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Posts Tagged ‘Regulation’

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.

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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.

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Beginning in the 1970s and 1980s, the federal government (as well as other governments around the world) began to adopt policies based on the idea that crime could be reduced if you somehow could make it very difficult for criminals to use the money they illegally obtain. So we now have a a bunch of laws and regulations that require financial institutions to spy on their customers in hopes that this will inhibit money laundering.

But while the underlying theory may sound reasonable, such laws in practice have been a failure. There’s no evidence that these laws, which impose heavy costs on business and consumers, have produced a reduction in criminal activity.

Instead, the only tangible result seems to be more power for government and reduced access to financial services for poor people.

And now we have even more evidence that these laws don’t make sense. In a thorough study for the Heritage Foundation, David Burton and Norbert Michel put a price tag on the ridiculous laws, regulations, and mandates that are ostensibly designed to make it hard for crooks to launder cash, but in practice simply undermine legitimate commerce and make it hard for poor people to use banks.

Oh, and these rules also are inconsistent with a free society. Here are the principles they say should guide the discussion.

The United States Constitution’s Bill of Rights, particularly the Fourth, Fifth, and Ninth Amendments, together with structural federalism and separation of powers protections, is designed to…protect…individual rights. The current financial regulatory framework is inconsistent with these principles. …Financial privacy can allow people to protect their life savings when a government tries to confiscate its citizens’ wealth, whether for political, ethnic, religious, or “merely” economic reasons. Businesses need to protect their private financial information, intellectual property, and trade secrets from competitors in order to remain profitable. Financial privacy is of deep and abiding importance to freedom, and many governments have shown themselves willing to routinely abuse private financial information.

And here are the key findings about America’s current regulatory morass, which violates the above principles.

The current U.S. framework is overly complex and burdensome… Reform efforts also need to focus on costs versus benefits. The current framework, particularly the anti-money laundering (AML) rules, is clearly not cost-effective. As demonstrated below, the AML regime costs an estimated $4.8 billion to $8 billion annually. Yet, this AML system results in fewer than 700 convictions annually, a proportion of which are simply additional counts against persons charged with other predicate crimes. Thus, each conviction costs approximately $7 million, potentially much more.

By the way, the authors note that their calculations represent “a significant underestimate of the actual burden” because they didn’t include foregone economic activity, higher consumer prices for financial services, lower returns for shareholders of financial institutions, higher financial expenses for unbanked individuals, and other direct and indirect costs.

And what are the offsetting benefits? Can all these costs be justified?

Hardly. David and Norbert point out that we’re all paying more and getting very little in return for the higher burdens.

The original goal of the BSA/AML rules was to reduce predicate crimes, such as illegal drug distribution, rather than money laundering itself. Judged by this standard, very little empirical evidence suggests that the rules have worked as designed. In fact, even though BSA/AML rules have been expanded consistently throughout the past four decades, it remains difficult to discern any net benefit of the overall BSA/AML regulatory framework. Even though there is no clear evidence that the rules materially reduce crime, the BSA/AML bureaucracy began relentlessly expanding internationally—primarily through the Financial Action Task Force (FATF)—more than two decades ago. One comprehensive study reports that even though the FATF proceeds as if these rules have produced only public benefits, “[t]o date there is no substantial effort by any international organization, including the International Monetary Fund, to assess either the costs or benefits of” this regulatory framework. In fact, BSA/AML regulations have been sharply criticized as a costly, ineffective approach to reducing crime. …compliance costs are high for financial companies, with a disproportionate burden falling on smaller firms…, where hiring even one additional employee can lower the return on assets by more than 20 basis points. Other research suggests that the increasing compliance burden in the banking industry is at least partly responsible for the trend toward consolidation and the disappearance of smaller banks. …an American Bankers Association (ABA) publication highlights a small bank that reports it has to dedicate more than 15 percent of its employees to compliance-related tasks. An ABA survey also suggests that the cumulative cost associated with compliance has caused banks to offer fewer services and raise fees, thus harming consumers. …the BSA/AML regime has been a highly inefficient law enforcement tool. At the very least, a high degree of skepticism about further expansion of these and similar requirements is in order. Given the billions of dollars spent annually by the private sector on the existing elaborate and costly AML bureaucracy, a serious data-driven cost-benefit analysis of the existing system is warranted.

If anything, I think they’re being too nice.

The cost-benefit analysis already exists. The laws and regulations don’t work.

Let’s expand our look at the issue. The Wall Street Journal notes that the current approach has myriad negative consequences as banks sever relationships with customers (in a process called “derisking”) because they don’t want to deal with the hassle, expense, and liability of money-laundering red tape.

…financial firms, faced with strict penalties over counterterror and anti-money-laundering rules, have severed accounts of thousands of customers in recent years over fears of heightened risk. The consequences of shuttered accounts were detailed this week in a Wall Street Journal investigation showing how money-transfer firms whose bank accounts have been closed have been pushed out of the global banking system. In addition, nonprofit organizations operating in Syria and Lebanon have faced challenges after losing their bank accounts. …In February of this year, more than 50 nonprofits asked the U.S. Treasury to publicly affirm that nonprofit organizations aren’t inherently high risk. …Two studies by the World Bank in late 2015 found that money-service businesses—which include money transmitters—and foreign banks were both seeing account closures at increasing rates.

Amen.

This process has made life much more difficult for people and businesses seeking to engage in legitimate commerce.

Not to mention that the government abuses the enormous powers it has accumulated, as we can see from the Obama Administration’s odious “Operation Choke Point.”

Another report from the WSJ explains that the rules actually make it harder for law enforcement to monitor the people who might actually be doing bad things.

U.S. banks have closed thousands of accounts held by people and organizations considered suspicious, high-risk or difficult to monitor—including money-transfer firms, foreign banks and nonprofits working abroad. Closing accounts for fear their customers may be up to no good evicts from the financial system the innocent as well as those the U.S. government would most like to watch, a consequence not anticipated by Washington. Comptroller of the Currency Thomas Curry this month acknowledged the potential danger. “Transactions that would have taken place legally and transparently may be driven underground,” he told an international conference of bankers and regulators in Washington. …Fearing steep financial penalties for failing to spot a wayward customer, many banks now shun anyone who looks risky. That leaves ostracized companies to seek alternatives—such as toting bags of cash overseas—a practice that allows hundreds of millions of dollars to leave the global banking system… “The whole flow of money goes underground, and that becomes counterproductive to the original purpose of being able to track” it, said Dilip Ratha, head economist of the World Bank’s unit that studies remittances. “It’s a bit paradoxical.” U.S. officials said they didn’t intend banks to close whole categories of customer accounts.

So potential bad guys are harder to track.

And financial institutions waste lots of money (which translates into higher costs for consumers).

Risky accounts should be managed, officials said, not avoided altogether. …Western Union said it now spends $200 million a year watching for suspicious activity… J.P. Morgan Chase & Co….now has about 9,000 employees dedicated to anti-money-laundering and has cut off thousands of customers viewed as higher-risk. …Jaikumar Ramaswamy, a Bank of AmericaCorp. compliance executive and former federal prosecutor, said, “I’m surprised at how much of my time is spent not focusing on the guilty but chasing the innocent.” Instead of looking for needles in haystacks, he said, the system demands banks “turn over every piece of hay.”

The good news is that some nations are looking to adopt a more rational approach, as evidenced by this Bloomberg report from 2015.

The U.K. government said it will look to relax anti-money laundering controls as part of a plan to save British companies 10 billion pounds ($15.4 billion) over the next five years. …The government said it wants to protect the country without putting “disproportionate burdens” on legitimate businesses. …“This new review is about making sure the rules we have to protect our strong financial services industry from abuse are not unintentionally holding back new and existing British business,” Business Secretary Sajid Javid said. “I want firms to come forward and tell us where regulation is unclear or its enforcement ineffective.”

Though, as reported by the Times, the U.K. government has a bizarrely inconsistent approach to these issues. Even to the point of threatening to steal people’s property unless they can somehow prove that it was purchased with innocent money.

People who amass suspicious quantities of wealth in Britain will be ordered to prove that it was not obtained through corruption, under proposals being considered by the Home Office. New “unexplained wealth orders”, which would reverse the burden of proof to compel the recipient to justify the source of the questionable cash.

Sigh.

Here’s a novel idea. Why doesn’t law enforcement engage in actual, old-fashioned police work. In other words, instead of having costly burdens imposed on everybody, governments should use the approach which historically has successfully reduced crime – i.e., policies that increase the likelihood of apprehension and/or severity of punishment.

But don’t hold your breath waiting for that to happen.

Instead, we actually get politicians and policy makers coming up with schemes to expand the burden of money laundering laws. Some of them want to ban the $100 bill, or perhaps even ban cash entirely. All so government can more closely monitor the private financial choices of innocent people.

If you want more information, here’s a video I narrated on this topic for the Center for Freedom and Prosperity.

Last but not least, let’s return to the Heritage study, which includes this very important warning about a very risky and dangerous treaty that may be considered by the U.S. Senate.

…the willingness to impose costs on the private sector and to violate the privacy interests of ordinary people should be less in the case of information sharing for tax purposes than for the purposes of preventing terrorism or crime. Moreover, tax-information-sharing programs are quite often a veiled attempt to stifle tax competition from low-tax jurisdictions. Tax competition is salutary and limits the degree to which governments can impose unwarranted taxation. …The U.S. Senate is currently considering the “Protocol Amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters,” which would impose a wide variety of new information-reporting requirements on financial institutions to help foreign governments collect their taxes. A second treaty—worse than this protocol—is the follow-on OECD treaty known as the “Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information.” This follow-on treaty implements both the protocol and the 311-page OECD “Standard for Automatic Exchange of Financial Account Information in Tax Matters.” Together, the protocol, the Multilateral Competent Authority Agreement, and the OECD Standard constitute the three main parts of a new automatic information-exchange regime being promoted by the OECD and international tax bureaucrats. If the U.S. ratifies the protocol and implements the new OECD standard, Washington would automatically, and in bulk, ship private financial and tax information—including Social Security and other tax identification numbers—to Argentina, China, Colombia, Indonesia, Kazakhstan, Nigeria, Russia, and nearly 70 other countries. In other words, foreign governments that are hostile to the U.S., corrupt, or have inadequate data safeguards, would automatically have access to private financial (and other) information of some U.S. taxpayers and most foreigners with accounts in the U.S.

A truly awful pact. And keep in mind it also would be the genesis of a World Tax Organization.

P.S. Since we closed by discussing the intersection of tax and money laundering, I should point out that statists frequently demagogue against so-called tax havens for supposedly being hotbeds of dirty money, but take a look at this map put together a few years ago by the Institute of Governance and you’ll find only one low-tax jurisdiction among the 28 nations listed.

P.P.S. You probably didn’t realize you could make a joke involving money laundering, but here’s one starring President Obama.

P.P.P.S. But when you look at the real-world horror stories that result from these laws, you realize that the current system on money laundering is no laughing matter.

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Frederic Bastiat, the great French economist (yes, such creatures used to exist) from the 1800s, famously observed that a good economist always considers both the “seen” and “unseen” consequences of any action.

A sloppy economist looks at the recipients of government programs and declares that the economy will be stimulated by this additional money that is easily seen, whereas a good economist recognizes that the government can’t redistribute money without doing unseen damage by first taxing or borrowing it from the private sector.

A sloppy economist looks at bailouts and declares that the economy will be stronger because the inefficient firms that stay in business are easily seen, whereas a good economist recognizes that such policies imposes considerable unseen damage by promoting moral hazard and undermining the efficient allocation of labor and capital.

We now have another example to add to our list. Many European nations have “social protection” laws that are designed to shield people from the supposed harshness of capitalism. And part of this approach is so-called Employment Protection Legislation, which ostensibly protects workers by, for instance, making layoffs very difficult.

The people who don’t get laid off are seen, but what about the unseen consequences of such laws?

Well, an academic study from three French economists has some sobering findings for those who think regulation and “social protection” are good for workers.

…this study proposes an econometric investigation of the effects of the OECD Employment Protection Legislation (EPL) indicator… The originality of our paper is to study the effects of labour market regulations on capital intensity, capital quality and the share of employment by skill level using a symmetric approach for each factor using a single original large database: a country-industry panel dataset of 14 OECD countries, 18 manufacturing and market service industries, over the 20 years from 1988 to 2007.

One of the findings from the study is that “EPL” is an area where the United States historically has always had an appropriately laissez-faire approach (which also is evident from the World Bank’s data in the Doing Business Index).

Here’s a chart showing the US compared to some other major developed economies.

It’s good to see, by the way, that Denmark, Finland, and the Netherlands engaged in some meaningful reform between 1994-2006.

But let’s get back to our main topic. What actually happens when nations have high or low levels of Employment Protection Legislation?

According to the research of the French economists, high levels of rules and regulations cause employers to substitute capital for labor, with low-skilled workers suffering the most.

Our main estimation results show an EPL effect: i) positive for non-ICT physical capital intensity and the share of high-skilled employment; ii) non-significant for ICT capital intensity; and (iii) negative for R&D capital intensity and the share of low-skilled employment. These results suggest that an increase in EPL would be considered by firms to be a rise in the cost of labour, with a physical capital to labour substitution impact in favour of more non-sophisticated technologies and would be particularly detrimental to unskilled workers. Moreover, it confirms that R&D activities require labour flexibility. According to simulations based on these results, structural reforms that lowered EPL to the “lightest practice”, i.e. to the US EPL level, would have a favourable impact on R&D capital intensity and would be helpful for unskilled employment (30% and 10% increases on average, respectively). …The adoption of this US EPL level would require very largescale labour market structural reforms in some countries, such as France and Italy. So this simulation cannot be considered politically and socially realistic in a short time. But considering the favourable impact of labour market reforms on productivity and growth. …It appears that labour regulations are particularly detrimental to low-skilled employment, which is an interesting paradox as one of the main goals of labour regulations is to protect low-skilled workers. These regulations seem to frighten employers, who see them as a labour cost increase with consequently a negative impact on low-skilled employment.

There’s a lot of jargon in the above passage for those who haven’t studied economics, but the key takeaway is that employment for low-skilled workers would jump by 10 percent if other nations reduced labor-market regulations to American levels.

Though, as the authors point out, that won’t happen anytime soon in nations such as France and Italy.

Now let’s review an IMF study that looks at what happened when Germany substantially deregulated labor markets last decade.

After a decade of high unemployment and weak growth leading up to the turn of the 21th century, Germany embarked on a significant labor market overhaul. The reforms, collectively known as the Hartz reforms, were put in place in three steps between January 2003 and January 2005. They eased regulation on temporary work agencies, relaxed firing restrictions, restructured the federal employment agency, and reshaped unemployment insurance to significantly reduce benefits for the long-term unemployed and tighten job search obligations.

And when the authors say that long-term unemployment benefits were “significantly” reduced, they weren’t exaggerating.

Here’s a chart from the study showing the huge cut in subsidies for long-run joblessness.

So what were the results of the German reforms?

To put it mildly, they were a huge success.

…the unemployment rate declined steadily from a peak of almost 11 percent in 2005 to five percent at the end of 2014, the lowest level since reunification. In contrast, following the Great Recession other advanced economies — particularly in the euro area — experienced a marked and persistent increase in unemployment. The strong labor market helped Germany consolidate its public finances, as lower outlays on unemployment benefits resulted in lower spending while stronger taxes and social security contribution pushed up revenues.

Gee, what a shocker. When the government stopped being as generous to people for being unemployed, fewer people chose to be unemployed.

Which is exactly what happened in the United States when Congress finally stopped extending unemployment benefits.

And it’s also worth noting that this was also a  period of good fiscal policy in Germany, with the burden of spending rising by only 0.18 percent annually between 2003-2007.

But the main lesson of all this research is that some politicians probably have noble motives when they adopt “social protection” legislation. In the real world, however, there’s nothing “social” about laws and regulations that either discourage employers from hiring people and or discourage people from finding jobs.

P.S. Another example of “seen” vs “unseen” is how supposedly pro-feminist policies actually undermine economic opportunity for women.

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The presidential contest between Clinton and Trump (can we shorten that to “Clump”?) is so depressing that it’s time to distract ourselves with some libertarian humor.

And I’m even willing so share such humor when libertarians are the target of mockery.

We have a new addition to that list. Here’s Ron Paul selling Libertarios, a “deregulated cereal.”

I have to confess that I laughed when I first saw this. The “prizes inside” on the lower left is an especially clever touch.

I suppose I should take this opportunity to explain why “Libertarios” wouldn’t actually exist in a genuine free market.

  • First (and I can’t believe I actually have to explain this), it’s not profitable to poison/kill/nauseate/irritate customers. Investors are not going to sink a bunch of their money (building factories, buying raw materials, marketing, etc) into a cereal without making sure there is some reasonable expectation that the product will be sufficiently attractive to generate a profit.
  • Second, libertarian theory very explicitly embraces the use of the legal system to impose costs and penalties on those who (presumably by accident) do things that cause harm to others. So when mistakes happen (as they will in any system), there is a mechanism for monetary compensation. Perhaps even more important, unfettered markets produce a web of “mutually reinforcing private regulation.”

The bottom line is that people value health and safety, so markets naturally will seek to provide these things. In part because most people are decent human beings. But even if some folks aren’t good, there will be pressure to provide health and safety simply because it’s a way to earn profits and avoid costs.

Some people have a hard time believing this, which is why they embrace command-and-control regulation.

And they periodically cite examples of how mandates and red tape from government are supposedly correlated with good outcomes. One of my favorite examples is the data showing a decline in workplace deaths after the creation of the Occupational Safety and Health Administration. Fans of OSHA think this is a slam-dunk argument showing the benefits of regulation.

Perhaps, but then they need to explain why workplace deaths were consistently falling way before OSHA was ever created. When you look at a chart with long-run historical data, the most obvious conclusion is that the bureaucracy and accompanying red tape hasn’t had any positive impact.

In other words, workplace deaths have been falling for a very long time. Mostly because such tragedies are very bad for the bottom line, and also because societies can afford more health and safety as they get richer.

Went out of business Executives lost jobs Investors lost money Civil penalties imposed

So, yes, laugh at the Libertarios humor, but also keep in mind that in a genuine free market that such a cereal never would exist.

And if it did somehow materialize, the box actually would be accompanied by some additional information (which I have helpfully added since I’m a thoughtful person).

By the way, if you’re still not convinced, take a trip to North Korea, Venezuela, Cuba, or some other statist paradise. I’m sure you won’t be able to get honest data on workplace deaths, but you’ll quickly learn about the limits of command-and-control health-and-safety regulation if you buy a bunch of consumer products.

P.S. Needless to say, I also have a collection of explicitly pro-libertarian humor.

Libertarian Jesus scolding modern statists.

This poster about confused statists.

The libertarian version of a sex fantasy.

The theory and reality of occupational licensing.

Libertarian Star Wars.

I also have lots of anti-big government humor (I especially like these cartoons), but the above list are the jokes and images I have that are based on a purely libertarian perspective.

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I’m a bleeding heart libertarian in that I get most upset about statist policies that make life harder for disadvantaged people so that folks with more money can get undeserved goodies.

  • For instance, I despise anti-school choice leftists because they value political support from teacher unions more than they value opportunity for poor kids.
  • And I get very agitated that about the Export-Import Bank, which is a form of corporate welfare that transfers money from the general population to the rich.

Another example is occupational licensing, which occurs when politicians require newcomers to jump through expensive and/or time-consuming hoops before getting “permission” to provide a good or service. These licensing rules create unjust profits for established businesses by hindering competition, and they are especially burdensome for poor people, all of which is explained in this superb video from the Institute for Justice.

But if there’s a sliver lining to that dark cloud, it’s this image that I will add to my collection of libertarian humor. To be fair, I don’t know if it counts as purely libertarian humor, but I saw it on Reddit‘s libertarian page and it definitely makes the right points.

If you like libertarian humor, both pro and con, click here, here, and here for other examples.

P.S. Let’s close by sharing some good news on a serious topic.

Unlike the short-sighted politicians in the United States, the crowd in Australia seems a bit more level-headed on the issue of competitive corporate taxation. Here are some excerpts from a story in the U.K.-based Guardian.

The Turnbull government has given big business exactly what it wants – a substantial tax cut. It has also extended the Abbott government’s small business tax package by giving small and medium businesses more tax cuts and incentives. …“Our corporate tax rate is high by international standards and well above the average for OECD countries and those in the Asian region,” the budget papers say. “This will make Australian companies more internationally competitive in a tough global market place.” The government plans to cut the corporate tax rate significantly, from 30% to 25%. …The cut will be phased in over 10 years… The treasurer, Scott Morrison, says treasury modelling suggests the measures will grow the economy by 1% over the long term. He says they will lead to higher living standards, via increased business investment and more jobs.

I certainly don’t think “significantly” is a word to describe a modest five-percentage-point reduction in the rate, but kudos to Aussie politicians for moving in the right direction. I also like the part about “treasury modelling,” which suggests that the Australians also have a sensible approach on the issue of static scoring vs. dynamic scoring.

So perhaps now you can understand why Australia is my choice if (when?) the welfare state collapses in the United States (though I’m still of the opinion that the Swiss are the world’s most sensible people).

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If you look at the methodology behind the major measures of economic liberty, such as Economic Freedom of the World and Index of Economic Freedom, you’ll notice that each nation’s regulatory burden is just as important as the overall fiscal burden.

Yet there doesn’t seem to be adequate appreciation for the importance of restraining red tape. I’ve tried to highlight the problem with some very depressing bits of information.

Unfortunately, these bad numbers are getting worse.

We start with the fact that there’s a natural tendency for more intervention in Washington because of the Obama Administration’s statist orientation.

That’s the bad news. The worse news is that this tendency to over-regulate is becoming more pronounced as Obama’s time in office is winding down.

I’ve already opined on the record levels of red tape emanating from Washington, but it’s getting even worse in the President’s final year.

Here’s what the Wall Street Journal recently wrote about the regulatory wave.

…government-by-decree that is making Mr. Obama the most prolific American regulator of all time. Unofficially, Mr. Obama’s Administration has once again broken its own record by issuing a staggering 82,036 pages of new and proposed rules and instructions in the Federal Register in 2015. …That would not only eclipse Mr. Obama’s record of 81,405 set in 2010; it would also give him six of the seven most prolific years of regulating in the history of the American republic. He’s a champion when it comes to limiting economic freedom, and American workers have the slow growth in jobs and wages to prove it. …His Administration is also in a class by itself in issuing de facto rules as “notices” or “guidance” that are ignored by businesses at their peril. …And there’s much more to come.

Amen. The WSJ is correct to link the regulatory burden with anemic economic performance.

As I point out in this interview, red tape is akin to sand in the economy’s gears.

By the way, I can’t resist emphasizing that the Nordic nations, much beloved by Bernie Sanders and other leftists, generally are more free market than the United States on non-fiscal issues.

In other words, they have a more laissez-faire approach on matters such as regulation.

Now let’s try to quantify the cost of all this red tape.

The Washington Examiner reports on some new research.

The price of the Obama administration’s regulatory burden hit just shy of $200 billion last year, or $784 million for every day his government was open for business, according to a new analysis by American Action Forum.

To make matters worse, as I noted in the interview, I very much suspect the bulk of that new regulation was not accompanied by cost-benefit analysis. So the supposed benefits will be small and the actual costs will be high.

Let’s move from the general to the specific. The Heritage Foundation has a list of the worst regulations from last year. Here are some of the highlights, though lowlights would be a better term.

  • …a ban by New Jersey on sales of tombstones by churches — adopted in March at the behest of commercial monument makers.
  • Certain New York restaurants now have to include warnings on their menus about the sodium content in many popular dishes.
  • The Occupational Safety and Health Administration…expanded its mandate in June by declaring that businesses should allow employees to use whichever restroom corresponds to their “gender identity.”
  • …the Environmental Protection Agency and Army Corps of Engineers expanded their own jurisdiction to regulate virtually every wet spot in the nation.

And there are plenty more if you really want to get depressed.

But let’s not dwell on bad news. Instead, we’ll close by highlighting a potentially helpful bit of regulatory reform north of the border. Here are some blurbs from a story in the Washington Examiner.

…look to Canada for lessons from its experiment with regulatory budgeting. What is regulatory budgeting? It’s a process that seeks to use traditional budget concepts to better manage regulatory costs. The goal is to require government departments and agencies to prioritize and manage “regulatory expenditures,”… Regulatory budgeting imposes hard caps on departments and agencies and requires that new regulatory policies fit within their respective budgets. It may not be a silver bullet to the U.S. government’s regulatory profligacy, but with strong political leadership and a proper design, it can arrest the growth of new regulations and bring greater accountability, discipline and transparency to the process. …Departments and agencies are given a “baseline” calculation of regulatory requirements and the costs they impose on individuals and businesses, and then are expected to live within their respective budgets. This means — at least, in the case of the federal experiment — that any new regulatory requirements be offset by eliminating existing ones with equivalent “costs.” An independent, third-party panel verifies the government’s year-over-year compliance.

And it appears this new system is yielding dividends.

Over the past two years, the federal government estimates the system has saved Canadian businesses more than C$32 million in administrative burden, as well as 750,000 hours spent dealing with “red tape.” Most importantly, regulatory budgeting has gradually contributed to a more disciplined regulatory process by rewarding departments and agencies for finding lower-cost options and for making existing requirements smarter and less burdensome.

Hmmm…, maybe I should consider escaping to Canada rather than Australia if (when?) America falls apart.

In addition to this sensible approach on regulatory reform, Canada is now one of the world’s most economically free nations thanks to relatively sensible policies involving spending restraint, corporate tax reform, bank bailouts, the tax treatment of saving, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.

Though things are now heading in the wrong direction, which is unfortunate for our northern neighbors.

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 ones listed above), I think Greece and Japan win the record if you want to identify the most absurd specific examples of red tape.

P.P.S. Though I suspect America wins the prize for worst regulatory agency and most despicable regulatory practice.

P.P.P.S. Here’s what would happen if Noah tried to comply with today’s level of red tape when building an ark.

P.P.P.P.S. Just in case you think regulation is “merely” a cost imposed on businesses, 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.

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