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Muni broadband: The gift that keeps on taking

May 30, 2014, 4:37 PM

LUS Fiber, the municipal broadband system in Lafayette, La., last month received another warning from city auditors, an advisory that appears to have become an annual thing.

Although losses were anticipated during the initial five years of offering retail services to customers, management should carefully monitor the financial results of operations of the communications system. The projections calculated by operating and finance management should be compared to actual results on a regular basis and appropriate measures should be taken to minimize any significant negative variances. Additionally, management should continue to enhance its market strategy in order to increase its revenue base.

Lafayette’s auditors voiced similar concerns in their reports the last two years. In 2012, they punctuated it with a calculation that the $140-million system was costing the city $45,000 a day.

Now, after six years of operation, prospects aren’t much better. The city’s financial reports, provided by a source in Lafayette, show that for the fiscal year ended Oct. 31, 2013, LUS Fiber reported $23 million in operating revenues, compared to $36.7 million that was forecast in its feasibility study. The system incurred a $2.5 million operating loss for the year. According to the original plan, this was to be the point where the operation swung to a profit of $902,000.

The most staggering number, however, is LUS Fiber’s deficit, which stood at $47 million at the end of October, up from $37.1 million the year before.

LUS officials have been trying to put a smiling face on this by noting that the operation is cash-flow positive, which simply means that LUS Fiber is taking in more than it’s spending on a day-to-day basis, but does not factor in its enormous long-term debt liability. They’ve also tried some sales gimmicks, like doubling the amount of bandwidth capacity for an additional $5 a month. This deal goes for everyone except low-income customers, for whom provision of quality high-speed service was a major justification for LUS Fiber’s creation. They remain stuck with a 3 Mb/s connection, about a quarter to a fifth of the speed you now get from cable.

Officials also continue to assure Lafayette residents that profitability, like a Cubs pennant, is just one more year away, and that there is robust subscriber growth ahead. Yet it’s time to seriously question this proposition in light of broadband business trends. Cable customers have been turning to wireless and video on demand for video programming. Citing data from the ISI Group, an equity research firm, BusinessInsider.com reported that nearly 5 million cable TV subscribers cut the cord in the last five years, and that the number of cable TV-only subscribers remaining could sink below 40 million (see graph below).

True, in many cases you still may want a landline broadband connection to get Netflix or Amazon Prime, but the triple play business model—phone, cable, Internet—looks like it’s toast. Like the cable industry, muni broadband operations like LUS Fiber bet their entire long-term viability on triple play. Phone’s been gone for years. Cable TV is going. Commercial cable companies are scrambling to deal with this market shift, and muni operations are in the same boat. The difference is that, with private companies, the cost falls on shareowners. For municipalities, the cost is paid by taxpayers. In Lafayette, the meter stands at $47 million

What’s distressing is that today, when the turmoil in the service provider market is so measureable and visible, there are still cities and towns—Westminster, Md.; Princeton, Mass.; Vallejo, Calif., to name three I found here—think that municipal broadband is a sound idea.

For an in-depth look at the challenges municipal broadband faces, see my case study of LUS Fiber, downloadable here.

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Big Ideas: Erasing the past, foreign policy and tax cuts

May 30, 2014, 3:13 PM

From the Washington Examiner:

Steven Titch for R Street: The European Union’s highest court has ruled that Internet search engines must give serious consideration to users who request they remove links to any content or article that is personally or professionally unflattering, unfavorable or embarrassing.

Will the NFIP survive this year’s hurricane season?

May 30, 2014, 2:14 PM

This Sunday, June 1, marks the start of the 2014 Atlantic hurricane season. And though experts are predicting a relatively quiet one this year, our dutiful representatives in Congress have done their darnedest to ensure that it would take just one big storm to push a particularly troubled federal agency over the brink of bankruptcy.

The National Oceanic and Atmospheric Administration’s Climate Prediction Center recently unveiled its projection of a near-normal or below-normal hurricane season, with a 70 percent likelihood of eight to 13 named storms, three to six hurricanes and one or two major hurricanes.

Those projections more or less jibe with those released in April by forecasters Philip Klotzbach and William Gray of Colorado State University, who note the impact of a cooled Atlantic and at least a moderate-strength El Niño in their projection of nine named storms, three of which would become hurricanes and one of those would become a major hurricane. Klotzbach and Gray assign a 35 percent chance of a major hurricane making landfall somewhere on the U.S. coastline, compared to 52 percent in an average year.

Of course, it takes just one big storm to knock those living near the coast, as 126 million Americans do, for a major loop. It also would take just one big storm to render the National Flood Insurance Program – the federal agency that writes most flood coverage in the United States – unable to pay its claims.

In fact, the program is only able to pay any claims thanks to billions in loans from federal taxpayers. The NFIP currently owes the Treasury $24 billion, a tally mostly rung up during Hurricane Katrina in 2005 and Hurricane Sandy in 2012. The program hasn’t made a payment against its principal since 2010 and it’s been able to keep up with its interest payments only because interest rates have dropped dramatically in recent years. In 2008, the NFIP paid $730 million in interest to service its then-$18 billion of debt, compared to just $72 million in interest payments in 2011.

Current law allows the program to borrow up to $30.4 billion before it would need once again to go back to Congress, hat in hand. But the bottom line is that the premiums paid in — $3.8 billion last year, on $1.3 trillion of insured property – simply aren’t enough to keep up with claims. A major hurricane hitting any of the significantly populated areas along the Gulf and East coasts could easily cause another $10 billion or so in flood insurance claims, enough to bankrupt the program.

Congress had a plan to fix this mess. Years in the making, both houses ultimately passed – by wide margins and with strong bipartisan support – and President Barack Obama signed legislation in 2012 intended to set the NFIP on the path to solvency. The plan involved phasing out subsidies for the roughly 20 percent of policyholders who were getting them – more quickly, for vacation and business properties, less quickly for primary homes. It also involved updating and redrawing the program’s long-outdated maps, to ensure those properties most at risk were charged the rates they should be.

Alas, it didn’t take long for Congress to think better of its momentary rush into sane, responsible policymaking. The first complaints about rising rates from coastal policyholders started pouring in while the ink was still dry on the reform bill. Eventually the deafening chorus of complaint – emanating, as it did, from states like Louisiana, Arkansas, Georgia and North Carolina, which will prove crucial to control of the U.S. Senate this fall – was sufficiently to prompt action. Earlier this year, Congress set up re-breaking the program they had just attempted to fix, passing a law that, as the non-partisan Government Accountability Office put it, “will address affordability concerns, but may also reduce program revenues and weaken the financial soundness of the NFIP program.”

Entering into any storm season, one always hopes for the best and particularly, for no major loss of life or limb. But should the storm surge flood in and the flood program collapse, you’ll know where to point the finger of blame.

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

Nicotine/tobacco research and policy experts endorse THR in letter to World Health Organization

May 30, 2014, 9:17 AM

Fifty-three tobacco research and policy experts from 15 countries today endorsed many of the tobacco harm reduction principles that I have advocated for 20 years. In a widely publicized open letter to Dr. Margaret Chan, director of the World Health Organization, they declared:

 Tobacco harm reduction is part of the solution, not part of the problem. It could make a significant contribution to reducing the global burden of non-communicable diseases caused by smoking, and do so much faster than conventional strategies. If regulators treat low-risk nicotine products as traditional tobacco products and seek to reduce their use without recognising their potential as low-risk alternatives to smoking, they are improperly defining them as part of the problem

Just as I have done before, the experts warn that harsh regulation of e-cigarettes could have the unintended effect of protecting cigarettes:

On a precautionary basis, regulators should avoid support for measures that could have the perverse effect of prolonging cigarette consumption. Policies that are excessively restrictive or burdensome on lower-risk products can have the unintended consequence of protecting cigarettes from competition from less-hazardous alternatives, and cause harm as a result. Every policy related to low-risk, non-combustible nicotine products should be assessed for this risk.

The letter’s signatories also endorse a tax strategy that I have promoted for many years:

The tax regime for nicotine products should reflect risk and be organised to create incentives for users to switch from smoking to low-risk, harm-reduction products. Excessive taxation of low-risk products relative to combustible tobacco deters smokers from switching and will cause more smoking and harm than there otherwise would be.

The letter points to the enormous public health gains that are possible with tobacco harm reduction:

The potential for tobacco harm reduction products to reduce the burden of smoking-related disease is very large, and these products could be among the most significant health innovations of the 21st Century – perhaps saving hundreds of millions of lives.

It is encouraging to see such widespread international support for my long-held positions.

Here’s why an Obama plan to regulate carbon could work

May 30, 2014, 9:02 AM

From Wired:

The U.S. Chamber of Commerce, a corporate advocacy group, has charged that regulations would cost $51 billion and 224,000 jobs. The National Mining Association ran advertisements predicting a near-doubling of electricity costs. Those claims were quickly rebutted, but they reflect a deeper fear that the EPA will try to micromanage the cuts rather than trusting companies to find their own solutions. That sort of command-and-control approach “is likely to be a costly disaster,” said Andrew Moylan, a senior fellow at R Street, a free market think tank…

…In addition to cap-and-trade, noted Moylan, states and power companies could also consider a carbon tax like British Columbia’s. Set at $30 Canadian dollars per metric ton, and ultimately reflected in the price of gasoline and fuel, it presently raises $1 billion in annual revenue, which is in turn used to fund business and income tax cuts.

Upcoming Google hangout on copyright reform

May 29, 2014, 11:41 AM

We’ll be hosting a Google Hangout with the Mercatus Center at George Mason University, the Electronic Frontier Foundation and the Competitive Enterprise Institute to discuss copyright reform on Thursday, June 5, at 3 p.m. ET.

Copyright has long been a source of division among conservatives and libertarians. While some see creative works the same as any other property, and thus a natural right, others argue that copyright is different than traditional property, and that special interests have bloated the copyright system to the point where innovation is stifled. How much copyright is too much? At what point does cronyism trump innovation?

Panelists Tom W. Bell, author of “Intellectual Privilege,” Derek Khanna of R Street, Mitch Stoltz of EFF and Ryan Radia of CEI will debate these issues. We invite you to join the discussion by asking questions through the Hangout at j.mp/copyrighthangout or using the hashtag #iphangout on Twitter.

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N.C. auto insurance price controls stifle innovation

May 29, 2014, 10:47 AM

There has been a great deal of heated discussion in North Carolina regarding auto insurance reform during the past several years. The insurance industry is divided and parties are trying to make their case to legislators in the N.C. General Assembly.

It can’t be denied that the average premium for drivers here is ranked as one of the lower in the nation and the market is not in a state of crisis.It also can’t be denied that our regulatory system is unique nationally and the rate bureau model is dated. This approach worked in the 1980s, before advances in technology, risk assessment and online resources. We now have usage-based insurance options that give the driver the ability to install a device that monitors driver habits in real time and allows discounts for driving carefully. Technology enables insurers to more accurately price risk on individual characteristics and reward less risky behavior. This is fairer than charging average rates based on large indiscriminate groupings.

We do not need to completely dismantle the current system, but it does seem reasonable to modify the system so that it makes it easier for insurers to operate and offer discount programs and enhancements commonly used in other states.

As it stands currently, the states with simpler, more modern systems are the first to receive new programs and North Carolina is left for last, or left out. Insurers could be given the opportunity to opt out of the current rate bureau system, provided that the insurance commissioner still has the option to review and approve new programs. This should lead to additional benefits for consumers, as insurers have more flexibility and incentives to compete.

I’ve taught insurance and personal finance courses for two decades – the last 12 at Appalachian State University. Each semester, I assign a project in which the students are required to obtain a quote for their auto insurance. I do not tell them where to get their quote or how to do it; they have to figure that out on their own.

The students are consistently able to complete this assignment and typically have the same general comments each semester. They are surprised how easy it is to get a quote online, over the phone or by visiting an agent. They also ask about commercials they have seen on TV and wonder why they couldn’t enroll in certain programs. “I have good grades, why doesn’t my insurer offer the good student discount in North Carolina?”

I believe the consumer is best served by allowing the commissioner to have authority to review and deny rate changes when appropriate. Standard forms with consistent policy language should continue and also be subject to the commissioner’s approval. There is concern that insurers may try to raise rates, and this could certainly happen for higher-risk drivers. However, if an insurer attempts to raise rates to an unfair level, they will quickly price themselves out of the market, as consumers shop around for the best deal.

I believe many consumers would be better served by revising our system and giving insurers the option to operate as they do in most other states. This would encourage insurers to market additional discount programs and unleash competitive products that would benefit consumers.

Readmorehere: http://www.charlotteobserver.com/2014/05/27/4936249/nc-auto-insurance-price-controls.html#.U4dKgijEZOk#storylink=cpy

Five reasons why online poker is here to stay

May 28, 2014, 6:03 PM

The annual World Series of Poker got underway in Las Vegas Tuesday. Poker enthusiasts are looking to see if legalization of online poker has an impact on the tournament series, which takes in 65 bracelet events over seven-and-a-half weeks, culminating with the $10,000 Main Event beginning July 5.

If there is a substantial bump in registrations – say, an increase of 1,000 entrants over the 6,352 who played in last year’s Main Event – it would be a strong indicator that online play has caused an uptick of interest in the game.

Nevada was the first state to legalize online gambling, in February 2013, and two of the three current sites got rolling early last summer. The Silver State limits online wagering to poker, but Delaware and New Jersey, the two states that followed shortly thereafter, permit Internet sites that offer the gamut of traditional casino house-banked games, such as blackjack, roulette, slots and video poker.

Overall, however, the first year of online gambling has fallen short of expectations. U.S. online poker revenues for the first 11 months of operation totaled $9.4 million, according to a recent Associated Press report. By comparison, the casinos in Nevada by themselves brought in $982 million in the month of March alone.

Gaming operators point to continued competition from off-shore providers, some of which still take deposits from players in the United States. There has also been the usual tech hiccups with some sites. In addition, Ultimate Poker, the first site to launch in Nevada, made a strategic decision to stick to very low-limit games at the outset —literally nickel-and-dime stakes—to keep professionals off the site. While this allowed newcomers the opportunity to play with less risk, it also suppressed early revenues.

Then there’s billionaire casino mogul Sheldon Adelson, principal owner of the Venetian and Palazzo hotels in Las Vegas, who says he’ll spend “whatever it takes” to stop online gambling. His principal goal is a federal law that would pre-empt state action, but he also aims to stop any state-level legalization.

Nonetheless, Morgan Stanley predicts that by 2020, legal online gambling in the U.S. will generate $8 billion a year. At least eight states have introduced legislation to legalize online poker or full-out house-banked gambling.

So despite the slow start, there is reason for optimism. Momentum for legalization is growing in Pennsylvania and California, although in the latter case, some tribal issues need to be worked out. However, the prevailing feeling in the Golden State is that online poker is an extension of the numerous brick-and-mortar poker rooms that already dot the state.

Here are five more reasons poker players should be patient, but optimistic, about the return of online play:

  1. The basic fact is that online poker is back.

After a meteoric rise, the last few years the industry has been dinged with shutdowns and (in the case of the Full Tilt Poker site) scandal. But legalization brings the ability to promote and advertise. The NBA’s Philadelphia 76ers and NHL’s New Jersey Devils have signed sponsorship deals with PartyPoker, which operates a site in New Jersey. This means PartyPoker signage in their playing arenas and consequent visibility on TV, as well as extensions into digital space. The pact will build mindshare about online poker in the key young male demographic. As awareness grows, so will online participation. In the meantime, Delaware and Nevada have agreed to a compact that allows residents of both states play on each other’s poker sites. New Jersey, guarding its large population, so far has stayed out. Nonetheless, compacts like these, which derive from multi-state lottery agreements, will help build player pools.

  1. The Feds made good on Full Tilt repayment.

Although the news didn’t get much play in the mainstream press, the government’s decision to return funds seized from online poker accounts was a huge development in the poker community. The money was seized as part of the Department of Justice’s investigation into Full Tilt Poker and few expected to see that money again. As a result of a complicated agreement (explained here), PokerStars was awarded Full Tilt’s assets under the stipulation that funds held in any accounts be returned to players.

  1. States need the money.

Call it cynical or realistic, but most states face enough financial pressure that any new source of tax revenue is attractive. Allowing online gambling through Pennsylvania’s casinos could bring in $307 million annually to the state, according to a study commissioned by the Pennsylvania Senate. Since gambling has the air of “vice,” higher percentages can be extracted than would be otherwise feasible with conventional sales taxes (not necessarily fair, but true all the same). Tobacco and alcohol serve as a model.

  1. Sheldon Adelson is hard to take seriously as a moral crusader.

While it’s one thing to give an ear to passionate critics who believe the social harms of gambling outweigh any fiscal benefits, it’s difficult to accept anti-gambling moralizing from a man who’s made billions operating casinos internationally. Adelson, 80, has made online gambling his personal bête noir, and seems bent on using a considerable part of his casino-generated wealth on winning political favor for a ban on Internet gambling.

Most observers believe there will be no federal legislative action here, despite Adelson’s lobbying. Adelson is in direct opposition to his fellow casino owners, represented by the American Gaming Association, which is pro-legalization. Such intra-industry conflicts favor the status quo, which in this case, tilts toward online.

  1. Poker is popular.

Finally, people like to play. Poker is recognized as a game of skill, in which satisfaction and profit can be derived from learning and improving on one’s play. Unlike lotteries, which rely on pure chance, or house-banked games, which give the casino a built-in mathematical edge, poker can be a winning proposition for those with the knowledge and self-control required to master the game.

Poker always was a social game, and online play served to introduce millions more to the experience. Its peak moment came when Chris Moneymaker won the 2003 World Series of Poker Main Event, after having played only online to that point. At that point, there was no turning back.

Right now, it’s enough to say that online poker has overcome a coordinated government effort to run it out of the country. Besides poker players, this simple statement should warm the hearts of anyone weary of paternalistic or moralistic governing. Yes, there can indeed be pushback when the government arbitrarily takes away a pastime that a substantial portion of the population enjoys.

Full Disclosure: Titch is an avid poker player and will play in his second $1,500 event in this year’s World Series of Poker.

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The insurance implications of Google’s self-driving car

May 28, 2014, 5:44 PM

Google has announced a truly “driverless” car that lacks a steering wheel, brakes or anything else that allows a driver to control its movements. This actually strikes me as a much bigger deal for the insurance industry than the optionally self-driving cars that have received so much attention and seem likely to come to market within the next few years. And, while the short-term insurance implications of the type of self-driving cars that are coming to market soon seem pretty modest, the new truly driverless models seem a lot more likely to have big effects.

Let’s start with what’s going to happen soon. Self-driving cars that require a “pilot” in a driver’s seat and have a steering wheel, accelerator and brakes are really just an evolutionary change in vehicles that progressively have become more automated over the last decade.  As such, the changes in auto insurance are also going to be evolutionary. All major automakers already sell models with traction control, self-parking, collision avoidance and adaptive cruise control features. Together, these features make a car “half self-driving” already.

The “self-driving car” that will probably be on the market within a few years just adds a steering and navigation functions to this already widely deployed suite of features. Since drivers will still be able to control these cars, they will still need liability insurance. Some claims will become product liability claims—some types of accident claims already are—but most accidents would still result from human error of various kinds. There isn’t going to be a huge change. The insurance business will continue in much the same way for most insurers and most consumers.

There’s one exception: self-driving cars, even in the early generation, will be nigh-impossible for street criminals to steal. Any self-driving car is almost certainly going to be traceable via its GPS system and have a “kill switch.” Protection against theft isn’t a huge part of auto insurance premiums in most places but, in the long term, self-driving cars seem likely to more-or-less eliminate an entire category of crime. (Computer hackers might still steal cars from time-to-time but I’d suspect this is going to be about as difficult as raiding a bank account, which is hard.)

However, the kinds of fully self-driving cars that Google is now testing could represent a much bigger change. If a driver can’t manipulate a car in any way (except maybe to press a “stop” button) most crashes will probably result in product liability claims. Although such product-liability auto insurance could, in principle, be purchased as “master policies” by automakers, the mere fact that we have a longstanding cultural habit of buying auto insurance makes it quite possible that consumers will still buy polices. And, most likely, automakers as well as some insurance and consumer groups will argue for offering these policies on a no-fault basis. This, in turn, could lead to a real resurgence in no-fault coverage that’s fading elsewhere.

Second, under a full-self-driving model a significant fraction of people may well move towards a fractional ownership or “car-sharing subscription” service. Car sharing, of course, is already reasonably widespread in dense urban areas but remains a niche market because it’s not economically efficient to use car-sharing to commute to work, go on a road-trip or, really, do much of anything besides run a brief errand. By contrast, a service that lets you summon cars without drivers to wherever you are and have them take you where you want to go could replace automobiles for many people. One would think these services would probably bundle in some sort of policy in just the same way that existing car-sharing services do.

The near future of self-driving cars probably isn’t a big deal for insurers. The more distant future of fully autonomous cars, however, may well result in big, big changes.

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Forget everything you know about six-pack organizers

May 28, 2014, 2:57 PM

Picture a six-pack of bottles or cans. Now, imagine you want to transport or organize those bottles and/or cans. How are you going to do it?

Perhaps you might be thinking of a “tray” — say, one six six recessed wells designed to hold a cylindrical fluid container. That’s a pretty good idea. But would you think of something that looked like THIS?

Ok, maybe you would. In fact, you almost certainly would, because this is literally the most obvious design one could imagine. But that didn’t stop the U.S. Patent and Trademark Office from issuing design patent D705618 S1 this week, covering an “organizer for bottles and cans.”

In case you were unclear about how such an imaginative and breakthrough design might work in practice, the grant application included this helpful illustration:

The patent was granted to “inventor” James D. Reid, Jr., who previously was awarded a patent for the following bit of innovation. You can’t say he doesn’t have a genre.

 

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New York Times prison problems

May 28, 2014, 9:07 AM

A new study from the National Academies strongly suggests that we should reduce the number of people in prison and jail and make it easier for them to re-enter society. This is all good. As the report says, things have “gone past the point where the numbers of people in prison can be justified by social benefits.” But, in endorsing the study, the New York Times editorial board, now almost sure to set the tone for the left wing’s agenda on criminal justice, ignores the history that lead to such high rates of incarceration, understates the crimes committed by people now in prison and is far too optimistic about the possibility that efforts at “rehabilitation inside prison” coupled with measures that remove “barriers that keep people from rejoining society” can actually solve the same social problems prison did.

History first: We have a lot of people locked up because circumstances demanded it. Quite simply, crime ranked among America’s most pressing political issues between roughly the mid-1950s and mid-1990s. As crime declined—coincident with building more prisons—the problem disappeared from the public imagination. Today, only 2 percent of people tell Gallup pollsters that crime is the nation’s most important problem and, in 2012, neither presidential candidate mentioned it in any of the debates or his acceptance speech. More than a third of Americans considered crime a vital problem as recently as the early 1990s. Today, overall crime rates in the United States (a measure dominated by assaults and thefts) are lower than those in Europe and Canada. Judged by its intended results, mass incarceration has “worked.” We can’t forget that if we want to make good policy.

Second, contrary to the implications flowing from the NYT, others on the left and a few on the libertarian right, there are very, very few “innocents” being locked up. Most non-violent offenders have done very bad things. The Bureau of Justice Statistics finds that such “non-violent offenders” have long prior records — an average of almost ten arrests and four convictions — and a third all have violent offenses on their records and nearly 10 percent actually used a weapon to commit the “non-violent” crime for which they’re serving time (e.g. a drug dealer who shoots a competitor and then pleads guilty to a narcotics offense). While plenty of sentences are excessive, nobody goes to jail for life for “stealing a pair of socks” as the NYT claims: No state punishes non-violent petty theft as a felony under a “three strikes law.”

Third, although a lot of people (me included) would favor a lot more efforts to help both prisoners within jailhouse walls and after they get out, decades of social science have produced few certain ways of doing this. Many programs that sound good – vocational training, in-prison counseling, literacy classes, even most drug treatment – actually show mixed or negative results. The best evidence suggests that particularly intensive community monitoring of released offenders coupled with “swift and certain” sanctions (usually a brief return to prison or jail) can reduce recidivism a bit but, even under the best of these programs, recidivism remains very, very high. The reality is that changing individual behavior is very, very hard for anyone – just ask anyone who has tried to diet or undergone psychotherapy – and, if anything, people who transgress social norms strongly enough to end up in prison are going to be even harder to change than law-abiding citizens. This means we should tread carefully in changing a policy that, for all of its very real flaws, has worked more-or-less as advertised.

America can—and should—reduce mass incarceration. But we have to recognize where current policies come from, with whom we’re dealing, and the difficulties implicit in getting anybody to change.

Alcohol taxes should be tripled

May 28, 2014, 8:59 AM

America is rushing headlong toward legalizing the recreational use of marijuana. A growing majority—54 percent as of a Pew survey released just last month—favor legalization, and an even larger majority of millennials (69 percent) feels the same way. Colorado and Washington are the first states to move decisively in this direction, but they won’t be the last. I basically think this is an ok development. Like Mark Kleiman, a public policy professor at UCLA who is my guru on the regulation of controlled substances, I see full commercial legalization as a truly terrible idea, while I think noncommercial legalization, ideally via monopolies owned and operated by state governments, would be an improvement over the status quo. Regardless, marijuana legalization is coming, one way or another.

One thing that is really striking about the new Pew data is that 69 percent of Americans believe, correctly, that alcohol is more harmful to society than marijuana. When asked if alcohol would still be more harmful to society than marijuana if marijuana were just as easy to get a hold of as alcohol is now, 63 percent said that yes, it would be. Most people see marijuana’s relative harmlessness as a reason for us to regulate marijuana as lightly as we regulate alcohol. I see things differently. The fact that alcohol is more harmful to society than marijuana is a reason to regulate alcohol more stringently than we regulate marijuana. In other words, let’s ease up on marijuana prohibition and ramp up good old-fashioned alcohol prohibition. More precisely I favor something like what the libertarian journalist Greg Beato calls, and not in a nice way, “prohibition lite.”

Though it is true that I was raised in a Muslim household, it is not my intention to impose sharia law on you and yours. As someone who came to drinking late in life, I still marvel at its disinhibiting effects and I genuinely appreciate the good it can do by, essentially, helping awkward people have fun. I also think there is much to be said for psychoactive substances like MDMA, or “Molly,” which have enormous therapeutic potential.

But alcohol is crazily dangerous, and it needs to be more tightly controlled. Everyone knows that Prohibition was a disaster. What most of us forget is that the movement for Prohibition arose because alcohol abuse actually was destroying American society in the first decades of the 20th century, and the strictly regulated post-Prohibition alcohol market was shaped by still-fresh memories of the pre-Prohibition era.

For a nightmare vision of where heavy drinking can lead a society, consider Russia, where the pervasiveness of binge drinking contributes to an epidemic of cardiovascular disease and a death rate from fatal injuries that you’d normally see in wartime. Political economist Nicholas Eberstadt has gone so far as to suggest that drunkenness is a key reason why Russia, a country with universal literacy and a level of educational attainment that is (technically) in the same ballpark as countries like Australia and Sweden, has roughly the same living standards as Ecuador.

Closer to home, Great Britain has seen a staggering increase in alcohol consumption since the 1990s, much of it among teenagers. Tim Heffernan, writing in the Washington Monthly, has attributed Britain’s binge-drinking crisis to its laissez-faire alcohol market, which has allowed for the vertical integration of the liquor business. America has been shielded from U.K.–style liquor conglomerates by those post-Prohibition regulations that inflate the cost of making, moving and selling booze, but that’s now changing thanks to big multinationals like Anheuser-Busch InBev and MillerCoors, which are working hand in glove with national retail chains like Costco to make alcohol as cheap and accessible as they can.

Why would I, a great lover of the free-enterprise system, want the alcohol market to be more heavily regulated? Precisely because I’m a believer in the power of the profit motive, I understand how deadly it can be when the product being sold is intoxication. For-profit businesses exist to increase sales. The most straightforward way to do that is not to encourage everyone to drink moderately, but to focus on the small minority of people who drink the most. That is exactly what liquor companies do, and they’ll do more of it if we let Big Liquor have its way. In Marijuana Legalization: What Everyone Needs to Know, the authors estimate that at current beer prices, it costs about $5 to $10 to get drunk, or a dollar or two per drunken hour. To get a sense of what the world would look like if that price fell significantly, go to a typical town square in England on a weekend night, where alcohol-fueled violence is rampant, or to Russia, where the ruling class has used cheap vodka as a tool to keep the population drunk, passive and stupid for generations.

We shouldn’t be satisfied with keeping the per-dollar cost of getting drunk where it is today. We should make it higher. Much higher. Kleiman and his colleagues Jonathan P. Caulkins and Angela Hawken have suggested tripling the federal alcohol tax from 10 cents a drink to 30 cents a drink, an increase that they estimate would prevent 6 percent of homicides and 6 percent of motor vehicle deaths, thus sparing 3,000 lives (1,000 from the drop in homicides, 2,000 from safer highways) every year. Charging two-drink-per-day drinkers an extra $12 per month seems like a laughably small price to pay to deter binge drinking. Then, of course, there is the fact that a higher alcohol tax would also raise revenue. If you’re going to tax tanning beds and sugary soft drinks, why on earth wouldn’t you raise alcohol taxes too? If anything, 30 cents a drink isn’t high enough. Let’s raise the alcohol tax to a point just shy of where large numbers of people will start making illegal moonshine in their bathtubs.

Kleiman et al. have also suggested creating separate “drinking licenses.” Bars wouldn’t just check the IDs of the young looking. They’d check everyone’s drinking licenses, and those who’ve had them revoked for some reason (drunk driving, let’s say) would be bounced. A related reform would actually lower the drinking age, to get underage drinking out of the shadows and to socialize older teenagers into drinking responsibly.

I would go further. Libertarians like Beato can’t stand former New York City Mayor Michael Bloomberg for his constant efforts to reduce the smoking rate, which have succeeded in reducing smoking while dramatically raising the costs borne by poor smokers. For example, Beato reports that smokers earning less than $30,000 a year now spend almost a quarter of their income on cigarettes, or twice as much as they did a decade ago. Yet even Bloomberg’s harshest critics acknowledge that smoking rates have declined. Rather remarkably, New York City’s adult smoking rate is 14 percent, well below the nationwide rate of 19.3 percent. This is despite the fact that the five boroughs are chock full of immigrants from countries where smoking is all the rage. And it’s not just because of higher cigarette taxes. Apart from banning smoking in restaurants, bars and public parks, Bloomberg used a series of social marketing campaigns to sell people, and particularly young people, on the dangers of smoking.

Recently, Derek Thompson of the Atlantic riffed on new research from the marketing professors Caleb Warren and Margaret C. Thompson, who argue that “coolness” is “a measured violation of malign expectations.” Instead of simply warning young people of the dangers of drunkenness, we need to make binge drinking seem mainstream and thus lame. This will be extremely difficult because, as I’ve learned to my detriment, being drunk can be quite fun—until you wet the bed or start murdering people.

 

Endow R Street’s office supplies of freedom

May 27, 2014, 2:00 PM

 

After two years of serious work and a lot of fun, we at the R Street Institute feel like we’ve finally joined the big leagues. We’ve produced widely-circulated papers, hosted conversation-starting events and increased our footprint in DC and in the states.

To celebrate our motley crew becoming a going concern, we’ve decided to do what grown-up think tanks do and create some endowed chairs, and we’d like you to endow them! But don’t worry – like everything else with R Street, this isn’t your typical endowment opportunity. While we do plan to grow in the coming year, these chairs won’t cost you $1,000,000 over the next two years. Rather, we’d like you to make your mark on R Street by simply endowing our actual office chairs. And just about everything else in our office.

So now’s your chance! We’ve listed many items from our office, and the winner for each item can name it whatever he wants. Yes, you read that correctly – if you want Andrew to come in each day and sit in the “I love the Marketplace Fairness Act Chair for the Study of Internet Taxation,” you can do that! There’s something for every budget – from all of our chairs, to our coffee maker to office “decor” – a term we use lightly. We expect the strongest bidding war to be over R Street’s liquor cabinet.

The auction will last one week, after which the names of our items and their benefactors will be announced. Don’t let someone outbid you in this once in a lifetime opportunity! After all, most of you live in one of America’s most expensive cities and work for nonprofits – when are you going to get the chance to endow a chair again?

To visit the online auction, please click here.

*R Street reserves the right to have final approval over naming of endowed items.

 

 

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

Meet the men fighting to keep minor drug criminals in jail

May 27, 2014, 10:22 AM

From BuzzFeed:

“The American system is built to be deliberative,” said Eli Lehrer, president of the R Street Institute, a libertarian-skewing think tank that supports a reexamination of the drug war, said. “I’m not that different from a lot of these people and obviously I hope that the Smarter Sentencing Act would become law. I support it. But I don’t think the conservatives oppose it — or the liberals opposing it — are doing so out of bad motives.”

Lehrer believes the Republican Party won’t change until some of the fervent tough-on-crime types have left politics.

“The generational divide is enormously important,” he said. “If somebody was originally elected at a time when many of their constituents’ number one complaint was crime, that’s going to shape their political ideology for life, as it should.”

Rate Bureau protects vested interests, not consumers

May 27, 2014, 9:57 AM

A recent Star News editorial on auto insurance reform in North Carolina (“Don’t let companies wreck state’s auto insurance system,” May 24) argues that allowing companies to opt out of the North Carolina Rate Bureau “would eventually tear apart the system that has kept rates and the market competitive.”

In truth, the rate bureau is the opposite of competition — a legally mandated, but privately run cartel through which insurers collectively set both rates and the terms and conditions of coverage for insurance products. That’s why every other state in the union abandoned rate bureaus a long time ago.

It bears noting that the companies fighting to reform the system – State Farm, Geico, Allstate and Progressive – are also the four largest auto insurers in the United States. They rose to the top by offering the most attractive products at the most attractive prices in every state in the union.

By contrast, reform opponents Nationwide, N.C. Farm Bureau and GMAC control 34.1 percent of North Carolina’s market, but just 4.9 percent of the national market. They benefit from the status quo, which bars new products, grants enormous pricing freedom to companies with a large number of “consent to rate” policyholders and guarantees by law that the industry must earn a profit.

It is entrenched interests, not consumers, who benefit from the rate bureau system.

Prop 103′s troublesome legacy

May 23, 2014, 12:58 PM

It’s been more than a quarter-century since California voters passed Proposition 103. Spurred on by questionable analysis of the causes of high auto insurance premiums, five competing insurance-regulation referenda were placed on 1988′s general election ballot. Prop 103, with 51.13 percent approval, was the only one of the five to be ratified by the voters.

The initiative has served as the basis of a wave of new laws that have proven as problematic in practice as they are philosophically. Thus, decades later, some provisions of Prop 103 remain flashpoints of conflict between insurers, plaintiffs’ attorneys, “rate intervenors” and the state Department of Insurance. Today, there are four cardinal infirmities that continue to impact California deleteriously.

Infirmity number one is the election, rather than the appointment, of the state’s insurance commissioner. Though perhaps not apparent to many voters, the regulatory good and the public good do not always coincide. This is even more true when the regulator is a politician, primarily concerned with personal political survival and ambition. The public good arguably pales in comparison to a politician’s selfish interest in personal survival and power.

Even worse, the politician-commissioner often will demonize the insurance industry and ignore insurance realities in order to create the illusion of himself or herself as the aggressive savior of the public. Given the essential, esoteric and complex realities of insurance, one can hardly imagine a worse scenario for efficient and sensible regulation. Expertise is required to regulate coherently. While not every appointed expert is perfect, it’s hard to imagine a worse system than the one brought about by Prop 103. Voters and insurers alike would do well to work to see the commissioner’s office again filled by appointment.

Infirmity number two is the requirement that insurers submit rate-filings to the Department of Insurance for approval prior to their use. This system, known as “prior approval,” has proven slow, costly and cumbersome. Part of the problem with regulatory vetting of insurance rates in California is that the process is subjective and political. The language of Prop 103 and other insurance-rating laws is artfully vague about what constitutes an “appropriate” rate. Could there be a better lever for a meddlesome politician or social engineer than to have the power to determine whether a rate is “inadequate, excessive or unfairly discriminatory”? In the immediate aftermath of Prop 103, to turn the referendum into something workable, insurers filed lawsuit after lawsuit to clarify how they should operate in this new rating environment.

Yet, the struggle to resolve what those five words mean is ongoing. In April this year, a coalition of insurers petitioned a Sacramento court to intervene in a case brought by Mercury Insurance in which the insurance commissioner transformed a filing for a rate increase of 7.3 percent into a rate decrease of 8.2 percent. The unmistakable message from the regulator to the industry is that, if you have the gall to request a rate increase, you will be punished…and severely. Presumably, the hope of the intervening insurers is to regain some control over the pricing of their products. If that hope is dashed by the court, the department will continue to revel in rate-approval ambiguity.

Infirmity number three is the bureaucratic bloat needed to accommodate the rate-filing process. In a bureaucratic dream come true, the department has more than doubled its workforce, from 600 to 1,300 employees, and has seen its budget increase by $130 million, to $237 million. Slyly, the department touts that little of its budget comes from the state’s general fund. This is true, but only because its budget comes from the state’s “Insurance Fund,” financed almost entirely by fees and assessments on insurance companies. This is a bizarre brag, since those costs are necessarily passed along to insurance-buying Californians.

Infirmity number four, and perhaps the worst from a personal greed standpoint, has been Prop 103′s creation of a private right to intervene in the rate-making process. Suffice it to say that, in California, it pays to get in the way. Intervenors are individuals or groups allowed to participate in the rate-making process who are entitled to recover the cost of their activities from the filing insurer. (Would you be shocked to discover that the drafter of Prop 103 is a frequent intervenor?) Intervenor costs borne by insurers in the rate-making process are passed on to their policyholders. In addition, while consumers, insurance companies and the department benefit from an efficient and quick rate consideration process, intervenors do not, since they are able to bill more hours and make more money by dragging out the process.

An intervenor-driven delay would be understandable if it was necessary, but it is not. Given the department’s politically driven obsession with rates, the participation of intervenors is redundant. Heroically, unnecessary intervenors usurp the department’s unnecessary role. Clearly, insurers and the department should actively seek to curtail the damage caused by the inevitable “for-profit” intervenors by reevaluating the administrative processes and standards to which intervenors are subject.

In short: Proposition 103 has frustrated its stated purpose, which was to save Californians money. It has led to explosive growth in both regulatory bureaucracy and associated costs of doing business in California, while doing nothing to impact such cost drivers as insurance fraud or other fundamental factors that determine insurance rates. Just as troubling, as a result of affordability problems caused by the higher costs it has driven, Prop 103 may have led to an increase in uninsured drivers on California roads.

It would be of great benefit for California to eliminate election as the method of selecting the insurance commissioner, to return to an open rating system and to dump intervenors. The effort required would be Herculean, but it would be worth it.

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

Ian Adams

May 23, 2014, 11:09 AM

Ian Adams is an attorney in Sacramento, Calif. and an associate policy analyst of the R Street Institute.

Africa can tap global reinsurance markets; why not Florida?

May 23, 2014, 10:32 AM

In what can only be taken as an exceedingly encouraging sign for emerging markets around the world, an African Union-created agency has established the continent’s first-ever catastrophe insurance pool, offering coverage to the nations of Kenya, Mauritania, Mozambique, Niger and Senegal to protect against extreme weather and threats to the food supply.

Capitalized with contributions from Germany and the United Kingdom, the agency’s newly created Bermuda-based specialist hybrid mutual Africa Risk Capacity Insurance Co. Ltd. is offering $135 million of coverage to the participating countries. The pool also has secured $55 million of index-based reinsurance, brokered by Willis Re and Willis’ Global Weather Risks Practice. Reinsurance claims will be calculated using satellite rainfall data and parametric triggers designed to account for each country’s specific mix of staple crops.

As the agency itself put it in announcing the deal:

The aim of the ARC catastrophe insurance pool is to reduce African governments’ reliance on external emergency aid. Currently international assistance is secured through an appeals system and then allocated on a largely ad hoc basis once a disaster strikes. Consequently, African governments affected by disasters can be forced to reallocate funds from essential development projects to crisis responses, exacerbating problems in other areas of their economies.

That’s sound planning, particularly as it comes at a time when a massive influx of third-party capital from hedge funds, pension funds and other institutional investors has forced reinsurance pricing to grow so soft, and terms and conditions so generous, that both credit and equity analysts are warning the sector is heading into “dangerous” territory. As reported by the ILS-focused blog Artemis.bm, the investment bank Keefe, Bruyette & Woods recently warned that:

On property catastrophe reinsurance specifically, KBW’s analysts note the growing concern that the influx of third-party reinsurance capital has significantly shifted property catastrophe reinsurance market dynamics, with softening now also emerging on other lines of reinsurance business.

In KBW’s view, attempts by some reinsurers to ward off pricing pressure by loosening reinsurance terms, conditions and coverages are a dangerous and under-appreciated side effect of the pricing pressure in the market.

Of course, until such point that the market softness actually pushes over into solvency-threatening territory – not currently a risk with such an over-capitalized industry – then what is a source of distress for bondholders and shareholders is a major boon for policyholders.

Which makes it all the more disheartening that one of the largest government-backed catastrophe insurance entities in the United States – the Florida Hurricane Catastrophe Fund – is not taking this opportunity to shift some of its $17 billion in potential 2014 obligations off the backs of taxpayers and onto a private market that is clamoring for more risk.

Coming into the year, we had hopes the time was ripe for risk transfer by the Cat Fund, with Chief Operating Officer Jack Nicholson presenting a plan buy up to $1.5 billion in private reinsurance for the 2014 hurricane season. Alas, the Florida Legislature closed out its 2014 session earlier this month with no action on that front.

Certain partisans will point out that, given a historically lucky streak of good weather, the Cat Fund is in the best shape it’s faced in years. According to the twice-yearly assessment released last week by Raymond James & Assoc., the fund’s financial adviser, it goes into the 2014 hurricane season (which starts next weekend) with an estimated bonding capacity of approximately $8.3 billion and total claims-paying capacity of $21.25 billion. That’s certainly a major improvement from the reports in the not-distant past projecting the fund would face a shortfall if a major storm were to hit the state.

But bear in mind that baked in to this apparently rosy outlook are a few major assumptions. One is that, if faced with a capacity-draining event or series of events in 2014, the fund would need to borrow up to $4 billion to meet all of its needs — bonds that would be financed by post-storm “hurricane taxes” on nearly every insurance policy in the state.

This would represent an extremely large bond issuance by municipal market standards. Since 2009, there have been only three municipal issues that were this large: two (one taxable and one tax-exempt) by the State of California that were each more than $6.5 billion, and a $4.1 billion tax-exempt issuance by the Puerto Rico Sales Tax Finance Corp.

The broker-dealers consulted by Raymond James expressed confidence that the Cat Fund would be able to raise the needed funds, although it is notable that Goldman Sachs, which traditionally had been the most bearish about the fund’s bonding capacity, has been dropped from the rotation of polled firms. Raymond James itself felt compelled to offer the caveat that, just because the Cat Fund would likely to be able to raise the money, doesn’t mean it necessarily will be on attractive terms:

As a less-frequent issuer with relatively less debt outstanding and primarily at the shorter end of the yield curve, the FHCF may not be as well-covered by investor credit analysts in the primary or secondary markets, even though it has strong credit ratings. This relative lack of exposure and investor familiarity could serve as a limiting factor in determining the FHCF’s potential market access in the short run.

What’s more, it is important to keep in mind that the report shows only that the fund would be able to cover its obligations for ONE bad hurricane season. If it faced back-to-back storm years that drain its capacity, such as Florida experienced in 2004 and 2005, the Raymond James report shows it would go into that subsequent season facing a potential $5.1 billion shortfall in its ability to meet all of its obligations.

All of which is to say that Florida lawmakers are once again foolishly rolling the dice on the weather, when far more stable, affordable and fiscally prudent forms of risk transfer are readily available (and, indeed, are being smartly exploited by the Cat Fund’s sister entity, Florida’s Citizens Property Insurance Corp.) This is one case where the First World clearly has a thing or two to learn from the Third World.

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

Patent trolls rejoice! Reform bill likely dead as sponsoring Sen. Patrick Leahy takes it off agenda

May 23, 2014, 9:07 AM

From Reason:

“Very disappointing that patent reform efforts came to a halt with @SenatorLeahy‘s decision today,” the R Street Institute, a D.C.-based think tank that has been following patent reform efforts, tweeted this afternoon.

Letter to Chairman Leahy: Don’t kill prospects for real patent reform

May 23, 2014, 8:00 AM

May 22, 2014

The Hon. Patrick Leahy
Chairman
Committee on the Judiciary
United States Senate
Washington, D.C. 20510

Dear Chairman Leahy:

On behalf of the R Street Institute, we urge you to reconsider your recent decision to table the committee’s current patent reform legislation. The committee’s efforts to curb frivolous litigation have offered an important step toward providing security to American innovation. The panel should continue to work toward compromise on provisions requiring fee shifting to losers of spurious lawsuits, increased transparency in demand letters, heightened pleading standards requiring the identification of alleged infringements and protections for end users.

In your statement explaining the decision to shelve the bill, you claim that “competing companies” couldn’t come to agreement on the best way to achieve the goal of patent reform. But no particular company or industry should be guaranteed favorable treatment for their particular business model. The job of the committee is to bolster our patent system in a way that encourages innovation and protects against egregious abuses, not to satisfy the competing interests of prominent businesses.

It’s disheartening that important bipartisan reform efforts have stalled since, in our view, they represent the beginning of fundamental reform of the patent system, not the end. Beyond litigation reform, the system still needs significant overhaul to ensure more consistent patent quality.

America’s inventors deserve better and this current Congress owes them more. Patent reform has passed the House by a wide margin and enjoys the support of the president, as well. The last piece of the puzzle is for the Senate to act upon broad bipartisan support for patent reform and produce a consensus bill that advances this important cause. We look forward to working with you to make that a reality.

Sincerely,

Zach Graves & Lori Sanders
R Street Institute