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Updated: 2 weeks 5 days ago

Half a trillion unaccounted for on federal spending transparency website

August 05, 2014, 5:39 PM

The federal government can’t find $619 billion dollars on the website it built six years ago to give a transparent account of its spending activities. USA Today‘s Gregory Korte has the full story:

A government website intended to make federal spending more transparent is missing at least $619 billion from 302 federal programs, a government audit has found. And the data that does exist is wildly inaccurate, according to the Government Accountability Office, which looked at 2012 spending data. Only 2% to 7% of spending data on USASpending.gov is “fully consistent with agencies’ records,” according to the report….OMB spokesman Jamal Brown said the administration is already working to improve the data.

The website is currently maintained by the Office of Management and Budget, and had an initial budget of $15 million.

Hat tip to AEI’s Arthur Brooks for the tweeting the story.

Paying for permissionless innovation

August 05, 2014, 11:49 AM

We’re big fans of permissionless innovation—the concept and Adam Thierer’s excellent book. The biggest, most consequential enemy of permissionless innovation in the United States is undoubtedly the Food and Drug Administration. Its long, expensive approval process delays access to life-saving drugs and other innovations for years, dramatically increases the price of such things once they reach the market, and skews the investment incentives for the health industry. Many economists would like to see the FDA radically reformed, some would like to abolish it entirely. In the spirit of the sort of political compromises that Milton Friedman was famous for proposing, I’d like to suggest an intermediate solution: a permissionless premium.

Here’s how it would work: there would be some specified amount (either an absolute amount per unit or a percentage of the revenue) that patients would have to pay in order to get a given drug or access to a medical device before it was FDA approved. The patient should be made well aware that the risks are at this point unknown (not that they’re thoroughly understood just after FDA approval anyway). The revenue would bolster the FDA’s budget, thus in theory helping to investigate the risks associated with the drug and drugs like it in the future.

Moreover, this would allow pharmaceutical companies to start getting revenue before FDA approval, lowering the burden of their overhead. As things currently stand, they spend billions on drug development and by the time the FDA process is complete, they have a very short window before their patent expires. As Alex Tabarrok documents well, the result is that pharma companies have almost no incentive to develop drugs that treat diseases that are anything other than very broadly experienced. The pharma dream in this scenario is not to find an effective treatment for rare but aggressive cancers, but to find the next Lipitor.

However, if they could develop experimental new drugs for rare diseases that could be bring in revenue immediately, that might just change the cost-benefit analysis sufficiently to see some real progress on that front. The premium will act as a Pigovian tax rather than an outright ban on the consumption of such still largely untested drugs, and will help fund both pharmaceutical companies and the FDA’s efforts to increase our stock of medical knowledge. It seems, from a number of perspectives, to be a win-win.

The sharing economy will thrive only if government doesn’t strangle it

August 04, 2014, 1:02 PM

The so-called sharing economy is many things to many people. To Wall Street and Silicon Valley, firms like Uber and Airbnb offer tantalizing market capitalizations, the likes of which have not been seen since the go-go ’90s. At the same time, political operatives see the emerging debates over regulation of ride-sharing and space-sharing as a potential opening for the libertarian right to assert their world view in urban politics for the first time in a long time.

At the other end of the political spectrum, some on the left see the rise of these services as yet another brick in the wall of income inequality, putting downward pressure on service workers’ already paltry incomes while simultaneously expanding the myriad opportunities the wealthy already have to pay to jump to the front of most any line. Others on the far left disagree, going so far as to hold up “peer to peer” transactions as the model for a new, post-capitalist economic regime.

If ye gaze into the sharing economy, the sharing economy gazes also into ye. It contains multitudes.

It’s easy to dismiss these various takes as just more grist for the hype mill, as pointless navel-gazing over fads that most Americans have never used and for which they might never have need. But there is reason to suspect the sharing economy might, in fact, be more than that. Indeed, the potential economic benefits of putting our vast stores of trapped and dormant capital into the stream of commerce and reducing the costs of productive work on the margin really are quite enormous.

A national survey in the United Kingdom showed that, in 2008, more than one in every three households was “under-occupied,” with more bedrooms than people to sleep in them. Meanwhile, of the world’s roughly 1 billion cars, about 740 million are mostly used only by a single rider. These sorts of statistics help demonstrate the scope of currently fallow resources that new technological platforms are beginning to put to productive use. The McKinsey Global Institute estimates that social technologies could unlock $900 billion to $1.3 trillion of annual consumer surplus in just four key sectors of the economy: consumer packaged goods, consumer financial services, professional services and advanced manufacturing.

In this way, it’s possible that Lyft and Flightcar, SnapGoods and ShareDesk, TaskRabbit and Etsy and DogVacay – rather than merely being the new digital toys of over-entitled millennial hipsters – are following in the footsteps of other grand innovations and social movements throughout history that have unlocked trapped capital and powered economic growth. These include the public offerings of non-railroad companies in the 1920s and the development of high-yield bonds in the 1980s. But they also include the even larger unlocking of human capital that came in the form of the mass movement of women into the U.S. workforce and the opening of skilled jobs to African-Americans in the second half of the 20th century.

But in order to achieve these benefits, regulators must not strangle the emerging peer production economy in the cradle. In too many cases, when confronted with disruptive business methods, the tendency of public officials is to apply regulatory models developed in an earlier era. This obviously provides clear benefits to incumbent firms, but the benefits for consumers, who lose access to expanded choices and cheaper prices, is not so obvious.

In a new paper, my colleague Andrew Moylan and I suggest regulators tread extremely lightly in this emerging sector, allowing firms and industries to self-regulate to the extent practical. For instance, reputation has shown itself a powerful force in these markets, where most firms offer a system for participants to rate each transaction. Those who receive consistently poor ratings are edged out and sometimes barred from operating, while those who receive good ratings see that translated into better sales.

Which is not to say that there is no room for regulation of any kind. For providers of services such as transportation and lodging, it may be appropriate to require they maintain liability insurance to cover the costs of injuries sustained by consumers. Where this is the case, insurance can also serve something of a self-regulatory function, as insurers tend to make coverage available at attractive rates to those who demonstrate good market conduct, while limiting coverage or raising rates on those who demonstrate a pattern of recklessness. (We also would urge peer production services, the insurance industry and insurance regulators to work together to develop and approve new products in areas where existing offerings are not good fits for the nature of these emerging risks.)

Finally, where lawmakers do find the need to pass new legislation to deal with sharing economy services, they should take this opportunity to significantly scale back, rather than increase, reliance on occupational licensure. Occupational licensing laws, which impact as much as one-third of the U.S. workforce, cost roughly $100 billion annually in lost economic output, despite no evidence that licensing improves the quality of services provided to consumers.

The sharing economy has not, for the most part, birthed many truly novel services. Instead, what it does is harness technology to connect buyers and sellers who otherwise would not have connected. A regulatory approach that is modest and even-handed, and that does not discriminate between new and old providers or new and old business models, is the best way to ensure those connections are not cut prematurely.

What Mississippi can learn from Louisiana

August 04, 2014, 11:56 AM

Good planning efforts can ensure that the coming financial windfall is not wasted.

One month into the 2014 hurricane season, Gulf Coast residents, businesses and governments once again have our eyes on the North Atlantic, Caribbean Sea and Gulf of Mexico. Of course, we all hope this season will be a calm one. But with many of our communities still feeling the effects of Katrina, Ike and Rita, we know how devastating these storms can be.

This summer, Mississippi and the other Gulf states will have a unique chance to make major investments in coastal restoration and improvement. If done correctly, there is a great opportunity for our states to significantly reduce the potential for damage from future hurricanes and floods.

The opportunity comes thanks to the RESTORE Act. Passed by Congress in 2012, the law earmarks to the five Gulf Coast states 80 percent of the civil fines stemming from the 2010 Deepwater Horizon oil spill. The RESTORE Act directs the states to spend on projects that benefit both our economies and our natural environments.

If done right, our coastlines will become stronger, our communities better protected and our economies strengthened. But if done poorly, taxpayers could be left on the hook for big costs later on, and we will be no better protected against natural disasters than we are today.

In this regard, Mississippi could take a page from its neighbor to the west. Since 2007, Louisiana has undertaken a planning process to address the decades-long problem of coastal land loss that has taken a toll on our state’s economy and effectively moved the southern half of the state closer to the Gulf of Mexico and into harm’s way.

The result of this process is Louisiana’s “Comprehensive Master Plan for a Sustainable Coast,” a document most recently revised in 2012 and unanimously approved by the Legislature. The plan is ambitious, with a $50 billion price tag over the next half-century. But it’s also the first such plan in any state that would address coastal risks in a comprehensive, sustainable and cost-effective way.

Louisiana’s plan is held up as a model for a number of reasons. It is comprehensive and systematic, looking at the economic and ecological health of the coast and how different projects interact. It is budget-conscious and does not pretend that resources are unlimited. Because it has the support of the Legislature, the governor and stakeholders ranging from oil and gas companies to environmental groups, it represents a shared vision. This gives the plan a combination of popular legitimacy and political viability.

Finally, Louisiana lawmakers have passed legislation requiring that RESTORE Act funds go to master plan projects, making it unlikely that money will be wasted on projects that have not been thoroughly vetted or that don’t support coastal restoration.

The coastline is deeply important to both Louisiana and Mississippi for a number of reasons, not the least of which its importance to our economic growth. Across Mississippi’s three coastal counties, 26,000 jobs and $2 billion in annual spending are supported by nature-based tourism, such as hunting and recreational fishing. In fact, nearly one in five jobs along Mississippi’s coast is tourism-related, while the state’s commercial fishing industry tallies up some $250 million in sales annually.

With that in mind, the RESTORE Act will provide Mississippi an opportunity to make critical investments in its coastline, from restoring coastal habitats and barrier islands to enhancing flood control to better protect against future natural disasters. With sufficient and effective planning, Mississippians will reap the benefits of this investment for decades to come, but planning must be both transparent and participatory.

Just as a building is only as good as the blueprints that underlie it, the strengths of the coastal investments that Mississippi and other states make with RESTORE Act funds will only be as good as the plans that go into them. As unlikely as it may sound, Louisiana’s state government has done some first-class planning work, and we invite our neighbors to follow our lead.

Uber, Lyft and Houston’s policy leadership

August 01, 2014, 4:58 PM

Under the guise of needing to review a list of new amendments, the Houston City Council this week once again delayed a vote on granting legal status to vehicle-for-hire services like Uber, Lyft and Sidecar.

At least the Bayou City is making an effort to come to terms with services like Uber, Lyft and Sidecar. New York, Los Angeles, Chicago and dozens of other U.S. cities are trying to ban them, mostly in response to pressure from local taxi lobbies. Houston has the opportunity to buck this trend and burnish its reputation as a city that’s friendly to entrepreneurs and willing to embrace technology models that benefit consumers and increases their quality of life.

Local political winds are favorable to the new entrants. A few City Council members have noted that the success Uber and Lyft have had since entering the Houston market in February indicates that there is sizeable unmet demand for ride services, despite what the city’s taxi companies claim.

Sensing that the city council is willing to introduce more competition to the Bayou City, the taxi industry has been trying to subvert reform by piling on as many regulations it can so as to make it as difficult as possible for Uber and Lyft to operate.

The amendment requiring that at least two-percent of vehicles be wheelchair accessible has been getting the most press, as it is the most emotionally resonant. No one wants to see a disabled person denied a ride. Uber says that many of its drivers can accommodate vision and hearing-impaired passengers, but wheelchair accommodation would require more expensive upgrades. There’s no reason this can’t be phased in over time. The proposal is not clear whether the two-percent requirement is must be met before launch, only that there should be regular compliance audits.

Other amendments are much more brash in terms of protecting taxi interests. Uber and Lyft drivers would be prohibited from parking or cruising near hotels and cab stands, or using their cell phones to take ride requests—only requests via the Uber site could be answered. The new proposal also requires all drivers to have $1 million in insurance, and vehicle-for-hire companies must perform background checks through a company designated by the city. Lyft performs driver background checks, but claims the company it uses is more thorough.

Any limits on cruising and parking and cell phone use should be struck down as anti-competitive. As long as cab companies can meet the same criteria for background checks, they should be allowed to choose the company they want.

These might be necessary compromises to grant Uber and Lyft the legitimacy they deserve. Still, much of this regulatory process seems to be about jamming the square peg of Uber into a round hole of legacy regulation. We’re seeing the same reaction to other on-line services like AirBnB (vacation rentals) and Parking Panda (parking spots) that are stimulating what Forbes magazine has dubbed the “share economy.”

Uber and Lyft call the entire taxi regulatory structure into question. Among the anti-consumer rules that have come to light from this debate are that the city requires limousine customers to wait at least 30 minutes from the time they call for a car and pick-up.

But rather than force start-ups like Uber and Lyft to adapt to a decades-old regulatory set-up that have built-in advantages for entrenched taxi companies, why not force the city’s cab companies to adapt to the way consumers want to hail cabs in 2014?

Houston consumers have spoken. More than 15,000 people in the Houston area have signed two online petitions supporting changing rules to accommodate Uber and Lyft. Meanwhile Uber and Lyft drivers continue to operate—and find plenty of riders—without regulatory approval, despite the risk of being caught in a Houston Police Department sting.

These vote delays only postpone the inevitable. Houston has a chance to buck the trend of hostility toward ride-share services. The city council should streamline the current regulations and let Uber, Lyft, Sidecar compete.

The tide is turning: More scientific support for e-cigarettes

August 01, 2014, 3:12 PM

E-cigarettes get a positive health review in the new issue of the journal Addiction. Quoting from the abstract:

[Electronic cigarettes, EC] aerosol can contain some of the toxicants present in tobacco smoke, but at levels which are much lower. Long-term health effects of EC use are unknown but compared with cigarettes, EC are likely to be much less, if at all, harmful to users or bystanders. EC are increasingly popular among smokers, but to date there is no evidence of regular use by never-smokers or by non-smoking children. EC enable some users to reduce or quit smoking.

Conclusions: Allowing EC to compete with cigarettes in the marketplace might decrease smoking-related morbidity and mortality. Regulating EC as strictly as cigarettes, or even more strictly as some regulators propose, is not warranted on current evidence. Health professionals may consider advising smokers unable or unwilling to quit through other routes to switch to EC as a safer alternative to smoking and a possible pathway to complete cessation of nicotine use.

The study confirms what I and others have documented about bogus claims regarding toxicants, poison episodes and gateway. Here are excerpts:

Claim: Chemicals in EC cause excess morbidity and mortality.

Evidence: Long-term use of EC, compared to smoking, is likely to be much less, if at all, harmful to users or bystanders.

Claim: Smokers who would otherwise quit combine EC and cigarettes instead of quitting and maintain a similar smoking rate.

Evidence: EC use is associated with smoking reduction and there is little evidence that it deters smokers interested in stopping smoking tobacco cigarettes from doing so.

Claim: Young people who would not try cigarettes otherwise start using EC and then move on to become smokers.

Evidence: Regular use of EC by non-smokers is rare and no migration from EC to smoking has been documented…The advent of EC has been accompanied by a decrease rather than increase in smoking uptake by children.

Claim: EC use will increase smoking prevalence indirectly, e.g. by making smoking acceptable again in the eyes of people who cannot tell the difference between EC and cigarettes, via machinations of the tobacco industry, or by weakening tobacco control activism.

Evidence: There are no signs that the advance of EC is increasing the popularity of smoking or sales of cigarettes.

In other words, the far-fetched claims by anti-tobacco zealots are derived from thin air, not vapor.

The article is authored by established tobacco harm-reduction advocates Peter Hajek, Jean-Francois Etter and Hayden McRobbie; and two Americans – Tom Eissenberg, a member of the FDA advisory panel on tobacco with a moderate record on e-cigarettes and tobacco harm reduction, and Neal Benowitz. The latter is a surprise, as Benowitz has previously opposed tobacco harm reduction (here and here) and last year endorsed gateway speculation about smokeless tobacco. It is welcome news that he has aligned his view on e-cig vapor with his position on marijuana vapor.

Drs. Benowitz and Eissenberg acknowledge research support from the National Institutes of Health and the FDA and note that the review “does not necessarily represent the official views of the National Institutes of Health or the Food and Drug Administration.”

But it should.

R Street applauds bipartisan bill increasing government preparedness for extreme weather

August 01, 2014, 12:42 PM
WASHINGTON (August 1, 2014) - The R Street Institute is encouraged by today’s introduction of H.R. 5314, the bipartisan Preparedness and Risk Management for Extreme Weather Patterns Assuring Resilience (PREPARE) Act, by Reps. Matt Cartwright, D-Pa. and Tom Cole, R-Okla. The legislation will ensure the federal government proactively plans and prepares for the grave risks associated with extreme weather with no additional costs to taxpayers. “The PREPARE Act is a simple, no cost, no regrets strategy for dealing with severe weather,” said Eli Lehrer, president of R Street. “It’s well worth strong consideration by both houses of Congress.” The PREPARE Act establishes a federal inter-agency council to ensure federal agencies are planning and coordinating preparedness plans for extreme weather events. The bill also provides state and local governments with the best information and practices available to help them adopt their own emergency preparedness plans.

Letter to Houston City Council on transportation network companies

August 01, 2014, 11:02 AM



Houston City Council
City Hall Annex
900 Bagby Street
First Floor
Houston, TX 77002

July 31, 2014

Dear Honorable Council Members,

By approving the proposal to allow vehicle-for-hire companies like Uber and Lyft to operate, Houston has an opportunity to demonstrate its leadership as a city that’s friendly to entrepreneurs and willing to embrace technology models that benefit consumers and improves their quality of life.

While Uber and Lyft face opposition in New York, Los Angeles, Washington and Chicago, it is gratifying to see that most council members wish to introduce more taxi competition. Sensing this, the city’s taxi industry has been trying to subvert reform by seeking delay after delay while piling on amendments that make it difficult for Uber and Lyft to operate.

The amendment requiring that at least 2 percent of vehicles be wheelchair accessible has been getting the most press, as it is the most emotionally resonant. No one wants to see a disabled person denied a ride. Uber says that many of its drivers can accommodate vision and hearing-impaired passengers, but wheelchair accommodation would require more expensive upgrades. There’s no reason this can’t be phased in over time. The proposal is not clear whether the 2 percent requirement must be met before launch, only that there should be regular compliance audits.

Other amendments are much brasher in protecting taxi interests. Uber and Lyft drivers would be prohibited from parking or cruising near hotels and cab stands, or using their cell phones to take ride requests—only requests via company websites could be answered. The new proposal also requires all drivers to have $1 million in insurance and vehicle-for-hire companies must perform background checks through a company designated by the city. Lyft performs driver background checks, but claims the company it uses is more thorough.

Any limits on cruising and parking and cell phone use should be struck down as anti-competitive. As long as screening companies can meet the same criteria for background checks, rise-sharing services should be allowed to choose the company they want.

Houston consumers have spoken. More than 15,000 people in the Houston area have signed two online petitions supporting changing rules to accommodate Uber and Lyft.

These vote delays only postpone the inevitable. Houston has a chance to buck the trend of hostility toward ride-sharing services. I urge the City Council to streamline the current taxi regulations and vote to allow Uber, Lyft and Sidecar to compete.

Sincerely yours,


Steven Titch
Associate Fellow
R Street Institute


Letter to Gov. Nixon on veto of tobacco harm-reduction bill

July 31, 2014, 5:13 PM

July 31, 2014


Gov. Jeremiah Nixon
P.O. Box 720
Jefferson City MO 65102
Re: Veto of Missouri Senate Substitute for S.B. 841

Dear Gov. Nixon,

As a public health physician, with decades of experience in tobacco control, I write to express deep disappointment with your veto of S.B. 841. I respectfully urge your reconsideration.

This bill would prohibit sale of all non-pharmaceutical nicotine delivery products to minors and provide separate legal categories for alternative and vapor devices. Since nicotine is potentially harmful to the adolescent brain, and more addictive to adolescents than adults, this bill, as proposed, would enhance Missouri’s public health.

The separation of alternative (i.e., non-combustible) tobacco products from combustible tobacco products is appropriate for the protection of public health. The risk of potentially fatal tobacco-attributable illness presented by non-combustible products – chewing tobacco, snuff, snus and dissolvable sticks, strips and orbs – is less than 1 percent of the risk posed by cigarettes. These products have also been shown to be less addictive.

Creating a separate category for vapor products would be appropriate because vapor products contain no tobacco. Their active ingredient, tobacco-derived nicotine, is the same nicotine used in the pharmaceutical patches, gums, lozenges and inhalers. As such, we have reason to believe they present a level of risk similar to the risk posed by these commonly used pharmaceuticals, all of which are endorsed by the health related organizations you reference in your veto message.

Your veto message is laced with technical errors that conflict with the scientific evidence base developed over this past decade. All of the often quoted 480,000 tobacco-attributable deaths in the United States, each year, are due to a single tobacco product, the combustible cigarette. The numbers of deaths from all other tobacco and nicotine products, combined, are so small and so hard to distinguish from background mortality that such deaths are not tracked by federal authorities.

The technical and factual errors in your veto message suggests that few in the public health organizations that encouraged this veto are sufficiently up to date on tobacco-related research to be aware of the differences in risk and addictiveness of the alternative products and the patterns of use of e-cigarettes. Their encouragement of this veto seems based on this lack of current knowledge and a possible commercial bias on their part. In demeaning e-cigarettes, they fail to acknowledge that each of their national parent organizations enjoy generous support from drug companies that make the pharmaceutical nicotine products. These companies have much to lose as people learn that they can secure more than 99 percent of the benefits at less cost and with real nicotine- satisfaction from e-cigarettes.

Vapor contaminants are so low that exhaled e-cigarette vapor does not measurably increase the quantity of chemical contaminants in most indoor air environments. Despite hype, almost all vapor products are used by current smokers to cut down or quit. Teens may experiment with such vapor products, but they rarely continue such use and almost never transition from e-cigarettes to tobacco cigarettes.

Finally, waiting for FDA regulation of these products will be an exercise in futility. Due to circumstances partially out of the control of the FDA, it will be four to 10 years before FDA implements any such regulations.

In June, I published paper dealing with all these issues, with extensive bibliographic references. Copies of this paper can be secured at http://www.rstreet.org/wp-content/uploads/2014/07/20140630FDLI-EcigForum.pdf. This paper also includes a description of who I am, my background, and the nature of my affiliation with the R Street Institute.

I would welcome the opportunity to meet with governmental and health authorities in Missouri for the purpose of bringing them up to date on all these issues, discussing, and otherwise addressing their concerns.

The bottom line is that advising smokers of the difference in risk comparing cigarettes to alternative products and e-cigarettes could secure personal and public health benefits not otherwise obtainable. If skillfully done by public health authorities, this could further reduce teen smoking and teen addiction to other nicotine delivery products.

This veto does not protect the public. It helps ensure continuing high levels of tobacco-attributable illness and death and protects the profits of big drug companies.


Joel L. Nitzkin, MD
Senior Fellow for Tobacco Policy
R Street Institute

New York Times’ call for marijuana legalization advances harm reduction

July 31, 2014, 1:56 PM

A milestone in the fight for harm reduction was reached on July 28, when the New York Times formally endorsed the legalization of marijuana. A Times editorial, “Repeal Prohibition, Again,” called for reversal of the government’s 40-year ban on the popular weed. Legalization is overdue, as use of this psychoactive substance that is less dangerous than alcohol has led to the senseless prosecution of hundreds of thousands of Americans.

In 1994, as I was developing my tobacco harm-reduction strategy, I read a brilliant article on drug policy reform in the prestigious scientific journal Science. Entitled “Drug prohibition in the United States: costs, consequences, and alternatives,” the article was written by Ethan Nadelmann, a pioneer in drug harm reduction. Later that year, I described my strategy in a letter to Whitney Taylor of the Drug Policy Foundation (now the Drug Policy Alliance):

Thanks for taking my recent phone call. First, the proposal: that smokers unable or unwilling to quit consider switching to smokeless tobacco, which is far safer than smoking. Smoking-related cancers, heart diseases and lung disorders are responsible for 419,000 deaths every year in the U.S.A. In contrast, if all 46 million American smokers instead used smokeless tobacco, annual tobacco-related deaths (from a small risk of oral cancer) would number only 6000 [references here and here]. In fact, smokers who switch to smokeless tobacco reduce their risk for all smoking-related illnesses, including oral cancer. Newer smokeless tobacco products deliver the nicotine kick smokers crave and they can be used almost invisibly; spitting, once the stigma of smokeless tobacco use, is minimal or nonexistent with these products. Smokeless tobacco is already working for many Americans. Statistics from the Centers for Disease Control and Prevention (CDC) show that 1.5 to 2 million former smokers have chosen this option on their own [reference here].

I realize that your organization is only concerned with illicit drugs. However, the current tirade against tobacco use(rs) demonstrates alarming parallels to the long-term crusade against other drugs. First, as tobacco use is increasingly characterized as not just unhealthy but immoral and criminal, users are now experiencing an alienation process similar to that of narcotics users in the first three decades of the century. Health professionals with ideas on the medical management of nicotine addiction are being ignored or attacked. A cadre of prohibition-minded anti-tobacco activists has insisted on increased federal regulation (FDA, OSHA, EPA etc.) of tobacco use, which is endorsed without a hint of dissent by all major medical organizations. In fact, tobacco use is the only major medical issue in which there is no debate whatsoever. Prohibition may not be imminent, but smuggling from low to high tax states and the disastrous effects and ultimate reversal of the recent Canadian tax increase offer a great preview of where the crusade is headed and what the consequences will be.

This proposal has much in common with harm reduction models proposed for illicit drug use with one important exception: smokeless tobacco is legal. No new regulatory or legislative measures will be required. Only interested and informed smokers.

Mr. Nadelmann invited me to share my observations at drug policy reform conferences in 1999 and 2001. Tobacco harm reduction has been explored at various other drug policy meetings over the last decade.

The Times editorial board echoed the principals of harm reduction in its marijuana statement, as it weighed the relative risks of using various substances:

We believe that the evidence is overwhelming that addiction and dependence are relatively minor problems, especially compared with alcohol and tobacco. Moderate use of marijuana does not appear to pose a risk for otherwise healthy adults. Claims that marijuana is a gateway to more dangerous drugs are as fanciful as the ‘Reefer Madness’ images of murder, rape and suicide. There are legitimate concerns about marijuana on the development of adolescent brains. For that reason, we advocate the prohibition of sales to people under 21.

Advocates of tobacco harm reduction will recognize several themes in this passage. First, there are no apparent health risks for moderate marijuana use (and even fewer health risks for smoke-free forms versus combusted), just as there are no significant risks related to the use of smoke-free nicotine/tobacco products. Second, the “fanciful” gateway claim is as illegitimate for smoke-free tobacco as it is for marijuana. Finally, while it is appropriate to protect children from substance use, there is no credible reason to deny adults access to alcohol, tobacco or marijuana.

The Times has effectively advanced the cause of harm reduction, perhaps to the ultimate benefit of tobacco users and of public health generally.

Surveillance Costs: The NSA’s impact on the economy, Internet freedom & cybersecurity

July 31, 2014, 12:14 PM

From the Open Technology Institute:

R Street Institute’s January 2014 policy study concluded that in the next few years, new products and services that rely on cloud computing will become increasingly pervasive. “Cloud computing is also the root of development for the emerging generation of Web-based applications—home security, out-patient care, mobile payment, distance learning, efficient energy use and driverless cars,” writes R Street’s Steven Titch in the study. “And it is a research area where the United States is an undisputed leader.” This trajectory may be dramatically altered, however, as a consequence of the NSA’s surveillance programs…

…As the R Street Policy Study highlights, “Ironically, the NSA turned the competitive edge U.S. companies have in cloud computing into a liability, especially in Europe.”

…According to the R Street Institute study, “It appears the NSA’s aggressive surveillance has created an overall fear among U.S. companies that there is ‘guilt by association’ from which they need to proactively distance themselves.”

R Street joins groups in support of USA FREEDOM Act

July 31, 2014, 8:37 AM
WASHINGTON (July 30, 2014) - The R Street Institute today joined a coalition of groups expressing support for the USA FREEDOM Act, which was reintroduced in the Senate this week by Sen. Patrick Leahy, D-Vt.

In a letter to Congress, coalition members said the Leahy bill is a substantial improvement over a version passed by the U.S. House and addresses many of the earlier bill’s shortcomings. The Senate bill includes more effective prohibitions on bulk record collection, strengthened transparency reporting provisions and reforms to make the FISA Court process more accountable.

“While the bill does not include all of the reforms we’d like to see to the government’s surveillance powers, it is a vast improvement over the House bill and a good first step toward reining in the government’s out-of-control spying apparatus,” said R Street Senior Policy Analyst Zach Graves. “Chairman Leahy and his staff should be commended for their efforts.”

Other members of the coalition include such groups as the Electronic Frontier Foundation, the Center for Democracy and Technology, the Open Technology Institute, Generation Opportunity, the American Civil Liberties Union and Access.


Click here to read the letter and its support of key provisions of the bill.

Coalition urges Congress to support updated USA FREEDOM Act (S. 2685)

July 31, 2014, 8:30 AM

Majority Leader Harry Reid Minority Leader Mitch McConnell United States Senate

Chairman Patrick J. Leahy
Ranking Member Charles E. Grassley U.S. Senate Committee on the Judiciary

Chairman Dianne Feinstein
Vice Chairman Saxby Chambliss U.S. Senate Select Committee on Intelligence

Speaker John Boehner
Minority Leady Nancy Pelosi
United States House of Representatives

Chairman Robert W. Goodlatte
Ranking Member John Conyers, Jr.
U.S. House of Representatives Committee on the Judiciary

Chairman Mike Rogers
Ranking Member C.A. “Dutch” Ruppersberger
U.S. House Permanent Select Committee on Intelligence

July 30, 2014

Dear Majority Leader Reid, Minority Leader McConnell, Chairmen Leahy and Feinstein, Ranking Member Grassley, Vice Chairman Chambliss, Speaker Boehner, Minority Leader Pelosi, Chairmen Goodlatte and Rogers, and Ranking Members Conyers and Ruppersberger:

The undersigned civil liberties, human rights, and other public interest organizations write in support of the USA FREEDOM Act (S. 2685), which Senator Leahy reintroduced on July 29. We urge both the Senate and the House to pass it swiftly and without any dilution of its protections.

On June 18, many of the undersigned groups sent a letter to Senate leadership raising serious concerns about the version of the USA FREEDOM Act (H.R. 3661) that passed the House of Representatives in May, and recommending six specific areas for improvement in the Senate bill.1 The version of the USA FREEDOM Act introduced Tuesday is a substantial improvement upon the House-passed bill, and addresses many of our most significant concerns. While this bill does not include all of the necessary reforms to the government’s surveillance authorities, it is a good first step. Specifically, this version of the USA FREEDOM Act will:

1. Prohibit “bulk” collection. As drafted, S. 2685 will prohibit indiscriminate collection of records under USA PATRIOT Act Section 215 (Section 215) and help curtail other forms of broad or bulky collection as well. It significantly narrows the definition of “specific selection term” as applied to Section 215 orders for call detail records (CDR) and other items, as well as for FISA pen register and trap and trace device orders and National Security Letters (NSLs). Additionally, S. 2685 prohibits large-scale data collections under certain authorities based solely on terms that identify broad geographical regions or name particular Internet or telephone

1 Letter from coalition to Senator Reid, et. al, concerning USA FREEDOM Act (H.R. 3361) (June 18, 2014) (on file with author), available at http://www.newamerica.net/sites/newamerica.net/files/program_pages/attachments/CoalitionLetterOnUS AFreedom.pdf.

services, and more generally requires the government to narrowly limit its data collection. We understand the intent of these provisions is to put an end to bulk or bulky collection programs, whether the NSA’s phone records program or others. The bill also strengthens minimization requirements that would provide additional post-collection privacy protections in instances where a Section 215 order is likely to return records on more than one individual. While it does not include minimization procedures for pen register and trap and trace device authorities, it does clarify the Foreign Intelligence Surveillance Court’s (FISC) authority to impose stronger privacy procedures and review compliance. These reforms are all significant improvements over H.R. 3361. If faithfully implemented, they should ensure the end of bulk collection of Americans’ personal information under domestic national security surveillance collection authorities, thus achieving the USA FREEDOM Act’s primary stated purpose.

2. Strengthen transparency reporting provisions. This bill makes significant improvements to the level of detail that private companies can include in their transparency reports. It locks in the deal made earlier last year between the Department of Justice and Internet companies that gave the companies two different options for publishing information about the FISA and NSL demands they receive, but improves on it by narrowing the range of numbers in which the companies can report, and by shortening the waiting period to report on surveillance orders directed at new technologies from 2 years to 18 months. The bill also provides two additional options for reporting that were not in the original deal: one option that allows companies to report annually on the national security requests they receive in ranges of 100, the narrowest numerical range of all the different reporting options, and another option that allows companies to be more granular in their reporting about specific surveillance authorities including FISA Amendments Act Section 702 (FISA Section 702), which authorizes the PRISM and “upstream” collection programs that are of particular concern to customers and tech companies alike. Additional improvements are still needed, such as authorizing companies to report on the number of accounts actually affected by the government demands they receive rather than just those accounts that are targeted. However, the company reporting provisions in S. 2685 are a strong improvement over the House bill, and will help to start informing the public on the impact that these authorities have on American industry and consumers.

S. 2685 also strongly enhances reporting by the government. Whereas H.R. 3661, as passed, merely requires the Director of National Intelligence to report annually the number of “targets” and “orders” for each relevant authority, S. 2685 also requires disclosure of the number of individuals whose communications are collected, including an estimate of the number of U.S. persons. This is a much more meaningful set of numbers. More transparency is needed, as the bill exempts the FBI from key reporting requirements and allows the Director of National Intelligence to use a certification process to avoid the requirement of estimating how many U.S. persons are affected by FISA Section 702. Nonetheless, the bill materially improves the usefulness of government reporting.

3. Strengthen reforms to the FISA Court (FISC) process to provide more accountability.

S. 2685 expands advocacy within the FISC by creating Special Advocates who may serve as amici. While not all our concerns with this measure were resolved, S. 2685 clarifies that the Special Advocates’ duty is to advocate for privacy and civil liberties, and includes provisions to facilitate access to all relevant materials and precedent. It also increases access to technical and subject matter experts. Additionally, although some loopholes remain, the bill seeks to limit secret law by requiring the Director of National Intelligence to publicly release either a redacted copy or a summary of any significant FISC decision.

In addition to addressing some of our most pressing concerns as explained above, we are pleased that S. 2685 limits the use of CDRs to counterterrorism purposes, and resolves the threat of implicitly codifying controversial “about” searches under FISA Section 702 by removing that section from the bill. We are also encouraged that this bill does not include any form of a mandatory data retention regime. As we mentioned in our June 18 letter, we strongly oppose any such requirement, as it would threaten privacy and civil liberties, impose unnecessary economic burdens on companies, and create risks to data security.

S. 2685 is a substantial improvement over the House bill. It would meaningfully amend the laws that authorize some of the most deeply concerning domestic records collection programs. We must caution, however, that many of the positive steps included in the bill could be undermined through insufficiently targeted cybersecurity information sharing legislation. We also note that S. 2685 does not address the NSA’s cyber operations or its largest surveillance programs: those taking place under Executive Order 12333 and FISA Section 702. After passing S. 2685, Congress should immediately conduct public oversight and work to reform these authorities, which pose grave threats to privacy, civil liberties, and Internet security.

We support S. 2685 as an important first step toward necessary comprehensive surveillance reform. We urge the Senate and the House to pass it quickly, and without making any amendments that would weaken the important changes described above.


Advocacy for Principled Action in Government American Association of Law Libraries
American Civil Liberties Union
American Library Association
Arab American Institute
Association of Academic Health Sciences Libraries Association of Research Libraries
Bill of Rights Defense Committee
Brennan Center for Justice
Campaign for Digital Fourth Amendment Rights Center for Democracy & Technology
Center for Media and Democracy/The Progressive Charity & Security Network
Citizen Outreach
Competitive Enterprise Institute
Constitution Alliance
The Constitution Project
Council on American-Islamic Relations Cyber Privacy Project
Defending Dissent Foundation DownsizeDC.org, Inc.
Electronic Frontier Foundation Free Press Action Fund
Freedom of the Press Foundation FreedomWorks
Government Accountability Project Human Rights Watch
Liberty Coalition
Media Alliance
Medical Library Association
National Coalition Against Censorship National Security Counselors
New America’s Open Technology Institute OpenMedia.org
PEN American Center
Public Knowledge
Republican Liberty Caucus
R Street
Rutherford Institute

Portable persistency and the Prop 103 roadblock

July 30, 2014, 11:17 AM

The emerging need to develop new insurance products to cover California’s Transportation Network Company operators has spurred a reexamination of the nature of Proposition 103′s quasi-constitutional status. In the name of populism, 1988′s Prop. 103 inserted unwieldy, naïve and vague underwriting rules into California insurance law. As the TNC industry is discovering to its regret, even a cursory inspection reveals that Prop. 103 has a stultifying impact on market flexibility and innovation.

The trouble is that, even with a two-thirds vote of the Legislature, legislation that does not “further the purposes” of Prop. 103 is likely to be held invalid. Thus, before considering any legislative fix, it is necessary to grasp what furthering the purposes of Prop. 103 must entail.

Should existing industries, or disruptive start-ups like the TNCs, be inclined to seek guidance about how best to change Prop. 103 while furthering its purpose, they should start by examining the history of California’s “portable persistency” automobile insurance discount battles.

Prop. 103 lays out with great specificity a list of rating factors that insurers are to use as they develop auto insurance rates. The list of rating factors is divided between mandatory and optional factors. Currently, there are three mandatory factors and 16 optional factors. Additional rating factors may be adopted via regulation by the insurance commissioner, so long as those factors have a “substantial relationship to the risk of loss” (See CIC 1861.02(e)).

Insurers know for a fact that customer “persistency” – that is, how long a customer has maintained insurance without interruption – is predictive. Ignoring this reality, as originally drafted, Prop. 103 proscribed the use of some rating factors. For instance, subsection (c) of Section 1861.02 is a provision that prevents insurers from charging increased rates on the basis of a lack of prior coverage. The rationale for the prohibition is founded on the notion that reducing the number of uninsured drivers depends on preventing insurers from underwriting in a manner that reflects the scientifically determined risk.

In an effort to allow insurers to reap the benefits of underwriting certainty, Insurance Commissioner Chuck Quackenbush promulgated a regulation to increase rating flexibility, in spite of the prohibition articulated in 1861.02. The new regulation allowed insurers to use persistency as an optional rating factor, though only in an affirmative manner. Through this lens, persistency pertains to the amount of time an insured has continuously had coverage. Applied in this way, insurers did not “punish” customers for not having insurance. Rather, insurers rewarded those that did have insurance.

The regulation did not explicitly define persistency and, as a result, different insurers interpreted the optional factor differently. While some insurers chose to interpret persistency as the number of years of continuous coverage the insured enjoyed with a single insurer, others interpreted persistency to entail continuous coverage with any insurer. Subsequently, in 2002, Insurance Commissioner Harry Low sought to clarify what was meant by persistency by promulgating a regulation to make clear that only the length of time that a driver had been with a single company (or an affiliate) counted toward the discount. This meant that persistency was not “portable” for the customer and thus retarded company-to-company movement of insurance buyers. It made it difficult for companies to lure customers from other insurers.

Insurers were unhappy about the elimination of “portable persistency” discounts, so they went to the Legislature seeking a remedy. S.B. 841 of 2003, which ensconced portable persistency discounts in statute, was drafted and passed based on Section 1862.02′s prohibition against making rates on the basis of a lack of previous coverage. The bill’s sponsors ensured that it included intent language making clear that the bill “furthers the purpose of Proposition 103 to encourage competition among carriers so that coverage overall will be priced competitively.”

Upon the predictable challenge, the California Court of Appeal struck down the bill.

The court ruled that the thinking behind 1861.02(c) was that, between rating factors, cost distribution is a zero-sum game. For example, previously uninsured drivers will face higher rates if insured drivers are offered portable persistency discounts, because one factor will need to be adjusted to cover the cost of the other (for an interesting discussion on how rating factors are weighed, i.e.: “pumping” and “tempering,” see Spanish Speaking Citizens’ Found. v. Low 85 Cal.App.4th 1179). By adjusting the rate, the previously uninsured will be made to subsidize the persistently insured. For this reason, S.B. 841 was found not to “further” Prop. 103′s purpose which, ultimately, the court decided is to expand access to auto insurance.

Suffering additional beatings on the matter, since the elimination of portable persistency discounts, two attempts have been made by insurers outside of the Legislature to reinstate their use. Two initiatives, Prop. 17 and Prop. 33, failed.

While there is another persistency discount skirmish in the offing with the appearance of a Trojan horse, in the form of Prop. 45, will there ever be a way around the courts’ unfortunate readings of what furthers the purposes of the resiliently malignant Prop. 103?

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Today in Liberty: Treasury Department halts Ex-Im deals with Russia, federal court grants D.C. a stay on gun rights ruling

July 30, 2014, 9:23 AM

From UnitedLiberty:

“Peer production” could be huge for the economy if left alone by bureaucrats: A new study from the R Street Institute explains that the emerging “peer production” economy — think Lyft and Airbnb — could “add trillions of dollars to the economy of the next several decades,” making it important for policymakers to back off. “[T]he development of these new modes of doing business has been threatened by legislators and regulators – particularly on the state and local level – who in too many cases attempt to apply regulatory models developed in an earlier era to the individuals and small firms that are innovating through peer production,” write Andrew Moylan and R.J. Lehmann in the study, Five Principles for Regulating the Peer Production Economy. “These actions do little to protect consumers, but rather they prevent innovative ideas from coming to market and keep potential service providers sidelined.” Moylan and Lehmann say that policymakers “should consider the risk of ‘government failure’” and regulate with a “light hand” to prevent suppressing this emerging part of the economy.

NAF report quantifies cost of NSA snooping

July 29, 2014, 3:42 PM

In the year since Edward Snowden began disclosing the scope of National Security Agency’s programs to use cell phone networks, the Internet and various commercial websites to spy on both American citizens and foreign nationals, there has been considerable speculation about the cost of these programs to the U.S. information technology industry in terms of money and trust.

The New America Foundation has released a report that attempts to quantify these costs, concluding that over the past 12 months the NSA’s actions “have already begun to, and will continue to, cause significant damage to the interests of the United States and the global Internet community.”

In the executive summary, authors Danielle Kehl, Kevin Bankston, Robyn Greene and Robert Morgus discuss detrimental effects on four specific areas:

  • Direct economic costs to U.S. businesses: American companies have reported declining sales overseas and lost business opportunities, especially as foreign companies turn claims of products that can protect users from NSA spying into a competitive advantage. The cloud computing industry is particularly vulnerable and could lose billions of dollars in the next three to five years as a result of NSA surveillance.
  • Potential costs to U.S. businesses and to the openness of the Internet from the rise of data localization and data protection proposals: New proposals from foreign governments looking to implement data localization requirements or much stronger data protection laws could compound economic losses in the long term. These proposals could also force changes to the architecture of the global network itself, threatening free expression and privacy if they are implemented.
  • Costs to U.S. foreign policy: Loss of credibility for the U.S. Internet freedom agenda, as well as damage to broader bilateral and multilateral relations, threaten U.S. foreign policy interests. Revelations about the extent of NSA surveillance have already colored a number of critical interactions with nations such as Germany and Brazil in the past year.
  • Costs to cybersecurity: The NSA has done serious damage to Internet security through its weakening of key encryption standards, insertion of surveillance backdoors into widely-used hardware and software products, stockpiling rather than responsibly disclosing information about software security vulnerabilities and a variety of offensive hacking operations undermining the overall security of the global Internet.

Among the recommendations the authors make are strengthening privacy protections for both Americans and non-Americans, within and outside the U.S. borders; increased transparency around government surveillance, both from the government and companies; renewed commitment to the Internet freedom agenda in a way that directly addresses issues raised by NSA surveillance, including moving toward international human rights-based standards on surveillance; and development of clear policies about whether, when and under what legal standards it is permissible for the government to secretly install malware on a computer or in a network.

The entire 64-page report can be downloaded here. A summary version is here. Also check out my own R Street white paper on the potential cost of NSA computer spying here.

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The left’s case against Ex-Im

July 29, 2014, 1:48 PM

Efforts to finally kill the $140 billion federal boondoggle that is the Export-Import Bank — led by House Financial Services Committee Chairman Jeb Hensarling, R-Texas — are getting characterized in some quarters as another round of impractical, rabble-rousing tea party invective.

The truth is, just as the bank has more than its share of apologists within the Republican Party, some of its more eloquent critics actually come from the left.

Of course, those critics at one time included the president himself, who on the campaign trail in 2008 called Ex-Im “little more than a fund for corporate welfare.” Alas, Obama nonetheless signed a 2012 reauthorization bill and is now backing Senate Democrats like Mary Landrieu and Mark Warner as they try to make the bank’s pending reauthorization a campaign issue.

But some on the left still see clearly through the haze. Particularly noteworthy is today’s takedown — by Dean Baker of the Center for Economic and Policy Research — of an op-ed published in yesterday’s New York Times by former U.S. Sen. William Brock, R-Tenn. Not only does Brock pull out all the usual tired claims for Ex-Im reauthorization, but he even has the brass to invoke the ghost of Ronald Reagan:

The bank is not perfect. It could do more to increase efficiency and transparency, and to better leverage partnerships to reach even more small businesses. But as President Reagan understood, that is a reason to reform it, not end it. Opponents of the bank say that it supports just 2 percent of all exports. Still, 2 percent amounts to $37.4 billion of American products made by American workers in American plants. That translates into tens of thousands of jobs from every state in the country.

Baker does an effective job of fisking this claim, noting that ending the bank would not actually cause Boeing, which receives 30 percent of Ex-Im’s subsidies, to stop selling planes abroad :

For the most part this would be a story of lower profits, but there would be some reduction in exports, probably in the range of 10 to 30 percent of the amount being subsidized. That translates into $3.7 to $11.2 billion in exports that we would lose without the Ex-Im Bank.

Is that a big deal? We can compare this to another export number that has been in the news recently. A new study showed that because of the sanctions against Iran, the United States has lost $175.4 billion in exports since 1995, with the estimated losses coming to $15 billion in 2012, the latest year covered by the study. So the jobs at stake with the Ex-Im Bank are about 75 percent of the number that could be gained if we ended the sanctions against Iran. In other words, if we think the ending of loans from the Ex-Im Bank would be a hit to the economy, then we must think the sanctions to Iran are an even bigger hit.

Baker goes on to note that, if promoting exports were actually the policy goal, the clearest way to do that would be to devalue the dollar, most likely through a negotiated arrangement with those countries that have been bidding up its value. It turns out that option isn’t so popular, not only because it would raise the prices of imported goods that retailers like Wal-Mart have come to rely on, but also because it would “hurt major manufacturers like Boeing and GE who now do much of their manufacturing overseas,” Baker writes.

Time magazine’s Michael Grunwald — author of the decidedly non-tea party tome The New New Deal: The Hidden Story of Change in the Obama Era — lays out the progressive case against Ex-Im perhaps as well as anyone:

The fate of the Ex-Im Bank…will not affect the fate of the planet. It probably won’t even affect the fate of Boeing, which is perfectly capable of doing deals with Arab petro-states without government-guaranteed financing. So what’s the point of keeping it around and enduring its periodic scandals? Those of us who believe that government should do a lot of important things, like defend the nation and fight climate change and ensure universal health insurance, ought to recognize that government shouldn’t try to do everything. Opposing the Ex-Im doesn’t mean agreeing with the Tea Party notion that government shouldn’t try to do anything—just that it should stop trying to do this.

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The peer production economy should be allowed to succeed without heavy regulation, R Street study finds

July 29, 2014, 8:14 AM

WASHINGTON (July 29, 2014) – Emerging “peer production” markets could unlock trillions in previously dormant capital, making it essential that lawmakers and regulators do not strangle these new business models before they have the opportunity to develop, two R Street Institute senior fellows write in a new paper.

Co-authored by R Street Executive Director Andrew Moylan and Editor-in-Chief R.J. Lehmann, “Five principles for regulating the peer production economy” finds that new technologies and changes in the way we communicate have created more opportunities for individuals and small groups either to develop and build upon innovative ideas or to bring their marginal capital and labor into productive use.

With new services like Lyft, Airbnb and Etsy connecting buyers directly to sellers, the peer production economy has helped to democratize production, liberate underutilized capital and reduce costs for consumers and producers.

“In some cases, this shift has allowed small startups to threaten dominant market incumbents, as long-standing asset-intensive firms now must compete with new firms than can tap the resources of privately held assets by individuals who aren’t using them fully,” Moylan and Lehmann write. “Overall, the effect has been to eliminate many of the benefits of being big.”

“Alas, the development of these new modes of doing business has been threatened by legislators and regulators – particularly on the state and local level – who in too many cases attempt to apply regulatory models developed in an earlier era to the individuals and small firms that are innovating through peer production,” they add. “These actions do little to protect consumers, but rather they prevent innovative ideas from coming to market and keep potential service providers sidelined.”

The authors lay out five principles for legislators and regulators to take into consideration when thinking about how to regulate the peer production economy.

Regulators should tread lightly, allowing firms and industries to self-regulate to the extent practical. They also should consider using existing market-regulating instruments, such as insurance contracts and surety and fidelity bonds, rather than prescriptive regulation.

The authors also recommend reduced reliance on occupational licensing and that regulators exercise extreme caution before any attempt to determine the “right” balance of buyers and sellers. Finally, regulators and legislators should strive for neutrality in regulation, so as not to benefit either incumbent or emerging business models at the expense of others.

“At a minimum, regulators should think very carefully about banning any peer production activity that isn’t already banned and should review existing laws to assure that policies created for one purpose do not place an undue burden on the sharing economy,” the authors write. “With a sensible, minimal regulatory structure, the peer production economy can and will create enormous new wealth, generate jobs and put previously underutilized resources to work,” said Moylan.

The full paper can be found here:


Five principles for regulating the peer production economy

July 29, 2014, 8:00 AM


The attached paper was co-authored by R Street Executive Director Andrew Moylan.

Economic history over the last 200 years is largely the story of the industrial move from small-scale domestic production and piece work to systems dominated by economies of scale: factories, big businesses and multi-national corporations. But over just the past two decades, new technologies have radically altered this trend,disaggregating physical assets in space and time and employing digital platforms that allow for more individually tailored pricing, matching and exchange. Changes in the way we communicate and transact business have reduced economies of scale in some industries, shifting value to producers who have access to distributed capital.

In some cases, this shift has allowed small startups to threaten dominant market incumbents, as long-standing asset-intensive firms like car rental giants Avis and Hertz now must compete with new firms like RelayRides and Getaround that can tap the tens of millions of privately owned cars that currently sit idle in American driveways. Overall, the effect has been to eliminate many of the benefits of being big.

These changes have led not only to a greater diversity of products to meet niche demands, but to a panoply of divergent business models in sectors previously dominated by a just a handful of options, whether the consumer need is to find lodging or to get across town, to take just two notable examples.

As a result, there are more opportunities for individuals and small groups either to develop and build upon innovative ideas or to bring their marginal capital and/or labor into productive use. This phenomenon goes by a number of names, including the “sharing economy” and the “mesh economy.” We will use the phrase “peer production” as the hallmark of this emerging economic phenomenon. To be sure, the participants in this market aren’t necessarily peers, but we feel this label better describes the underlying dynamics. Peer production is not sharing, per se, nor is it a seamless mesh of production. Rather, it is about harnessing technological platforms to connect buyers and sellers who otherwise would not have connected, either because of supply- or demand-driven constraints.

Alas, the development of these new modes of doing business has been threatened by legislators and regulators — particularly on the state and local level — who in too many cases attempt to apply regulatory models developed in an earlier era to the individuals and small firms that are innovating through peer production. These actions do little to protect consumers, but rather they prevent innovative ideas from coming to market and keep potential service providers sidelined. Too often, the presumption is to “ban first; ask questions later.”

In exploring how to regulate new firms that shake up existing markets — especially those who develop entirely new business models — or what rules should apply to individuals who develop smartphone apps or rent out their power tools over the Web, legislators and regulators should step back and reexamine the first principles of consumer protection. Consumer-oriented regulation should be about providing basic standards to market players and should not serve as a barrier to entry, either for those who seek to compete with incumbent producers or for those with innovative ideas that redefine markets.

As the markets for peer production services evolve, it is the welfare of consumers that most concerns us and that should most concern policymakers. Innovation and “creative destruction,” as the economist Joseph Schumpeter termed it, are not prized because of their effects on incumbent producers, which are in many cases negative. Nor are they prized because of their “jobs created” or similar workforce metrics frequently espoused by politicians. Rather, they are valued because, from the perspective of the consumer, they improve on existing goods and services, reduce costs for households and create a host of new options to increase consumer utility.

In many cases, regulators charged with defending consumers’ interests instead work to protect incumbent producers from innovative market forces. This phenomenon, known as “regulatory capture” in public choice literature, not only impedes innovation and economic growth, but is profoundly unfair to consumers.

The national security social contract

July 28, 2014, 9:11 AM

Of all the news outlets that covered the mysterious replacement of the U.S. flags on one of the towers of the Brooklyn Bridge, only the New York Post got the lede right. While other media pondered what the “message” of the flag switch was, the Post identified the true significance of the story: a stupefying breakdown in the security of critical infrastructure.

Under the classical liberal idea of social contract, people hand over certain rights to the state in return for a degree of safety and security. Implied is that the cost-benefit ratio of this trade-off favors the average citizen. That is, the sense of well-being I gain is substantially exceeds the pain of losing a few freedoms.

But the social contract ceases to be of value when the costs in freedom and privacy outweigh any benefit in security. Or, to put it less delicately, why should we grant the government the power to track and record all our public movements, 24 hours a day and seven days a week, when it can’t use those assets to act fast enough to stop a small group of people from gaining access to a secure area on one of the America’s most iconic landmarks?

Today’s news has police and politicians speculating how the trespassers got past gates, fences, cameras and police officers stationed at either end of the bridge. The real question isn’t how they did it. It’s that they did it. And believe me, any explanation that emerges as to how these guys pulled it off is only going to reflect worse on the system. As a test of national, state and city terror readiness, this incident earns a bright red F.

In the name of protecting us, we have granted our government unprecedented intrusiveness in our personal space. In addition to widespread surveillance, the government eavesdrops on phone conversations, tracks our locations via cellphones, evaluates our web-surfing habits and monitors our purchases—and this is just what we know from the Snowden disclosures.

Innocuous activities – such as photographing public art, meeting a friend at a train station or buying more than one computer at Best Buy – can put you on a government terror watch list. The watch list itself has swollen to 1.5 million people, a level of dilution that pretty much makes it useless as an analytic tool, but could present enormous headaches for someone at an airport or a routine traffic stop.

The government asks us to accept on faith that numerous threats were detected and neutralized by way of these methods, but refuses to provide any examples. That the Brooklyn Bridge trespassers, whatever their motive, were able to accomplish their act is bad enough. There is no credibility to the claim that such ultra-high levels of surveillance are necessary when the government proves inept at containing what would have appeared to be an overt threat.

Citizens and their elected representatives should be demanding more accountability from the White House, the National Security Administration, the Department of Homeland Security and all other agencies who have the power to listen, watch and search Americans without due process. What quantitative metrics and specific cases can you show us to prove these programs work?

Until that question is answered, the government will be asking too much in privacy and return for too little in security.

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