting downward. If wages cannot decline, negative aggregate demand shocks (such as the Great Recession) result in growth of unemployment.

The three economists wanted some way to test the impact of regulation, so they looked at the labor market for immigrants in Italy since some of them work in the formal (regulated) economy and some of them work in the shadow (unregulated) economy.

While this argument is straightforward, it is not easy to test empirically. Cross-country studies of labor markets are subject to comparability concerns. The same problems arise in comparing labor markets in different industries within the same country. In order to construct a convincing counterfactual for a regulated labor market, one needs to study a non-regulated labor market in the same sector within the same country. This is precisely what we do in this paper through comparing formal and informal markets in Italy over the course of 2004-12. We use a unique dataset, a large annual survey of immigrants working in Lombardy carried out by ISMU Foundation since 2004. …Our data cover 4000 full-time workers every year; one fifth of them works in the informal sector. The dataset is therefore sufficiently large to allow us comparing the evolution of wages in the formal and in the informal sector controlling for occupation, skills and other individual characteristics.

And what did they find?

In the absence of regulation, labor markets can adjust. The bad news for workers is that they get less pay. But the good news is that they’re more likely to still have jobs.

Our main result is presented in Figure 1. We do find that the wage differential between formal and informal sector has increased after 2008. Moreover, while the wages in the informal sector decreased by about 20 percent in 2008-12, the wages in the formal sector virtually did not fall at all. This is consistent with the view that there is substantial downward stickiness of wages in the regulated labor markets. …we find that both before and during the crisis, undocumented immigrants (those without a regular residence permit) are 9 percentage points more likely than documented immigrants to be in the labor force

Here’s the relevant chart from the study.

And here are some concluding thoughts from the study.

…despite the substantial growth of unemployment in 2008-12, the wages in the formal labor market have not adjusted. In the meanwhile, the wages in the unregulated informal labor market have declined substantially. The wage differential between formal and informal market that has been constant in 2004-08 has grown rapidly in 2008-12 from 18 to 35 percentage points. …These results are consistent with the view that regulation is responsible for lack of wage adjustment and increase in unemployment during the recessions.

For what it’s worth (and this is an important point), this helps explain why the Great Depression was so awful. Hoover and Roosevelt engaged in all sorts of interventions designed  to “help” workers. But the net effect of these policies was to prevent markets from adjusting. So what presumably would have been a typical recession turned into a decade-long depression.

So what’s the moral of the story? Good intentions aren’t good if they lead to bad results. Which brings me back to my original point about helping workers by minimizing government intervention.

Read Full Post »

Since yesterday’s column was a look back on the good and bad things of 2016, let’s now look forward and speculate about the good and bad things that may happen in 2017.

I’m not pretending any of this is a forecast, particularly since economists have a miserable track record in that regard. Instead, the following lists are simply things I hope may happen or fear may happen.

We’ll start with the things I want.

  • Reform of healthcare entitlements – Republicans in 2017 will control Congress and the White House, so they’ll have the power to fix our broken entitlement system and dramatically improve America’s long-run outlook. And since the House and Senate GOPers have voted for budgets that presume much-need structural changes to Medicare and Medicaid, that bodes well for reform. The wild card is Donald Trump. He said some rather irresponsible things about entitlements during the campaign, which suggests he will leave policy on autopilot (which is not a good idea when we’re heading for a fiscal iceberg). On the other hand, politicians oftentimes disregard their campaign commitments (remember Obama and “you can keep your doctor“?), especially when they get in power and finally take a hard look at budget numbers. Perhaps the most optimistic sign is that Trump has appointed Budget Committee Chairman Congressman Tom Price to be Secretary of the Department of Health and Human Services and Congressman Mick Mulvaney to be Director of the Office of Management and Budget.  I very much hope Trump seriously addresses the health entitlements.
  • A lower corporate tax rate, “expensing,” and repeal of the death tax – During the campaign, Trump proposed a very large tax cut. With Republicans controlling both ends of Pennsylvania Avenue, some sort of significant tax cut should be feasible. It’s highly unlikely that Trump will get everything he wants, but the three items at the top of my wish list are lowering the corporate tax rate, ending the tax code’s bias against new investment by replacing punitive “depreciation” rules with “expensing,” and repeal of the death tax. Those reforms would have the strongest impact on long-run growth. And the icing on the cake would be a repeal of the state and local tax deduction, which subsidizes high-tax states such as California, Illinois, New York, and New Jersey (I’d also like to see repeal of the healthcare exclusion, but I’m focusing on things that might actually happen in 2017 rather than what’s on my fantasy list).
  • Regulatory reform – The tentacles of the regulatory octopus are stifling the American economy. There’s no single fix for this problem. The overall system for approving regulations should be changed (I will write on the “REINS Act” in a few days), but that’s a partial solution for future red tape. To deal with the existing burden of red tape, a different set of answers will be necessary, including sensible political appointees so that bureaucrats will have a harder time pushing for regulations that are needlessly expensive and misguided and instead will be charged with undoing existing red tape. In some cases (Dodd-Frank, Obamacare, etc), it will be necessary to change current law in order to roll back regulatory excess.
  • Italian default – I’m not hoping for Italy to face a fiscal crisis, but it almost certainly will happen in the near future. The nation’s demographic decline, combined with its bloated welfare state, are a horrible recipe. And while it’s theoretically possible to avert a mess by capping spending and fixing programs (just as it is still possible to fix the mess in Greece), I don’t think good policy is very likely. So Italy will soon face a fiscal crisis and the real question is whether there’s a good response. Ideally, if this happens in 2017, Italy will be allowed to default (presumably because Trump’s representative at the International Monetary Fund vetoes any sort of bailout). This will mean, a) the people and institutions who were silly enough to lend money to a profligate government will suffer losses, making them more prudent in the future, b) Italy will lose the ability to borrow more money, putting an end to additional red ink, c) Italian politicians will be forced to immediately balance the government’s budget, which hopefully means genuine budget cuts, and d) the Italian people will (hopefully) realize that a system based on looting and mooching can no longer be maintained.

Now here’s a list of things I’m afraid may happen.

  • Punting on entitlement Reform – As noted above, the wild card for any sort of genuine entitlement reform is Donald Trump. If he decides to to be President Santa Claus by appeasing various interest groups (like the previous GOPer in the White House), then reform will be dead. Simply stated, House and Senate Republicans will not push good changes without support from the White House. But that’s only a partial worst-case scenario. Trump may choose to be like the previous Republican President and actually expand entitlements (perhaps by borrowing a page from Elizabeth Warren’s playbook and expanding Social Security). If Trump decides to punt (or, gulp, make things worse), that has very grim implications. Reform will be dead for at least eight years (either because Trump gets reelected or because he’s replaced by a Democrat who also opposes reform) and the longer we wait to address the problem, the harder it will be to save America from a Greek fiscal future.
  • A “Poison Pill” in tax reform – While there is a great opportunity to fix some of the biggest warts in the internal revenue code, I worry that lawmakers will include some bad revenue raisers to help “pay for” the good provisions. I don’t think there’s any danger (at least for 2017) of a value-added tax, but the plan from House Republicans includes a “border adjustable”/”destination based” tax on imports (known as a DBCFT) that is not only protectionist, but could eventually morph into a VAT. A smaller tax cut without a DBCFT would be better than a bigger tax cut with a DBCFT.
  • An infrastructure boondoggle – It appears that some sort of infrastructure plan will be approved in 2017. I wrote last year to suggest three guidelines for the incoming Trump Administration on this issue, but I fear that this initiative will become a typical DC feeding frenzy. Lots of spending with no accountability.
  • Italian bailout – If the inevitable Italian fiscal crisis occurs in 2017, the worst possible outcome would be a Greek-style bailout. That approach has several undesirable implications. It will a) exacerbate moral hazard by rewarding the investors who bought Italian bonds, b) it will enable Italian politicians to incur more debt, and c) it will enable the Italian people to continue thinking that big government is good because someone else is paying for it. To be sure, because there’s so much more debt involved, bailing out Italy will be much harder than bailing out Greece. But so long as the corrupt and venal IMF plays a role, it’s always prudent to assume the worst policy will be imposed.

I hope all readers have a happy new year. And I hope. for the sake of America and the rest of the world, that the first half of today’s column is more accurate than the second half.

Read Full Post »

I’ve always viewed Ayn Rand’s most famous novel, Atlas Shrugged, as a warning about the dangers of over-regulation, over-taxation, and excessive redistribution.

I won’t spoil the plot for those who haven’t yet read the book, but it’s basically a storyWelfare State Wagon Cartoons about what happens to a society when the people pulling the wagon decide that’s no longer how they want to spend their lives.

And as these highly productive people begin to opt out, politicians come up with ever-crazier ideas of keeping the economy going.

The most absurd example, something that could only happen in a dystopian work of fiction rather than real life, was “Directive 10-289,” an edict from the government to prevent continued contraction by requiring everybody in the economy to do exactly the same thing next year that they did this year. This meant no changing jobs. No starting new companies. No closing down existing companies. No changes in pay. Or employment. No changes in anything. Freeze the economy at current levels.

In other words, take Nixon-style wage and price controls and apply them to every bit of economic activity.

Unfortunately, some politicians think Atlas Shrugged is a direction manual rather than a warning. In Montreal, they’ve come up with a crazy idea to apply a version of Directive 10-289 to the restaurant industry. I’m not joking. In a column for Reason, Baylen Linnekin explains this surreal new policy.

…lawmakers in Montreal have moved to crack down on new restaurants, in an odious attempt to protect existing ones. “Montreal has one of the highest restaurant per-capita ratios in North America and the amount of places to eat is worrying local politicians,” reads a Canadian Press piece from earlier this week. …Data shows Montreal trails only New York City in terms of restaurants per capita in North America. As in New York City, that competition is great for Montreal’s consumers. But it puts pressure on incumbent restaurateurs. So lawmakers have decided to side with the latter.

The new law isn’t quite as bad as Directive 10-289, but it’s guided by the same attitude: Everything that exists now should be preserved and what’s new is bad.

…a ban on new restaurants from opening within 25 meters of an existing one along the city’s Rue Notre Dame… Notably, the action comes as “a number of commercial and retail properties remain empty” in this same part of Montreal. The law “risk[s] turning the city’s restaurant scene into a heavily bureaucratized nightmare like the province’s construction industry,” says the head of Quebec’s restaurant association

So who could possibly support such an initiative?

Unsurprisingly, the greatest enemies of genuine capitalism aren’t just politicians, but also incumbent firms that don’t want competition.

…some protectionist restaurateurs support the measure. “In Montreal you can apply for a restaurant permit and get it immediately—that’s a problem for me” says David McMillan, a supporter of the restrictions, whose high-end restaurant, Joe Beef, is an intended beneficiary of the ban. He’s not alone. “I don’t believe in the free market anymore,” says restaurateur Carlos Ferreira. “We have to protect the good restaurants.”

Gee, I thought consumers were the ones who were supposed to determine which restaurants are good. But Mr. Ferreira wants politicians and bureaucrats to now have the power.

Though we shouldn’t mock the Canadians too much. After all, Barack Obama imposed a version of Directive 10-289 in the United States.

Heck, he must be a big fan of Atlas Shrugged because he also mimicked another part of the book.

Of course, there are some cities, and even entire nations, that apparently want to replicate everything in Ayn Rand’s classic novel.

And the results in these real-world experiments are similar to what happens in the book. Except the book actually has a happy ending, whereas there’s little reason to be optimistic for a rebirth of freedom in places such as Greece and Venezuela.

P.S. John Stossel and Charles Murray have interesting things to say about Atlas Shrugged.

Read Full Post »

I routinely grouse about the heavy economic cost of red tape.

I’ve also highlighted agencies (such as the EEOC) that seem especially prone to senseless regulations.

And I’ve explained why private regulation actually is a very effective way of promoting health and safety.

Today, let’s get specific and look at the Food and Drug Administration. This bureaucracy ostensibly is supposed to protect us by making sure drugs and medical devices are safe and effective before getting approval, which seems like it might be a reasonable role for government.

But the FDA routinely does really foolish things that undermine public health. The likely reason is that the bureaucracy has a bad incentive structure. As Professor Alex Tabarrok has explained.

…the FDA has an incentive to delay the introduction of new drugs because approving a bad drug (Type I error) has more severe consequences for the FDA than does failing to approve a good drug (Type II error). In the former case at least some victims are identifiable and the New York Times writes stories about them and how they died because the FDA failed. In the latter case, when the FDA fails to approve a good drug, people die but the bodies are buried in an invisible graveyard.

This video from Learn Liberty looks at some data on how the FDA’s Type II errors have led to thousands of deaths, but mostly focuses on whether people and medical professionals should have the freedom to makes choices different from what the FDA has officially blessed.

It’s also worth mentioning that the process of drug approval is jaw-droppingly expensive, as Professor Tabarrok noted in another column.

It costs well over a billion dollars to get the average new drug approved and much of that cost comes from FDA required clinical trials. Longer and larger clinical trials mean that the drugs that are eventually approved are safer. But longer trials also mean that good drugs are delayed. And the more expensive it is to produce new drugs the fewer new drugs will be produced. In short, longer and larger trials mean drug delay and drug loss.

The FDA bureaucracy can’t even approve things it already has approved. There was a big controversy a few months ago about the EpiPen, which is a very expensive device that auto-injects medication to people suffering severe allergic reactions.

But the device is only costly because the FDA is hindering competition, as noted by the Wall Street Journal.

Epinephrine is a basic and super-cheap medicine, and the EpiPen auto-injector device has been around since the 1970s. Thus EpiPen should be open to generic competition, which cuts prices dramatically for most other old medicines. Competitors have been trying for years to challenge Mylan’s EpiPen franchise with low-cost alternatives—only to become entangled in the Food and Drug Administration’s regulatory afflatus. …the FDA maintains no clear and consistent principles for generic drug-delivery devices like auto injectors or asthma inhalers. …injecting a kid in anaphylactic shock with epinephrine…is not complex medical engineering. But no company has been able to do so to the FDA’s satisfaction.

Research from the Mercatus Center reveals that the FDA imposes ever-higher costs and gets ever-higher budgets, but also how the bureaucracy fails to deliver on its obligation to facilitate innovation.

The expense of putting drugs and devices through this system is almost unimaginable. The cost of bringing low- to medium-risk 510(k) medical devices to market averages $31 million, $24 million (75 percent) of which is dedicated solely to attaining FDA approval within an average of about six months. Any significant improvement to the device requires reapplication. For higher-risk medical devices where there may be significant health gains, the costs are about $94 million, $75 million (80 percent) of which is dedicated to attaining FDA approval. For drugs, the situation is much worse. It costs an average of $2.6 billion simply to get a drug through the FDA process and onto the market. This does not include postmarket monitoring, the terms of which are laid out by FDA upon approval. These costs have increased from about $1 billion between 1983 and 1994. …we continue to increase the funding and authority for FDA and assume that we will somehow boost innovation in medical products (drugs and devices) despite the growing obstacles. This has not happened. …Congress continues to increase funding for FDA through both the general fund and industry user fees…with the hope that performance goals and additional funding would increase FDA’s performance and lead to an increase in innovations. …but FDA finds strategic ways to narrowly meet each goal while frustrating the original goal of improving health outcomes through innovation.

By the way, the FDA also does really bone-headed things. I’ve previously written about the bureaucracy’s war against unpasteurized milk (including military-style raids on dairies!). Now the bureaucrats think soldiers shouldn’t be allowed to get cigars.

The Wall Street Journal has the details of this silly nanny-state intervention.

You might think GIs in Iraq and Afghanistan have enough to worry about with Islamic State and the Taliban. But it turns out they’ve also got a problem called the Food and Drug Administration. In August a new FDA rule went into effect that forbids tobacco makers and distributors from handing out free samples. Some companies that have been donating cigars to service members for decades have now stopped for fear that this is now illegal. The FDA nuttiness has attracted the attention of Rep. Kathy Castor, a Democrat who represents Florida’s 14th district, which includes “Cigar City,” or Tampa. She has introduced a bill to “reinstate the tradition of donating cigars to our military members to provide them with a taste of home while deployed.” Her press release notes that cigars are the “second-most requested item” from troops overseas. …cigars for service members is in question because it’s a proxy for the political war on tobacco, but the first casualty is common sense. The FDA’s bureaucrats are happy to have U.S. soldiers, sailors, airmen and Marines dodge bullets overseas but they’re horrified they might relax by lighting up a stogie.

But the nanny-state war against soldiers enjoying cigars is downright trivial compared to the deadly impact of the FDA’s attack on vaping.

Jacob Sullum of Reason outlines some of the horrifying details.

The Food and Drug Administration’s e-cigarette regulations, which took effect last week, immediately struck two blows against public health. As of Monday, companies that sell vaping equipment and the fluids that fill them are forbidden to share potentially lifesaving information about those products with their customers. They are also forbidden to make their products safer, more convenient, or more pleasant to use. The FDA’s censorship and its ban on innovation will discourage smokers from switching to vaping, even though that switch would dramatically reduce the health risks they face. That effect will be compounded by the FDA’s requirement that manufacturers obtain its approval for any vaping products they want to keep on the market for longer than two years. The cost of meeting that requirement will force many companies out of business… All of this is unambiguously bad for consumers and bad for public health. Yet the FDA took none of it into account…the Family Smoking Prevention and Tobacco Control Act…gave the FDA authority over tobacco products, a category to which it has arbitrarily assigned tobacco-free e-cigarettes, even when they contain nicotine that is not derived from tobacco or no nicotine at all. …A brief that 16 advocates of tobacco harm reduction filed last week in support of Nicopure’s lawsuit notes that the cost of the FDA’s regulations will far outweigh their benefit if they cause even a small percentage of vapers to start smoking again or deter even a small percentage of current smokers from switching. That’s because of the huge difference in risk between e-cigarettes and the conventional kind (at least 95 percent, according to the Royal College of Physicians)… The FDA acknowledges that its regulations might also harm public health by retarding the substitution of vaping for smoking. But it does not include that cost in its analysis, deeming it too speculative. The FDA literally assigns zero value to the lives of smokers who would have quit were it not for the agency’s heavy-handed meddling.

Oh, I suppose I also should mention that FDA red tape is responsible for the fact that Americans have a much more limited selection of condoms than Europeans.

I’m sure there’s a good joke to be made about the bureaucrats screwing us in ways that interfere with us…um…well, you know.

Let’s wrap up with some tiny bits of good news. First, Arizona’s Goldwater Institute has been remarkably successful in getting states to adopt “Right to Try” laws that give seriously ill people the right to try investigational medications.

Sadly, those laws will have limited use until there’s also reform in Washington. Fortunately, there’s some movement. Here’s a video from a congressional hearing organized by Senator Johnson of Wisconsin.

Here’s a second item that sort of counts as good news.

If there is one silver lining to the dark cloud of FDA incompetence, it’s that the bureaucrats haven’t figured out how to criminalize those who use drugs for “off-label” purposes (i.e., for reasons other than what was approved by the government). A good example, as reported by the New York Times, is a tooth desnsitizer that’s only been recently approved by the FDA (after being available for decades in nations such as Japan), and already dentists are using it to fight cavities.

Nobody looks forward to having a cavity drilled and filled by a dentist. Now there’s an alternative: an antimicrobial liquid that can be brushed on cavities to stop tooth decay — painlessly. The liquid is called silver diamine fluoride, or S.D.F. It’s been used for decades in Japan, but it’s been available in the United States, under the brand name Advantage Arrest, for just about a year. The Food and Drug Administration cleared silver diamine fluoride for use as a tooth desensitizer for adults 21 and older. But studies show it can halt the progression of cavities and prevent them, and dentists are increasingly using it off-label for those purposes. …Silver diamine fluoride is already used in hundreds of dental offices. Medicaid patients in Oregon are receiving the treatment…it’s relatively inexpensive. …The noninvasive treatment may be ideal for the indigent, nursing home residents and others who have trouble finding care. …But the liquid may be especially useful for children. Nearly a quarter of 2- to 5-year-olds have cavities

Since I’m not familiar with the history of the FDA, I wonder whether the bureaucrats have ever tried to block medical professionals from using drugs and devices for “off-label” purposes.

Let me close with one final point. Our leftist friends aren’t very interested in reforming the FDA.

Instead, they argue that the big problem is greedy pharmaceutical companies and suggest European-style price controls.

That could save consumers money in the short run, I’m sure, but it would gut the incentive to develop new medications.

One expert looked at the Rand Corporation estimates that such policies would lead to a decline in life expectancy of 0.7 years by 2016. He then crunched the numbers and concluded that the aggregate impact would be worse thing to ever happen. Even worse than the brutality of Mao’s China.

…let me put this in context. In 2060 there will probably be 420 million Americans and 523 million Europeans. And suppose that whatever changes we make in drug regulations today last for one human lifespan, so that everybody has a chance to be 55-60. So about a billion people each losing about 0.7 years of their life equals 700 million life-years. Since some people live in countries outside the US and Europe [citation needed] and they also benefit from First-World-invented medications, let’s round this up to about a billion life-years lost. What was the worst thing that ever happened? One strong contender is Mao’s Great Leap Forward, in which ineffective agricultural reforms and very effective purges killed 45 million people. Most of these people were probably already adults, and lifespan in Mao’s China wasn’t too high, so let’s say that each death from the Great Leap Forward cost what would otherwise be twenty healthy life years. In that case, the worst thing that has ever happened until now cost 45 million * 20 = 900 million life-years. Once again, RAND’s calculations plus my own Fermi estimate suggest that prescription drug price regulation would cost one billion life-years, which would very slightly edge out Communist China for the title of Worst Thing Ever.

I guess the bottom line is that the FDA is a typical regulatory agency, both incompetent and expensive. But if the statists have their way, things could get a lot worse.

P.S. While the regulatory burden in the United States is stifling and there are some really inane examples of silly rules such as the FDA’s war on vaping, I think Greece and Japan win the record if you want to identify the most absurd specific examples of red tape.

P.P.S. Here’s what would happen if Noah tried to comply with today’s level of red tape when building an ark. And here’s some clever anti-libertarian humor about deregulated breakfast cereal.

P.P.P.S. Just in case you think regulation is “merely” a cost imposed on businesses, hopefully today’s column drives home that red tape can have terrible consequences for human health. And don’t forget that bureaucratic red tape is the reason we’re now forced to use inferior light bulbs, substandard toilets, second-rate dishwashers, and inadequate washing machines.

Read Full Post »

Last year, I explained the theoretical argument against antitrust laws, pointing out that monopoly power generally exists only when government intervenes.

Now it’s time to consider a real-world example from the private sector and ask whether we should be concerned about monopoly power. ATT and Time Warner have announced a merger, a step that has triggered lots of hand-wringing by politicians.

But as I explain in this interview for a British news outlet, the expanded company won’t have any power or ability to coerce me, particularly so long as politicians don’t create any “barriers to entry” to hinder the entry of new competitors to the market.

The Skype connection became garbled for a few seconds at the end of the interview, but I think my point about the misuse of antitrust laws was reasonably clear.

Suffice to say that allowing politicians and bureaucrats to have any authority over mergers is a recipe for abuse and corruption as companies try to use antitrust laws to sabotage their competitors.

Let’s see what some experts have written on this topic. And we’ll start by looking at the big picture. Writing for Bloomberg, Professor Tyler Cowen points out that antitrust laws often don’t make sense.

Reading through old cases does not induce great faith in the contemporary usefulness of 19th- and 20th-century antitrust laws. …For instance, the famous suits against Standard Oil, Kodak and Alcoa wouldn’t make sense in today’s globalized economy. …In 1998, the U.S. Justice Department initiated an antitrust suit against Microsoft, partly on the grounds that the company sought to extend its market power to browsers. Few people today think the company’s Internet Explorer browser failed because the government restored competitiveness; Firefox and Google built better software. Yet prosecutors spent years distracting the talent of one of America’s most successful companies, as they had with IBM earlier in a 13-year case dropped in 1982.

And he points out how monopoly power often is created by government intervention and regulation.

…there is a strong case that growing concentration in the hospital market has raised health-care costs. Some major metropolitan areas have only a small number of hospital chains. Part of the problem is that highly regulated environments encourage consolidation and larger firms to deal with compliance costs… Cable television is another area where anti-monopoly remedies might be appropriate, but keep in mind that cable is typically a government-created local monopoly.

Now let’s look at he specific case of the ATT/Time Warner merger.

Holman Jenkins of the Wall Street Journal is not impressed by those who want government interference. And he shares my disdain for the way influence peddlers in Washington are the big beneficiaries of antitrust laws.

…this week’s proposed merger of AT&T and Time Warner is eliciting opposition that is ferocious, idiotic and almost contentless. …tens of thousands of people in Washington make their living by extracting rents from companies going about their business and trying to adapt to besetting waves of technological and market change. …Unwisely, Silicon Valley mostly sat out 2014’s epic battle over the Obama administration’s desire to impose antique utility regulation on broadband. Its argument: Who cares? Technology will swamp the regulators with broadband ubiquity anyway, so why pick a fight…the Valley’s naïfs may discover they have underestimated the power of bureaucratic perversity and political indifference to things that would actually serve the public good. One way to look at the inevitable torture AT&T is about to undergo at the hands of Washington’s regulators: It will be the first test of the libertarian-optimist theory that technology is more powerful than a bloody-minded bureaucrat.

Last but not least, Paula Dwyer’s Bloomberg column takes a dim view of those who want the heavy foot of government to second guess the invisible hand of the market.

Donald Trump and Bernie Sanders, wearing their populist stripes, want regulators to block it outright. …the politicians’ concerns are overblown. …Antitrust, of course, is meant to protect consumers from the higher prices and reduced choices that result when a company has market power. But a merged AT&T and Time Warner are in different industries, and their merger wouldn’t affect ownership concentration. Nor would it result in the loss of a competitor from the market.

And she points out the dismal history of antitrust enforcement.

…think back to 1974 to the original AT&T antitrust case, which also began from a fear of vertical integration. …For sure, AT&T had a monopoly, but it was created and sanctioned by the federal government. All that was needed was a government deregulation order and a green light that it wouldn’t block competitors. Instead, the U.S. sued to break up Ma Bell. …If the U.S. had simply deregulated plain old telephone service, any one of these technologies could have forced AT&T to adjust or disappear. The U.S.’s 1998 antitrust case against Microsoft had much the same fighting-the-last-war problem. …while the Justice Department was fixating on browsers and operating systems, the personal computer was losing market share to laptops, which lost out to tablets and which are now being overtaken by smartphones. While Microsoft was bogged down with the Windows case, which it eventually settled in 2001 on favorable terms to the company, a new generation of tech giants — Google, Facebook, Amazon — took flight. The lesson is that a technology or media conglomerate’s dominance these days is almost certainly transitory.

In other words, let the merger proceed. It may be a wise business decision. Or it may be a foolish business decision.

But that outcome should be determined by the preferences of consumers in a competitive marketplace.

The heavy foot of government shouldn’t play a role. Especially since, as noted by this cartoon, antitrust laws are so broad and vague that companies can get in legal trouble for charging more than their competitors, less than their competitors, and the same as their competitors.

P.S. If this information hasn’t been sufficient to make you skeptical about antitrust laws, then also keep in mind that the European Commission’s tax shakedown of Apple is based on antitrust policy rather than tax policy.

Read Full Post »

Older Posts »

%d bloggers like this: