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Updated: 1 hour 42 min ago

Congress should help, not hinder, private terror insurance markets

2 hours 45 min ago

Earlier this week, I took part in what I found to be a lively and enlightening panel discussion on the Terrorism Risk Insurance Act, the now-12-year-old federal program that provides a $100 billion reinsurance backstop for terrorism-related claims in the workers’ compensation, commercial property and commercial liability insurance markets.

Set to expire at the end of the year, TRIA continues to divide business interests, who have called for a speedy renewal and extension (some even suggest the program should be permanent) and free-market partisans, some of whom argue it should be allowed to sunset. We at R Street have attempted to carve out something of a middle ground, conceding that some federal role in insuring terrorism is likely inevitable, particularly for workers’ comp and for nuclear events, while arguing that there are key improvements that should be made to protect taxpayers and shift more risk back on to the private sector.

After a series of fits and starts over the past year and a half, Congress may finally be ready to start debating the topic in earnest. Last week, a bipartisan group of Senate Banking Committee members – including Sens. Chuck Schumer, D-N.Y.; Dean Heller, R-Nev.; Mark Kirk, R-Ill.; Jack Reed, D-R.I.; Chris Murphy, D-Conn.; and Mike Johanns, R-Neb. – introduced a reauthorization bill that is expected to serve as the main legislative vehicle in the upper chamber.

The measure extends the program for an additional seven years. Importantly, unlike other extension bills that have been filed thus far, it makes some changes, albeit minor ones, to the program’s terms. While preserving the current deductible (20 percent of prior year direct earned premiums in covered lines) that must be paid by industry before the backstop kicks in, it increases the co-payment paid by private insurers for amounts above that deductible to 20 percent from the current 15 percent.

What’s more, while current law has a provision requiring the government to recoup at least $27.5 billion of any expended funds, using post-disaster assessments, the proposed Senate bill would raise that mandatory recoupment to $37.5 billion. (The Treasury would maintain discretionary authority as to whether to recoup larger amounts.)

Both provisions, which would be phased in over a five-year period, represent improvements over the current law. Our preferences would be to go much further – to scrap the post-event recoupment model altogether and have companies pay premiums upfront; to significantly raise the “trigger” mechanism, which currently is just $100 million, but could easily be upped to $5 billion or even $10 billion; and to end altogether any backstop for commercial liability insurance, which as a public policy matter, currently amounts to subsidizing companies for behavior a court has found to be reckless.

But beyond simply shrinking the TRIA program itself, we hope Congress will place a greater priority on seeking ways to encourage private capital to play a bigger role in the market for terrorism insurance. And most importantly, we would urge Congress not to head down certain roads that could result in crushing that market altogether.

As R Street Associate Fellow Ernie Csiszar told the House Financial Services Committee last fall, adopting a more uniform and sensible regulatory framework, including appropriate accounting and fiscal guidance, could go a long way toward encouraging the burgeoning insurance-linked securities market to take on terrorism risks. Securitization of terrorism-related risks has gotten a bad rap, basically ever since the existence of DARPA’s proposed Policy Analysis Market – developed in part by George Mason University economist Robin Hanson – was unfairly tarred as “betting on terrorism” by a handful of opportunistic senators. But given the enormous rush of institutional investors into the reinsurance sector in recent years, and the accompanying soft market in which all players are scrambling to find yield, it would be utterly irresponsible not to seek ways to turn those market forces toward solving the thus-far intractable problem of getting the private sector to play a bigger role in insuring against terrorism.

Congress also could examine the tax treatment of catastrophe reserves to provide insurers and reinsurers financial incentives to increase their capital and expand capacity for terrorism risks without endangering their solvency or contractual commitments. One idea to do just that – developed by R Street Associate Fellow Larry Mirel and introduced as legislation in 2011 by Rep. Eleanor Holmes-Norton, D-D.C. – would designate the District of Columbia as a special tax jurisdiction where catastrophe reserves and related investment income set aside by insurers and reinsurers could be deposited free of federal income tax.

Perhaps the greatest looming threat to the existing private market for terrorism insurance is the potential for changes to the tax treatment of affiliate reinsurance. Both the White House’s proposed 2015 budget and in bills introduced by Rep. Richard Neal, D-Mass., and Sen. Bob Menendez, D-N.J., propose disallowing some or all of the deduction for reinsurance purchased by U.S.-based insurers from affiliates located overseas.

This protectionist proposal, which also was included in a tax reform package floated by the Senate Finance Committee last fall, would almost certainly drive up the cost and drive down the availability of private insurance and reinsurance to cover catastrophic terrorism. In fact, analysis of one version of the proposal conducted by the Brattle Group found the tax would reduce the supply of reinsurance (for all types of perils) to the United States by 20 percent and raise prices paid by insurers by between $11 and $13 billion.

There are obvious practical limits on how far Congress can be expected to go, either in scaling back TRIA or in opening new paths for private capital to insure terrorism. But first, they should endeavor to do no harm.

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Differentiation within the peer production economy

4 hours 54 min ago

Earlier this week, Pascal-Emmanuel Gobry posted a long and thoughtful comment on my response to his Forbes piece on the sharing economy from last week. I wanted to follow up with a few additional (and admittedly disjointed) thoughts.

I think PEG’s basic point about Uber as a fast food franchising model is worth considering. He writes:

Uber is not exactly GE, but it’s very, very far from the NYSE. If anything, it’s more like a big fast food franchise: I’m technically, legally and economically independent, but really, all of my value comes from the franchise agreement and the franchiser wants to suck as much as possible about it. Except that even then franchisees have assets that Uber drivers don’t, namely real estate/location (quite valuable in many cases) and the “last meter” of the consumer relationship.

While the franchising mental model may be a good way to think about at least some companies in the peer production space (most notably Uber), a few caveats are in order. First, while Uber reigns supreme in the black car space, I’m not sure the network effects are as strong as he suggests. I don’t see what would stop another firm from opening up to compete with Uber, either on service or price grounds. Uber certainly has a first mover advantage, but — as Gobry himself argues — they’re basically providing a commodity product: a clean black car with a driver who speaks English and has a working knowledge of the city, paid for by an on-file credit card. It doesn’t seem that the advantage of incumbency is actually that large; if it were, we wouldn’t see such competition in the ridesharing space between Lyft, Sidecar, and UberX.

That said, there probably is more of a first mover advantage for firms like Airbnb, Etsy, or RelayRides that act as marketplaces for a diversified and differentiated group of sellers. People come to Airbnb to peruse offerings and look at what differentiates different products sold through the Airbnb network; when people want a black car or a ride-share, the only differentiation is in the parameters set by the firm.

Additionally — and this is admittedly nitpicking — my uninformed impression is that it’s far easier, both logistically and contractually, to change whether or not you drive for Uber or another company than to go from being a McDonalds franchisee to a Taco Bell franchisee. The ease of exit in peer production reduces the ability of the franchiser to collect monopoly rents from drivers or other peer producers.

In short, I think PEG’s analysis may be right for the parts of the peer production economy that provide a commoditized service. But I’m not sure it holds up as well under business models where sellers can and do differentiate themselves. What will be interesting to watch, then, is how things that we currently think of as commodity products begin to allow some degree of differentiation. Uber’s VIP option is at least a tiny step in that direction; it will be interesting to see if other innovations follow. But for now, Uber’s black car service (and ped cabs, and bicycle messengers, and Christmas tree deliveries, and ice cream trucks) remain focused on commodity provision.

In the fullness of time, I think we will likely look back at the early peer production firms and business models as original and innovative, but what we see in a decade or more will likely look little like what we have today. And the evolution of this sector of the economy — and the ways in which its spoils are divided up — will be a function at least in part of to what extent firms act like marketplaces where sellers can differentiate themselves from one another.

Finally, PEG is right that the brands in question here do own a great of capital, albeit non-physical. The nature of capital in the twenty-first century is changing, and returns to it are changing likewise. Someone should write a book about that.

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Paul Krugman isn’t a hypocrite

5 hours 5 min ago

Paul Krugman may be America’s foremost public intellectual. He’s certainly a contender for the title. He has done more than any other thinker to sound the alarm about rising income inequality in the United States, and in doing so, he has shaped the worldview of a generation of liberals. Krugman’s influence reflects more than just the stylishness of his writing or his reach as a widely read columnist for the New York Times. It also rests on his sterling academic credentials. Among other laurels, Krugman has been awarded the Nobel Prize and the John Bates Clark Medal, the highest distinctions available to a living economist. The esteem in which Krugman is held among his fellow scholars lends his arguments an authority that delights those inclined to agree with him—and drives those disinclined to do so, myself very much included, up the wall.

So when Gawker reported that Krugman was offered $225,000 to join the faculty of the City University of New York’s Graduate Center, at least some of Krugman’s critics saw an opportunity to knock “Krugtron the Invincible” down a peg or two. Was he not aware that CUNY is a publicly funded institution that pays bona fide full-time professors far less than Krugman was being offered to essentially serve as a mascot for the school’s new inequality initiative—a mascot with a truly minimal teaching load? If Krugman cares so much about income inequality, his detractors wondered, why would he accept such a sum for doing so little work? And as someone who has done so much to draw attention to the evils of “the undeserving rich,” how could the offer not leave him feeling like at least a little bit of a jerk?

But this is one case where I think Krugman is in the right and his critics are in the wrong. Not only should he have had no compunction about accepting CUNY’s offer—he would have been entirely justified in asking for more. And doing so should have no bearing on his credibility as a scourge of rising inequality.

When Krugman announced he was leaving Princeton to join the CUNY faculty back in February, it was a big deal. Princeton, one of the country’s most storied, selective and elite private research universities, was losing its most celebrated social scientist to a public institution that prided itself on its inclusiveness and its democratic spirit. Krugman emphasized that though he’d very much appreciated his time at Princeton, he was attracted by the opportunity to devote more time and effort to the study of income inequality.

To that end, he sought an affiliation with the Luxembourg Income Study, a think tank that gathers and analyzes data on income, wealth and employment from a number of countries to draw meaningful cross-national comparisons. It just so happens that the LIS is led by Janet Gornick, a professor of political science and sociology at the Graduate Center. One thing led to another, and Krugman wound up with not just an LIS affiliation, but also with a faculty position at the Graduate Center.

Understandably, Krugman chose not to disclose any financial details in his announcement. But one can read between the lines. The LIS does difficult, expensive, thankless work, and attracting a scholar of Krugman’s stature would do much to raise its profile. The Graduate Center is home to a number of well-regarded scholars, yet it is not generally seen as competitive with other major research universities with deeper pockets. Krugman’s value to CUNY wouldn’t be that he is willing to devote a great deal of time and energy to educating graduate students, so it’s not surprising that the Graduate Center didn’t ask him to devote a significant portion of his time to that end. Rather, his value lies in his ability to raise the school’s profile—to attract other faculty members, to attract high-caliber graduate students and, perhaps most importantly, to attract donors who share Krugman’s convictions concerning income inequality, or who at least find it useful to appear to share his convictions. Viewed through this lens, CUNY’s offer to Krugman looks like a bargain.

One thing to keep in mind is that Krugman is most likely taking a salary cut by leaving Princeton for CUNY. We don’t know what Princeton paid Krugman, but we can ballpark it. The University of California is one of many public universities that provides information on how much it pays its employees and a quick look reveals a number of faculty members who haven’t received Krugman’s accolades but who are being paid quite a bit more than CUNY offered to pay Krugman. Having followed the academic job market closely for some years now, I can tell you that even Berkeley, the crown jewel of California’s public university system, finds it difficult to match the salaries offered by schools like Princeton, with its $17 billion endowment. And then there are the bloated salaries public universities routinely offer athletic coaches. Far be it from me to suggest that Paul Krugman will do as much for CUNY as basketball coach John Calipari does for the University of Kentucky. But Calipari earned $5.4 million in 2012. Isn’t it possible that Krugman might be worth one-twetnty-fourth as much as Calipari? Or maybe even a little bit more?

As Krugman has made clear on more than one occasion, his quarrel is not with members of the top 5 percent or even with members of the top 1 percent. The real problem, in his view, lies with the top 0.01 percent, a category dominated by executives, especially those who work in finance. These are the people with the resources to manipulate political outcomes and entrench their power and that of their descendants. I happen to think that Krugman is wrong about the threat posed by this kind of dynastic wealth, but he has made it absolutely clear that he sees this threat as separate and distinct from the wage gains experienced by upper-middle-income professionals. According to Krugman, the main thing that we as a society should do about upper-middle-income professionals, or rather upper-upper-middle-income professionals, is raise their taxes. And who doubts that Krugman would happily pay a higher marginal tax rate?

There is a moral framework that would make Krugman’s (apparent) willingness to accept CUNY’s offer look damning. In If You’re an Egalitarian, How Come You’re So Rich?, the political philosopher G.A. Cohen argued that we as individuals shouldn’t just favor institutions that are designed to maximize the well-being of the poorest among us, like, say, a progressive tax code. Rather, all of the choices we make should serve this end, whether or not the right institutions are in place. So short of donating every cent he earns above what he needs to survive, Krugman would indeed be failing as an inequality fighter by Cohen’s rigorous standard. But then, who wouldn’t?

State Policy

7 hours 25 min ago

Facing Social Security’s ignoble lie

April 16, 2014, 1:17 PM

That federal entitlement programs are heading for an increasingly unavoidable crisis has (justifiably) become conventional wisdom in Washington. What’s more, these programs unquestionably hold the lion’s share of responsibility for the country’s ever-increasing debt.

Originally meant to secure healthy retirements and healthy bodies as a bulwark of the American dream, our federal entitlements now act more as simple wealth transfers from the financially strapped millennial generation to their much wealthier parents and grandparents, thus inhibiting the former from achieving the economic upward mobility they so desperately need. There have been no shortage of proposed solutions to this vexing problem, notably the attempts by House Budget Committee Chairman Paul Ryan, R-Wis., to alter the accounting for Social Security and Medicare.

But Ryan is not alone. At the Roosevelt Institute, Brian Lamberta, claiming to speak for the millennials who are most victimized by America’s entitlement crisis – offers the standard progressive solution: increase the cap on taxable earnings under Social Security.

It would be easy for a cynical observer to dismiss this notion as nothing but tax-and-spend leftist pablum. Indeed, Lamberta’s assurance to his readers that “Social Security can remain in perpetuity if we scrap the cap” sounds more like the glib conclusion of a freshman term paper than serious analysis. To his credit, he does acknowledge the justifiably dim view that most millennials hold of Social Security, and his solution might at least do something to make the disproportionately wealthy Baby Boomers feel the same sting that their less solvent children feel, and thus not to view Social Security and Medicare as simply free lunches.

Nevertheless, Lamberta’s belief that Social Security should continue “in perpetuity” as it is currently structured avoids addressing the great lie at the center of the program, which is what drives both its current perceived illegitimacy and insolvency.

The economist Robert Samuelson has pointed out repeatedly that Social Security, far from being insurance against the dangers of old age, which merely gives recipients back what they already paid in. It is, in fact, nothing but “middle class welfare.” Quoting Samuelson:

Benefits shift; they’re not strictly proportionate to wages but are skewed to favor low-wage earners – a value judgment reflecting who most deserves help; and they aren’t paid from workers’ own “contributions.” But we ignored these realities and encouraged people to think they “earned” benefits and that Social Security is distinct from the larger budget. Politicians, pundits, think-tank experts and journalists engaged in this charade to spare Social Security’s 54 million recipients the discomfort of understanding they’re on welfare.

Adding to the problem is that the “Social Security Trust Fund” is more or less raided to pay current beneficiaries with no serious attempt to account for paying future beneficiaries and, in many cases, it continues paying people even after they get back all the money they paid in. Politifact puts this ugly reality very concisely:

Thus, Social Security is – and always has been – a transfer system from younger generations to older generations.

Put in perspective, this means that practically every reason one could have for preserving Social Security in its current form amounts to defending a program built on the lie that it is simply saving money for one generation that they will get back later. It is not. It is taking money from one generation in order to try to cover up that it squandered the previous generation’s money mostly on people who didn’t pay into it in the first place.

This is not to say that no Social Security program could be devised that acts as an efficient insurance policy for all Americans, or that acts as a humane wealth transfer such as might have been envisioned by Milton Friedman through the negative income tax. The current one may have been intended that way. But it has degenerated into a regressive program that cuts off the upward mobility of young people at the knees in order to fete mostly well-off elderly people, with no guarantee that the young will ever be able to see their money again.

A tweak to the payroll income caps might make this model sustainable until the millennial generation comes of age, but it’s not clear why anyone would want to enshrine the right

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How to tax sharing

April 16, 2014, 10:45 AM

Across the nation, so-called “peer production businesses” have become a common feature of the urban landscape, and cities are scrambling to figure out how to tax and regulate them. From the short-term housing provided through services such as Airbnb and Breather to Lyft and Sidecar’s “ride-sharing” services, new companies founded on elegant new business models are disrupting some of the most highly regulated and highly taxed companies in American cities.

Some firms, most notably Airbnb, have gone to great lengths to work with authorities to help their sellers (“hosts” is Airbnb’s preferred term of art) comply with local tax law. Lyft provides drivers some advice on complying with their income tax requirements, but because their regulatory status remains ambiguous in most places, so do their tax obligations.

Taxing businesses from the peer production or sharing economy is not a question of if, but when and how. Yes, cities are always looking for new sources of revenue, but legitimate fairness questions are at stake that must be addressed squarely, and as soon as possible.

To begin with, regulation and taxation should be considered separately; in principle, the two have nothing to do with one another. The purpose of government regulation is (ostensibly) to protect consumers from unscrupulous hoteliers, livery and taxi drivers, shopkeepers, manufacturers and the like. Taxation, however, is about collecting revenue.

As a general principle of taxation, it’s best to aim for neutrality. Consumer decisions should not be made based on tax advantages given to one firm or industry over another. Phrased differently, all participants in a marketplace should be taxed according to the same set of rules.

But that’s easier said than done. Many cities and states have made a dog’s breakfast of their tax policies, particularly as they concern lodging and transportation. Hotel taxes are typically exorbitant across the country, as cities have found it relatively easy to shift taxes to non-residents (non-voters). The Global Business Travel Association finds that hotel taxes in major U.S. cities range from 10.5 percent in beautiful downtown Burbank to over 18 percent in New York City.

These tax burdens are typically not reflected in a single high rate. Hotel stays in New Orleans’ Central Business District, for instance, are subject to a city tax, a per-person occupancy tax and three different state taxes.

Car rental charges are even more Byzantine, despite federal limits on whether and how on-airport concessions (including rental cars) can be taxed. A recent one-day car rental at Boston’s Logan airport cost me about $40 — but governments and the airport authority tacked on a convention center surcharge, a parking surcharge, a customer facility surcharge, a concession recovery fee, a vehicle license recovery fee, and a state rental tax, raising the bill by over 60 percent.

Non-resident tax regimes are based on two assumptions: consumers are relatively inelastic in the choice of cities they visit (which may be true for business travelers, but is less so for leisure travelers) and consumers have no practical alternatives to staying in hotels and renting cars or relying on taxi services.

The peer production economy has challenged that second assumption, with enormous implications for local revenues that have already become apparent. Last year, a New Orleans bed and breakfast owners association estimated the city was losing out on $1.4 million annually as visitors shifted their lodging from traditional establishments to short-term rentals, predominantly through Airbnb. One estimate in 2013 put the foregone revenue tab for San Francisco at $1.8 million.

Which brings us back to tax neutrality. While there are many reasons for choosing to stay in an Airbnb establishment over a hotel or B&B, price is certainly one of those reasons. And at present, prices are, to some extent, being driven by discriminatory tax policies. The game is currently rigged against traditional lodging establishments (and rental car companies and anything else subject to discriminatory taxes). Bad tax policy has consequences.

The best way to fix this problem is simply to scrap hotel and rental car taxes, and reduce them to the same level as the taxes applied to other goods and services. After all, these surtaxes do undoubtedly reduce the number of rental days and bed nights visitors spend in a city, at least on the margin.

Of course, cities and states are unlikely to want to reduce taxes that can be easily exported, no matter how strong the case for their elimination. So a second-best option (albeit far inferior to lowering rates) would be for governments to eliminate the tax discrepancy between different service providers offering similar services, and also make compliance simple and affordable. This means, at a minimum, reducing the number of taxes that have to be computed for each transaction, and treating hotels, motels, Holiday Inns, B&Bs, and Airbnb-type rentals identically. Additionally, the legal incidence for such taxes must be made crystal clear (it currently is not).

With respect to regulation, though it serves a different purpose than taxation, the two functions must be coordinated. It’s not enough to remedy the tax problem if the underlying business activity — ridesharing, short-term rentals — remains illegal, either de jure or de facto. (Oddly, some states continue to sell marijuana tax stamps despite pot being illegal.)

Despite the fawning coverage many peer production companies have received, the tech they’re using is better understood as elegant, not revolutionary. The innovations in the peer production economy are not tech innovations per se; they’re expansions of marketplaces previously dominated by a small number of large firms or regulated industries where competition was non-existent. The magic comes from using technology to bring new buyers and sellers together.

As cities begin to tax the sharing economy, they should be guided by the understanding that this is simply a growing market with more participants transacting in different ways. Most of what we are seeing is not new in any meaningful sense; what’s changed is that production has become much more democratized. Cities and states should adjust their tax systems accordingly, and use this as an opportunity for broader reform by cutting some of their most egregiously discriminatory taxes.

Improve business tax climate

April 16, 2014, 9:42 AM

From the Asbury Park Press:

Not only that, but recent research from the R Street Institute’s Joel Nitzkin found that e-cigarettes can actually reduce the risk of tobacco-related death or illnesses by 98 percent or more. By tacking on an additional $35 million per year levy, policymakers would likely price some consumers out of this safer-than-smoking alternative.

Treasury regs and Louisiana’s coast

April 16, 2014, 7:37 AM

Yesterday saw two significant bits of news come out of the Louisiana Gulf Coast. First, oil company BP announced that, almost four years after the Deepwater Horizon oil spill, it was ending active cleanup of the Louisiana coast.

Second, three member of Louisiana’s congressional delegation sent a letter to Treasury Secretary Jack Lew asking that the Treasury Department pick up the pace on publishing the final rules required to implement the RESTORE Act and get funds flowing to the Gulf Coast.

Their concern is well-founded. Last fall, Treasury published draft RESTORE Act regulations, which were widely critiqued both by interest groups and state and local governments. As a result, they are having to substantially revise their first draft — but it seems to be taking a very long time.

The three Louisianans — Senator David Vitter and Representatives Steve Scalise and Bill Cassidy — are right to prod Treasury to finish up final rulemaking and keep lawmakers informed about when to expect more information. Louisiana knows exactly what they’re going to do with RESTORE Act funds when they start coming in, but they can’t start implementing until Treasury publishes final regs.

Some of the other Gulf Coast states, meanwhile, are relying on the first tranche of RESTORE Act funding to implement planning processes for the future. This first round of funds comes from the Transocean settlement, and it pales in comparison to what is likely to come from a BP settlement or judgement later this year or in 2015. Other state and local governments  need resources now to plan for what happens when the BP funds become available — lest it turn into a slush fund for legislative raids.

The ball is in Treasury’s court right now — and the sooner they get to publishing final regs, the sooner Louisiana can get to work on its ambitious and necessary coastal project.

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The sharing economy’s undead capital, and its discontents

April 15, 2014, 2:17 PM

From the American Conservative:

Last week, R Street’s Daniel Rothschild described these services as bringing to life massive stores of previously “dead capital,” allowing a tremendous democratization of commercial life. He wrote, “If the key economic trend of the nineteenth and twentieth centuries was the growth of economies of scale—factories, big firms, multinationals—we are now seeing the opposite.” The sharing economy combined with the Etsy (an online craft marketplace) economy in his eyes to represent a tremendous turn towards filling the coffers of the common person, rather than the great industrialist. Ever more easily, people can rent out their car to pay for a dinner, a room to pay for a date, a house to pay for their own vacation. In Rothschild’s eyes, corrupt cities bought off by entrenched interests risk stomping out this tremendous innovation, sending the undead capital back into the ground for good and depriving countless people of a chance to make a bit of extra money.

Renters and rent-seeking in San Francisco

April 15, 2014, 1:36 PM

As anyone who’s lived in a major coastal American city knows, apartment renting is about as far from an unregulated free market as you can get. Legal and regulatory stipulations govern rents and rent increases, what can and cannot be included in a lease, even what constitutes a bedroom. And while the costs and benefits of most housing policies can be debated and deliberated, it’s generally well known that housing rentals are subject to extensive regulation.

But some San Francisco tenants have recently learned that, in addition to their civil responsibilities under the law, their failure to live up to some parts of the city’s housing code may trigger harsh criminal penalties as well. To wit: tenants who have been subletting out part or all of their apartments on a short-term basis, usually through web sites like Airbnb, are finding themselves being given 72 hours to vacate their (often rent-controlled) homes.

San Francisco’s housing stock is one of the most highly regulated in the country. The city uses a number of tools to preserve affordable housing and control rents, while at the same time largely prohibiting higher buildings that would bring more units online, increasing supply and lowering prices. California’s Ellis Act provides virtually the only legal and effective means of getting tenants (especially those benefiting from rent control) out of their units — but it has the perverse incentive of causing landlords to demolish otherwise useable housing stock.

Again, the efficiency and equity ramifications of these policies can be discussed; the fact that demand curves slope downward, however, is really not up for debate.

Under San Francisco’s municipal code, it may be a crime punishable by jail time to rent an apartment on a short-term basis. More importantly, it gives landlords the excuse they need to evict tenants they otherwise can’t under the city’s and state’s rigorous tenant protection laws. After all, they’re criminals!

Here’s the relevant section of the code:

Any owner who rents an apartment unit for tourist or transient use as defined in this Chapter shall be guilty of a misdemeanor. Any person convicted of a misdemeanor hereunder shall be punishable by a fine of not more than $1,000 or by imprisonment in the County Jail for a period of not more than six months, or by both. Each apartment unit rented for tourist or transient use shall constitute a separate offense.

Here lies the rub. There are certainly legitimate reasons to prohibit the short-term rental of a unit in an apartment or condo building — some people want to know who their neighbors are, and a rotating cast of people coming and going could potentially be a nuisance.

But that’s a matter for contracts and condo by-laws to sort out. If people value living in units that they can list on Airbnb or sublet to tourists when they’re on vacation, that’s a feature like a gas stove or walk-in closet that can come part-and-parcel of the rental through contractual stipulation. Similarly, if people want to live in a building where overnight guests are verboten, that’s something landlords or condo boards can adjudicate. The Coase Theorem can be a powerful tool, if the law will allow it.

The fact that, so far as I can tell, there’s no prohibition on having friends or family stay a night — or even a week — under San Francisco code, it seems that the underlying issue isn’t a legitimate concern about other tenants’ rights, but an aversion to commerce. From the perspective of my neighbor, there’s no difference between letting my friend from college crash in my spare bedroom for a week or allowing someone I’ve never laid eyes on before do the same in exchange for cash.

The peer production economy is still in its infancy, and there’s a lot that needs to be worked out. Laws like those in San Francisco — which circumvent the discovery process of markets — prevent landlords, tenants, condos, homeowners and regulators from learning from experience and experimentation — and lock in a mediocre system that threatens to put people in jail for renting out a room.

Legislators to consider state-wide public smoking ban, includes e-cig

April 15, 2014, 11:51 AM

From NBC News:

Dr. Joel Nitzkin is inclined to agree. As the past co-chair for the Tobacco Control Task Force, Dr. Nitzkin brought his own findings before the California Assembly Governmental Organization Committee in August 2013 in opposition to SB 648, a similar bill that has yet to be passed in that state.

“The e-cigarette is one of a number of smoke-free tobacco/nicotine alternatives to the cigarette that can reduce the risk of tobacco-attributable illness and death by 98% or better, while satisfying the user’s urge for nicotine,” Dr. Nitzkin told the committee. “Misrepresenting e-cigarettes has the practical effect of reinforcing real tobacco cigarettes as the dominant product for nicotine consumption.”

Dr. Nitzkin went on to note the absence of pharmaceutical nicotine inhalers from the ban, questioning the true intentions of the committee in their stated claims to improve public health. He stated the exclusion of the inhalers readily dissolves the feared hazard of e-cigarette vapors. The current version of SB209 excludes similar devices from Alaska’s proposed state-wide ban.

R Street’s Lehmann on terrorism insurance

April 15, 2014, 10:36 AM

R Street Co-Founder, Editor-in-Chief and Senior Fellow R.J. Lehmann participated in a panel organized by National Journal magazine and hosted at Chicago’s Soldier Field by Zurich North America on whether, and how, Congress should reauthorize the Terrorism Risk Insurance Act. Lehmann argued that — while some form of backstop may be necessary, particularly for workers’ compensation insurance — Congress should adjust the program’s trigger levels, industry deductible and recoupment mechanism to reflect that more capacity has entered the terrorism insurance market. He also questioned whether a backstop for commercial liability insurance is wise public policy, given that, by definition, it amounts to subsidizing behavior that a court has found reckless.

Lehmann was joined on the panel (which was moderated by Steve Clemons, editor-at-large of National Journal and The Atlantic) by Anne Gron, vice president of NERA Economic Consulting; Kyle Logue, professor at the University of Michigan Law School; Wisconsin Insurance Commissioner Ted Nickel; Kristin N. Pate, associate general counsel of General Growth Property Inc.; and Leigh Ann Pusey, president and CEO of the American Insurance Association. Below you can watch video of the discussion, along with a keynote speech by Rep. Randy Hultgren, R-Ill.

TRIA Triage Policy Summit from National Journal on FORA.tv

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Expert FAQ: How will depopulating Citizens Insurance affect Florida?

April 15, 2014, 9:23 AM

From NerdWallet:

According to the R Street Institute’s Florida director, Christian Cámara, “If the claims arising from a storm (or series of storms) taps all of Citizens resources, the remaining claims would be borne by Floridians through costly assessments (“hurricane taxes”) on virtually every type of policy – including homeowner’s, renter’s, business, and even automobile insurance. This would have a ripple effect on the economy for years to come.”

Floridian policyholders are still subject to surcharges for damage in the 2004-2005 hurricane season.

Depopulating Citizens changes the financial landscape for the state and individual Floridians. As Cámara notes, “Claims from policies in private companies would be paid for by private capital rather than public debt.”


How to fairly tax families

April 15, 2014, 8:42 AM

From The American:

In his 2015 budget proposal, President Obama called for expanding the Earned Income Tax Credit (EITC) for workers without children. Currently, that program heavily favors parents relative to nonparents. It also gives rise to large marriage penalties, which some observers have proposed eliminating on the grounds that marriage should not be punished. Another proposal to change the way we tax families came, last fall, from Senator Mike Lee of Utah, who unveiled a tax reform plan that would dramatically reduce taxes on parents relative to nonparents. Defending this underlying principle, Reihan Salam has argued, “By shifting the tax burden from parents to nonparents, we will help give America’s children a better start in life, and we will help correct a simple injustice” stemming from the fact that we all benefit from the work parents do in raising the next generation.

Happy Tax Day!

April 15, 2014, 8:31 AM

From the Washington Post:

SALAM: How poor are America’s poor? “(a) It is useful to think about absolute household incomes as well as household incomes in relative terms; (b) the quality of public services matters a lot, and Sweden, a country where (for example) the market for education services is much freer than it is in the U.S. seems to do a pretty good job of offering high-quality public services; and (c) it turns out that universal coverage does not mean that households no longer face financial difficulties when it comes to securing medical care, as we see in countries like Germany and France with relatively well-regarded health systems. Many Americans romanticize European social models, and this in turn leads them to embrace public policy solutions that aren’t a good fit for the particular challenges and demands that obtain in the U.S.” Reihan Salam in National Review.

Responding to Coppage and Gobry on the sharing economy

April 14, 2014, 1:29 PM

This morning in the American Conservative, Jonathan Coppage writes about “The Sharing Economy’s Undead Capital, and Its Discontents,” commenting on my essay in The Ümlaut last week, as well as Pascal-Emmanuel Gobry’s excellent Forbes post on the possible distributional effects of the sharing economy.

To a large degree, the discussion about the “sharing economy” has been marred by imprecise terminology — most notably, the term “sharing economy” itself. As Coppage points out, this term has more to do with the political leanings of many of the early movers in the industry than it does with accurately characterizing the economic phenomena we are seeing. Sharing, of course, implies the non-remunerative joint use of resources, based on certain norms of reciprocity within a highly personal economy. That’s all fine and well, but it’s inimical to the idea of the larger, extended order which is an absolutely necessary feature of economic growth. Perhaps that was the sharing economy founders’ point.

I’ve been using the term “peer production economy” in lieu of “sharing economy” for a couple of reasons. First, I think it’s a less normative way to describe and categorize what we are seeing — which, though it may dismay the sharing economy vanguard, has very little to do with sharing and a re-establishment of exchange based on personal or tribal relationships. (This should be self-evident: an economy based on “gifts” and “sharing” is one that does not need smartphone apps to connect heretofore-unknown buyers and sellers, or “recipients” and “givers.”) Second, the term “peer production” highlights the larger and, to me, more interesting trend: a technology-enabled movement from big firms, big bureaucracy and big capital to connecting individual buyers and sellers. In other words, it’s a deepening of markets and the number and type of transactions that may occur within them.

PEG’s post on the distributional effects of the peer production economy is a very useful and well-grounded exercise in thinking through what an Uberfied economy might look like distributionally. I’d like to offer a couple of critiques.

For one, PEG’s UberForBabysitters actually seems to highlight the limits of the peer production economy rather than illustrate the likely next steps. Babysitting markets are one area where the personal economy seems to trump the impersonal economy, and even were such a service to be introduced, it’s hard to see how it would generate robust network effects. It seems  unlikely that many parents would actually want more than a handful of babysitters to choose from (as Gobry says); here, personal knowledge of the people we are entrusting with our sprogs is a feature not a bug. That market, and many others like it, largely remains thin and personal, and that’s just fine. (Though DogVacay is, at least on the margin, a refutation of my hypothesis.)

So it seems unlikely that the full Uberization of the economy is nigh, at least for services where there is value in buyers and sellers having at least a limited personal relationship. Even Hayek argued that an extended order doesn’t preclude personal exchange, altruism and solidarity; rather, the two can be mutually supportive.

The bigger point that I think PEG misses is that an Uberized economy isn’t just about more capital and labor — it’s about who owns the capital. For better or worse, labor in our economy today has long been commoditized. This has been the progressive dream for the last century: turning people into interchangeable parts within bureaucracies that sought to efficiently administer either capital (big business) or power (big government). The civil service system, labor unions and human resources departments were all agents in this effort. Simultaneously, capital allocation has become increasingly efficient (another word for this is “ruthless”).

The peer production economy brings individually owned capital back into the equation, and this capital is tied to the labor of its owners. In the medieval guild system and the proto-industrialized workshop system, workers owned their tools and work spaces; industrialization turned laborers into mere factors of production where skill was the only determinant of value. (This radical shift in economic life not only significantly changed conceptions of class but eventually spawned an entire counter-movement.)

With firms like Uber, Lyft, Sidecar, Airbnb, Etsy, and RelayRides, sellers are putting their capital back into play — and these sellers, not the owners of the firms running the marketplaces — will bear the benefits of the returns to capital.

In other words, Gobry is wrong to assume that the owners of the firms of the peer production economy will take an outsize portion of the growth of this section of the economy, because by and large, they don’t own the capital; rather, they own the marketplace. Lyft is the New York Stock Exchange of the car-sharing movement — it’s not the General Electric.

One final note: Whatever the distributional impacts and the effects on community of the peer production economy — and it’s important to think about them and their larger effects, and kudos to Gobry for raising the subject — it’s important to not lose sight of what’s really at stake. In many of these areas, there’s a battle going on against captured regulators protecting entrenched interests that are do little either for market efficiency or for communitarian values. The status quo is neither efficient, nor is it conducive to building community.

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Swedish tax proposal threatens successful tobacco harm reduction

April 14, 2014, 8:30 AM

Sweden, which represents the world’s best example of the population effect of tobacco harm reduction, is considering increasing its snus tax by 22%, according to the Swedish national newspaper Aftonbladet. An April 2 article claims “it would be the first time ever that a can of snus would cost more than a pack of cigarettes.”

Swedes are reportedly outraged by the proposal. Public health experts should be outraged as well, given such a tax hike’s threat to the developed world’s lowest smoking and lung cancer rates.

As expected, the Karolinska Institute’s tobacco expert Hans Giljam expressed support for a higher snus tax. However, even he admitted, “there is a risk that many will quit snus and move to cigarettes. And if many start smoking instead of using snus, we will get sicker. That is a certainty.”

That is unquestionably the strangest endorsement of tobacco harm reduction ever heard. Giljam couched his comment in dire, unfounded or exaggerated warnings about links between snus and a host of diseases, but he waffled on how much snus use triggers health effects.

It takes decades of study to reach such conclusions. It is one of the pedagogic problems we face; we don’t really know what the health effects of long-term snus usage are.

In fact, decades of study have defined the long-term health effects of snus use – nearly zero. And even Giljam acknowledges that smoking is at least ten times more dangerous than using snus. His support for equalizing taxes on snus and cigarettes is unfathomable.

This article is available only in Swedish, so the English translation I have could account for Giljam’s bizarre logic. But I sincerely doubt it. Like anti-tobacco extremists everywhere, those in Sweden not only completely ignore the phenomenal Swedish tobacco experience, they enthusiastically endorse policies that would destroy it.

Why Congress must rethink sanctions on Cuba

April 14, 2014, 8:00 AM

Alan Gross, the 64-year-old American who has been imprisoned by Cuban authorities since 2009, is an unremarkable man on the surface. He could be a friend or colleague, or an uncle you’ve been meaning to call.

Yet what distinguishes Gross from most of the rest of us, myself included, is his courage. As a sub-contractor for the U.S. Agency for International Development, Gross traveled to Cuba to help private citizens gain access to the Internet, and thus to news and information not managed or manufactured by the Cuban government. Gross likely knew that his work was dangerous, but he may have underestimated the risk he was taking. In a heartbreaking letter to President Obama, Gross recounted the many ways his wife and daughters have suffered in his absence. He beseeched the president to intervene in his case.

And so Gross, a husband and father from Maryland who seems to want nothing more than to be reunited with his family, has reignited the decades-long debate over how the United States should deal with Cuba, a rogue state that continues to adhere to Marxist-Leninist one-party rule long after the collapse of its Soviet patron.

While some lawmakers, including Cuban-American Sens. Marco Rubio, R-Fla., and Robert Menendez, D-N.J., have urged the Obama administration not to negotiate — but instead to demand Gross’ unconditional release — Sen. Patrick Leahy, D-Vt., has led the chorus of those calling for the president to play ball with Cuba’s rulers, or rather to “not shrink from the obligation to negotiate for his freedom.”

What the Cuban government wants most is a relaxation of the economic sanctions the U.S. government first imposed on the island nation in 1963, when it became clear that Fidel Castro intended to align his new regime with the Soviet Union and to have Cuba serve as a staging ground for armed insurgencies throughout Latin America.

In the decades since then, the sanctions regime has evolved in various ways. There are now a number of licensed exemptions that allow Americans to provide humanitarian assistance in Cuba, or that allow academic researchers to travel there. Cuban households receive $2.6 billion in remittances from Cuban immigrants and people of Cuban origin living abroad, most of which comes from the United States. And as Emily Parker observed earlier this week, for example, the Obama administration made it somewhat easier for U.S. telecom providers to do business with Cuba in 2009, in an effort to encourage the free flow of information in and out of the country.

So should the U.S. government ease economic sanctions even further? The plight of Alan Gross represents an opportunity to rethink the sanctions regime. One widely held view is that U.S. sanctions actually serve to entrench the current Cuban government, as they allow Cuba’s rulers to tightly control the flow of resources in and out of the island, and also to blame the United States for the poverty and deprivation that plagues Cuban society. The problem with this line of thinking, as Mauricio Claver-Carone, director of Cuba Democracy Advocates and a proponent of sanctions, notes, is that foreign trade and investment in Cuba is the exclusive domain of the state.

Whereas the Chinese government offers wide latitude to private enterprises, both domestic and foreign-owned, to operate on Chinese soil, the Cuban government severely limits the scope for private economic activity. This is one reason why China “feels” like a freer society than Cuba, despite the fact that the Chinese government maintains a large and expensive repressive apparatus. To grow the Chinese economy, China’s rulers have had little choice but to relax their grip on investment and entrepreneurship.

In recent years, the Cuban government has allowed for the emergence of a small-scale “self-employment” sector. Yet this sector shouldn’t be mistaken for private enterprise, as self-employed individuals are barred from building their own independent businesses.  If sanctions are lifted without conditions, it seems more likely than not that the Cuban government would insist that all U.S. trade and investment be channeled through state-owned entities. Given Cuba’s parlous fiscal state, this would be an enormous boon.

Rather than lift sanctions unilaterally, the U.S. ought to consider modifying the approach it has taken since passage of the Helms-Burton Act of 1996. Under Helms-Burton, the U.S. is prepared to lift sanctions if and when Cuba releases political prisoners and allows for the inspection of its prison facilities, legalizes political activity and opposition parties and abolishes its secret police. Essentially, the law insists on immediate regime change, and it is easy to see why Cuba’s rulers find its conditions unacceptable.

Congress ought to consider a new approach: the U.S. will relax sanctions if Cuba allows its citizens greater scope to build their own private businesses, which will have the right to engage in foreign trade, receive foreign investment and employ workers. The Cuban government will, of course, be allowed to tax and regulate these private businesses, but it will have to offer its citizens at least some economic liberty, so that an influx of U.S. trade and investment won’t simply bolster the Cuban state and Cuba’s repressive apparatus.

Yes, Cuba’s propagandists will characterize this deal as yet another example of Yankee meddling. It is also true, however, that this approach would offer Cuba’s rulers a meaningful alternative to Regime Change Now while also allaying the concerns of Americans who fear that easing sanctions might strengthen the current regime. And by loosening the economic stranglehold of Cuba’s state-owned monopolies, we can give Cubans the breathing room they need to start building a free society.

A primer on patents: who’s getting them, where and how long it’s taking

April 13, 2014, 9:30 AM

From Entrepreneur:

Legislation to limit the ability of “patent trolls” – individuals or companies who own patents they don’t use and sue inventors for infringing upon them – is moving through Congress right now. In October, the House of Representatives passed the Innovation Act, which aimed to stem the tide of frivolous patent lawsuits. Several parallel bills have been proposed in the Senate. Just this week, the non-profit policy advocacy organization, R Street, sent a letter to the U.S. Senate Judiciary Committee urging them to take action.

“The targets of these ‘patent trolls’ are not just big technology companies,” the letter from R Street to the Senate said. “Rather, most troll lawsuits are brought against non-tech companies. These victims are often main street businesses such as restaurants, coffee shops, hotels, banks and others that don’t invent or manufacture anything, but are seen as easy targets by patent trolls.”

A way out of Detroit’s desperate times: Sell the family heirloom?

April 13, 2014, 9:27 AM

From The Canal:

It hasn’t always been this way. Andrew Moylan and Alan Smith of the R Street Institute describe Detroit as something of a “predecessor to today’s Silicon Valley,” and a “center of the high-tech industry of the day.” It also enjoyed rapid population during the early 20th century, being the second fastest-growing US city after Los Angeles.

However, its “just as precipitous decline” may not have been as sudden as those of us tracking auto bankruptcy had previously thought. According to a Reason article by Moylan, more than one million individuals have left Detroit since its population peak in 1950.