June 30, 2015 10:15 AM
Today, CEI published my white paper, “Reimagining Surface Transportation Reauthorization: Pro-Market Recommendations for Policy Makers.” In it, I lay out the case for making some small but important changes to federal surface transportation policy.
Traditionally, free market fiscal conservatives have advocated for devolving all federal highway and transit programs to the states. To be sure, we at CEI support this eventual goal. Unfortunately, it is wholly unrealistic at this time. But there are still things that can be done to move closer to this direction. We suggest a strategy of “de facto devolution,” which basically involves keeping federal spending steady while increasing the flexibility of states to fund and finance their own highways. To accomplish this, we recommend the following changes to federal highway policy:
- Repeal the current federal prohibition on states tolling their own Interstate segments for reconstruction purposes, codified at 23 U.S.C. § 129.
- Uncap or greatly increase the national cap on private activity bonds, currently set at $15 billion, codified at 26 U.S.C. § 142(m)(2)(A).
- Provide technical and financial assistance to states looking to launch their own mileage-based user fee pilot programs.
With respect to mass transit, most free market fiscal conservatives have long and correctly held that transit is an inherently local issue. As such, it has no business receiving federal funding, let alone the current 1/5 share of total federal surface transportation spending—especially given the fact that mass transit accounts for less than 2 percent of person trips nationwide. You read that correctly: the federal government currently spends 1/5 of its surface transportation dollars on a mode that accounts for 1/50 of person trips.
The federal politics of mass transit could be described as an unfortunate mix of parochial and ideological interests battling over non-federal issues. Given that serious federal mass transit spending cuts are at the moment politically difficult, fiscal conservatives and proponents of sound national transportation policy should embrace some more modest goals to rationalize federal mass transit policy. We recommend the following changes to federal mass transit policy:
- Work to end Highway Trust Fund bailouts and raise public awareness of the huge discrepancy between transit funding and transit use—that 19 percent of federal surface transportation funding is currently directed to a mode that accounts for less than 2 percent of trips nationwide.
- Roll existing discretionary transit grants programs such as New Starts into the Urbanized Area Formula Program.
- Realign spending priorities to a fix-it-first-strategy by allowing federal transit funds to be used for maintenance projects.
Read the whole white paper here.
June 29, 2015 2:43 PM
The clock is ticking on the Export-Import Bank’s upcoming reauthorization. For the larger part of the past eight decades, Ex-Im’s existence has continued unchallenged and generally conceded as just another example of “the way Washington works.” However, this year is different. Bipartisan support for closing Ex-Im, and ending its crony practices, has grown to an all-time high. Here are the top 5 reasons why it’s time to finally close the Ex-Im for good.
Ex-Im’s policy is to secure financing for companies that might not be able to secure it in the open marketplace. But that actually isn’t Ex-Im’s only mandate. Ex-Im only secures financing when the benefiting company has a high likelihood of paying back the debt. Companies that meet the former criteria may fail to be eligible under the latter, and vice versa. Companies with the high likelihood to pay back debt probably wouldn’t run into problems securing financing in the first place. In theory and in practice, Ex-Im’s dual mandate is nothing short of a massive contradiction.
There’s a reason Ex-Im is called “Boeing’s Bank”. It’s because over 40% of Ex-Im’s business “invests” in Boeing. In fact, the top 10 companies financed by Ex-Im swallowed up 76% of its entire 2013 budget. Sound like cronyism to you too? Ex-Im may call itself “pro-business,” but pro-market advocates know what’s behind the curtain.
June 29, 2015 2:14 PM
The big news from last week was the Supreme Court’s King v. Burwell decision, which upheld the IRS’ right to issue regulations directly contradicting legislation passed by Congress and signed by the president. But other agencies also issued more than 60 new regulations covering everything from cotton farmers’ conduct to infant formula.
On to the data:
- Last week, 64 new final regulations were published in the Federal Register, after 81 the previous week.
- That’s the equivalent of a new regulation every two hours and 38 minutes.
- So far in 2015, 1,511 final regulations have been published in the Federal Register. At that pace, there will be a total of 3,071 new regulations this year, which would be several hundred fewer rules than the usual total of 3,500-plus.
- Last week, 1,343 new pages were added to the Federal Register, after 1,542 pages the previous week.
- Currently at 36,780 pages, the 2015 Federal Register is on pace for 74,757 pages.
- Rules are called “economically significant” if they have costs of $100 million or more in a given year. Thirteen such rules have been published so far this year, two in the past week.
- The total estimated compliance cost of 2015’s economically significant regulations ranges from $1.50 billion to $1.57 billion for the current year.
- 125 final rules meeting the broader definition of “significant” have been published so far this year.
- So far in 2015, 261 new rules affect small businesses; 37 of them are classified as significant.
June 25, 2015 2:40 PM
This morning, the U.S. Supreme Court ruled for the Obama administration in King v. Burwell, upholding the legality of health insurance tax credits for people in the 36 states that haven’t set up insurance exchanges under Obamacare. Chief Justice John Roberts wrote for the Court, while Justice Antonin Scalia dissented, joined by Justices Alito and Thomas.
Unlike the major Obamacare case decided by the Supreme Court in 2012, NFIB v. Sebelius, today’s decision in King doesn’t concern the law’s constitutionality. Instead, the case challenged an IRS regulation interpreting the meaning of the Affordable Care Act (ACA)—better known as Obamacare. The law says that many low- and middle-income Americans can get “premium assistance” to help them pay for health insurance. This assistance comes in the form of income tax credits, hence the IRS’s involvement.
But according to the ACA provision that explains how the IRS calculates which taxpayers are eligible for tax credits, a person cannot get a tax credit unless she’s enrolled in a health care plan offered by “an Exchange established by the State.” This may sound like a technicality, but it’s actually a very big deal, because Obamacare lets each state (and the District of Columbia) decide whether to set up a health insurance exchange. Only 14 states and D.C. have established their own exchange; in the remaining 36 states, individual health insurance is available through Healthcare.gov, an exchange run by the federal government.
Despite the plain language of the law, the Court decided that an “Exchange established by the State” actually means “Exchange established by the State or the Federal Government.” The majority reasoned that Congress couldn’t possibly have intended to deny health insurance subsidies—or the individual coverage mandate—in states that opted not to set up their own exchanges. Otherwise, the Court feared that in the 36 states where the federal government runs the exchange, the absence of subsidies would lead to a “death spiral.” Healthy people would forego costlier health insurance, while sicker and older people would keep paying, sending prices higher and higher.
If a state were worried about such a death spiral, however, all it would need to do is establish its own exchange—for which the subsidies would offer an incentive. But the Court rejected the notion that Congress might have actually designed Obamacare to work this way, siding instead with the administration’s position that lawmakers never intended to encourage states to set up their own exchanges by linking them with valuable health insurance subsidies. So the Court rewrote the law, much as it did in NFIB v. Sebelius, which held that the “penalty” Obamacare imposes on people who fail to buy health insurance is actually a “tax.” (Never mind that a bill with the word “tax” in it may not have passed Congress.)
The Court’s explanation for why Congress didn’t really mean what it wrote regarding who can get tax credits is unpersuasive. The majority points to several parts of the Act that would supposedly make no sense if subsidies were available only in states that established their own exchange. But the majority’s version of the law creates irregularities of its own. The dissent identifies several obligations imposed on “an Exchange established by the State” that cannot logically apply to states where the federal government operates the exchange. Instead of reading the law to mean what it says, the Court rewrote the Act’s plain language to avoid some minor oddities.
Moreover, the subsidy provision doesn’t seem to be an accident. As the dissent notes, the very phrase the Court rewrote—“an Exchange established by the State under section 1311”—appears in the Affordable Care Act not once, but seven times. In other parts of the Act, only the word “Exchange” is used. The Court dismissed this aspect of the law as the byproduct of “inartful drafting,” and thus replaces the text Congress actually wrote with words that make more sense to the six Justices in the majority.
June 24, 2015 3:21 PM
Last night, the U.S. House of Representatives passed its version of TSCA reform (H.R. 2576) by a roll call vote of 398 in favor, one opposed, and 34 members not voting. Yesterday, I lamented the fact that this bill was pushed through under suspension of the rules, which is supposed to be for low-cost, non-controversial bills, which is something that TSCA reform certainly is not.
In any case, the issue is very complicated, and I am willing to bet money that many of those members who voted yea could offer few details about this legislation, what it does, or what the impact might be, which to some extent remains an enigma.
That said, one principled member who dared to vote against this legislation deserves some praise. Rep. Tom McClintock (R-Calif.) apparently did his homework and had very good reasons for voting no. I contacted his office to inquire why he would be willing to vote nay, while 398 of his colleagues voted yea. His staff sent me the following statement, which outlines many of the reasons that I am also very skeptical that this legislation will do any good:
This is a well-intentioned bill that accomplishes the opposite of what it is designed to do. Its purpose is to expedite and standardize the evaluation of toxic chemicals. Instead, it grants sweeping new powers to the EPA, removes the consideration of cost when conducting a risk evaluation, removes the “least burdensome regulation required” standard from current law, dedicates an unaccountable revolving fund in the Treasury for EPA evaluations, and still allows states to adopt more stringent standards. Thus, it greatly increases the burdens on low-regulatory states without easing the burdens on high-regulatory states.
Wow, he says it all in a nutshell! In particular, the elimination of the requirement that EPA consider and apply the “least burdensome regulation” is critical. That standard holds regulators accountable and ensures that they don’t do more harm than good or impose more burdens than necessary, all while protecting public health.
Kudos to Tom McClintock (and his staff) for doing his homework and having the courage to take a tough, principled stand. He’s a rare breed among politicians.
June 24, 2015 10:55 AM
The United States, along with many other countries, is adopting the Basel III capital standards for banks. The Basel standards are complicated, and they require different levels of capital financing (i.e., stock ownership) for different kinds of assets. The general rule is that more risky investments are required to be financed with a higher proportion of capital. Less risky assets have lower capital standards. In other words, the required mix of liabilities—owners’ equity and borrowing—used to finance assets changes with the expected risk of those assets.
Since the Basel standards were written by governments with some help from the world’s major banks, they naturally give favorable treatment to government debt held by banks. In fact, the risk-weighted capital requirement for U.S. Government debt or U.S. Government-backed debt is zero. If a bank holds nothing but U.S. Government debt or U.S. Government-backed debt, it could in theory be financed with no capital under the risk-weighting approach! This is limited in practice, however, by additional leverage-based capital requirements that do not use risk weights. Regardless, the Basel III standards clearly give banks an incentive to invest in more government debt and government-backed securities then they would without this preferential treatment. By investing in government-backed debt, banks can artificially increase their profits per unit of ownership (return on equity).
Enter the Ex-Im. If a bank makes a loan to a foreign firm to buy U.S. products, Ex-Im can step in and guarantee that debt. The full faith and credit of the U.S. government attaches to Ex-Im guarantees, eliminating any commercial or other risk the bank has taken on. Courtesy of Ex-Im, the bank now holds a risk-free asset with a greater return than other risk-free assets. In addition, the Basel rules let the bank be funded with less capital because of the government’s support for the Ex-Im-backed loan. That lets the bank generate higher profits relative to its stock, artificially boosting bank owner profits by putting taxpayers on the hook if the loans go bad.
In this way, the Export-Import bank is a corporate welfare program not just for exporters, but also for banks.
June 23, 2015 4:00 PM
The process of lawmaking is often compared to sausage making: an unpalatable job that produces a palatable result. It’s easy to agree with the first part of that analogy, but in politics, the result isn’t always pleasant.
Today, U.S. House of Representatives is scheduled to “suspend the rules” and pass its version of reform to the Toxic Substances Control Act (TSCA). This cursory approach is another example of the suspension of reason that has plagued the entire TSCA debate, the result of which remains ambiguous at best.
June 23, 2015 10:43 AM
Ten years ago today, the U.S. Supreme Court issued a 5-4 decision upholding the City of New London, Connecticut’s “right” to condemn Connecticut homeowners’ properties, transfer them to a state-created entity called the New London Development Corporation, which would then transfer those properties to a private developer of a planned mixed-use redevelopment project aimed at supporting an adjacent Pfizer research facility. (Land of the free, right?) At issue was the interpretation of the Fifth Amendment’s Takings Clause “public use” standard.
The Court relied primarily on three previous cases involving the “public use” standard:
Berman v. Parker (1954)—This case upheld the right of municipalities to declare entire areas blighted, even if the parcel in question isn’t blighted. It also accepted Washington, D.C.’s argument that the area condemnation was necessary to prevent future blight. An all-around terrible decision.
Hawaii Housing Authority v. Midkiff (1984)—This case involved the redistribution of land titles in Hawaii. When the state moved to seize the properties, 49 percent of land in Hawaii was controlled by government and 47 percent was controlled by 72 private owners. The Court failed to recognize the central problem with land distribution in Hawaii at the time: almost half of the property was controlled by government, which created massive real estate market distortions—in addition to Hawaii’s odd economic history. While Justice Sandra Day O'Connor wrote the majority opinion in Midkiff, she also wrote a scathing dissent in Kelo, where she regretted her broad language in the Midkiff ruling that opened the door for a terrible opinion like Kelo.
Ruckelshaus v. Monsanto Co. (1984)—This case involved chemical industry trade secrets. While it was solely about intellectual property, the Court argued that this case was relevant because it dealt with public use in a purely economic context. The enormous distinctions between intellectual property and real property were lost on the majority in Kelo.
The result was the majority definitively watering down “public use” to a weak “public purpose” standard, leaving us with a “public purpose” standard that can be satisfied in the following situation: the government condemns your house in order to transfer it to a private developer, which the government expects the property will be put to higher use under the planned redevelopment and thus will increase its tax base. Think that couldn’t happen in the U.S.? Well, it did and was supported by the majority of the Supreme Court in Kelo.
June 23, 2015 6:55 AM
Many people believe U.S. companies should export as much as possible, and buy imports only when necessary. Adam Smith called this balance-of-trade obsession “mercantilism,”acidly noting in The Wealth of Nations that “in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer.”
Or, as Milton Friedman put it more recently, “imports are the goods and services we get to consume without having to produce; exports are the goods and services we produce, but don’t get to consume.”
Right now, the U.S. runs a current account deficit, popularly called the trade deficit, of $40.9 billion. That means Americans are importing more than they export. Trade balancers would instead prefer a current account surplus. A major part of the Export-Import Bank’s mission is to move the trade balance in that direction.
As it turns out, there is an easier way to shift America’s balance of trade towards exports that does not require an Export-Import Bank at all. First, fill a container ship with American-made goods. Then, send it out to sea. Once it leaves U.S. territorial waters, the goods count as exports in official statistics.
Before the ship reaches port overseas, have the crew sink the ship (and escape safely, of course). As far as U.S. trade balance statistics are concerned, the best place for all those goods is the ocean floor. That way they cannot be exchanged for imports.
The point is that exports are not automatically a good thing, and the Export-Import Bank’s mission in this regard is misguided.
June 22, 2015 4:05 PM
(Note: What follows is a hyperlinked version of the introductory paragraphs to the chapter of the same name in the new Fraser Institute/Mercatus Center book What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity, edited by Donald J. Boudreaux.)
When policymakers neglect federal regulation, they ignore arguably the greatest element of governmental influence in the United States’ economy and perhaps in society itself. One cannot prove it, but it would be no great surprise to find the regulatory enterprise to constitute a greater bulk than federal spending. As a policy concern, regulation merits attention like the $18 trillion national debt receives. This essay provides a roadmap for focusing attention on regulation.