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Video of panel ‘The Financial Crisis Inquiry Commission Report: Five Years Later’

February 05, 2016, 3:14 PM

To mark the fifth anniversary of the Financial Crisis Inquiry Commission report, R Street hosted a Feb. 4 panel featuring commission members Peter Wallison of the American Enterprise Institute and Douglas Holtz-Eakin of the American Action Forum, along with Edward Murphy of the Congressional Research Service, Tom Stanton of Johns Hopkins University and Philip Wallach of the Brookings Institution. R Street’s Alex J. Pollock served as moderator. You can watch video of the full panel below.

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A tale of two sovereigns

February 05, 2016, 1:49 PM

Canute was a king of Denmark who ruled over an empire that included large parts of Sweden, all of Norway and almost all of England. He ruled over person and property alike. He ruled over the land and sought to expand his direct control over the activities of the sea, as well.

Legend has it that, one fine 11th century day, resplendent in royal finery as he stood by the shore, he remarkably issued a command to the tide. He said:

I command you therefore not to rise onto my land.

But, the tide did not heed Canute. Disobediently, the sea disregarded Canute’s admonition, did as it would and rose anyway. Canute responded by announcing to those present:

Let all men know how empty and worthless is the power of kings…

Nine centuries later, the voters of California, invested with collective sovereignty, decided that they would, as much as possible, take direct control over automobile-insurance pricing. Toward that end, through the power of Proposition 103, they commanded insurance rates not to rise in their land. Bolder than King Canute, they even commanded insurance rates to go down! Unlike Canute, however, they set up a huge engineering organization and a system of regulatory dams and dykes to control the flow and rise of prices.

Nearly 30 years later, has the power of the second sovereign been any more noteworthy than the power of the first? No, not really. As outlined in my study entitled “The troublesome legacy of Prop 103,” the measure has expanded the regulatory bureaucracy and associated costs of doing business in California, while doing nothing to reduce insurance fraud or insurance rates. Instead of saving California consumers money, it has yielded only dramatic growth in the regulatory purview of the California Department of Insurance, at immense cost to taxpayers and premium-payers alike.

Yet, the legacy of Prop 103 remains confused. The initiative was passed Nov. 8, 1988. By coincidence, it so happens that Nov. 6 marks the feast of St. Illtyd, the 5th century Welsh abbot who is celebrated for accomplishing what King Canute could not.

Illtyd marched to the shore, drew a line in the sand and prayed for the tide not to wash across his line. Through what has been recorded by church officials as a miracle, Illtyd’s prayer was answered and the tide never crossed the line.

Advocates of Prop 103 have declared the law’s value based upon a similar premise. They claim the mantle of Illtyd, instead of their earned status as inheritors of the legacy of Canute. Like the tide, the underlying activity of markets, the costs that drive them, are immured to the pronouncements of kings and regulators alike. That Canute was frustrated and Illtyd exalted had everything to do with the tide and nothing to do with their pronouncements. But where luck failed to smile upon Canute, it elevated Illtyd to sainthood.

So, too, has it been with the authors of Prop 103. They passed their ballot initiative at a time when insurance cost drivers were ebbing from a high tide and have been able to claim with considerable success the credit for stabilized and reduced auto insurance premiums, in spite of no clear academic consensus to support that claim.

Ultimately, between sovereigns, has the power of the people of California been any more noteworthy in its ability to control insurance rates than was King Canute in his effort to command the tide to stop rising? Yes, but only insofar as the lesson learned by King Canute was less time-consuming and less expensive than the second sovereign’s ongoing effort.

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David Bowie’s legacy on copyright and the future of music

February 05, 2016, 1:13 PM

The following was co-authored by R Street Innovation Policy Director Mike Godwin.

Amid the steady stream of “hot takes” the past few weeks on the legacy of the late great David Bowie, The Washington Post’s Robert Gebelhoff dug up some of the rock legend’s contrarian views on copyright, if only to rebuke them thoroughly.

Gebelhoff’s piece cited a 2002 interview Bowie gave to The New York Times in which he prophesied: “I’m fully confident that copyright…will no longer exist in 10 years, and authorship and intellectual property is in for such a bashing…It’s terribly exciting.”

Exciting though it may have been, Bowie’s prediction obviously has not come to pass, for which Gebelhoff says we should be thankful. In his piece, he notes that strong copyright laws “play an essential role in our creative economy – and have done so for centuries.” He cites as evidence a recent Stanford University/NBER study on how differing laws in Italian city-states led to more operas being produced where copyright was protected.

Bowie has long been an innovator and music visionary, experimenting with early ways to use the Internet to “cybercast” concerts and connect with fans. But it’s important that Bowie wasn’t necessarily seeking the death of copyright (after all, he used it to make a living). Instead, he was paying heed to what digital media already had done to revolutionize copyright-centered industries.

What he got right was detecting traditional copyright industry’s anxiety – the same anxiety that has led them to push successfully for copyright terms to be extended by nearly 580 percent over the last 200 years. Mickey Mouse famously has enjoyed several retroactive copyright term extensions since Walt Disney’s death, though Walt has yet to take advantage of this added incentive.

So why would Bowie, whose fortune and fame owed so much to the music industry, be excited about the end of copyright? The answer is straightforward: as a working, successful musician and producer, he knew as well as anyone that unlimited copyright protection could hinder creation, as well as remunerate it. If you’re a fan of Bowie’s “Young Americans,” you know that part of its power as a song derives directly from its unembarrassed quotation of the Beatles song “A Day in the Life.”

While copyright didn’t disappear in the decade since Bowie’s interview, Bowie was in many ways right about the impending shakeup of the industry. More and more consumers, particularly millennials, are listening to their music on demand through a streaming subscription, rather than purchasing copies a la carte. Remix has become a central technique for new creativity. And heavy-handed copyright can get in its way. Look, for instance, at what future presidential candidate Kanye West did with Ray Charles’ “I Got a Woman.” Bowie’s vision that “music itself is going to become like running water or electricity” turned out to be pretty accurate.

This trend has led to sharply declining revenues from physical sales (except for vinyl, which isdoing fine, thanks to hipsters) and a steadily increasing share for streaming. Digital downloads are still popular and continue to represent a major revenue source for now. As physical formats have fallen out of favor, as Bowie perhaps foresaw, the industry experienced a period of sharp disruption.

The result has been not just depressed global revenues, but also a whole apparatus of production, distribution and retail falling away. As a 2015 study by Midia observed, the narrative of “music industry decline is a label phenomenon.” Which echoes what Bowie saw coming in 2002: “I don’t even know why I would want to be on a label in a few years, because I don’t think it’s going to work by labels and by distribution systems in the same way.”

Of course, the role of our copyright system is not to protect established industries from disruption. Policymakers shouldn’t protect the record store from Apple or the bookstore from Amazon. Our nation’s founders gave Congress a mandate to use copyright to “promote the Progress of Science and useful Arts.” That is, to provide the carrot to spur artistic creation. If we take copyright “incentives” too far, they can undermine artistic freedom by imposing limits on other forms of creative expression and uses of tangible property.

Even the opera study Gebelhoff cites in his piece acknowledges this, as its authors write that “there is no clear evidence” that copyright extension beyond the author’s life span creates meaningful incentives. In fact, they suggest it has little effect “beyond the first five years.” In anarticle about the study, New York University law professor Christopher Jon Sprigman notes that: “[this] conclusion is particularly important because our contemporary debate is usually not whether to have copyright at all, but rather whether to extend already very long copyright terms.”

Bowie was wrong that copyright would end, but he was right that copyright as we know it is under threat. Its foundation, built for an analog age, increasingly struggles to function in the digital one. And its market, warped by decades of heavy-handed government intervention and industry carve-outs, doesn’t know how to operate freely anymore.

That’s why substantial reforms will be inevitable. As Congress slowly moves in that direction, it should be mindful of this lesson: stronger copyright laws don’t automatically incentivize more creative freedom. In fact, they often come at its expense.

Bill legalizing ridesharing moving through West Virginia House

February 05, 2016, 12:45 PM

What a difference a year makes in the world of ridesharing. Just 18 months ago, only one state (Colorado) had passed comprehensive legislation legalizing and regulating the emerging market of transportation network companies like Uber and Lyft. Now we’re down to just a handful of states that have yet to act.

Joining Florida, Pennsylvania, Missouri and New Mexico among states that are seeing renewed legislative pushes in 2016, the majority leader of West Virginia’s House of Delegates has introduced legislation that would authorize the state Department of Motor Vehicles to license TNC drivers and enforce minimum basic requirements for insurance criminal background checks.

H.B. 4228 – the bill from Del. Daryl Cowles, R-Morgan – cleared the House Roads and Transportation Committee earlier this week and now will be sent on to the House Finance Committee. Like other recent bills crafted in the wake of last year’s major inter-industry compromise, the measure provides that insurance requirements can be satisfied either by the driver or the TNC, and sets minimum levels of $50,000 per person and $100,000 per accident for bodily injury, as well as $25,000 for physical damage.

The measure also would clarify that TNC drivers are considered independent contractors under state law, provided both parties agree by contract and the TNC does not prescribe the driver’s hours, territory or forbid drivers from doing other work or driving for rival TNCs. As a result, the law would stipulated that TNCs are not responsible to provide workers’ compensation coverage to drivers.

The West Virginia Legislature came within a hair of passing a similar bill, S.B. 585, during last year’s session. Differing versions of the measure did manage to pass both houses, but the chambers ultimately could not reach a compromise on language prohibiting drivers from discriminating against passengers on the basis of sexual orientation or gender presentation.

Gov. Earl Ray Tomblin, a Democrat, separately introduced a bill during this session, H.B. 4305, that would require TNCs to have a nondiscrimination policy and comply with nondiscrimination laws. Similar generic anti-discrimination language also is included in the Cowles bill, which states:

(a) The transportation network company shall adopt a policy of nondiscrimination with respect to riders and potential riders and notify transportation network company drivers of such policy.

(b) Transportation network company drivers shall comply with all applicable laws regarding nondiscrimination against riders or potential riders.

(c) Transportation network company drivers shall comply with all applicable laws relating to accommodation of service animals.

(d) A transportation network company may not impose additional charges for providing services to persons with physical disabilities because of those disabilities.

 

 

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After latest F-35 setback, time to consider a replacement

February 05, 2016, 9:59 AM

Just when the F-35 Lightning II Joint Strike Fighter project appeared it couldn’t get any worse, it went and did exactly that.

The case study in how not to procure a weapons system has received yet another failing grade. According to a new 48-page report from J. Michael Gilmore, the Pentagon’s director of operational test and evaluation, the version of the F-35 designed for the Marine Corps has not yet demonstrated it is fit to enter combat on its own.

“If in an opposed combat scenario,” Gilmore writes, “the F-35 Block 2B aircraft would need to avoid threat engagement and would require augmentation by other friendly forces.” As reported by Popular Mechanics, the F-35 would require fighter escort because, at high speeds, it can’t actually fire its weapons:

[Gilmore] lists off some of the problems facing…the current version of the F-35 Block 2B, including the fact that the F-35 is unable to deploy weapons or defensive countermeasures while flying at its maximum speed—pilots will need to slow down from the F-35’s max speed of Mach 1.6 to Mach 1.2 or less in order to fire.

Software bugs continue to plague the fighter as well, with 11 out of 12 weapons tested during Block 2B evaluation severely hampered. The software malfunctions, Gilmore writes, “required intervention by the developmental test control team to overcome system deficiencies and ensure a successful event (i.e., acquire and identify the target and engage it with a weapon).

Not only can the F-35 not fire its weapons, but the fighter also has issues with overheating. The F-35’s weapons bay can overheat if the atmospheric temperature exceeds 90 degrees and when the plane is flying at high speeds under 25,000 feet. The way to mitigate the overheating is to open the weapons bay doors. The problem? That compromises the plane’s stealth capabilities, which are its first line of defense.

The Pentagon report also had critiques of the Navy version of the F-35. It said the plane’s current timeline to be ready for full-scale testing by August 2017 is unrealistic. The training simulator originally designed for the plane was scrapped after it was behind schedule and the new one has not yet been authorized. The new recommended target date is now August 2018.

Given these problems and the newly reported ones about the software, it’s probably time for the military to consider the unthinkable: a replacement for the F-35. The military, of course, has no such plans.

The F-35 is a Cold War relic designed to use stealth technology to gain superiority over all enemies, air and ground. The problem with stealth technology is that the Russians and Chinese are on track to beat it. The F-35 would then have to rely on its agility and weapons to win an encounter against an advanced enemy. But the F-35 loses simulated dogfights to older F-16s and cannot see enemies very well at beyond visual range. It is essentially a glorified F-117 stealth bomber.

The National Interest has twice published articles (one in 2014 and one last year, when Canada considered withdrawing from the F-35 program) suggesting replacements for the F-35. The common suggestions are a combination of updated legacy-fleet airframes and foreign airplanes such as the French-made Dassault Rafale and the Swedish-made Saab JAS-39 Gripen. Both articles also recommended ordering more UAVs (Unmanned Aerial Vehicles, aka “drones”) and electronic-warfare-capable aircraft.

The F-35 places American national security at-risk by depleting resources available for other weapons systems and equipment the military needs. It also places American national security at risk by not being about to live up to its “jack-of-all-trades” billing. It’s time for Congress and the Pentagon to begin putting together a plan to replace the F-35 that will save taxpayer money and protect American national security.

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Margin between keeping, removing PITFA from customs bill down to ‘handful of votes’

February 05, 2016, 9:52 AM

From Washington Internet Daily

“It’s somewhere north of 50, but it’s going to come down to a handful of votes.” R Street Institute Executive Director Andrew Moylan told us he’s “cautiously optimistic even though there’s obviously an ongoing effort to strip” PITFA from HR-644. “But, we know what the vote looked like on the House side [for PITFA (HR-235)]. This has passed twice in the last several years on a voice vote so there’s been no significant objection to speak of” in the House, Moylan said. “I don’t think there’s any question that the Senate could easily support this measure on its own but the question is how many people are going to succumb to the temptation to torpedo” passing PITFA as part of HR-644 “in favor of some ploy to carry along a much more controversial” S-698.

What grade does your state get for its insurance regulation?

February 05, 2016, 9:49 AM

From Property Casualty 360

North Carolina went from bad to worse in R Street’s annual rankings of state insurance regulation.

Coming in at No. 49 last year in the R Street Institute’s Insurance Regulation Report Card, the Tar Heel state dropped to No. 50 and received an “F” grade for the second year in a row.

Utah citizens: Internet sales tax system works fine, don’t mess with it

February 05, 2016, 9:46 AM

From NetChoice

“The new NetChoice-Vrge Analytics research finds conclusively that among ordinary Utahns, such proposals are viewed as little more than a power and money grab. These findings largely track the results of 2014 polling conducted by Mercury, which found that Utahns opposed Internet sales tax legislation by a 15-point margin overall, including a 21-point margin among independents.” said Andrew Moylan, executive director, R Street Institute.

 

Cameron Smith talks New Hampshire Primary

February 05, 2016, 9:04 AM

R Street State Programs Director Cameron Smith appeared on the Feb. 4 edition of the Matt Murphy show on 1070 WAPI in Alabama to discuss the GOP Presidential Field, the New Hampshire Primary and Alabama politics. The full audio is below.

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The tension between hedge fund activism and corporate law

February 05, 2016, 8:00 AM

The attached paper was presented at a Jan. 22, 2016 symposium honoring the work of Henry G. Manne, sponsored by the Law & Economics Center at George Mason University School of Law. This is a draft version, while the final will be published in the symposium issue of the Journal of Law, Economics & Policy.

What role is an activist hedge fund to play in the decision-making of a public company? That question is very simple to answer. If a public company is organized as a corporation, which is very likely, and it has not opted out of the default rule that provides managerial control of the company to the board of directors (board), which is even more likely, then, like any other shareholder, the activist hedge fund can, at most, play only a purely advisory role. That is, even if the activist hedge fund yells and screams about the company’s poor performance, publicly insults the current board and executive management or threatens a proxy contest to replace some or all of the current members of the board with its own nominees, it is not provided any decision-making authority under corporate law.

Therefore, the real corporate governance issue that needs to be addressed is the following: to what extent may a board act to reduce an activist hedge fund’s influence in company decision-making? Like defensive measures that are utilized by the board to defend against a hostile bidder, such as the poison pill, this question will ultimately be answered by the judiciary in its statutory interpretation of corporate law’s default rule that provides the board with ultimate management authority. For purposes of this article, that default rule is Delaware General Corporation Law (DGCL) §141(a):

The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.

The judicial review of board decision-making is built on an approach that provides great deference to board authority. For the overwhelming majority of potential fact patterns, this deferential approach enhances the decision-making of public companies and helps move them to shareholder-wealth maximization, the objective of board authority. However, hedge fund activism (HFA), with numerous empirical studies that attests to its role in enhancing shareholder value and target-company performance, legitimately questions the value of that deferential approach in some exceptional, but very important, fact patterns.

The thesis of this article is as follows: the courts will be overly permissive in allowing boards to mute the activities of activist hedge funds unless the courts start to recognize the value of hedge-fund activism (HFA) as a corrective mechanism and thereby feel the need to make an exception to their traditional approach to judicial review: strong deference to board authority. We have already seen evidence of the courts not recognizing the value of HFA in in Third Point LLC v. Ruprecht, a case where the court reviewed with approval a discriminatory poison pill meant to keep an activist hedge fund from winning a proxy contest.

There are four important observations about corporate law that support this thesis. First, the default rules of statutory corporate law explicitly provide the board with unlimited authority to manage the public company. Without modification of this default rule, there is no place for an activist hedge fund in the decision-making of a corporation. Second, the parties to the corporate contract of a public company never modify the board’s statutory authority in any substantive way. The courts understand that this private ordering is being sanctioned by statutory corporate law and will feel compelled to act aggressively to protect board authority. Third, the courts also understand, because of the inherent limitations of being a judge and not a business leader, that the board and its executive officers are in the best position to determine if a corporate decision is wealth-maximizing and feel compelled to defer to their expertise. Fourth, the first three observations imply that when the courts review a board decision, it will provide strong deference to board authority. Therefore, even though it has created fiduciary duties to constrain the unlimited power of the board, it will apply them in a very gentle way. That is, the plaintiffs will have a hard time satisfying the court that the board has breached its duties. The evidence for this is found in the traditional application of the business-judgment rule and the permissive Unocal test. This traditional approach to judicial review includes being restrained in finding a breach in fiduciary duties when the board takes actions meant to mute the activities of an activist hedge fund, even when it is clear that the activist hedge fund is acting as a corrective mechanism in corporate governance.

The discussion that follows, when it references state corporate law, has been pragmatically framed in the context of Delaware corporate law. Delaware is the state where the majority of the largest U.S. companies are incorporated, and its corporate law often serves as the authority that other states look to when developing their own statutory and case law. Therefore, the primary examples are from Delaware, but the thinking is meant to be global in nature.

This article proceeds as follows: Part I briefly describes HFA. Part II describes how HFA operates as a corrective mechanism in corporate governance. This description closely parallels how acquirers seek control to correct managerial inefficiencies. This part closes by providing a theory of shareholder activism that explains how HFA creates value for shareholders and enhances the performance of target companies. This argument has as its foundation Henry Manne’s remarkable article, “Mergers and the Market for Corporate Control.” Manne argued that control of a public company was a valuable asset in and of itself if used to correct managerial inefficiencies. Shareholder activism, such as HFA, can be thought of in the same manner, a valuable asset in and of itself if the purpose of such activism is to correct such inefficiencies. Part III discusses how the judiciary’s traditional approach to the review of board decisions, strong deference to board authority, could potentially be used to reduce the incentives of hedge funds to act as activists. The judiciary could do this by being overly permissive in allowing boards to mute the activities of activist hedge funds. The judiciary’s strong deference to board authority derives from a strong respect for statutory corporate law’s private ordering of authority and its understanding that the board and its management team, not the courts, are the business experts. Part IV discusses the Unocal test as a permissive standard of review and how the application of the test in Third Point conforms to the thesis. Part V concludes with general recommendations on how the courts should handle the review of board actions meant to mute the activities of activist hedge funds.

20+ Conservative Organizations to South Dakota Legislature: Oppose Online Sales Tax Proposal

February 04, 2016, 5:38 PM

February 2, 2016

Dear South Dakota State legislator:

On behalf of our organizations and the millions of citizens we represent, we write in strong opposition to the online sales tax proposal currently being considered in the South Dakota state legislature. This misguided plan (SB 106) would empower South Dakota to collect taxes from businesses with no presence in the state, and would create host of economic, logistic, and Constitutional problems.

Allowing states to assert tax authority on businesses outside their borders is also constitutionally suspect and practically unwise. It’s constitutionally suspect because the interstate commerce clause exists precisely to empower Congress to prevent such activities and because Supreme Court precedent underscores the importance of physical presence. It’s practically unwise because it could subject South Dakota businesses to the tax collectors of states that don’t share your generally conservative governance, like California, New York, and Illinois.

Despite proponents’ claim to the contrary, online sales tax legislation would impose high costs of compliance on businesses, especially small businesses and individual sellers. Keeping constantly-changing rates, bases, and collection methodologies, would be very challenging for remote sellers, and may even prevent some from selling to South Dakota consumers. This is a much higher collection standard than bricks-and-mortar sellers, which are only required to collect at the rate of their physical location.

We oppose efforts to impose tax collection and reporting requirements on businesses without a physical presence in the state, including measures like SB 106 and others like it.

Sincerely,

Ben Lee, South Dakota State Director
Americans for Prosperity

Grover Norquist, President
Americans for Tax Reform

Wayne Brough, PhD, Chief Economist and VP for Research
FreedomWorks

Lisa B. Nelson, CEO
The Jeffersonian Project, an affiliate of the American Legislative Exchange Council

Brandon Arnold, Executive Vice President
National Taxpayers Union

Andrew Moylan, Executive Director and Senior Fellow
R Street Institute

George David Banks, Executive Vice President
American Council for Capital Formation

Sean Noble, President
American Encore

Coley Jackson, President
Americans for Competitive Enterprise

Peter J. Thomas, Chairman
Americans for Constitutional Liberty

Norm Singleton, President
Campaign For Liberty

Timothy H. Lee, Senior Vice President of Legal and Public Affairs
Center for Individual Freedom

Tom Brinkman Jr., Chairman
Coalition Opposed to Additional Spending and Taxes (COAST)

Jessica Melugin, Adjunct Fellow
Competitive Enterprise Institute

Katie McAuliffe, Executive Director
Digital Liberty

Jonathan Haines, Director
Federalism In Action

George Landrith, President
Frontiers of Freedom

Andrew Clark, President
Generation Opportunity

Mario H. Lopez, President
Hispanic Leadership Fund

Seton Motley, President
Less Government

Daniel Garza, Executive Director
The LIBRE Initiative

David Williams, President
Taxpayers Protection Alliance

Judson Phillips, Founder
Tea Party Nation

Labor and Employment Issues: The sharing economy

February 04, 2016, 3:52 PM

From Opportunity America:

Eli Lehrer president, R Street Institute

‘What’s in it for the employer? We need to provide an incentive for employers to participate in a portable benefits system. One way to do that would be to reverse the presumption about who is an employee and who is an independent contractor. As is, courts in many states put the burden on the employer to prove that the worker is an independent contractor. Employers who contribute to a portable benefits fund should not have to prove that. In their case, the burden should be on the worker – if workers want full employee benefits, they should have to prove they are employees.’

How Manhattan made a mockery of Prohibition

February 04, 2016, 2:06 PM

“It should not be forgotten,” writes historian Ellen NicKenzie Lawson, “that one possible derivation of the word Manhattan is the Native-American word manahachtanienk, which translates as ‘place of general inebriation.'” It thus should not surprise that when the federal government imposed Prohibition, New York City became the nation’s biggest scofflaw.

Drinking was a normal daily activity for many city dwellers. The poor drank in rough taverns and the working classes in beer saloons. The rich and learned had opulent clubs like the Union Club (est. 1836) and Century Association (est. 1847) where they could knock back Madeira, Champagne and anything else their bellies desired.

When Prohibition first hit the city in 1920, Mayor John F. Hylan shrugged. “I have never been a drinker or a smoker,” he told a crowd. “But that does not mean I am for Prohibition. I believe in personal freedom.”

Voters replaced Hylan in 1925 with a boozier pol. Jimmy Walker was a carouser and a drinker, whose nocturnal gallivanting earned him the moniker “the night mayor.” Walker advocated policies to make some drinking licit. When that failed, he ignored Prohibition and shamelessly hung out in speakeasies, celebrating the night. But it wasn’t all fun and games during the time of teetotalism. Prohibition unleashed mayhem in Manhattan, as Lawson richly details in “Smugglers, Bootleggers, and Scofflaws” (SUNY Press).

To understand why, one need only consider the basic economics of the matter. Outlawing the supply of goods and services does not demand for those things disappear. Supply instead shifts from licit producer and sellers to illicit ones, who will fight among themselves for market share. The quality of the product may decline, as firms can’t be held unaccountable by either the government or customers.

So it was that the city became riven with gangs, who formed complex syndicates that trafficked in smuggled, illicitly produced and often toxic alcoholic beverages. With 30,000 speakeasies operating and millions of bottles and kegs of drink being consumed, one can only imagine how immense was the untaxed wealth flowing into the pockets of thugs like Big Bill Dwyer and Lucky Luciano.

Manhattan and its fellow boroughs — Brooklyn, Queens, Manhattan, the Bronx and Staten Island — are surrounded by water. Massive amounts of liquor and other strong drinks slipped into the city via ships like the Mazel Tov, which deposited lord-only-knows-how-much liquor. The tugs, barges, tankers and speedboats were joined by trucks and automobiles, which hauled hooch over the spans of new bridges built in the previous few decades. Trains also brought intoxicating drinks to town. Surveying the insanity in 1932, abstemious titan John D. Rockefeller, wrote:

When Prohibition was introduced, I hoped that it would be widely supported by public opinion and the day would soon come when the evil effects of alcohol would be recognized. I have slowly and reluctantly come to believe that this has not been the result. Instead, drinking has generally increased; the speakeasy has replaced the saloon; a vast army of lawbreakers has appeared; many of our best citizens have openly ignored Prohibition; respect for the law has been greatly lessened; and crime has increased to a level never seen before.

New York City was greatly relieved in 1933. Prohibition was abolished, in part, due to the machinations of President Franklin D. Roosevelt (a New Yorker). Legal drinking establishments rapidly opened across the city and the speakeasies died off. The hoodlums shifted into other rackets, with so little moonshine in demand. The prices for drinks went down and the quality went up. People were happy.

The 21st Amendment, to its credit, carved back the federal government’s role in alcohol policy. Its major downside was that it immensely empowered states to regulate the trade of alcohol, an arrangement that runs headfirst into the Constitution’s Commerce Clause.  (Article 1, Section 8, Clause 3). Like most states, New York erected all sorts of protectionist, anti-trade and often corrupt policies that inhibit the free trade of alcohol among the states, to say nothing of within them. That, however, is a subject for another day.

New poll echoes R Street finding that Utah residents oppose Internet sales taxes

February 04, 2016, 1:36 PM

WASHINGTON (Feb. 4, 2016) – A new poll released today shows that Utah residents overwhelmingly oppose Internet-sales-tax collection schemes at the federal and state level that would require online businesses to collect and file taxes with up to 46 states.

When Utah residents were polled by research firm Vrge Analytics, 71 percent said they oppose the proposed online-sales-tax legislation. These findings mirror similar results from polling completed by the R Street Institute and the National Taxpayers Union in 2014.

“It’s no surprise that Utah voters oppose legislation that effectively would force e-retailers across the state to serve as tax collectors for other jurisdictions, like New York and California,” said Moylan. “It confirms the results of our own polling, which found broad and deep opposition to this power grab by tax officials.”

Several bills in Utah’s current legislative session would require out-of-state businesses that make online sales to Utah residents to collect Utah sales tax on those sales or report them to Utah tax authorities. According to the Vrge poll, 67 percent of Utah residents believe imposing sales-tax-collection obligations on businesses that aren’t physically present in the state amounts to a tax hike. A whopping 78 percent of voters said the state’s current sales-tax system doesn’t need to be changed.

“The bills currently under consideration constitute an attempt by Utah to pressure Congress and the courts to give the state extraordinary powers to enforce its tax law outside its borders,” R Street Executive Director Andrew Moylan said. “It’s important that the strong voices of opposition to these tax collection schemes be heard.”

The recent polling was conducted on behalf of NetChoice, an association of e-commerce businesses and online consumers who share the goals of promoting convenience, choice and commerce on the Internet.

In the R Street/NTU polling of Utah likely voters from 2014, respondents opposed a federal Internet sales tax law by a 15-point margin overall, including 21-point margins of opposition among independents and Republicans. Strong majorities also indicated their belief that the Internet should remain as free from regulation and taxation as possible, by an overwhelming 55-point margin. R Street and NTU found similar results in 19 other states.

“Lawmakers from Utah and across the country would do well to listen to the clear message that’s being sent to them on this issue,” Moylan said.

Fueling the e-cigarette ‘gateway’ crusade with tax dollars

February 04, 2016, 12:16 PM

In an extraordinary leap of logic, a report in Tobacco Control links “ever” use of e-cigarettes – even a single experimental puff – to subsequent “ever” use of cigarettes.  Researchers from the University of Hawaii, University of Connecticut and the Norris Cotton Cancer Center in New Hampshire base their findings on surveys of high-school students on the Hawaiian island of Oahu.  The journal’s press release publicizing the study quotes first author Thomas Wills: “Teens who use e-cigarettes are more likely to try the real thing a year later.”

In the journal and the release, the terms “use” and “try” are used interchangeably to make the case for the e-cigarette as a gateway to smoking.  The news media eagerly took the bait (see here and here).

Wills defines an e-cig user as anyone who “smoked [sic] e-cigarettes 1-2 times…3-4 times…a few e-cigarettes a year…a few e-cigarettes a month…a few e-cigarettes a week…[or] every day.”  In other words, students who ever took a puff on an e-cig were counted together with students who used them more often.  Wills similarly distorts the definition of cigarette smoking.

Such broad definitions are pointless from a scientific perspective, but they have one advantage: by inflating the number of users, they support a (false) linkage between e-cigs and cigarettes.

If we use the generally accepted definition for adolescent substance use – i.e., used in the past month – the prevalence of e-cig use was 8 percent and cigarette use was 4 percent during the study.  By manipulating the definitions, Wills claims that 31 to 38 percent of students used e-cigs and 15 to 21 percent of students smoked.

Those numbers are then used to suggest that students who were e-cigarette users were two to four times more likely to use cigarettes at the one-year follow-up than students who had never used an e-cigarette.  This is not a surprising finding.  As I have repeatedly noted (here and here): “If you have ever used one tobacco product, you are likely to have ever used another.”

Even if we accept the authors’ definitions and analysis, the majority of new smokers at follow-up were students who had never used e-cigarettes, as shown in this table.

Number of Ever Cigarette Smokers at Follow-Up Among Never Smokers at Baseline, According to E-Cigarette Use E-Cigarette Use at Baseline (n) Percent Smoking at Follow-up Number Never (926) 5 percent 46 Ever 1-2 times (60) 14 8 Ever 3-4 times (82) 11 9 More often (73) 19 14 All (1,141) 77

The bottom line: although “ever” e-cig users were more likely to ever use a cigarette than “never” e-cig users, the numbers still show that most new “ever” users of cigarettes at follow-up (46 of 77) were teens who had never used an e-cig.

Another flaw in the Tobacco Control article is that the authors write that they completed a “[l]ongitudinal school-based survey with a baseline sample of 2,338 students (9th and 10th graders…) in Hawaii…in 2013…and followed up 1 year later…” (The number was repeated in the journal’s press release).  That is, in fact, a gross overstatement, as there was only complete follow-up information for 1,302 students.  Since, of those, 161 had used cigarettes at baseline, my results in the table above are based on 1,141 students from Table 2 of the publication.  However, Wills’ results are based on only 1,070 students.

A co-author of the article, James Sargent, was cited in this blog last year for co-authoring a “fatally flawed” gateway article about youth e-cig use.  My examination of that study revealed similar problems with defining “ever” or current use.  The first author of that study, Brian Primack, is quoted in a Reuters’ story about the current study, as is Adam Leventhal, first author on a third flawed gateway study.

I have described how the National Institutes of Health is spending hundreds of millions of dollars to fund anti-tobacco research.  These studies are prime examples.  Primack reported that his work was supported by $1.3 million in grants from the NIH’s National Cancer Institute; Leventhal listed NCI grants totaling nearly $13 million; the Wills study acknowledges a $660,000 NCI grant.

Taxpayers continue unwittingly to finance an ill-conceived battle against tobacco harm reduction.

Don’t blame business for government mandates

February 04, 2016, 12:07 PM

People rightly rail against the evils of big government. But just as serious a problem is what might be called “hidden government,” when regulation becomes so pervasive that you can no longer tell where government stops and the private sector begins.

Consider, for example, the recent controversy over open-carry in grocery stores. Texas law prohibits individuals from carrying firearms in places where alcohol is served. The law makes an exception, however, for people who have a license to carry a handgun.

As of Jan. 1, Texans who hold a concealed handgun license may openly carry a gun in a holster or belt. In response, some Wal-Mart stores have begun asking to see license documentation for anyone openly carrying in certain stores.

While this has sparked a backlash and calls for boycott among some gun rights activists, Wal-Mart’s defense is that the new policy is necessary to prevent the loss of its own liquor licenses. Under Texas law, a business that “knowingly allows” unlicensed individuals to carry firearms on their premises risks losing their permit to sell alcohol.

Of course, the law doesn’t explicitly require stores to make these checks. Nor were they expected to check patrons for concealed weapons. But while the Texas Alcoholic Beverage Commission hasn’t said that a store will lose its ability to sell alcohol if it doesn’t do open-carry checks, its answers haven’t been reassuring, either.

“Anytime you have a TABC license or permit, you’re required to abide by the structure of the alcoholic beverage code to ensure that alcohol is sold safely and lawfully,” Chris Porter, public information officer for the TABC, recently told KVIA News. “In this case, making sure all handguns brought onto the premises [are licensed] is part of that responsibility.”

Given the amount of money at stake, you can’t blame Wal-Mart from erring on the side of caution. The end result, however, is that the business is forced to carry out the wishes of bureaucrats even when it isn’t legally required to do so. Whatever you think about the merits of open carry, that should be troubling.

Sadly, this isn’t an isolated case. I was recently at a workshop on tax-compliance issues for nonprofits. Tax-exempt organizations are restricted from engaging in certain types of political activities, yet the standard for the advice seemed to be that you should avoid doing anything that could be considered prohibited by an IRS official in a bad mood. When the penalties are stark enough, any regulatory uncertainty can create a broad chilling effect, forcing people to go above and beyond the call of the law for fear that someone might see things differently.

The worst part about hidden government is that it removes the accountability essential to a democracy. If there are potholes on the public streets, I know whom to hold responsible. But when businesses adopt precautionary policies to avoid the wrath of regulators, it may not be apparent to the average consumer what’s really going on. Without that awareness, it’s hard for people to take appropriate action.

That’s bad news. Because without accountability, neither government nor the private sector can be counted on to serve the public interest.

What about agriculture?

February 04, 2016, 11:42 AM

From The American Conservative

Lori Sanders of the R Street Institute explains the bill’s importance:

Tucked neatly away in Sec. 32205, on Page 1,143 of the 1,301-page bill, is a repeal of Sec. 201 of the Bipartisan Budget Act of 2015, passed in early November. For taxpayer advocates, Sec. 201 was one of that bill’s strongest selling points. It ordered the Department of Agriculture to renegotiate the Standard Reinsurance Agreement the federal government has with private insurers who participate in the federal crop insurance program. It would push their taxpayer-guaranteed rate of return down from 14 percent to 8.9 percent.

This small reduction actually goes a long way. The agriculture portion of the farm bill is vastly over budget, to the tune of more than $5 billion in 2014 alone. Despite Big Ag’s cries that their programs deliver taxpayer savings, a large chunk of the supposed savings from the latest farm bill already have been squandered on higher-than-expected payouts from our overly generous farm programs.

That’s why free-market advocates from Citizens against Government Waste to FreedomWorks to the National Taxpayers Union came out in force to support renegotiation. The Heritage Foundation lauded the provision as real savings in a package they otherwise termed a “colossal step” away from fiscal restraint. Unfortunately, it seems Big Ag is about to win the day, and in the most backhanded way – by attaching a seven-line provision to a completely unrelated bill.

 

Don’t blame business for government mandates

February 04, 2016, 9:06 AM

People rightly rail against the evils of big government. But just as serious a problem is what might be called “hidden government,” when regulation becomes so pervasive that you can no longer tell where government stops and the private sector begins.

Consider, for example, the recent controversy over open-carry in grocery stores. Texas law prohibits individuals from carrying firearms in places where alcohol is served. The law makes an exception, however, for people who have a license to carry a handgun.

As of Jan. 1, Texans who hold a concealed handgun license may openly carry a gun in a holster or belt. In response, some Wal-Mart stores have begun asking to see license documentation for anyone openly carrying in certain stores.

While this has sparked a backlash and calls for boycott among some gun rights activists, Wal-Mart’s defense is that the new policy is necessary to prevent the loss of its own liquor licenses. Under Texas law, a business that “knowingly allows” unlicensed individuals to carry firearms on their premises risks losing their permit to sell alcohol.

Of course, the law doesn’t explicitly require stores to make these checks. Nor were they expected to check patrons for concealed weapons. But while the Texas Alcoholic Beverage Commission hasn’t said that a store will lose its ability to sell alcohol if it doesn’t do open-carry checks, its answers haven’t been reassuring, either.

“Anytime you have a TABC license or permit, you’re required to abide by the structure of the alcoholic beverage code to ensure that alcohol is sold safely and lawfully,” Chris Porter, public information officer for the TABC, recently told KVIA News. “In this case, making sure all handguns brought onto the premises [are licensed] is part of that responsibility.”

Given the amount of money at stake, you can’t blame Wal-Mart from erring on the side of caution. The end result, however, is that the business is forced to carry out the wishes of bureaucrats even when it isn’t legally required to do so. Whatever you think about the merits of open carry, that should be troubling.

Sadly, this isn’t an isolated case. I was recently at a workshop on tax-compliance issues for nonprofits. Tax-exempt organizations are restricted from engaging in certain types of political activities, yet the standard for the advice seemed to be that you should avoid doing anything that could be considered prohibited by an IRS official in a bad mood. When the penalties are stark enough, any regulatory uncertainty can create a broad chilling effect, forcing people to go above and beyond the call of the law for fear that someone might see things differently.

The worst part about hidden government is that it removes the accountability essential to a democracy. If there are potholes on the public streets, I know whom to hold responsible. But when businesses adopt precautionary policies to avoid the wrath of regulators, it may not be apparent to the average consumer what’s really going on. Without that awareness, it’s hard for people to take appropriate action.

That’s bad news. Because without accountability, neither government nor the private sector can be counted on to serve the public interest.

This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.

Shut up, explained the businessman: how consumers like you get SLAPPed down

February 03, 2016, 12:33 PM

From Reason

Representatives from eight free market, pro-consumer groups just sent today a letter in support of the SPEAK FREE Actto the House Judiciary Committee. The groups involved include the R Street Institute, FreedomWorks, the Center for Individual Freedom, Tech Freedom, the American Consumer Institute Center for Citizen Research, the Niskanen Center, the Insitute for Liberty, and the Competitive Enterprise Institute.

 

Lefties who moved right

February 03, 2016, 11:11 AM

I very much enjoyed reading the “Exit Right: The People Who Left the Left and Reshaped the American Century” (Simon & Schuster, 2016), which details the movement of six very different individuals from the political left to the political right. The book’s subjects are Whittaker Chambers, James Burnham, Ronald Reagan, Norman Podhoretz, David Horowitz and Christopher Hitchens, each of whose apostasy is explicated in a chapter.

The subject matter intrigued me. As a graduate student at New York University, I seriously considered writing a dissertation on the history of conservatism in America (I switched to another topic when it became plain that the subject matter would not earn me a teaching job anywhere). Reading this book was a pleasure, in no small part, because it allowed me once again to read about the intellectual tumults of the second half of the 20th century, which birthed new voices on the right.

Stylistically, “Exit Right” is a beauty. Oppenheimer is a man of the left, but he does not checker his book with snark or condescension. He respectfully details each man’s life up to and through their political conversion. The book’s prose is mellifluous and engaging, which is no mean feat when you consider the subject matter: the evolving ideas of six men—most of whom are dead.

But what important subject matter it is, for as William Faulkner put it: “the past is never dead. It’s not even past.” Both the right and the left continue to experience the reverberations of the political defections of Chambers, Burnham and the rest to this day. To a degree, all of us continue to argue within the bounds they drew and divide ourselves according to the stands they took.

A complex amalgam of experiences and motivations drew each of the profiled individuals to make their respective journeys from left to right. For Chambers and Burnham, two men of very different casts of mind, the incompatibility of art with communism put them off the left. Reagan’s change of heart was more deliberate, flowing from his growing enamoration with the idea of America, which came from his travels as a General Electric pitchman. Reagan also was driven rightward by the attempts of communists to hijack Hollywood guilds. Podhoretz, meanwhile, was a lost man in his twenties and thirties hunting for a purpose for his generation. He found one in the well of his wounded soul, discoursing on “white guilt,” Jews’ place in America and more. Horowitz and Hitchens, who ostensibly share little more than the H’s in their last names, together took right turns after those they knew felt the brunt of political evil.

But none of these right turns were fated to happen. If Trotsky had not been so heavy-handed and condescending, Burnham might never have rejected Marxism and ended up editing National Review. Who knows?

One common thread is that each man was turned off by the left’s dogmatism. Hitchens was appalled when fellow leftists justified the Ayatollah Khomeini’s fatwa against Salman Rushdie, as they insisted on the primacy of “respecting cultural differences and sensitivities.” As thoughtful people, Chambers and the rest could not live with such toadying and rationalizations.

In this respect, “Exit Right” offers a lesson that still rings true today: defending the indefensible ultimately fails. Ideologies and political movements remain vibrant only so long as their visions remain appealing and credible.

Oppenheimer’s book is a fascinating intellectual history, but its stories also remind us of the value of humility. As he writes:

We know belief is complicated, contingent, multi-determined. But do we really know it? Do we feel it? Do we act as though it’s true, with the humility that such knowledge would entail? Not most of us. Not most of the time[T]he grounds of our beliefs are more contingent than we could possibly account for.

This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.