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Service, restrictions force CU fans to abandon CU

June 16, 2014, 10:39 AM

This piece was co-written by R Street President Eli Lehrer.

We both love credit unions. The free-market think tank we lead considers them a vital part of America’s financial system. Professionally, we’ve worked with credit unions, their trade associations and fellow credit union members to fight off taxation efforts and raise the cap on member business loans.

Now, however, we’ll be withdrawing almost all of our funds from the credit union where we’ve done business for the past two years and depositing them in a big national bank. We aren’t doing this lightly. In fact, we soon hope to find a credit union that better suits our needs. But in the meantime, we hope we can offer a few lessons to other credit unions that want more small business members.

To an extent, our decision was driven by the things that credit unions just don’t or can’t do. Our organization – which can have as much as $1 million on deposit – didn’t have access to some of the kinds of services we all have on our own personal accounts.

Among other things, we couldn’t easily make electronic check deposits and couldn’t see check images online. When we looked for these features – and we spent almost a month searching – we couldn’t find a single credit union anywhere that both offered them to small business and could fit us into their field of membership.

This state of affairs, we believe, exists because of federal laws that cap credit union member business loans. Since credit unions face such onerous restrictions on the size of their loan portfolios, it’s natural and even proper that many underinvest in the IT systems necessary to support small business. In the long term, easing MBL restrictions and declining IT costs will almost certainly solve these particular problems. But this will take time.

We might have continued to put up with the IT inconveniences if we felt our credit union excelled in other areas but, ultimately, we didn’t. We have three pieces of advice to credit unions who want to keep small business clients, even without making big IT investments or lifting the MBL cap:

Take member democracy seriously: We inquired several times about serving on the credit union’s board or a committee. While we certainly weren’t entitled to any sort of governance role by virtue of our advocacy or level of deposits (our credit union is small enough that we are a major depositor), we do think we deserved a reply and perhaps an invitation to meet with some board members. We never got either.

If credit unions are serious about running their affairs on a democratic basis, they need to be at least as responsive to member requests as politicians are to requests from constituents. The ability of a small business to participate in organizational governance is a key benefit that credit unions enjoy over banks; they need to capitalize on it.

Realize that kindness can’t replace competence: Our branch manager and several of the tellers are lovely people. They know us by name, came to parties we threw and sent us holiday cards. But when it came to business-specific requests, they fell down on the job. Over two years, about a quarter of our e-mail messages and telephone calls went unreturned. This is a bad practice in any business and unpardonable for one that’s supposed to exist only to serve members.

Don’t do what you can’t do well: Some aspects of the credit union were indifferently run. One reasonably minor issue with a credit card took dozens of phone calls and several months to resolve. Nobody would take responsibility for dealing with it. By the time we finally reached someone who could, it was too late to resolve. The credit union could have saved itself a black eye if it hadn’t gotten into a business it clearly didn’t know how to run. Bad service is worse than no service.

We’re still committed to the credit union movement. We hope to move our funds back into a credit union before the end of 2014. But even if the MBL cap isn’t lifted, credit unions like ours can do a much better job serving their small business members.

Comments to FDA on e-cigarette deeming regs

June 16, 2014, 10:07 AM

This note is in response to the April 2014 FDA Docket No. FDA-2014-N-0189 requesting comment on proposed regulations for extending the authority of the FDA Center on Tobacco Products (CTP) to a number of tobacco products not covered by the 2009 Family Smoking Prevention and Tobacco Control Act (the Law).

FDA has proposed a set of regulations intended to bring almost all non-pharmaceutical, tobacco-related products under the authority of the CTP. This step requires CTP to demonstrate it has the authority and capability, within the current scope of its jurisdiction, to implement a regulatory structure that will protect and improve public health.

CTP’s performance to date is very much open to question, given its failures to propose regulations governing the manufacturing quality of products already under its jurisdiction; to process thousands Substantial Equivalent applications; and to communicate practical guidelines to manufacturers for New Product, Reduced Exposure and Modified Risk applications. Substantially increasing the numbers of products the CTP will regulate could make matters worse.

As a public health physician, I strongly support FDA regulation of all tobacco and nicotine-delivery products, provided that regulation is evidence-based, practical and reasonably streamlined in a way that will protect and enhance public health. Unfortunately, it appears CTP is nowhere near meeting this performance standard. The 24-month grace period built into the currently proposed deeming regulations may help sort out these internal problems, but there is nothing in the proposal that indicates CTP recognizes the problems exist.

Though I have no direct insight into the inner workings of CTP, their paralysis appears related to an unwillingness or inability to acknowledge that approval guidelines will expose the public to some degree of risk. This reluctance is compounded by substantial discrepancies between prescriptions in the text of the Law and what our “evidence base” suggests should be done to protect and improve public health.

As I see it, the discrepancies are so severe that, if CTP opts to implement the letter of the Law without administrative discretion to accommodate contrary evidence, FDA efforts will do more harm than good in terms of future rates of tobacco-related addiction, illness and death in the United States.

I respectfully urge FDA to consider alternate approaches in pursuit of public health objectives. After determining which approaches comport with our best evidence, the agency then could consider which actions would fall within a reasonable scope of administrative discretion, and which, if any, might require technical corrections by Congress.

In the best of all worlds, CTP would suspend further consideration of the proposed deeming regulations until it can demonstrate to Congress, industry and the general public that it is successfully executing its existing responsibilities. Only then should it proceed to release an amended set of deeming regulations for public comment.

Suspecting that this will not be done, I offer the following observations and recommendations.

These recommendations are largely based on the “continuum of nicotine delivery products.” They represent one public health physician’s opinion on best how to streamline the FDA regulatory process; bring it in line with the totality of scientific evidence, as opposed to research limited to each newly proposed product; and pave the way for substantial reductions in tobacco-related harms in the United States.

The tobacco control law was intended to reduce tobacco-attributable addiction, illness and death, while allowing adults who choose to do so to continue use of tobacco and non-pharmaceutical nicotine-delivery products. The law was not intended to eliminate such products from the American marketplace by imposing regulatory burdens so onerous that none but the largest of the “big tobacco” companies could comply.

Unfortunately, the Law includes a number of provisions that directly conflict with the evidence base. Discrepancies between the Law and the evidence base include, but are not limited to the following:

  1. Risk to non-users is based on the physical and chemical characteristics of the product, without regard to marketing or social factors;
  2. The presumption that fruit and candy flavors other than menthol are intended to attract children and teens to tobacco use, and that such flavoring is not required to make the lower-risk smokeless and nicotine-only products palatable to adult users;
  3. The presumption that any statement of reduced exposure or reduced risk is likely to attract large numbers of teens and other non-smokers to nicotine use;
  4. Emphasis on chemical analyses as a means of ascertaining the risk posed by a tobacco product, without regard to the lack of certainty regarding how much cancer, heart, lung and other disease risks can be attributed to any given chemical substance;
  5. Disregard of the American and Scandinavian epidemiologic literature demonstrating major difference in risk between cigarettes and smokeless and other tobacco and nicotine-only products.

Because of these discrepancies, proceeding further with implementation of the Law without due exercise of administrative discretion may do more harm than good, in terms of our collective ability to reduce tobacco-related addiction, illness, and death in the United States.

The Law, and CTP implementation to date, both appear to presume that each newly proposed tobacco product is so unique that research findings on similar products cannot be considered. This presumption so substantially increases the cost and difficulty of New Product applications that none have been fully submitted to date. This presumption also substantially increases the burden of processing such applications and denies FDA use of prior literature for baselines and benchmarks with which to judge such applications. The stakeholders who benefit from this presumption are those in the tobacco control community who would prefer to eliminate all tobacco and non-prescription nicotine delivery products, as well as the cigarette and pharmaceutical companies who would like the Law to protect them from competition from relatively low-risk smoke-free and nicotine-only products. However, the presumption does nothing to protect or enhance public health.

Fourteen specific recommendations are listed at the end of this report. Most, if not all, of them can be implemented without congressional action. Where congressional action is required to bring the Law into better concordance with congressional intent, such action should be requested.

Big Ideas: On superheroes, inequality and Hollywood

June 16, 2014, 8:50 AM

From the Washington Examiner:

Mytheos Holt for the R Street Institute: In what is likely the most bizarre story you will read all week, Seattle resident, trained fighter and self-proclaimed “superhero” (read: costumed vigilante) Phoenix Jones has decided to disband his team, the Rain City Superhero Movement (RCSM), citing an amusing problem: A lot of people seeking to join it aren’t all that … well … super. …

What Eric Cantor’s loss — and a quirky economist’s win — means for Republicans

June 12, 2014, 4:50 PM

On Tuesday, Republican primary voters asserted themselves in spectacular fashion by wresting the GOP nomination from House Majority Leader Eric Cantor and giving it to quirky economist Dave Brat, who now looks very likely to win the seat in the fall. This is much more than a run-of-the-mill primary upset. Because Cantor was second in command to Speaker John Boehner among Republicans in the House, his defeat has set off a scramble for power, the outcome of which has yet to be determined.

Cantor’s defeat has led to searching questions about what exactly Brat’s victory means? Let’s run through a few different interpretations.

Immigration. One widely held view is that Cantor’s defeat means that immigration reform is dead. There is one problem with this line of thinking: comprehensive immigration reform, as endorsed by the Obama White House and a bipartisan group of senators that includes Chuck Schumer, D-N.Y., and John McCain, R-Ariz., among others, was already dead. The fundamental bone of contention is whether or not unauthorized immigrants should be granted a path to citizenship, provided they jump through various hoops, like paying back taxes and demonstrating English language proficiency, most of which would be impossible to implement.

Grassroots conservatives staunchly opposed a soft amnesty along these lines when it was proposed by the Bush administration, and they continue to oppose it now. They’ve long had the numbers and the influence in Congress to keep legislation to this effect from making it to President Barack Obama’s desk. It’s true that Cantor and other Republicans, including Boehner, had tried to find ways to revive the immigration reform effort, but they weren’t gaining much traction.

Tea Party vs. the Establishment. Though Cantor is now being portrayed as an establishment Republican par excellence, it is important to remember that he had long styled himself as a more conservative alternative to Boehner, who was always careful to cultivate allies to his right. Cantor predates the tea party, and his urbane manner contrasted with the populist style that is a hallmark of the tea party right.

Nevertheless, Cantor was, by and large, a man with whom tea party conservatives could do business, and he was willing to take on the thankless task of leading often fractious House Republicans. It is true that, as Ross Douthat observes, Cantor was seen as a friend of K Street, the lobbying corridor that does so much to shape American politics on both sides of the partisan divide. But it’s only relatively recently that (some) tea party conservatives decided that they wanted Cantor’s scalp. To suggest that Cantor’s defeat is a victory for the Republican right over the party’s squishy centrists is not quite correct.

Change vs. the Status Quo. My preferred interpretation is that Cantor’s defeat represents a defeat for those Republicans who believe that there is nothing wrong with the party that can’t be solved by a charismatic candidate and moving to the left on social issues like marriage equality and immigration reform. National Review senior editor Ramesh Ponnuru laments Cantor’s defeat because he had done so much to tout the work of conservative policy thinkers offering an alternative to the centralized, top-down, big-government policies offered by the left and the coziness with big business and Wall Street that defines too much of the right. He is right to do so. Cantor really did make an effort to open up the domestic policy conversation on the right.

Yet like Douthat, Ponnuru suggests that Cantor’s shift might have been too little too late: had Cantor been quicker to champion Main Street over Wall Street, he might have bested Brat. Instead, Brat’s call for a Main Street agenda resonated with enough GOP primary voters to put him over the top. If Brat’s success doesn’t demonstrate that rank-and-file Republicans are hungry for change, nothing will.

The tea party movement does not represent some irrational, nihilistic force, as its critics both inside and outside of the Republican coalition maintain. Rather, it is a movement founded on the belief that the Republican elite has grown fat, happy and complacent at a time when the country faces serious challenges — economic, fiscal, and social — and that the elite needs to be shaken out of its torpor.

What the movement needs is an agenda: something to be for, not just something to be against. Cantor’s defeat underscores that this longing for change persists, and that it won’t go away until Republicans start seriously addressing the economic stagnation at the bottom and the crony-capitalist corruption at the top of the American economy.

The California Earthquake Authority: A confused success story

June 12, 2014, 4:22 PM

This year, the California Senate Insurance Committee has hosted two informational hearings on earthquake risk, bringing together stakeholders, regulators and thought-leaders.

The fact is that Californians are overexposed and underinsured. The desire to live in a beautiful environment outweighs the certainty of earthquake loss, as the state’s population continues to concentrate itself along the coast in two of the most seismically active areas of the world. The likely impact of a significant earthquake increases apace.

Modeling done in contemplation of the 100th anniversary of the 1906 San Francisco earthquake estimated that, were an identical event to occur today, the total economic loss to the region would be $260 billion. In that event, California would not be facing an insurance crisis. Instead, it would be facing a massive depression.

Leaving aside commonsense questions about any individual’s wisdom or responsibility in moving to dangerous locations, or government’s baffling public policy support of such foolish decisions, we must accept as a reality that people willingly put their lives and property in the path of certain disaster. Is sympathy wasted on the person bemoaning her flood loss after she built her castle on the banks of the certain-to-flood Mississippi?

The California Earthquake Authority – a publicly managed, privately funded, state residual market entity – was established in the wake of the 1994 Northridge earthquake. That earthquake measured 6.7 on the Richter scale, killed 60 people, destroyed thousands of homes, businesses and apartment complexes, and is, to date, still the costliest quake that California has experienced.

Insurers had dramatically underestimated their exposure to a Northridge-like earthquake. The insured loss in Northridge was more than four times the $3.5 billion in earthquake premiums collected by all earthquake insurers in California from 1969 through 1994.

Because California law requires insurers that sell homeowners insurance to also offer earthquake insurance, insurance companies’ response to Northridge was to attempt to reduce their earthquake exposure by restricting the sale of new homeowners policies. Insurers representing more than 93 percent of the homeowners market either reduced their sales of new policies or stopped writing entirely. Lenders, builders and realtors started to howl in economic pain. A state residual market entity, though controversial, was deemed necessary because of the problems caused by Northridge’s effect on the homeowners insurance industry.

Over time, the animating rationale undergirding the genesis of the CEA has changed. Just what was “the problem” that policymakers were seeking to address?

It is often assumed that the CEA was created to increase earthquake coverage, which is a reasonable assumption, given that the Northridge quake preceded the CEA’s creation. However reasonable, that assumption is wrong. Floor analysis from the time makes clear that the CEA was created in an effort to ensure that homeowners insurance remained available, in spite of the specter of seismic catastrophe.

To wit, the CEA’s primary function is not as a guarantor against earthquakes, but rather as a stabilization mechanism in the homeowners insurance market. Expanding the number of Californians with earthquake coverage is an ancillary benefit.

In each of this year’s hearings, a consensus developed that the CEA has been at once a success and a failure. The success was that the CEA has ushered in a new era of stability to the residential homeowners insurance market. The purported failure is that availability has not resulted in most homeowners being protected against earthquake risk.

It is odd that the CEA is indicted for failing to achieve what its creation did not anticipate. In fact, though financially robust, the CEA’s inability to cover a large proportion of Californians should surprise nobody. As far as take-up rate is concerned, one problem is affordability. As far as affordability is concerned, the problem is a high risk and a small pool of insured. For people willing to move into the jaws of disaster, insurance to cover such risks will be costly.

To solve the problem of affordability, both of California’s U.S. senators, with support from the CEA, have tried to put everyone else in the nation on the hook for California’s earthquake coverage. Their proposal would establish a system by which California would pay fees to the federal government in exchange for loan guarantees to the CEA, allowing it to reduce its premium rates and increase its take-up rates. As one would expect, the California Senate has seen fit to endorse just such a proposal. Senate Joint Resolution No. 28 urges the federal government to implement the “Earthquake Insurance Affordability Act.”

Eli Lehrer soundly dispatched the viability of such a federal approach back in 2011. In primis, a loan-based approach does not spread risk adequately to sustain the rates necessary to make the CEA policies practicable to purchase.

Are there other solutions to expanding the number of Californians covered by earthquake policies? Some might say a more desirable alternative would be to require, as a condition of securing financing for real property, earthquake insurance coverage in earthquake-prone areas. Such a mandate is comfortably within existing precedent. For example, federally backed mortgage securitizers Freddie Mac and Fannie Mae already require homeowners’ insurance and, in flood prone areas, flood coverage. As long as homeowners policies are linked by law to an earthquake offer, as a matter of long-term strategy, such an approach could be brought to bear.

But given the status quo, and aside from their market distorting infirmities, such insurance mandates are likely to lead to technical complications. For instance, mandating earthquake coverage could cause problems in California since the CEA is statutorily required to stop issuing policies within 180 days of exceeding its financial capacity. The CEA maintains that mandatory coverage would push the agency over the statutory limit. If so, it is clear that mandatory coverage would require a sizable increase of insurance capacity.

With regard to capacity, one school of thought holds that the scale of California’s earthquake risk is simply too big for capital markets to cover and that there is no way of “insuring our way out” of the present situation. R.J. Lehmann makes a compelling case that there is currently no such deficiency and that, even now, the private market is willing and able to take-on more earthquake risk. If Lehmann is correct, increasing CEA capacity is not a question of ability, but is, rather, a question of will.

More importantly, the private market could be induced to take-on more earthquake risk. A more straightforward approach to expanding coverage while maintaining the homeowners insurance marketplace could be pursued by simply “de-linking” homeowners policies from mandatory earthquake policy offers. This free-market approach would allow smaller insurers to enter the homeowners market, while simultaneously freeing up other insurers to more aggressively approach the earthquake insurance market.

Regardless of how the earthquake coverage problem is resolved, the CEA should be considered a success. It alleviated a dire situation in which insurers were forced to refuse to sell even basic homeowners policies. And yet, the existence of the CEA should also serve as a reminder that California’s penchant for micro-managing insurance practice has had profoundly dangerous, unexpected and distortionary consequences.

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

Paper puts cost of patent trolling at $22B

June 12, 2014, 3:28 PM

A new research paper has calculated that frequent lawsuits by patent assertion entities—or patent trolls as they are known pejoratively—has scared off some $22 billion in venture capital investment over the past five years.

Advocates of patent reform long have argued that patent trolls – which buy up and hoard low-value patent with the intent to claim infringement should another company develop a similar product or device – have had a deleterious effect on entrepreneurs and start-ups. The paper, by Catherine Tucker, a professor at MIT’s Sloan School of Business, is believed to be the first to quantify the damage statistically. The research was commissioned by the Computer & Communications Industry Association.

In her 48-page paper, Tucker measured the statistical correlation between levels of patent litigation and venture capital investment in the United States between 1995 and 2012.

We find that VC investment, a major funding source for entrepreneurial activity, initially increases with the number of litigated patents, but that there is a “tipping point” where further increases in the number of patents litigated are associated with decreased VC investment, which suggests an inverted U-shaped relation between patent litigation and VC investment….There is some evidence of a similar inverted U-shaped relation between patent litigation and the creation of new small firms. Strikingly, we find evidence that litigation by frequent patent litigators, a proxy for PAE litigation, is directly associated with decreased VC investment with no positive effects initially.

Among her conclusions is that frequent patent litigators reduced VC investment by $21.8 billion over the past five years, relative to a baseline of $131 billion that VCs invested in start-ups and innovation over the same period. Frequent litigators are defined as companies that file 20 or more patent lawsuits. The direct costs of legal fees and settlements for this type of litigation were between approximately $3.77 billion and $18.9 billion in 2012.

The report puts more sting into the tabling of the Senate’s Patent Transparency and Improvements Act, which, among other points, would have codified a “loser pays” stipulation if a court found a patent case is frivolous. One of the reasons patent trolls are so successful is that it is in the financial interest for defendants to settle, rather than risk the costs of a lengthy trial, even if the accused infringer stood a good chance to win. The patent assertion entity extracts its settlement fee and, at the same time, avoids having the validity of its claim adjudicated. In short, it lives to troll another day. A “loser pays” regime would provide more incentive for a defendant to take the case to court, and mean more risk for a troll when pressing dubious claims.

Hat tips to Ars Technica and CCIA for their posts.

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

Student debt isn’t the problem. Colleges are.

June 12, 2014, 2:40 PM

If you borrowed money from the federal government to finance your education and you’re having an extremely hard time paying it back, I have good news for you. President Obama has just signed an executive order that expands eligibility for Pay As You Earn, a new-ish program that caps the monthly debt payments of eligible borrowers to no more than 10 percent of their monthly income. And if you still have outstanding debt after 20 years, or 10 years if you work in the public sector or for a nonprofit, it will be forgiven, like a youthful transgression.

You crazy kid! Remember when you thought taking on this student loan debt made sense because getting a college education meant that you’d eventually earn enough to pay it off? Oh gosh. Those were the days. Clearly you had been passed the peace pipe once too often.

Cutting debt payments for cash-strapped borrowers is a nice gesture. In 2008 and 2012, Barack Obama fared well with under-30 voters, and Pay As You Earn will give some of them a nice little boost, just in time for the midterm congressional elections. But there is a much larger problem that the president’s feel-good proposal fails to address, which is the fact that people who take on federal student loan debt aren’t earning enough to pay it back. America’s higher education institutions aren’t offering value for money. And that’s a problem that tinkering with the federal student loan program won’t solve.

To state the obvious: Borrowers can’t handle their debt payments because of the general weakness of the economy. It would be far easier for borrowers to repay their student loan debt if they weren’t unemployed or underemployed, and it would be easier still if they were employed in jobs that offered robust wage gains over time. Yet the debt crisis also reflects the corruption of mass higher education in America.

You’ll notice that I’ve been referring to borrowers and not to college graduates. There’s a good reason for that. A large number of the Americans burdened by student loan debt never actually finished a degree. I can’t give you an exact figure because, until recently, the federal loan database didn’t actually track completion. What we do know, however, is that those who complete degree programs tend to earn substantially more than those who don’t. The college wage premium, or the ratio of the median hourly wage of college graduates and that of those who’ve only graduated from high school, increased at a fast clip in the 1980s and the early 1990s, but it’s been hovering around 1.8 for the past several years. That is, college grads have a median wage 80 percent higher than high school­–only grads. The premium for those with “some college” has been stuck between 1.15 and 1.2 for about 30 years.

Some of these noncompleters will be eligible for help from Pay As You Earn, and I’m sure many will be grateful for it. The fact remains that, even in this best-case scenario, noncompleters will still be obligated to fork over one-tenth of their often quite modest incomes to loan servicers. There goes at least half of your wage premium.

I know what you’re thinking. “Well, Reihan, the real problem is that college isn’t free. If colleges didn’t charge tuition, we wouldn’t have to worry about student debt.” That’s true in the most literal sense. But if the public sector is picking up the tab for higher education, so are all taxpayers, whether they’re college-educated or otherwise. Do we have good reason to believe that the federal government will do a great job of whipping colleges into shape if it controls the purse strings? Some smart, thoughtful people, like Sara Goldrick-Rab and Nancy Kendall of the University of Wisconsin, seem to think so. Take a long, hard look at federal programs like Medicare and you might think differently.

Granted, there is a strong case that higher education is a public good that generates positive spillovers, which is to say benefits that aren’t captured by the individual actually getting the education, and so I definitely think that there is a place for subsidies. Yet there are limits to the subsidize-everything-that-moves strategy. Right now, federal student aid subsidizes attendance at any accredited college at virtually any price. The result is that students have no way of knowing which colleges offer the best bang for the buck, and colleges have little incentive to get better at actually serving their students. By declaring that taxpayers will pay for just about anything labeled “higher education,” whether or not it translates into skills that young people can actually use, we have entrenched the worst aspects of the higher education status quo, from wasteful spending to a borderline criminal indifference to the well-being of students—particularly the poorest, most vulnerable students.

Consider the findings of Paying for the Party, a masterful account of the many ways life at a large Midwestern flagship public university is rigged against students from working- and lower-middle-class backgrounds. Over the course of five years, the sociologists Elizabeth A. Armstrong and Laura T. Hamilton tracked a group of female students at “Midwest University,” a thinly disguised big public flagship school, starting in their freshman year. One of their most striking findings is that standard college advising consistently failed to meet the needs of students from modest backgrounds. Students from affluent backgrounds had extensive social networks at their disposal, which helped them turn degrees in “party majors” like sports communication and broadcasting or interior decorating into jobs in glamorous, or glamorous-sounding, fields. Students who didn’t have parents familiar with the ins and outs of higher education to help them navigate the system found themselves at the mercy of incompetent, indifferent and overworked advisers who routinely led them astray.

Many of the students profiled by Armstrong and Hamilton thus wasted precious dollars, and precious years, taking courses that ultimately proved useless to them. It was this opportunity cost—the wasted time these young women might have spent learning something useful elsewhere, at a school that actually gave a damn about them—that is the real tragedy at the heart of Paying for the Party. It’s not clear that making Midwest University tuition-free would suddenly make its administrators more attentive to the needs of their students. If anything, it might ease what little pressure there is now to offer value for money.

So what can we do to address the many ways higher education is failing young Americans? A good first step would be to punish colleges that have failed their students, as Andrew P. Kelly and Alex Pollock of the American Enterprise Institute have suggested. The basic idea is that if a student defaults on her student loans, the higher education institution she attended should pay a penalty. The genius of this idea, as Kelly has explained, is that it would make colleges think twice about their lackluster advising, even if the penalty were quite small. Colleges would suddenly have an excellent reason to guide students to majors that would help them gain marketable skills. The usual objection to this notion of giving colleges more “skin in the game” is that colleges would become extremely selective to minimize the risk of default, and this in turn would deny large numbers of students the opportunity to get an education in the first place. The reality is that the vast majority of America’s higher education institutions are nonselective, and colleges that refuse to even try to educate students who need competent guidance would quickly find themselves out of business.

More broadly, we’d do well to rethink higher education from the ground up. Thinkers like Kelly and New America’s Kevin Carey often talk up the importance of breaking down the barriers to entry in higher education—of making it easier for new higher education institutions better-suited to the needs of today’s students to get up and running, and to compete with existing colleges that are failing to offer value for money.

Anya Kamenetz has gone even further in “$1 Trillion and Rising: A Plan for a $10K Degree,” a report from the think tank Third Way that offers a step-by-step roadmap for transforming public higher education. While Kamenetz appreciates the importance of lowering tuition, she emphasizes institutional reforms that would also lower the cost of high-quality instruction. Among other things, she envisions “cohort colleges” that offer students who need the most help intensive advising and instruction designed to help them meet their educational goals and short-term pop-up schools that would meet the lifelong learning needs of working students looking to learn specialized skills. Flagship schools, meanwhile, would be transformed from elitist bastions that take pride in their exclusivity to educational innovation hubs, where resources would be devoted not just to teaching students lucky enough to be on campus full time, but also commuters educated at satellite campuses throughout the state.

I get why President Obama is talking about student loans. Telling your voters that you want them to keep more of their own money is always a political winner. Just ask every Republican since Jack Kemp. And the president has, to his credit, made occasional noises about reform, most recently when he proposed a new college ratings system, an idea that the higher education lobby has correctly interpreted as a threat to its lucrative incompetence.

But he hasn’t gone far enough. It is egregious that students, parents and taxpayers are the ones who suffer when colleges don’t do their jobs while the colleges in question are left untouched. We simply can’t let them get away with it anymore.

Open letter to Congress: Support amendments to reform crop insurance

June 11, 2014, 11:11 AM

June 11, 2014

An Open Letter to the United States Congress:
Support Amendments to Reform Crop Insurance

Dear Representative,
On behalf of the millions of members of the undersigned organizations, we urge your support for two key amendments to H.R. 4800, the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act of 2015.

First, we encourage all members to vote in favor of Rep. DeLauro’s amendment to prohibit funding for outreach and education regarding federal crop insurance supports to farms with an adjusted gross income above $250,000. The federal crop insurance program serves as the main support for most farmers, and the recent farm bill expands its scope even further. Without proper controls, it will be an unjustifiable burden for taxpayers while primarily benefiting a small number of wealthy agribusinesses, which should bear more of their business risk themselves given mounting concerns about the size of our federal budget.

The House is already on record in favor of limiting crop insurance subsidies for wealthy farmers. During the recent farm bill process, a Sense of the House passed in favor of reducing premium support for those with an adjusted gross income above $750,000. Thus, simply limiting education and outreach to those with an AGI above $250,000 should be an easy vote for those who supported the much more stringent measure in late 2013. We urge you to take this step and limit the advertisement of subsidies to the richest Americans and their businesses.

Second, we hope all members will support an amendment from Reps. Kind, Petri, Sanford, Polis, Speier, and Duncan defunding USDA’s concealment of recipients of crop insurance premium support. Given that 26 farm businesses receive more than $1 million in premium support alone, it is simply unacceptable that taxpayers are unable to see who benefits from their support.

Reforming our nation’s farm programs to ensure fiscal responsibility and accountability should be a high priority for all members. We urge you to take this opportunity and make important changes toward that goal by voting yes on these amendments.


Lori Sanders
R Street Institute

Grover Norquist
Americans for Tax Reform

Norm Singleton
Campaign for Liberty

Jeff Mazzella
Center for Individual Freedom

Rob Sisson

Mattie Duppler
Cost of Government Center

Seton Motley
Less Government

Pete Sepp
National Taxpayers Union

David Williams
Taxpayers Protection Alliance

Swedish Match files to change smokeless tobacco warnings

June 11, 2014, 10:36 AM

Swedish Match has filed a modified risk tobacco product application with the FDA Center for Tobacco Products. The landmark event was announced in an Associated Press story.

The company wants to change three health warnings on ten of its snus products manufactured by the company in Gothenburg, Sweden and sold in the United States.

  1. Remove the current warning: “This product can cause mouth cancer.”
  2. Remove the current warning: “This product can cause gum disease and tooth loss.”
  3. Replace the current warning: “This product is not a safe alternative to cigarettes,” with this text: “No tobacco product is safe, but this product presents substantially lower risks to health than cigarettes.
  4. Retain the current warning: “Smokeless tobacco is addictive.”

Numerous studies document that the three targeted warnings have essentially no scientific basis (discussed here). I previously noted the bogus nature of the mouth cancer warning, which was mandated in 1986, five years after Dr. Deborah Winn mischaracterized the magnitude and scope of smokeless tobacco’s mouth cancer risk (discussed previously here and here). There is no foundation for an oral cancer warning for today’s American and Swedish smokeless products.

The gum disease/tooth loss warning is equally inappropriate. Even in 1986, there was virtually no scientific evidence that smokeless tobacco was an independent risk factor for any dental problem. The same is true today.

The not-a-safe-alternative warning is particularly egregious. The purpose of this 1986 warning was to deceive smokers into believing that smokeless tobacco was just as dangerous as smoking. As I wrote in my book, “For Smokers Only,” this warning is simply ludicrous.

Swedish Match’s replacement warning is identical to a change requested by R.J. Reynolds in a citizen petition filed with the FDA three years ago. The FDA ignored that petition, but it is obligated to consider the Swedish Match MRTP application. After an administrative review for completeness, the agency must refer the application to the Tobacco Products Scientific Advisory Committee and ask TPSAC to report its recommendations on the application to FDA within 60 days. The FDA will also make the application public and request comments. Final action on application should be complete within one year.

The misinformation in the current warnings has been shown to discourage smokers from switching. This welcome filing by Swedish Match could dramatically alter the landscape for tobacco harm reduction.

Conspicuous production

June 11, 2014, 10:13 AM

We are living in an era of makers. The objects being made are diverse: quadcopters, decorations, blog posts and hand-bound notebooks. The ones we hear about have some aspiration of commercial viability but the vast majority of these are labors of love or, perhaps less romantically, contributions to a vast status game played by an increasingly creative populace.

If Thorstein Veblen were still around, he might have a less rosy view of all of this conspicuous production than Chris Anderson or the folks at Make.

Nonetheless, you can’t help but feel there’s something wonderful about it. Was not the Marxist dream to overcome the “kingdom of necessity,” the world in which you had to do menial work in order to get by and had time for little else? There might be no better description for this time of indulgent creative energy, in which have abundant time to channel outside of work.

Moreover, in the past, one sought to legitimize such channeling by attempting to make it your day job. Now, people like Austin Kleon are actively defending the choice to stick with the boring job that pays well so you can have the freedom to do whatever you want creatively, on your own time and on your own terms.

Kleon also urges a most conspicuous kind of production. His rallying cry is Show Your Work. Not only should we be sharing our creative objects to the world once they are completed, but we should put the whole process out there. Make it public.

The problem in the world of policy is that law was long ago optimized to the head and remains unaware of the long tail. This may not have been so big a problem 10 to 20 years ago, but now hobbyist activities are a single Kickstarter project away from commercial viability.

Laws that raise barriers to entry that are acceptable at the usual scale of business may be prohibitive at the scale of integrating our conspicuous production into the ecosystem of regular commerce. Now more than ever, we need a permissionless approach to regulation. Not an everything-goes approach, but laws that make use of after-the-fact corrections, rather than prior restraint.

We live in flexible times and we need a regulatory regime that is flexible, and able to change with this changing reality on the ground.

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R Street testifies in support of free-market pricing in secondary ticket markets

June 10, 2014, 12:05 PM

LANSING, Mich. (June 10, 2014) - Offering tickets for resale on the secondary market should not be tantamount to a crime against the state, said Alan Smith, R Street midwest director in front of the Michigan Senate Government Operations Committee.

In a hearing to examine HB 5108, which would allow the resale of event tickets at higher or lower prices, Smith reiterated R Street’s support of the bill, which would put Michigan on an even playing field with most other states.

“It is counterintuitive to imagine that offering up property for resale at whatever price you establish in the marketplace is a crime against the sate,” said Smith. “What the public supports is the idea that even when an event is sold out, somebody for the right price will let you go in his or her place.”

Smith argued that markets are much more adept at working out ticket values than are any group of public officials, but cautioned that free market pricing does not necessarily negate the need for government protection against online scams and misallocations. 

“Limited, efficient government may also mean that laws targeting fraud may have to be occasionally updated to reflect all the improvisations of electronic age thieves,” he said. 

Should taxpayers insure office buildings and sports stadiums against terrorist attacks?

June 10, 2014, 11:52 AM

From the Washington Examiner:

As both Lawler and insurance expert Ray Lehmann of the R Street Institute point out, this is yet another fight pitting big business (the insurers and the property owners) against the Tea Partiers.

Testimony on Michigan ticket freedom bill

June 10, 2014, 11:49 AM

Testimony on House Bill 5108
Alan Smith, R Street Institute Midwest Director
Tuesday, June 10, 2014
Michigan Senate Government Operations Committee

Good afternoon Chairman Richardville and members of Senate leadership constituting the Government Operations Committee. Thank you for the opportunity to be heard today. I am Alan Smith, and I am a senior fellow and Midwest Director for the R Street Institute, a national think tank based in Washington, D.C., that supports free markets and limited, effective government. We’ve been engaged on several issues in Michigan during this session having to do with public policy solutions to challenges for Michigan residents.

As a think tank, we advocate for principles, not particular commercial interests. The first principle is that we have way too many crimes. The states of this nation have devoted much energy lately into refocusing public approbation and punishment on behavior that threatens lives as opposed to preferences. We may have a citizenry that is more prone to violence and more dishonest than we have had in the past, and we have to deal with this; but neither of these underlies Michigan’s 80-plus-year-old law that criminalizes certain transfers of property having to do with entertainment venues. As former U. S. Senator and Ambassador Daniel Patrick Moynihan famously observed, we started with a few laws and now we have “catalogs of offenses.” Actually, I counted them last night. There are currently 87 chapters of offenses in the Michigan crime catalog spanning Abduction to Weights and Measures.

The Heritage Foundation, the Texas Public Policy Foundation, the Washington Times, the Providence Journal, the Economist, many law review articles and attorney associations, including the American Bar Association have all come to the conclusion that this country is massively oversubscribed to criminal laws. An excellent 2009 book called One Nation Under Arrest is available from bookstores and the academics in this field are reading a law review articleby Douglas Husak, a Rutgers lawyer and philosophy professor, entitled “Overcriminalization: The Limits of the Criminal Law, published in 2008. Husak contends the first principle of criminalization is that criminal liability should not be imposed unless statutes are designed to prohibit a “nontrivial harm or evil.”

The second principle is that good public policy is understandable by the public. When people dole out a portion of their budget for the privilege to attend events they enjoy, it is counterintuitive to imagine that offering up that property, lease, or whatever you call it for resale at whatever price you establish in the marketplace is a crime against the state. Of course, in the overwhelming majority of states, it isn’t. To be specific, of the 27 states that have enacted laws regarding ticket resale, only 11 states generally ban selling tickets for more than face value, and all but three allow resellers to charge a service fee. By generally, I mean overall regulation, because several states have laws pertaining to tickets for specific events at universities, NFL games, NASCAR and the like.

A third principle is that good public policy is supported by the general public. What the public supports is the idea that, even when an event is sold out, somebody for the right price will let you go in his or her place. First come, first served is a traditional way to allocate resources, but it is not the only way, or we wouldn’t have handicapped parking spaces. How does the government distinguish between the serious Brazilian fans who stood in line all night to buy the extra World Cup soccer tickets last week, and the serious fans around the world who bought out all the major matches online in a couple of hours? One way of developing sound public policy is to allow the person who will ultimately place the most value for sitting in that seat to fund that experience. Moreover, who among us has not purchased something with the idea that it might become more valuable at some point, and that we might convert that value by selling it?

Even though we are a free-market-oriented public policy organization, we are not suggesting that, for instance, universities shouldn’t be allowed to organize their events in a way to assure that their students and alumni get preferences for attendance. We support, and you should, anybody’s right to draw up agreements that harness the well-traveled law of contracts or property to determine the placement of tickets. We support, and the public clearly understands, that licensees at entertainment venues may be ejected for inappropriate behavior. None of this however, needs to be backed up by Michigan criminal laws describing an offense against the state.

For those of you with backgrounds in economics, you well understand that the markets are much more adept at working out values than are any particular group of government officials. I’m sure many of you read that the average secondary market price for Stanley Cup finals tickets is twice as high as the rematch games between the San Antonio Spurs and Miami Heat for the professional basketball title. This is a product of a functioning market. Should the government be deciding if this is right or wrong? Or too expensive?

We do not suggest that the market can forego protection against automated online scams and misallocations. Limited, efficient government may also mean that laws targeting fraud may have to be occasionally updated to reflect all the improvisations of electronic age thieves. But the state should be cautious about lawmaking in an area that is essentially a software war.

In summary, we cheer Michigan in its desire to join most other states by opening up secondary markets for both individuals who have decided for whatever reason to resell their tickets, and the businesses who have sprung up to organize these marketplaces.

I will be delighted to discuss any of this in more detail, or to answer any questions you may have for me.

In memoriam, Sean Carr

June 10, 2014, 10:07 AM

Sean P. Carr, one of the best reporters covering the insurance industry here in the nation’s capital, died suddenly last night from complications during emergency surgery, just a few weeks shy of what would have been his 44th birthday.

Sean and I go back almost exactly 20 years. In my first job in journalism, I was (briefly) a staff writer reporting to Sean as editor of the weekly Elizabeth Gazette in Elizabeth, N.J. After a couple weeks, I was promoted to head my own paper, The Springfield Leader, and together Sean and I were recognized that year by the New Jersey Press Association with awards for editorial commentary. Our publisher swept the category.

In 1996, I replaced Sean as beat writer covering the communities of Lakewood and Point Pleasant, N.J. for the (sadly, now defunct) daily, The Ocean County Observer. Given our similarities in stature, complexion and hair and eye color, some local politicians weren’t even aware the paper had changed reporters, a problem that would recur throughout our careers.

Our paths diverged for a few years, as I went west to California and then south to Florida, and Sean for a time left journalism for politics, working on campaigns in New Jersey, Pennsylvania, Michigan and Arizona. They converged once again a decade ago in Washington, D.C., where I had moved to become bureau chief for the insurance news service A.M. Best and Sean was doing communications for the SEIU. After a failed attempt to recruit him to Best’s in 2004, I finally managed to lure him into the wacky world of insurance in 2007, hiring him to cover the NAIC.

I left A.M. Best for SNL Financial in 2009, and Sean subsequently replaced me as bureau chief. And when I left SNL in late 2011 to join Eli Lehrer at the Heartland Institute, he took my old gig at SNL. I continued to act as a source for his stories, though this required us to negotiate some loose and informal rules, particularly in our daily Gchat conversations, about which tidbits were to be considered on or off the record. My foul mouth, more than anything else, pushed most of these dialogues into the latter category.

For two guys whose lives and careers were as intertwined as ours, Sean and I did not share the same politics. I am a committed advocate of free markets and deregulation. Sean was a dyed-in-the-wool leftist with a background in the labor movement. In our younger, more hot-headed days, this clash sometimes led to loud newsroom shouting matches.

But on much else, we shared a lot of common ground, including our mutual love of Guinness, dogs and Star Trek. And our common ground helped our politics grow closer, the older  we got.

We both shared a love of science, and it was Sean (who had graduated with a degree in human ecology from Rutgers University’s Cook College) more than anyone else who eventually was able to convince me that climate change and other environmental ills were serious problems that merited a public policy response, even if we likely wouldn’t agree entirely on what the contours of that response should be.

And as two guys who both grew up in blue collar communities in New Jersey, I like to think I was able to bring him around to the realization that many government programs and regulations, pitched as in the “public interest,” are in fact merely tools that big corporations and other established interests use to crush small business and innovative new competitors.

I will miss those talks. I will miss Sean’s joy for life, his distaste for bullshit and even his goofy puns. The worlds of insurance and journalism both are a bit dimmer today, as they each lost one of their guiding lights. I lost one of my best friends, and my brother-in-arms.

UPDATE: I just received this very thoughtful note from former Sen. Ben Nelson, D-Neb., who is now serving as president of the NAIC:

I’m sorry you lost such a close friend. Makes Sean’s loss even more difficult. I enjoyed my brief experience with him and considered him professional. Thanks for sharing your common journeys. Memories will prevail.

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Join R Street’s Christian Camara in Pembroke Pines

June 09, 2014, 12:51 PM

R Street State Affairs Director Christian Camara will take part this Thursday in a forum sponsored by Florida International University’s Metropolitan Center on “The Hurricane Threat: Issues in Coastal Vulnerability.”

Joining a panel with state Rep. Joe Gibbons, D-Hallandale Beach, and experts from the Broward County Emergency Management Division, the FIU International Hurricane Research Center and the Metropolitan Center itself, Camara will discuss how Florida’s government-subsidized system of property insurance harms the environment and makes the state more vulnerable to hurricanes, both physically and economically. He will focus in particular on the incentives to build in high-risk, environmentally sensitive coastal areas, which place more life and property in harm’s way, as well as the enormous liabilities the state’s taxpayers carry.

To sign up to attend the event, scheduled to start at 8:30 a.m., June 12 at the FIU Broward Pines Center in Pembroke Pines, Fla., follow this link to the RSVP page.

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Moylan on Virginia’s TNC ban

June 09, 2014, 11:52 AM

R Street’s Andrew Moylan joined Afternoon Constitutional host Joe Thomas of WCHV-FM, 107.5 in Charlottesville, Va., to discuss Virginia’s recent cease and desist letter to transportation network companies like Uber and Lyft. Click the embedded link below to listen to the audio.


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Terrorism insurance pits NFL and NHL against tea party

June 09, 2014, 10:46 AM

From the Washington Examiner:

R.J. Lehmann, an insurance analyst and co-founder of the free-market R Street Institute, favors a slimmed-down TRIA program, rather than complete termination, acknowledging that “terrorism insurance is a little more complicated” than flood insurance. Private terrorism insurance may not be available if the program ends, he said.

He added that “with flood insurance, you’re subsidizing people to take risks they wouldn’t otherwise take. It’s not clear with terrorism insurance that that’s generally a problem.”

Why liberals should stop predicting the death of conservatism

June 09, 2014, 10:42 AM

From the Huffington Post:

This became evident at a recent panel held at Columbia University by The Current, a journal of culture, politics and Jewish affairs. The event featured a former conservative, Columbia Professor of Humanities Mark Lilla, and conservative thinker Reihan Salam of The National Review. Both thinkers believe that anti-statist ideology is genuine and deep-rooted, and not the last whimper of white supremacy or a disingenuous political posture. Lilla yearns for the moderate conservatism of the past, while Salam embraces the reformist drive of movements like the Tea Party. It is the conservatism of Lilla that has died; populist libertarianism is on the rise…

…Conservative commentator Reihan Salam of The National Review also believes there is a broad base of anti-government sentiment, but he holds a far more positive view of populist, “grassroots” conservatism. A Bangladeshi American, Salam disputes that conservatism is a movement for bigoted whites. During the panel, he noted that most conservatives under 40 support gay marriage, and argued that polling demonstrates that views on race are actually very similar across the ideological spectrum. In his view, the emergence of movements like the Tea Party is a direct consequence of the failures of an inept and profligate Republican establishment. In a recent piece in Slate, Salam maintained that Tea Party populism can be “the most constructive and powerful political force of our time” if it attacks not only Washington, but also the “Washington-Wall Street axis,” and the crony capitalism that accompanies this relationship. While Lilla yearns for the conservatism of yesteryear, Salam embraces the grassroots libertarianism that is driving the movement today.

Virginia’s war on Uber and Lyft

June 09, 2014, 10:04 AM

The hidebound arm of an administrative state once again has descended upon one of the nation’s most visible, exciting and novel industries. The Virginia Department of Motor Vehicles on Thursday furnished both Uber and Lyft — businesses that match people willing to pay for rides with people willing to provide them — with letters demanding they cease and desist operations within the commonwealth.

The DMV alleges these companies are operating in violation of Virginia law. While that may be true, attempting to kill a disruptive technology is a regrettable way to handle the problem.

The regulatory framework in Virginia was crafted to accommodate existing industries, and it doesn’t have a category that’s appropriate for a business like Uber or Lyft. The state doesn’t interfere with “ride-sharing arrangements” in which no money changes hands, but all “for-profit passenger carriers” must obtain operating authority from the state. To provide rides for pay, the commonwealth has determined, Uber’s and Lyft’s drivers must be licensed as taxicab operators, and the services must register either as common carriers or as contract carriers.

Virginia’s DMV is still studying the law, and the Legislature may well change it in the next session, but the state has asked Uber and Lyft to stop their “illegal operations” in the meantime.

By its very nature, innovation will force regulators to play catch-up. But why must innovation languish in the face of regulatory torpor? If instead we wanted to facilitate novel industries, what would our approach to regulation look like?

It certainly would not ask an administrative body to abdicate its duties. If anything, it would require full and robust communication between the novel industry and its potential regulator. Frank, timely and clear conversation about new practices, organizational principles, and early experiences can help regulators and policymakers alike assess how best to accommodate the new industry.

With less aggressive regulation, the civil-liability system, though fraught with excess and absurdity, could handle cases in which novel industries harm customers or others. And should a novel industry prove too disruptive, legislators, not regulators, could act. Regulators are bound by the scope of their devolved authority, while lawmakers are better equipped institutionally to address whatever fresh policy questions such industries pose.

The ongoing struggle of the transportation network companies (TNCs) — lodestars of the innovator-vs.-regulator conflict — has painted in stark terms the downsides of regulatory security blankets. Virginia’s present approach, one akin to forcing square pegs into round holes, is frustrating for both regulators and regulated firms.

When the administrative state lacks the ability to regulate a new business efficiently, it should grant the business some space, rather than trying to force it into existing regulatory categories. In exchange for granting innovators this space, society will more quickly experience the benefits of novel businesses and learn to avoid the shortcomings of innovation. Most importantly, society will again experience the transformative power of creative liberty.

The negativity of the Virginia DMV was predictable, but is not necessarily the Homeric victory of the TNCs. As evidenced by their inevitable difficulties in California, they too may not be playing their role in the “facilitative approach.” But at the end of the day, administrative institutions must adapt to disruptive technology. Until they do, we all lose.

Pioneering innovative new approaches to rectangles

June 06, 2014, 1:24 PM

Microsoft, one of the largest corporate holders of patents in the United States, received another major bundle of approvals this week from the USPTO. In addition to some interesting sounding utility patents — including a device for identifying and tracking multiple humans over time, a technique for motion-parallax 3-d imaging and several built around the concept of “action trigger gesturing” — the company also brought in a haul of design patents, including one for a new font.

Also in that cache are three new design patents for what’s described as “a display screen with graphical user interface.” These (D706281, D706285 and D706286) one must admit, are a bit more inscrutable. It would appear, at first glance, that USPTO has deemed as “novel” and “nonobvious” the display of various arrangements of rectangles on a digital screen.







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