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Private Retirement Plan a Cover for Bloated Public Pensions

April 05, 2016, 2:29 PM

From Fox and Hounds Daily

California’s Democratic leaders announced a “landmark deal” Monday to raise the minimum wage to $15 an hour by 2022. Yet it may be overshadowed by another milestone from the same day. Senate President Pro Tempore Kevin de León, D-Los Angeles, announced that his “Landmark Retirement Security Program” is moving to the next step in the legislative process.

The minimum-wage boost surely will stifle the economy and exacerbate teen unemployment, but it could at least theoretically be undone. The quickly advancing new retirement program — similar to other programs floated in other states — means creating another state-run boondoggle that probably will never go away.


Read more…


Competition, ratepayers lose big in Ohio

April 05, 2016, 11:24 AM

In a unanimous vote, the Public Utilities Commission of Ohio (PUCO) moved March 31 to accept modified plans from investor-owned utilities FirstEnergy Corp. and American Electric Power Ohio that amount to requiring Ohioans to subsidize unprofitable power plants. The practical implications will be higher bills, restricted customer choice and less competitive markets.

The decision runs squarely counter to the public interest and transfers costs and risks from FirstEnergy and AEP Ohio to captive ratepayers. Fortunately, consumers and the company’s competitors still have a chance to challenge the agreements in the courts and before the Federal Energy Regulatory Commission (FERC).

The plans promise rate stability as an insurance policy against potentially even higher electricity prices in the future. The only way the insurance policy pays off is if natural-gas prices rise sharply, which is highly unlikely. Hydraulic fracturing and horizontal drilling have opened up massive new natural-gas reserves. Industry forecasts of natural-gas prices stand well below the negative outcome against which the policy theoretically would act as a hedge.

The value that a ratepayer would assign for the ability to enjoy stable rates will vary quite a bit from individual to individual. For those willing to pay for it, Ohio ratepayers already have the option to contract for multiyear rate stability. The retail choice market thus best matches ratepayers with the plans that suit them.

The PUCO decision instead mandates a one-size-fits-all policy, forcing ratepayers to pay billions for a hedge they don’t need. The agreements include commitments from AEP and FirstEnergy to invest in grid modernization and wind and solar power, promises the companies used as bargaining chips to earn the support of particular interest groups.

The subsidies will interfere with competitive electricity markets. Ohio is a member of PJM Interconnection LLC, a regional transmission organization through which electricity generators compete in a marketplace that spans 13 states and the District of Columbia. The market allows investment signals to be sent that reflect market fundamentals, such as how low natural-gas prices signal the need to retire older coal and nuclear units when new natural-gas-fired generation costs less. PJM’s independent market monitor testified before PUCO that AEP and FirstEnergy’s proposals would disrupt how the PJM market functions and would have a negative effect on future reliability.

There’s still hope for a rational outcome. Precisely because it is so unreasonable, the decision may be overturned by the Ohio Supreme Court. Competing proposals from Dynegy Inc. and Exelon Corp. offer evidence that the AEP and FirstEnergy agreements include excessive and unnecessary costs.

The best chance to reject the plans quickly lies at FERC. The agreements constitute sales between utilities and their unregulated affiliates. An industry group, headed up the Electric Power Supply Association, correctly contends that these violate restrictions on affiliate transactions by forcing Ohio ratepayers to fund the agreements. The group argues in a complaint before FERC that this is unjust, unreasonable and unduly discriminatory. FERC would have to act swiftly to reject the agreements. The next PJM capacity auction, which sends long-term electricity-resource investment signals, will run in May.

Rejecting the PUCO decision would set a vital precedent in defense of competitive markets. Aging generation plants and inexpensive natural gas will continue to send market signals for more retirements of old power plants. Some owners of these plants will undoubtedly do what AEP and FirstEnergy have done – engage in rent-seeking behavior to protect their assets at others’ expense. Rate-stability plans sound tempting in this transition period, but do not justify interfering in competitive markets. This is a critical time for regulators to stand by fair and competitive principles and to resist political favoritism.

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

Update on U.S. property prices in the Fed’s brave new world

April 05, 2016, 10:40 AM


The attached policy short was published in the Spring 2016 edition of Housing Finance International, the quarterly journal of the International Union for Housing Finance.

Readers of my last update in Housing Finance International may recall this principle: The collateral for a home mortgage loan is not the house, but the price of the house. Likewise, the collateral for a commercial real estate loan is not the property, but the price of the property.

A key question always accompanies this principle: How much can asset prices change? The answer is always: More than you think. Prices can go up more than you expected, and they can go down a lot more than you thought possible; a lot more than your “worst case scenario” projected. The more prices have gone up in the boom, and the more leverage has been induced by their rise, the more likely are their subsequent fall and the bust.

From this, we can see how dangerous a game the Federal Reserve and other major central banks have played by promoting asset price inflation through their monetary manipulations of the last several years. Unavoidably, among the asset prices affected are those of residential and commercial real estate.

The Fed has tried asset price inflation before. In the wake of the collapse of the tech stock bubble in 2000, under then-Chairman Alan Greenspan, the Fed set out to promote a housing boom in order to create a “wealth effect” that would offset the recessionary effects of the previous bubble’s excesses. I call this the Greenspan Gamble. As we know, the boom got away into a new and far more damaging bubble. It was in fact a simultaneous double bubble in housing and in commercial properties. This is made apparent in Graph 1, showing the decade from 2000-2010. These events stripped Greenspan of his former masterful aura and of his former media title, “The Maestro.”

The economically sluggish aftermath of the twin bubbles brought us, under Greenspan’s successor, Ben Bernanke, the Bernanke Gamble. The Fed once again set about promoting asset price inflation and “wealth effects” to offset the financial and economic drag of the previous excesses. The brave new world of the Bernanke Gamble includes exceptionally low interest rates, years of negative real short-term interest rates, and the effective expropriation of savers, while making the Fed into the biggest investor in mortgage assets in the world. Of course this has inflated real estate prices.

Graph 2 shows U.S national average house prices from 1987 to 2015 and their trend line. The bubble’s extreme departure from the trend is obvious. It is essential to observe that the six years of price deflation, from the peak in 2006 to 2012, while a 27 percent aggregate fall, brought house prices only back to their trend line – there was very little downside overshoot. Since 2012, prices have risen by 31 percent in less than four years, and are now 12 percent over their trend line. This rate of increase is unsustainable. On top of that, the U.S. government is once again, as it did the last time around, pushing mortgage loans with small down payments and greater credit risk. Some politicians have apparently learned nothing and forgotten everything.

The price behavior of commercial real estate has been even more extreme. As shown in Graph 3, while commercial real estate prices peaked in 2008 at a level similar to that of housing in 2006, their fall was much steeper, dropping 40 percent, or about half again as much as house prices. The difference presumably reflects the large government efforts to prop up the prices of houses.

From the 2010 bottom in commercial real estate prices, they have now almost doubled, and the current index is 17 percent above the prices at the peak of the bubble. Cranes are busy, and this so far makes the Fed happy, since it means strong construction spending. But what comes next?

Asset prices need to be understood on an inflation-adjusted basis. Over long periods of time, the inflation-adjusted increase in U.S. house prices is very modest – only about 0.6 percent per year, on average. This means home ownership is a good long-term hedge against the central bank’s endemic inflation, but on average, not a great investment. Graph 4 shows real house price movements over 40 years, from 1975 to 2015, stated in constant 2000 dollars, and the modestly increasing long-term trend line. As of the end of 2015, average house prices are 19 percent above the inflation-adjusted trend – not yet a bubble, but distinctly a renewed boom.

Rapid increases in house and commercial real estate prices is what in the past has induced extrapolations of further price increases, looser credit standards, increasing leverage, and overconfidence among lenders and borrowers. We can only hope that this time they remember that it is the price, not the property, which is being leveraged.

Will the Bernanke Gamble end in similar fashion to the Greenspan Gamble? Will the historical average of a financial crisis about every 10 years continue? We will find out.

Now you can see what reports have been published by the Congressional Research Service

April 05, 2016, 8:30 AM

Did you know the Congressional Research Service has published reports on the federal defense budget, Supplemental Nutrition Assistance Program (food stamp) benefits, changes to hemp-growing restrictions and porcine epidemic diarrhea virus? Now you do, thanks to the R Street Institute’s Governance Project.

Using the Scribd digital library service, we have published 20 years of CRS annual reports online, including lists of the reports published by the agency. The report lists are available for viewing and downloading here.

Congressional Research Service reports are considered the gold standard for honesty and objectivity in Washington. Sadly, Congress to date has refused to make the reports generally available to the public. Why this six-decade-old policy persists is difficult to explain. The reports do not contain any classified or secret information and their contents come from publicly available sources. At the same time, members of Congress are happy to give copies to any citizen who asks, which explains why there are thousands of copies of CRS reports floating around on the Internet.

Which presents a conundrum: You, John and Jane Q. Public, may request copies of the reports. But Congress will not tell you which reports exist. Apparently, you are supposed to guess. Last year, Rep. Mike Quigley, D-Ill., tried to fix this ludicrous situation via legislation. His sane proposal to publish a list of CRS reports was quashed.

The CRS is a $100 million agency within the Library of Congress. Its apolitical civil servants write 1,000 or more reports each year. CRS reports cover public-policy issues large and small: government operations, federal spending and the machinations of Congress. Often the agency’s reports are the only material written on a particular topic (like post office closures).

Congress currently is considering legislation that would have the Government Publishing Office put all CRS reports online. Despite broad support from librarians, taxpayer and transparency advocates and even retired CRS employees, the fate of the bill is unclear.

In the meantime, members of the public can use the R Street Institute’s collection to learn what CRS is publishing and locate copies via Googling the titles or by contacting their members of Congress.

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

As tax day approaches, more families should enjoy the benefits of the EITC

April 05, 2016, 8:00 AM

As the April 15 tax-filing deadline approaches, nearly 30 million low-income families will receive more than $64 billion in tax breaks from the federal Earned Income Tax Credit.

Policymakers from President Barack Obama to House Speaker Paul Ryan, R-Wis., would like to see those numbers expand. Under a variety proposals favored by both sides of the political aisle, much of that expansion would come from an increase in the EITC for workers without children. Income limits and eligibility criteria largely ensure that proposed expansions would accrue to the deserving “working poor.”

But expanding the EITC in this way ignores a longstanding problem with the EITC that Zackary Hawley and I outlined in a recent paper for R Street. Because the EITC relies on one-size-fits-all federal income limits and credit amounts, it effectively treats workers who live and work in different cities very differently.

Significant differences in the cost of living between different metro areas result in very real differences in how much the credit benefits the working poor in different cities. While the cost of feeding a family in Boston is 53 percent higher than it is in Jackson, Tennessee, the federal EITC does not recognize that difference when determining the size of the tax break. For a single taxpayer with one child, the real value of the EITC ranges from $4,131 in Harlingen, Texas, to $1,531 in New York City. These differences mean the EITC helps the working poor in low-cost areas much more than it does those in high-cost areas of the country.

These factors also limit one of the EITC’s most attractive features — that it encourages a worker to find and keep a job. EITC expansions are responsible for large increases in labor-force participation. The working poor in high-cost cities largely miss out on these benefits. For example, the EITC claims rate (the number of EITC claims per tax filer) in Memphis, Tennessee, is nearly three times greater than in San Francisco. Even controlling for other local economic factors, a 10 percent increase in the local cost of living reduces EITC claims by 7.5 percent, meaning that poor workers living in expensive cities are not reached by the policy.

Ignoring local labor-market conditions also makes the EITC’s so-called “phase-out” tax even worse. The phase-out tax kicks in when an EITC-eligible worker starts to earn more income. Eventually, they hit an earnings level where policy dictates they have to start paying back the credit. This payback acts like an additional tax on working. The Congressional Budget Office estimates that workers paying the phase-out tax (combined with the loss of other benefits) can face marginal tax rates in excess of 90 percent, even though such workers may earn less than $20,000 annually.

Because the EITC is not adjusted for local labor-market conditions, similar workers in different parts of the country are subject to the phase-out tax after working radically different numbers of hours. For example, a single parent working as a dishwasher (someone who is poor by any reasonable definition) and living in Brownsville, Texas, will likely never be subject to the phase-out tax. If that same single parent lived in San Francisco, he or she will be hit with the phase-out tax after working about 85 percent of their normal hours — drastically reducing their effective wage rate and destroying the incentive to work harder.

When policymakers consider expanding the EITC, a good place to start is to adjust for local labor market conditions. This would provide an equal benefit to workers who are in the same cost-of-living-adjusted income group. For the 30 million families expected to file for the EITC this tax season, it would mean their refund has the same purchasing power, regardless of where in the country that refund is being sent.

Andrew Hanson will be discussing his research on the Earned Income Tax Credit at April 11 briefing at the U.S. Capitol’s House Visitor Center, along with Angela Rachidi of the American Enterprise Institute, Oren Cass of the Manhattan Institute and Lori Sanders of the R Street Institute. Interested parties can RSVP here.

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

Service-animal fraud throws the ADA to the dogs

April 05, 2016, 7:30 AM

A wave of animal friendliness has swept, and continues to sweep, the nation. Once relegated to waiting for his owner to return from a trip to the store, Fido now enjoys outings down aisles A through Z.

But for some pet-owners, this unprecedented level of collective pet-acceptance isn’t enough. They want to bring their nonhuman companions everywhere – the rights of their neighbors be dammed. The question is one of individual sovereignty, but gets confused by affection for fur and feathers.

The harms associated with the presence of animals, frequently dogs, in public places is often negligible. But hitherto downplayed pernicious effects are coming into focus. One such effect is being felt by the nation’s disabled citizens.

The Americans with Disabilities Act was enacted by Congress in 1990. Among its litany of provisions was guaranteed access for service animals to private establishments that otherwise prohibited pets. In rebalancing the rights and responsibilities of private life, Congress expressed a preference for those who need service animals at the expense of the wishes of business owners. Businesses cannot refuse admission to a service animal on the basis of a policy against admitting animals.

In its effort to create a low barrier of entry for Americans with disabilities to enjoy the protections of the ADA, Congress inadvertently permitted a wave of abuse against the property rights of individuals otherwise keen to accommodate the ADA’s purpose. These abuses have been slow to develop and likely weren’t anticipated by lawmakers in 1990. But as of 2016, the expansive flexibility Congress granted to service animals and their disabled owners has been appropriated by those without disabilities.

Owners without disabilities, aware the ADA prohibits only two questions about an animal’s training or purpose, are bringing their pets with them everywhere. Since these encounters are made in passing, and because the penalties for not complying with the ADA are so high, non-disabled pet owners are able to assert rights never intended for them. Currently, there is no verification, certification process or specific penalty in place to prevent such fraud. As a result, those genuinely in need of assistance from service animals are watching the hard-won respect and understanding for their companions evaporate, as untrained pets bark, bound and bite their way through the general public.

In an already overcriminalized and prolifically litigious society, the idea of introducing further restrictions on private behavior is justifiably balked at. But fraud, particularly fraud perpetrated to the detriment of a class of individuals specifically protected by federal law, is worthy of attention. One Colorado lawmaker, acting at the behest of a coalition of disability-rights activists, thinks he has a solution.

State Rep. Daniel Kagan, D-Englewood, has introduced legislation that would fine those who misrepresent their pets as service animals. The bill, H.B. 1308, creates the crime of “intentional misrepresentation of a service animal.” The measure represents an attempt to restore the default balance between the rights of individuals not contemplated by the protections of the ADA.

But while Rep. Kagan should be applauded for his effort, his bill – even if enacted – is unlikely to achieve its goal of curtailing fraud, for the simple reason that enforcing its provisions is virtually impossible. It’s legislation with teeth, but no bite.

For now, the ADA has set-out a ceiling for what may be asked of owners of would-be service animals beyond which states cannot legislate. State laws that prescribe more probing questions, even if the goal is to suss out fraud, likely would fail under the scrutiny of the Supremacy Clause. The ADA also precludes states from establishing certification and identification programs, which the law explicitly states are unnecessary, as well as investigatory rights of action.

Dishearteningly, there is no state fix for this federally created problem. A solution will have to come from the federal government. Three fixes to the ADA could tamp down on fraud:

  1. The law could raise the bar slightly for verification of service animals;
  2. Limits could be set for the costly liability associated with wrongly handling situations in which a service animal is misidentified, thus allowing business owners to resist obvious attempts at fraud; or
  3. In cases in which fraud is suspected, the law could provide for greater investigatory flexibility on the part of local authorities.

Balancing rights is always a challenge, but only one group of people is benefiting by exploiting the ADA’s service-animal provision – liars.

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

Why Congress mustn’t postpone vital flood insurance reforms

April 05, 2016, 7:00 AM

A new measure introduced by U.S. Reps. David Jolly and Gus Bilirakis, both R-Fla., that would postpone vital reforms to the National Flood Insurance Program, while well-intentioned, also would be bad for taxpayers and consumers.

After decades of charging rates insufficient to cover the risks it took on, the NFIP remains more than $23 billion in debt to the U.S. Treasury, with no practical way to pay it back. That’s money that could have funded education, transportation, health care, defense and other programs that taxpayers reasonably expect to pay for. Those billions instead went to bail out a program that subsidizes a relative few to live in harm’s way and encourages development in high-risk, environmentally sensitive areas prone to flooding, often repeatedly.

Additionally, with its artificially suppressed rates, the NFIP has discouraged private companies from writing the peril of flood, which has resulted in a de facto monopoly depriving Americans of a competitive flood insurance market.

Recognizing that the NFIP would go insolvent without meaningful reforms or additional multibillion-dollar taxpayer bailouts, Congress and President Obama enacted legislation in 2012 and 2014 to shore up the program’s finances, which included modernizing maps, as well as moderate rate increases on some policyholders, especially those living in areas prone to repetitive flooding. In Florida, 87 percent of NFIP customers already pay full, actuarially sound rates and will therefore see no premium hikes. Most of the remaining 13 percent will experience modest rate increases over time, as prescribed by the reforms.

In recent years, Gov. Rick Scott and state lawmakers enacted legislation to encourage private companies to write flood policies in Florida. These state-level regulatory reforms, coupled with reduced global reinsurance rates and the NFIP’s gradual rate increases, have led to a budding private flood insurance market with competitive prices and better coverage options than the NFIP’s one-size-fits-all model.

Postponing these necessary NFIP reforms will serve to undermine Florida’s progress in fostering a healthy private market and discourage additional companies from writing flood risk in Florida. But more importantly, it would continue to foist enormous risk on taxpayers, who will inevitably have to bail out the NFIP every time the waters rise.

Has the Federal Reserve gone too far?

April 04, 2016, 4:40 PM
05/09/2016 - 5:30 pm - 7:00 pm
American Enterprise Institute
1150 17th St. NW

On Puerto Rico, Congress is moving in the right direction

April 04, 2016, 2:52 PM

The draft bill to address Puerto Rico’s debt crisis – released late last week by House Natural Resources Committee Chairman Rob Bishop, R-Utah – marks a step in exactly the right direction. It realistically faces the fact that the government of Puerto Rico has been unable to manage its own finances, has constantly borrowed to finance its deficits and is now broke.

What is to be done as the Puerto Rican government displays its inability to cope with its debt burden — which, adding together its explicit debt plus its 95 percent unfunded pension liabilities, totals about $115 billion?

As the draft bill provides, the first required step is very clear: Congress must create a strong emergency financial-control board (“oversight board” is the draft’s term) to assume oversight and control of the commonwealth’s financial operations. This is just as Congress did successfully with the insolvent District of Columbia in 1995; what New York State, with federal encouragement, did with the insolvent New York City in 1975; and what the State of Michigan did with the appointment of an emergency manager for the insolvent City of Detroit in 2013. Such actions have also been taken with numerous other troubled municipal debtors. They are hardly an untried idea.

This should be the first step. As the bill provides, other steps will need to follow. To begin, the oversight board will need to establish independent authority over books and records, publish credible financial statements, and determine the extent of the insolvency of the various parts in the complex tangle of Puerto Rican government borrowing entities—especially of the Government Development Bank, which lends to the others. Then it will have to help develop fiscal, accounting, tax-collection and structural reforms that lead to future fiscal balance.

The oversight board will have to consider and report to Congress on the best ways to deal with the current excessive and unpayable debt, including pension liabilities. The draft bill provides a key role for the board in debt restructuring issues.

Puerto Rico has a failing, government-centered, dependency-generating political economy. The draft bill envisions the oversight board assisting with economic revitalization, which will be a key consideration going forward.

Needless to say, the current government of Puerto Rico does not like the idea of having its power and authority reduced. But this always happens to those who fail financially. The people of Puerto Rico understand this: 71 percent in a recent University of Turabo poll favored “a fiscal control board…that has broad powers.” In time, revitalized finances will lead to a more successful local government.

The draft bill is headed for introduction and hearings. Stay tuned.

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

Your retirement dream may require working much longer

April 04, 2016, 11:00 AM

A recent Citigroup monograph, “The Coming Pensions Crisis,” begins with some questions very much in the spirit of our time:  “What’s your dream for retirement?  Is it living on the beach, traveling on cruise ships…relaxing and enjoying the good life”?

Personally speaking, my dream for retirement is not to retire—at least, not now. I think if Warren Buffett can keep running the world’s greatest investment company at 85, and Alan Greenspan could run the world’s most powerful central bank until 79 before going on to lecture and write books, and Maurice R. “Hank” Greenberg can be battling the goliath of the government at 90, why would I stop at 73?  How much sitting on the beach, going on cruises and relaxing can you stand?

What, after all, is “the good life”?

As used by Citigroup, “the good life” means consuming without producing. The words of an old hymn admonish us to “work, for the night is coming.” Here the suggestion is instead: “play, for the night is coming.”

I understand that tastes differ, so may you may prefer the latter. But no one can escape the accompanying question: how many years can you afford to play without working, to consume without producing? If you retire at 63 and live to 85, you will have been retired for a quarter of your life. Should you live to 95 instead, you will have been retired for a third of your life. On average, such an arrangement cannot work financially.

As average lives grow longer, “the reality for many of us,” Citigroup rightly says, “is that there isn’t enough in the piggy bank to last throughout their retired life.” The same problem confronts many pension funds, both private and public, upon which workers rely. They don’t have nearly enough money in the piggy bank, either—not by a long shot.

This daunting problem – in total, an $18 trillion shortfall, by Citigroup’s estimate – is staring us in the face. There are only two answers. Put more money in the piggy bank while you are working—and as retirements grow longer, this means a lot more. Or make the retired years fewer by working longer. Or both. The math of the matter all comes down to this.

An essential element in the math is what I call the “W:R Ratio,” which measures how many years you work compared to how many years you will be retired. All the money spent in retirement is the result of what is saved, in one fashion or another, during one’s working years. This may be what you personally saved and invested, or what your employer subtracted from your compensation and invested, or the money the government took from your compensation and spent, but promised to pay back later.

The surest way to finance your retirement is to keep your W:R ratio up by not retiring too soon.

In 1950, the average age of retirement in the United States was 67. Average life expectancy at birth was 68. Average life expectancy for those who reaches age 65 was 79. Suppose you started work at 20 and retired at 67—working 47 years and ultimately living to age 79. Your W:R ratio was 47 working years divided by 12 retired years, or 3.9. You worked and could contribute to savings for about four years for every year of retirement.

Contrast the current situation. The average retirement age is much lower, at 63. Average life expectancy once you get to 65 is up to 86. Retirement has gotten longer from both ends. Also, many more people have post-secondary education and begin work later. Suppose you work from 22 to 63-years-old and live to age 86. Your W:R ratio is 41 divided by 23, or only 1.8. You have worked less than two years for each year of retirement. Can that work financially? No.

So the crux of the W:R relationship is: how many years do you have to work in order to save enough to pay your expenses for one year of retirement?  What is your guess?  One year of work for one year of retirement—say retiring after 30 years at 55 and living to 85?  No way. Two years?  That would take a heroic and implausible savings rate.

Calculations show that with retirement savings of about 10 percent of income, and historically average real returns of 4 percent a year on the invested savings, the W:R ratio needs to be 3:1. That means if you start working at 22 and live to 86, the financeable retirement age is 70. Or if you start work at 25, the financeable retirement age is 71. All of this is speaking of averages, of course, not necessarily in any individual case.

If the savings are lower, the rate of return is lower or both, the W:R ratio and the age of retirement must rise even more. The Federal Reserve is now making the problem much worse for retirement savings with low, zero or negative real interest rates. We have to hope this expropriation of savers by the Fed is temporary, historically speaking.

What certainly proved to be temporary was the idea that those still in good health and capable in many cases of productive work in a service economy should instead expect to be paid comfortably for long years of play. When combined with greatly extended longevity, this 1950s dream was simply unrealistic; indeed, it was impossible. Today’s savings and pension fund shortfalls bear witness to this financial reality. We must adjust our expectations and plans back to higher average W:R ratios and later retirements than in recent times.

Re:Create Coalition comments on DMCA safe harbor provisions

April 04, 2016, 10:28 AM

Pursuant to the notice of inquiry published by the Copyright Office (the Office) in the Federal Register at 80 Fed. Reg. 81, 862 (Dec. 31, 2015), later extended at 81 Fed. Reg. 11, 294 (Mar. 3, 2016), the Re:Create Coalition submits the following comments on the notice regarding the subject of the DMCA safe harbor provisions contained in 17 U.S.C. § 512.

I: Introduction

Re:Create is a new coalition founded in 2015 to educate and start a conversation on the positive impact the Internet has had on creativity and innovation over the last 25 years. Collectively, the members of Re:Create operate over 100,000 libraries visited by the public 1.5 billion times per year; fight censorship by repressive regimes globally; provide platforms that enable music and video content to reach a global audience; create new and interesting works of art, literature and video enjoyed by wide audiences; invest in new startups and entrepreneurs; and generate billions of dollars in revenue for the motion picture, recording, publishing and other content industries. While our individual organizations maintain diverse views of specific issues, we are united in our overarching respect for copyright and concern for its future.

Our members are the American Library Association, Association of Research Libraries, Center for Democracy and Technology, Computer and Communications Industry Association, Consumer Electronics Association, Electronic Frontier Foundation, FreedomWorks, Harry Potter Alliance, New America’s Open Technology Institute, Organization for Transformative Works, Public Knowledge, and R Street Institute. Most of them are individually or jointly filing comments in this docket and we refer you to all of their comments. We are also filing these comments on behalf of the coalition in response to the Notice of Inquiry.

II: General Effectiveness of Safe Harbors

Section 512 of the DMCA has provided the foundation for the success of the Internet and is a cornerstone of the overall U.S. economy. Today the Internet enables over $8 trillion in e­commerce each year and in 2014, was responsible for 6% of real GDP in the US. But, the benefits of the Internet are not just economic ­ the Internet has democratized and enabled a creative revolution. Its growth has benefited both creators and consumers, who have made it their preferred platform for the distribution and consumption of media. In 2015, overall revenues for the recorded music industry were up by .9% to $7 billion with streaming as the largest component of industry revenues, comprising 34.3% of the market and today, streaming video accounts for over a third of all Internet traffic. Independent artists are also on the rise, seeing a 60 percent increase in revenue. ​More people are creating more things on more mediums than ever before.

Under Section 512 copyright holders identify infringement and, if they choose, request its removal. Upon notification, online service providers remove or disable access to the infringing material. This is an essential part of the system because only copyright holders know what material they own, what they have licensed, and where they want their works to appear.

This approach rightfully recognizes that Internet intermediaries should not have to be the police or monitor for infringing works. This is because it is often impossible for them to determine if content is licensed, infringing, or if it is a permitted under the exceptions and limitations in copyright law. The risk of being responsible for infringing content would be a huge burden on online intermediaries that host content, like YouTube, WordPress, Facebook and Etsy. The same goes for some basic functions of the Internet like comment sections and blogging platforms that depend on user generated content. Without this balance, it is likely the Internet we know today ­ a place where creativity is thriving ­ would not exist.

Unfortunately, there is growing abuse and mistakes by copyright holders, who are sending notices of infringement in many cases where the use is not a copyright infringement or is a clear fair use. In many cases, the notices are being sent for reasons other than copyright infringement. This includes anti­competitive purposes, to harass a platform or consumer, or to try and chill speech that the rightsholder does not like. According to a recent study of takedown

requests, one in twenty­five were flawed because they targeted content that did not match the identified work and nearly a third had aspects that raised questions about their validity. Part of this is due to the rise of automated processes that search popular online platforms and send notices that do not verify basic criteria such as whether the material was authorized to be posted by a rightsholder. Automated processes have very limited ability to make necessary fair use determinations before issuing a takedown notice. And given the potential liability for a consumer fighting back, the risks associated with filing a counter notice often are too great. We encourage Congress to look at alternatives to deter this abusive and free speech­chilling

III: Notice and Takedown

The development of the DMCA in 1998 was a huge improvement for rightsholders. Previously, rightsholders needed to hire a lawyer to compose a cease­and­desist letter, as well as costs of registering copyrights and proceeding to litigation. The new law established a cheaper, faster alternative to remove content without the need for lawyers, for registration, or for litigation. Today, there is often no need to go to court ­ infringing content is removed with a single notice.

The DMCA has also provided an important legal framework for online services such as service providers, search engines, social networking platforms, file hosting sites, online marketplaces, cloud services, and instant messaging. Popular companies like Google, Amazon, Salesforce, Cloudflare, eBay, Wikimedia, Mozilla, Facebook and Snapchat rely on the DMCA safe harbors to offer their services. Individual users benefit from the safe harbors when they comment on a social media page, write a blog post, perform a search online, share a video with a friend or borrow a digital book from their local library.

As a result of the flexibility enshrined in the DMCA, online providers have each innovated on the notice and takedown process to make it more efficient, effective, and manageable for all stakeholders. Within the current framework, smaller providers are able to build tools that are appropriate for their platform and larger providers are able to create systems that are built for scale. Solutions that work for a Twitter or Facebook should not be imposed on smaller providers or they will be crushed by the costs of compliance. Startups will not even have a chance because of this burden.

In addition, a thriving vendor system has also been built to automate the notice process. While we have highlighted some of the abuses and mistakes made by vendors and the limitations of automation, these services also often make it faster, easier, and more efficient for rights holders of all sizes to find and remove infringing content. The growth of notices has been linked to the falling cost and growing capacity of large stakeholders to produce and handle notices. As this market grows, we are also seeing more and more low cost solutions emerge.

Some commenters are likely to suggest that the Section 512 notice and takedown regime be replaced with a type of content filtering they call “notice and staydown”. Such a system would replace the current process with a far more injurious provision to force online platforms to proactively filter content on the web. This is something that Congress squarely rejected. Notice and staydown presupposes ubiquitous monitoring of all users and content on an online service and would be burdensome, disproportionate, and invasive of the privacy interests of legitimate users.

Additionally, the content filtering proposed by advocates of a “notice and staydown” system would impose an undue burden on platforms of all types and would severely limit new and emerging forms of creativity. Not only would it require a platform to monitor and automatically remove all future instances of the identified work, but it would also require the platform to single­handedly determine each time whether a use is infringing, licensed, or protected under the exceptions and limitations in copyright law. It is clear that this type of system would chill perfectly legal speech and creativity on the web. It would ask platforms to act as the judge, jury and executioner at the risk of expensive lawsuits that could easily seek millions of dollars and chill financial investment, due to presence of statutory damages, absent the protections of the safe harbor. This is an ability they simply do not have.

Such a fundamental change to a bedrock principle of American jurisprudence would also have absurd consequences. Imagine a world where just the mere allegation of infringement would permanently keep that content down. This would have huge implications for everyone when it comes to sharing a video on Facebook or quoting song lyrics. That’s because social media networks would be forced to suppress user generated content, as they would not know if it was licensed or not. Parents can forget posting videos of their kids dancing to music and candidates would not be able to post campaign speeches because of the music that plays in the background. Remix culture and fan fiction would likely disappear from our creative discourse. Live video streaming sites would cease to exist. Notice and staydown might seem innocuous, but in reality it is content filtering without due process.

IV: Conclusion

In conclusion, the current Section 512 Notice and Takedown system and corresponding safe harbors are doing a good job of balancing the requisite interests of consumers, online service providers and content providers. It may not be perfect, and we certainly have some issues with certain aspects, but to undo this balance would have a detrimental impact on free speech, access to knowledge, innovation, creativity, consumer access and the two-­way nature of the Internet that is a great success story.

The Washington Post’s ‘Reefer Madness’ campaign against booze

April 04, 2016, 8:00 AM

I enjoy Christopher Ingraham’s writing for The Washington Post. His WonkBlog posts are data-heavy, which makes them interesting.

Like Ingraham, I have serious concerns about America’s long war on drugs. It strikes me as a losing battle, seeing as it is very hard to stop people from taking intoxicants that are so easy to produce. Worse, the war on drugs has encouraged law enforcement to undertake militaristic measures to thwart the illicit drug trade; measures like raiding individuals’ homes – then shooting their dogs and refusing to give back their property. Or sometimes even killing innocent people.

Intoxicants are like any other product, in that markets exist for them. Prohibition fosters illicit markets, which are highly profitable and therefore very violent. (Drug gangs slaughter other drug gangs to control market-share. Fast food companies do not.)

So, kudos to Ingraham for using data to make the case that American drug policy needs rethought. But for reasons unclear to me, Ingraham has started a war on alcohol. This past December, he wrote in a WonkBlog column:

In recent years, public health experts have focused extensively on overdose deaths from heroin and prescription painkillers, which have risen rapidly since the early 2000s. But in 2014, more people died from alcohol-induced causes (30,722) than from overdoses of prescription painkillers and heroin combined (28,647), according to the [Centers for Disease Control and Prevention].

Wow. Now, that is a bogus comparison. The number of people who consume alcohol is many times the number of people who take prescription painkillers. Perhaps seven in 10 Americans have consumed a beer, wine or spirits in the past year. Have seven in 10 popped OxyContin or some such opioid? Clearly not.

The column’s title, by the way, carries the clickbait scare title: “Americans are drinking themselves to death at record rates.” In fact, the numbers he cites show that just 9.6 out of every 100,000 Americans (0.0096 percent) had an alcohol-caused death. Regrettably, Ingraham does not explain to readers that it is very tough to put a clear number on alcohol deaths. CDC data do not only list alcohol poisoning and cirrhosis. Rather, the data list things like “firearm injuries,” suicides, car crashes and other misadventures whose causal connections to drink are less than clear.

Remarkably, citing these CDC data, Ingraham proclaims: “The United States is experiencing an epidemic of drug overdose (poisoning) deaths.” The CDC research on alcohol cited by Ingraham, meanwhile, does not say America has an alcohol epidemic.

This past week, Ingraham unleashed another assault on alcohol. “America’s biggest drug threat is 100 percent legal” begins with prose reminiscent of the pamphlets put out by early 20th century Prohibitionists:

America’s communities are besieged by a highly dangerous, addictive drug. Its users can become agitated and violent, harming themselves and family members. It’s incredibly toxic and even lethal at high doses. Many people who start abusing it are unable to quit. It’s responsible for nearly 90,000 deaths each year. And in a new survey, more than three-quarters of Americans identified it as a serious problem in their community. I’m talking, of course, about alcohol.

It is a methodologically fallacious bit of work. Ingraham relies on a survey by The Associated Press and the University of Chicago’s National Opinion Research Center of individuals’ views on a variety of alcohol-related topics to assert that phenomenon is, in fact, occurring. If the AP-NORC researchers had sought to ascertain how dangerous the American public feels any particular intoxicant is, then this is the question to ask:

“If someone you love wished to try an intoxicating substance, which of these substances would you suggest he/she try first: an alcoholic beverage, marijuana, heroin, cocaine, methamphetamine or some other substance.”

Plainly, many if not most people would not pick hard drugs as their first choice. They might not even put pot before alcohol. The survey data Ingraham cites notes many marijuana-legalization advocates say they would want restriction on how much weed one could buy or limit purchasers to individuals with a medical prescription. Such restrictions do not exist on buying alcoholic beverages. The AP-NORC survey, it is worth adding, also reflects the predominance of alcohol in American life. It is consumed openly everywhere, whereas use of hard drugs is less obvious and common.

Astonishingly, Ingraham throws in this bizarre claim about the perils of Demon Drink:

The difference between an ‘effective dose’ and a ‘lethal dose’ of alcohol (e.g., the difference between ‘buzzed’ and ‘dead’) is small.

That’s just silly. Overdosing on alcohol is very difficult to do. It’s not as if one has two glasses of wine and drops dead after the third. Binge-drinking deaths require ingesting huge doses of alcohol rapidly. This is why the CDC data show so few deaths from alcohol poisoning. Meanwhile, it’s easy to overdose on heroin (though admittedly, weed…not so much). Science, as nearly everyone knows, has found health benefits to moderate consumption of alcoholic beverages. No studies I have found declare that methamphetamines have any salubrious effects.

All in all, I get that Ingraham feels the war on drugs is inane and the government’s demonization of drugs is bad, but making spurious and hyperbolic claims about alcohol does little to advance the cause.

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

Free trade makes dollars and sense

April 04, 2016, 7:30 AM

Trade has become a huge issue on the campaign trail this year. The front-runner for the Republican presidential nomination, Donald J. Trump, has made trade one of his signature issues, threatening that he would, as president, impose 45 percent tariffs on foreign imports.

On the Democratic side, Vermont Sen. Bernie Sanders has condemned free trade agreements such as NAFTA for not including adequate protections for workers and the environment. Meanwhile, other candidates, including those who traditionally have been supportive of free trade, have been somewhat muted on the subject.

Based on the common media narrative, one gets the impression that the American public is in the midst of some kind of populist anti-trade revolt. Yet polling tells a different story. According to Gallup, the percentage of Americans who view foreign trade as an opportunity for economic growth has risen from 46 percent in 2012 to 58 percent today, while the percentage viewing foreign imports as a threat to the economy has fallen from 46 percent to 34 percent.

The same trend is apparent for lower-skilled workers, those supposedly more at-risk from foreign competition. A majority (52 percent) of Americans with a high school education or less view foreign trade mainly as an economic opportunity today, up from 37 percent four years ago.

The benefits of trade are particularly stark in Texas. According to the U.S. Commerce Department, Texas has been the top exporting state for the past 14 consecutive years, with $250 billion in exports in 2015 alone. Nearly 12 million U.S. jobs are supported by trade, including more than 1 million supported by Texas exports. On average, trade-supported jobs pay 18 percent more than other jobs.

Far from being a threat, trade is something Texans should want more of. With recent expansions to the Panama Canal, Texas has an opportunity to boost our economy through increased trade with Asia. But Texas-made goods are still subject to a host of tariffs and restrictions that leave us poorer than we should be. Current tariffs on U.S. exports reduce manufacturing wages by as much as 12 percent, according to the Office of the U.S. Trade Representative.

Pending trade agreements like the Trans Pacific Partnership are a key way to remove this hidden tax on American workers. The TPP would eliminate more than 18,000 existing taxes on American made products. No trade deal is perfect, but for a state like Texas approving the TPP really ought to be an easy choice.

Attempts to limit trade are the economic equivalent of cutting off your nose to spite someone else’s face. A good example of the folly of protectionism, detailed in a report from the Peterson Institute for International Economic, is the 35 percent tariff President Barack Obama imposed on Chinese tires in September 2009. An attempt to protect American tire manufacturers, these tariffs ended up saving around 1,200 American manufacturing jobs at the cost of a whopping $900,000 per job. At the same time, higher tire prices led to a decline in the retail market for tires, costing more than 2,500 jobs. China also retaliated by imposing its own tariffs on U.S. exports of chicken parts, costing the U.S. economy an additional $1 billion.

Unsurprisingly, then, a recent poll of economists from across the political spectrum found that 95 percent thought free trade was a net benefit to the economy. Instead of putting up barriers to trade with other nations, the United States should be working to remove existing barriers, so that our state and our nation can live up to its true economic potential.

A defender of property rights now a foe of short-term rentals

April 04, 2016, 7:00 AM

I first got to know Anaheim Mayor Tom Tait in the early 2000s, when we were battling a perverse city ordinance that forced low-income people – typically, folks one step ahead of homelessness – to move out of grubby old motels every 30 days. Local residents were upset that one-time tourist lodging had become permanent homes and were seeking to use the government to force the motels to remain devoted to tourism.

Tait and I are now on different sides of an issue in which many Anaheim residents want to use government to do the opposite. Instead of stopping people from residing in buildings designed for vacationers, they want to stop tourists from staying in buildings designed for residents.

This is an example of the kind of economic change ushered in by the “sharing economy.” When I moved to Orange County in the 1990s, many neighborhoods surrounding Disneyland battled blight. That explains why neighbors were upset about poor folks living in nearby motels. These days, home values are soaring, as tourists rent rooms through room-booking apps such as Airbnb and HomeAway.

This innovation is a great way to house a family vacationing at the Happiest Place on Earth. It’s a great way for owners to cover their mortgage payments. It has led to the renovation of many 1960s-era ranch houses. But it’s also upset neighbors. They have legitimate complaints about noise, traffic and parties. Obviously, vacationers live differently than people who need to get up at 5 a.m. and commute to work.

The hotel industry isn’t too pleased, either.

Anaheim has more than 200 permitted short-term rentals and many more that operate in the shadows. To deal with complaints, the City Council last year approved a moratorium on new permits. City staff created a 12-page memorandum offering suggestions. Tait – a self-described fan of the sharing economy and someone with real property-rights credentials – has nevertheless proposed a ban on this type of operation.

It’s pretty extreme. He would allow people to rent out rooms in their homes, provided it is their primary residence. They could operate, say, a bed-and-breakfast – or rent out the house while they take an extended vacation. But he would put the kibosh on rental houses that cater to vacationers. He would provide an 18-month period for existing short-term rentals to phase out.

The latter sounds too much like the kind of regulatory “taking” that Tait has opposed in the past. I appreciate concerns about noise and traffic, but those issues often are a proxy for the real issue: People don’t like it when their neighborhoods change.

“It’s the nature of what they are,” Tait told me. “They are bringing in 1,000 different people a year, and it’s no longer a neighborhood.” He says these houses are “essentially full-throttle minihotel businesses.”

City staff are trying to craft a middle way between the current system and a ban, but they have floated the idea of grandfathering in existing permit holders. That could mean the worst of all worlds. Now, if you can’t stand living in a neighborhood with vacation houses, you can sell out to someone who wants to operate a vacation home, pocket the cash (the Register reports room-sharing has pushed up property values by 25 percent) and move someplace more to your liking.

Under such staff proposals, you’d instead be stuck with a rental next door – and you’d only be able to sell your property as a residence. You’d also potentially have a neighborhood disclosure issue on your hands.

Tait believes this middle ground might do more harm than good. But instead of opting for a ban, he should opt for the traditional free-market approach: Letting people live their lives as they please – but cracking down on bad behavior.

My R Street Institute colleague Andrew Moylan recently released a report that gives Anaheim a good “Roomscore” grade of “B” for its current regulations. “Cities nearly always have ordinances to address traffic and noise complaints, whether a property is rented or not,” he wrote. “Where new problems arise related to congestion or noise, they are best addressed holistically, rather than a piecemeal approach that targets only short-term rentals.”

Exactly. I also like the suggestion from Anaheim Councilman James Vanderbilt: “I would have hoped the short-term-rental owners would have formed a self-policing group of some sort.” There’s still time for the city to work with owners and come up with a system that improves self-policing.

It’s not the government’s place to enforce the character of a neighborhood, whether we’re talking about old motels or rental houses. There’s still time for Tait to come to his senses.

Deregulate taxis to allow them to better compete

April 03, 2016, 2:26 PM

From OC Register

Spitzer told me he came up with the idea after reading Steven Greenhut’s Register column a week ago about state legislation and lawsuits aimed at grounding the ride-booking companies. “Why don’t we just do a free market for everybody?” he wondered. “I simply asked the OCTA to look at eliminating the meddling.”

Improving Outcomes with EITC: Strengths and Weaknesses of Current Reform Ideas

April 01, 2016, 3:53 PM
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  • Lawsuits, legislation threaten the ‘sharing’ economy

    April 01, 2016, 2:13 PM

    As an occasional cab rider in Sacramento, I’ve noticed something that isn’t always a given: fleets of newer cabs, polite drivers and the use of modern credit card machines. This is a city where the cabs can be so shabby, the City Council two years ago passed new regulations that require drivers to have a rudimentary understanding of local geography and English, to drive non-jalopies and “be hygienically clean.”

    “The ordinance was written in response to reports of fistfights among cabbies, rude exchanges with customers and high-speed rides,” according to the Sacramento Bee. But few would credit the new rules for a quickly improving cab-riding experience. The credit properly goes to Uber and Lyft—those ride-booking services that introduced competition.

    In San Diego, pressure from these upstarts caused the city to deregulate its “medallion” system that imposed a limit on the number of cabs in the city. Because of the cartel, operating permits cost more than $100,000, which forced cabbies to work long hours (earning only $5 an hour, according to one study) paying off the cab owners’ medallion fees. Now anyone who meets some basic standards is free to buy and operate a cab.

    This is how markets work. The results are good for almost everybody. But there’s always a market for grievances, too. Hence, some disgruntled drivers and allies of California’s unions want to take away the ride-booking services’ competitive advantages. A recently settled lawsuit against Lyft set out exactly what’s at stake: the survival of these fledgling services. Newly proposed legislation likewise threatens to destroy the nature of the companies.

    “According to newly published court documents, Lyft would owe its drivers $126 million in reimbursement expenses for the last four years if the ride-hail service classified them as employees rather than independent contractors,” according to a recent article in theVerge. One could almost hear the sense of entitlement, as the article pointed to court documents that “provide a rare glimpse into the huge amount of cash that companies like Lyft and Uber save by refusing to classify their drivers as employees.”

    Of course, these businesses’ model is based on contracting with independent drivers, who pay to access to an application that hooks up riders with drivers. Drivers can work hours that suit them, but they obviously don’t get all the perquisites that come with being an employee. It’s so expensive these days to hire permanent employees that contracting is a key way to build a new enterprise. No one forced any drivers to accept the terms offered by the companies.

    Drivers would have “recouped about $835 each, if the company applied the standard mileage reimbursement rate set by the U.S. government,” according to the article. “Leaked financial documents obtained by Bloomberg last year show that Lyft is struggling to make money: the company lost $127 million in the first half of 2015 on $46.7 million in revenue.”

    The irony is obvious. How would adding another $126 million in expenses help the company sustain itself? In the long run, drivers don’t benefit by threatening the profitability of the company that pays them. Lyft settled the lawsuit with a more modest $12.25 million payment. But the same writer noted that “[t]he bullet that Lyft just dodged is still coming for Uber,” which faces a class-action lawsuit that gets underway in June. It never stops.

    Even before the suits are settled, these companies must avoid a legislative bullet by Assemblywoman Lorena Gonzalez (D-San Diego) that would give independent contractors the right to bargain collectively for benefits, as if they were full-fledged employees. It would challenge federal antitrust law, which views collective bargaining among contractors as price-fixing. Her proposal takes aim at ridesharing companies, but it would apply to other industries, as well.

    Assembly Bill 1727 “would establish for eligible groups of independent contractors the right to organize and negotiate with hosting platforms.” It wouldn’t unionize the workers, per se, but would create associations supervised by state officials. Gonzalez says it would improve working conditions for “gig economy workers,” but really, it would undermine the flexibility, cost-savings and worker independence at the heart of these platforms’ success.

    Many in the taxi industry would love to use the political system to hobble competitors. It’s easier than outperforming them on the streets. If they succeed, however, consumers can go back to the days of lobbying city councils to pass rules requiring cabbies to dress appropriately and learn their way around town.

    Competition works best. Wouldn’t it be nice if California, for once, resisted the temptation to worsen its business climate?

    MetLife decision a win for constitutional government, loss for ambitious bureaucrats

    April 01, 2016, 1:37 PM

    Do the bureaucrats who run government agencies long to increase their power?  Are they ambitious to extend their reach over private institutions and citizens?  Of course they do and of course they are.

    In particular, does the committee of government agency heads known as “eff-sock” (FSOC, or the Financial Stability Oversight Council) have a notable will to power, desire to expand its jurisdiction and bring more companies under its orders?  You bet it does.

    How do these bureaucratic desires fit with constitutional limited government and the separation of powers required for a healthy republic?  Not well.

    So thank goodness for Judge Rosemary Collyer, who earlier this week ruled in favor of MetLife’s legal challenge to FSOC’s attempt to become its regulator on “systemic risk” grounds. The judge’s ruling points out to FSOC members, who include the Treasury secretary and chair of the Federal Reserve, that just because they want regulatory authority over somebody doesn’t necessarily mean they can have it. They needed to make a convincing case in accordance with the law, which they hadn’t done.

    FSOC apparently thought the court would defer to their committee opinion, but their opinion, like everybody else’s, is colored by their self-interest. Indeed, the one FSOC member appointed to the panel explicitly to provide insurance expertise — former Kentucky Insurance Commissioner Roy Woodall — also happened to be the lone vote against designating MetLife. The court wisely didn’t defer to the majority.

    A fundamental problem of the current American government is how to control the “administrative state” of unelected bureaucrats, who often combine all the powers of the constitutional three branches, without their checks and balances. The administrative agencies create rules which have the force of law, carry out the rules in executive actions, sit in judgment in disputes about them and mete out punishments. MetLife – one of the four nonbanks designated by FSOC as systemically important financial institutions, along with Prudential Financial, American International Group and GE Capital – had previously appealed the ruling which made it subject to FSOC, but it first had to appeal to FSOC. Strange to say, FSOC found in favor of itself.

    Luckily, MetLife had the pluck to take the issue to the courts, where it has now won—at least the first round. Indeed, the courts provide the best hope there is of keeping the regulatory agencies within constitutional bounds.

    But for the courts to work, somebody has to bring the cases and argue them. This is hard for regulated entities to do, for a simple reason: they can count on retaliation from the bureaucrats, who have a lot of ways to punish them later. This certainty of retaliation is why there are very seldom any lawsuits against bank regulatory agencies brought by banks, the most regulated industry of all, and the one most subservient to regulators. But this time, FSOC was challenged by an insurance company, not a bank.

    The existence of FSOC raises a more fundamental problem. This committee of agency heads draws its claim to functional legitimacy from its alleged ability to address “systemic risk.” But that it has or could have such an ability is more than dubious. For example, central banks, regulators, the U.S. Treasury and economists in general utterly failed to anticipate or understand the great 21st century bubbles in housing and European sovereign debt. More recently, they utterly failed to anticipate the collapse in oil prices and its severe effects. Further back, they did equally poorly in the 1990s, 1980s and 1970s.

    So is there anything in the record to show that the government bureaucracies represented on FSOC ever saw in advance what was happening better than everybody else?  Nope. Are they exempt from the cognitive herding which is a deep characteristic of human minds? Nope. Are they exempt from the influence of their own will to power?  Nope. Can they see the future?  Nope.

    Further, it is essential to understand that governments themselves are major creators of systemic risk. Is a committee of government employees, chaired by a political office holder (the Treasury secretary) capable of criticizing the systemic-risk-increasing actions of its employer?  Nope.

    In spite of this, FSOC was given the unprecedented power to expand its own jurisdiction, a power which seemed immune to constitutional checks and balances. Until FSOC met MetLife and Judge Collyer.

    Bravo MetLife and bravo Judge Collyer.

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