Ex-Im Is Back from the Dead, Kind of

Posted on December 10, 2015 | Comments Off on Ex-Im Is Back from the Dead, Kind of

On Friday, President Obama signed into law a five-year, $305 billion highway bill. Marc Scribner, CEI’s resident transportation expert, has his thoughts on the larger bill. But there is one highway-unrelated provision I will comment on: the Export-Import Bank’s revival.

Ex-Im has been in liquidation for the last five months. The highway bill revives it through September 2019 (see pp. 778-99). Unlike most other agencies, Ex-Im’s charter expires every now and then, and Congress has to renew it for it to continue existing.

So while reformers won an important battle, we have lost the war, at least for a few years. The loss stings, but it does bring to mind Ronald Coase’s observation that an economist who “is able to postpone by a week a government program which wastes $100 million a year (what I consider a modest success) has, by his action, earned his salary for the whole of his life.” Coase wrote those words in 1975. His point remains true after forty years of inflation.

Now consider that reformers shut down Ex-Im not for one week, but for five months. And Ex-Im is not a $100 million per year program, but a $27 billion per year program, with a roughly $100 billion pre-liquidation portfolio. A lot of folks earned their life’s pay on just this issue (don’t tell their bosses, though!). Mercatus’ Veronique de Rugy, Tim Carney from the Washington Examiner and AEI, Heritage’s Diane Katz, and Cato’s Dan Ikenson are just some of the people who did a masterful job making the case against Ex-Im to experts, laymen, and everyone in between.

In part because of their efforts, the loss is not total. Ex-Im is still unable to make new transactions larger than $10 million. Ex-Im’s five-person board of directors must approve any transaction larger than $10 million. Vacancies mean the board currently has only two members, short of its three-member quorum requirement. Since Ex-Im board members require Senate confirmation, Sen. Richard Shelby, an Ex-Im opponent, can see to it that Ex-Im actually sticks to its stated focus on small business by simply declining to hold hearings on board nominees. This is a big deal, asVeronique points out:

I calculated that 84 percent of the value of approved deals between October 2006 and September 2014 (the whole range of the dataset that’s online) are above $10 million. Also, while a majority of deals approved are below the $10 million threshold, they still only represent 16 percent of the total dollar amount approved.

So for the time being, Ex-Im will be unable to live up to its reputation as “Boeing’s Bank.”

The bill also contains provisions for an ethics officer (Ex-Im has multiple open corruption investigations), some fraud control provisions, and its total portfolio cap is lowered from $140 billion to $135 billion. There will also be a new risk management committee, and Ex-Im’s audits will now be performed independently by its inspector general. This might do something to lessen Ex-Im’s accounting shenanigans. All of these reforms are weak and of little consequence, but they are better than nothing. So at least there’s that.

The lengthy Ex-Im fight holds an important lesson for reformers. The only reason reformers could win even the modest victory we did is because of Ex-Im’s expiring charter. The EPA, SEC, and nearly all other federal agencies enjoy perpetual life, virtually exempt from congressional scrutiny. More agencies should have Ex-Im’s built-in sunsets. At the very least, they would have to publicly justify their existence every few years, and elected officials would have to go on record supporting or opposing an agency, giving voters valuable information. For more on this idea, see this article I wrote for Investor’s Business Daily.

In the meantime, Ex-Im lives on. But its capacity for cronyism is greatly reduced; may the Senate hold strong and keep it that way. Then Ex-Im can be abolished for good in 2019.

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Posted in Uncategorized

Regulatory Dark Matter

Posted on December 9, 2015 | Comments Off on Regulatory Dark Matter

How do regulations get made? Agencies have to follow specific procedures, first outlined in the 1946 Administrative Procedure Act. The trouble is that many agencies simply ignore the law. Wayne Crews documents several cases of such procedural abuse in his new paper, “Mapping Washington’s Lawlessness 2016: A Preliminary Inventory of ‘Regulatory Dark Matter.’”

The rulemaking process has been updated and amended over time, and it can get technical. But the basic principles are pretty simple. For a detailed look at the process, see Susan Dudley and Jerry Brito’s excellent primer. Wayne’s point is that more and more often, agencies are ignoring proper procedure. Perhaps folks at the EPA, HHS, and other agencies should read Dudley and Brito.

The first principle is that only Congress can legislate. Agencies can’t just unilaterally issue regulations; Congress has to pass legislation directing them to issue rules. Agencies do have some discretion, but their regulations do have to have statutory authority. More and more, agencies are flouting Congress and acting on their own. In 2014, Congress passed 224 laws—while agencies issued 3,554 regulations. Recent examples of non-congressional legislating include net neutrality, carbon emissions, and subsidies to health insurance exchanges—which led to the King v. Burwell Supreme Court case.

Another principle is public participation and transparency. Before a new regulation can take effect, an agency has to publish a proposed version of the rule in the daily Federal Register. Once it’s published, that opens a comment period where anyone, from the general public to policy experts, can submit comments about the rule. Comment periods vary, but typically last from 30 to 90 days. Agencies are required to respond to and take into account the public’s comments before the final version of the regulation takes effect.

The TSA’s body scanner policies openly violated this legal requirement, leading CEI and two other groups to sue the TSA. A proposed regulation for full-body scanner use never appeared in the Federal Register. The public never had a chance to comment on the rule. The TSA just went ahead and installed the scanners without telling anybody how they were going to use them, and what safeguards they would have against abuse. This complete lack of transparency is a serious form of regulatory dark matter.

Guidance documents are another increasingly popular form of dark matter. Regulations aren’t always clearly written, and the people drafting them can’t anticipate every problem or question that might come up. If a court has a question, an agency can issue a guidance document spelling out the agency’s intention or clearing up an ambiguous clause. Since many regulations are specialized and technical, judges routinely defer to the guidance documents, which means they have de facto force of law. Agencies know this, and will take advantage of it to sneak through regulatory requirements without having to put them before the public.

There are still other forms of dark matter, which Wayne documents in his paper. Agencies have issued about half a million Notices in the Federal Register over the last twenty years, many of which contain backdoor regulations. Presidential documents and memoranda, only some of which appear in the Federal Register, are also used to regulate outside of the proper rulemaking process.

The quantity and quality of regulatory dark matter is a threat not just to the economy, but to bedrock principles of government such as separation of powers, checks and balances, and public transparency.

What to do about it? Wayne has several reform ideas. One is to get Congress more involved. Two ways to accomplish that are enforcing and expanding the Congressional Review Act, and passing the REINS Act, which would require Congress to vote on all executive branch regulations costing more than $100 million per year. Over in the executive branch, the Office of Management and Budget needs to take account of all agency notices and memoranda, not just their formal regulations. Agencies themselves need to be subject to stricter disclosure requirements, along the lines of the Regulatory Accountability Act.

For more on the dark matter problem and its solutions, read the whole paper here.

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Posted in regulation

CEI’s Battered Business Bureau: The Week in Regulation

Posted on December 7, 2015 | Comments Off on CEI’s Battered Business Bureau: The Week in Regulation

With most of December still to go, the 2015 Federal Register is already the seventh largest ever, going back to 1936. It remains on pace to set the all-time page count record. New regulations from the last week cover everything from catfish inspections to swap entities.

On to the data:

  • Last week, 61 new final regulations were published in the Federal Register, after 60 the previous week.
  • That’s the equivalent of a new regulation every two hours and 48 minutes.
  • So far in 2015, 3,146 final regulations have been published in the Federal Register. At that pace, there will be a total of 3,376 new regulations this year, fewer than the usual total of 3,500-plus.
  • Last week, 1,247 new pages were added to the Federal Register, after 2,227 pages the previous week.
  • Currently at 75,917 pages, the 2015 Federal Register is on pace for 81,457 pages. This would break the all-time record set in 2010, with 81,405 pages.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. 34 such rules have been published so far this year, three in the past week.
  • The total estimated compliance cost of 2015’s economically significant regulations ranges from $3.68 billion to $4.93 billion for the current year.
  • 282 final rules meeting the broader definition of “significant” have been published so far this year.
  • So far in 2015, 518 new rules affect small businesses; 82 of them are classified as significant.

Highlights from selected final rules published last week:

For more data, see Ten Thousand Commandments and follow @10KC and@RegoftheDay on Twitter.

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Posted in regulation

Regulation in the News

Posted on November 30, 2015 | Comments Off on Regulation in the News

Paul Bedard of the Washington Examiner cites some of Wayne Crews’ and my recent research on regulation in his “Washington Secrets” column.

See the article here.

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Posted in Media Appearances, regulation

CEI’s Battered Business Bureau: The Week in Regulation

Posted on November 30, 2015 | Comments Off on CEI’s Battered Business Bureau: The Week in Regulation

Despite a respite for Thanksgiving, the 2015 Federal Register is now on pace to set an all-time record page count. It began publication in 1936. New regulations from the short week cover everything from California raisins to recombinant DNA technology.

On to the data:

  • Last week, 60 new final regulations were published in the Federal Register, after 67 the previous week.
  • That’s the equivalent of a new regulation every two hours and 48 minutes.
  • So far in 2015, 3,085 final regulations have been published in the Federal Register. At that pace, there will be a total of 3,383 new regulations this year, fewer than the usual total of 3,500-plus.
  • Last week, 2,227 new pages were added to the Federal Register, after 1,556 pages the previous week.
  • Currently at 74,670 pages, the 2015 Federal Register is on pace for 81,875 pages. This would break the all-time record set in 2010, with 81,405 pages.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. 31 such rules have been published so far this year, one in the past week.
  • The total estimated compliance cost of 2015’s economically significant regulations ranges from $3.63 billion to $4.88 billion for the current year.
  • 272 final rules meeting the broader definition of “significant” have been published so far this year.
  • So far in 2015, 508 new rules affect small businesses; 76 of them are classified as significant.

Highlights from selected final rules published last week:

For more data, see Ten Thousand Commandments and follow @10KC and@RegoftheDay on Twitter.

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Posted in regulation

Douglass North, 1920-2015

Posted on November 27, 2015 | Comments Off on Douglass North, 1920-2015

Many great economists live long lives. James Buchanan, Milton Friedman, F.A. Hayek, Ludwig von Mises, and Gordon Tullock all lived into their nineties. Ronald Coase died a centenarian. Sadly, Douglass North has joined that august club at age 95. Keynes’ prediction about the long run once again proves correct.

North’s ideas and influence will live even longer than he did; consider that his successful rebuttal to Keynes. North won the 1993 economics Nobel for his work as an economic historian, and for showing the importance of institutions in economic development. He also played a large role in inspiring the New Institutional Economics (NIE) movement, which has its own scholarly society.

What are institutions? North and the many economists he influenced use the word in a particular way. For example, the Competitive Enterprise Institute is an institution (it’s even in our name), but not in the Douglass North sense. For North, institutions are more like the rules of the game. In baseball, three strikes and you’re out is a baseball institution—again, in a very different sense than how the Yankees or Cubs are baseball institutions. How would a pitcher’s behavior change if the rule was four strikes per out, or two? How would a hitter behave differently if foul balls were automatic outs? That’s what Doug North’s research approach was about, except on a much larger historical scale.

One of North’s most famous papers is “The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs.” It is set in 12th century France, and coauthored with Paul Milgrom and Barry Weingast, themselves distinguished economists. France had no functional national court system in the 12th century, and a dearth of professional judges and lawyers. Even so, informal markets, called Champagne fairs, opened up and spontaneously evolved their own institutions. Even without help from up on high, people found ways to make things work.

These spontaneous Champagne fair institutions ranged from how stalls were allocated to norms for bargaining and haggling, all the way up to the creation of private courts for resolving disputes. It’s a real-life illustration of Hayek-style spontaneous order. North adds the insight that the institutions that evolved in the Champagne fairs guided peoples’ behavior in certain directions. Different institutions would have guided behavior differently.

Over time, successful institutions displaced unsuccessful institutions, in an ongoing social evolutionary process. This insight continues to influence scholars in many disciplines, not just in economics.

Another famous paper about England’s 17th century Glorious Revolution, also coauthored with Barry Weingast, makes the case that checks on royal power made modern life possible. In the short run, a weaker king made people’s property rights more secure. No longer could the king just take what he wanted. Now he had to deal with a strong Parliament. Successfully removing James II, the last of the Stuarts, and replacing him with the more amiable William and Mary made Parliament a credible counterweight to royal ambition.

This new institution, which we now call separation of powers (note that John Locke’s Treatises came out at precisely this time), made modern commerce and the Industrial Revolution possible. There is obviously much more to the story of modernity, but North told an important part of the tale.

North also laid out his institutional approach in a number of books. To his credit, they are all short. One of them particularly influenced me as a student: Understanding the Process of Economic Change. Here, North goes a level deeper than the Champagne fair or Glorious Revolution articles.

Yes, institutions matter. Societies with secure property rights, the rule of law, and so on tend to be wealthier than societies that don’t. But where do those institutions come from? How do they emerge? How do institutions evolve over time? The general theme is that the institutions that best fit a given society’s circumstances emerge organically, from the bottom up. They can’t be planned and imposed from the top down. They just kind of happen, as unsatisfying as that is to say. They also change over time. What works in one time and place may not work in another, so institutions must be allowed to evolve over time. Legislation and social conventions that worked for railroads or horses might not work for self-driving cars. It is a brilliant performance.

One final point to make: economics is about human cooperation and voluntary exchange. It is quite literally a social science. Douglass North understood that point as well as anyone. Fred Smith and I have recently spent a good deal of time encouraging economists to move beyond the Homo economicus blackboard caricature and study Homo sapiens as well. Douglass North needed no such reminder. Nor do his numerous students who work every day to carry on his impressive intellectual legacy. As long as North’s career was, his influence will last far longer.

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Posted in Economics, Great Thinkers

Much to Be Thankful For

Posted on November 25, 2015 | Comments Off on Much to Be Thankful For

Thanksgiving is tomorrow, and all of us have much to be thankful for. Over at Inside Sources, I have a Julian Simon-inspired take on the holiday:

This Thursday is an opportunity to give thanks for a wonderful fact: In all of human history, there has never been a better time to be alive than right now. This might seem an odd thing to say at the moment. War, terrorism, poverty, political repression and hunger still plague many countries. The most recent wounds, inflicted in Paris, Syria, and elsewhere, are still fresh.

But life is improving in unprecedented ways.

Over the last century or so, the typical American’s income has grown sixfold. Life expectancy increased 30 years during the 20th century, from 47 years in 1900 to 77 in 2000. Infant mortality went down by more than 90 percent over that period, from roughly one in 10 to less than one in 100. Just think of all the broken hearts avoided. Nutrition and health care improved so rapidly that the typical American in 1950 was three inches taller than in 1900. Today’s Americans are taller still.

Read the whole thing here.

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Posted in Economics, Publications

What Does the World Think of Capitalism?

Posted on November 24, 2015 | Comments Off on What Does the World Think of Capitalism?

My colleague Richard Morrison has a column up the Foundation for Economic Education that is well worth reading, even though it cites Fred Smith’s and my recent paper. The question he raises–why are markets unpopular?–is a good one.

Richard gives some good answers. I have plenty of my own thoughts on the matter, influenced by thinkers such as Michael Shermer, Matt Ridley, and James Buchanan. I hope to elaborate on them in the near future.

Read his whole column here.

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Posted in Economics

CEI’s Battered Business Bureau: The Week in Regulation

Posted on November 23, 2015 | Comments Off on CEI’s Battered Business Bureau: The Week in Regulation

The number of new regulations on the year passed the 3,000 mark last week, and theFederal Register is nearly on pace to set an all-time record page count. New rules cover everything from identifying jelly to avoiding seabirds, as well as more than 200 pages of crowdfunding regulations.

On to the data:

  • Last week, 67 new final regulations were published in the Federal Register, after 44 the previous week.
  • That’s the equivalent of a new regulation every two hours and 30 minutes.
  • So far in 2015, 3,025 final regulations have been published in the Federal Register. At that pace, there will be a total of 3,376 new regulations this year, fewer than the usual total of 3,500-plus.
  • Last week, 2,227 new pages were added to the Federal Register, after 1,556 pages the previous week.
  • Currently at 72,897 pages, the 2015 Federal Register is on pace for 81,359 pages. This threatens the all-time record set in 2010, with 81,405 pages.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. 31 such rules have been published so far this year, one in the past week.
  • The total estimated compliance cost of 2015’s economically significant regulations ranges from $3.63 billion to $4.88 billion for the current year.
  • 263 final rules meeting the broader definition of “significant” have been published so far this year.
  • So far in 2015, 494 new rules affect small businesses; 72 of them are classified as significant.

Highlights from selected final rules published last week:

For more data, see Ten Thousand Commandments and follow @10KC and@RegoftheDay on Twitter.

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Posted in regulation

Virtuous Capitalism in Theory and Practice

Posted on November 17, 2015 | Comments Off on Virtuous Capitalism in Theory and Practice

Government is responsible for billions and billions of dollars of corruption and corporate welfare. Considering the potential returns on investment compared to honest entrepreneurship, it is a minor miracle the vice-to-virtue ratio in the economy isn’t even worse than it already is. Why is that? CEI founder Fred Smith and I wrote a recent paper, “Virtuous Capitalism,” which explores several possible answers to the question.

If you don’t have time to read the whole thing, Fred summarizes it in his most recent Forbes column, to which I contributed:

Capitalism has a bad reputation. Many people see it as corrupt, uncaring, and in bed with politicians. And popular wisdom isn’t always wrong. For example, take the Export-Import Bank’s pending renewal. How dare large, healthy businesses such as Boeing and General Electric receive billions of dollars-worth of special privileges?

Has Big Business thought through the political and social costs of such self-aggrandizement? Is sacrificing long-term moral standing for short-term dollars really wise?

Read the whole column here. The paper is here.

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Posted in Economics, Public Choice, Publications