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Earlier this week the New Jersey Assembly unanimously passed a bill to allow direct sales of Tesla cars in New Jersey. (H/T Marina Lao). The bill

Allows a manufacturer (“franchisor,” as defined in P.L.1985, c.361 (C.56:10-26 et seq.)) to directly buy from or sell to consumers a zero emission vehicle (ZEV) at a maximum of four locations in New Jersey.  In addition, the bill requires a manufacturer to own or operate at least one retail facility in New Jersey for the servicing of its vehicles. The manufacturer’s direct sale locations are not required to also serve as a retail service facility.

The bill amends current law to allow any ZEV manufacturer to directly or indirectly buy from and directly sell, offer to sell, or deal to a consumer a ZEV if the manufacturer was licensed by the New Jersey Motor Vehicle Commission (MVC) on or prior to January 1, 2014.  This bill provides that ZEVs may be directly sold by certain manufacturers, like Tesla Motors, and preempts any rule or regulation that restricts sales exclusively to franchised dealerships.  The provisions of the bill would not prevent a licensed franchisor from operating under an existing license issued by the MVC.

At first cut, it seems good that the legislature is responding to the lunacy of the Christie administration’s previous decision to enforce a rule prohibiting direct sales of automobiles in New Jersey. We have previously discussed that decision at length in previous posts here, here, here and here. And Thom and Mike have taken on a similar rule in their home state of Missouri here and here.

In response to New Jersey’s decision to prohibit direct sales, the International Center for Law & Economics organized an open letter to Governor Christie based in large part on Dan Crane’s writings on the topic here at TOTM and discussing the faulty economics of such a ban. The letter was signed by more than 70 law professors and economists.

But it turns out that the legislative response is nearly as bad as the underlying ban itself.

First, a quick recap.

In our letter we noted that

The Motor Vehicle Commission’s regulation was aimed specifically at stopping one company, Tesla Motors, from directly distributing its electric cars. But the regulation would apply equally to any other innovative manufacturer trying to bring a new automobile to market, as well. There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of its auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple.

While enforcement of the New Jersey ban was clearly aimed directly at Tesla, it has broader effects. And, of course, its underlying logic is simply indefensible, regardless of which particular manufacturer it affects. The letter explains at length the economics of retail distribution and the misguided, anti-consumer logic of the regulation, and concludes by noting that

In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies. It is discouraging to see this ban being used to block a company that is bringing dynamic and environmentally friendly products to market. We strongly encourage you to repeal it, by new legislation if necessary.

Thus it seems heartening that the legislature did, indeed, take up our challenge to repeal the ban.

Except that, in doing so, the legislature managed to write a bill that reflects no understanding whatever of the underlying economic issues at stake. Instead, the legislative response appears largely to be the product of rent seeking,pure and simple, offering only a limited response to Tesla’s squeaky wheel (no pun intended) and leaving the core defects of the ban completely undisturbed.

Instead of acknowledging the underlying absurdity of the limit on direct sales, the bill keeps the ban in place and simply offers a limited exception for Tesla (or other zero emission cars). While the innovative and beneficial nature of Tesla’s cars was an additional reason to oppose banning their direct sale, the specific characteristics of the cars is a minor and ancillary reason to oppose the ban. But the New Jersey legislative response is all about the cars’ emissions characteristics, and in no way does it reflect an appreciation for the fundamental economic defects of the underlying rule.

Moreover, the bill permits direct sales at only four locations (why four? No good reason whatever — presumably it was a political compromise, never the stuff of economic reason) and requires Tesla to operate a service center for its cars in the state. In other words, the regulators are still arbitrarily dictating aspects of car manufacturers’ business organization from on high.

Even worse, however, the bill is constructed to be nothing more than a payoff for a specific firm’s lobbying efforts, thus ensuring that the next (non-zero-emission) Tesla to come along will have to undertake the same efforts to pander to the state.

Far from addressing the serious concerns with the direct sales ban, the bill just perpetuates the culture of political rent seeking such regulations create.

Perhaps it’s better than nothing. Certainly it’s better than nothing for Tesla. But overall, I’d say it’s about the worst possible sort of response, short of nothing.

On May 9, 2014, in Horne v. Department of Agriculture, the Ninth Circuit struck a blow against economic liberty by denying two California raisin growers’ efforts to recover penalties imposed against them by the U.S. Department of Agriculture (USDA).  The growers’ heinous offense was their refusal to continue participating in a highly anticompetitive cartel.  In order to understand this bizarre miscarriage of justice, which turns orthodox anti-cartel policy on its head, a bit of background is in order.  

Perhaps the most serious affront to a sound consumer welfare-based American antitrust policy is the persistence of federal government-sponsored agricultural cartels.  In a form of bureaucratic schizophrenia, while the Justice Department works hard to send private cartelists to jail, and grants leniency to informers who undermine cartels, the U.S. Agriculture Department (USDA) seeks to punish individuals who undercut USDA-sponsored cartels created pursuant to Agricultural Marketing Agreement Act marketing orders.  Those orders establish antitrust-exempt government-approved frameworks under which private industry members restrict output and raise the price of specific crops, in the name of ensuring “orderly” markets.  (Various scholars, such as Mario Loyola, have explored the public choice explanations for the private-public collusion that leads to marketing orders and other government-supported cartels.)    

A particularly notorious USDA cartel is the California Raisin Marketing Order (“Raisin Order”), in operation since 1949, which establishes a Raisin Administrative Committee (“RAC”).  The RAC is comprised almost entirely of self-interested raisin growers and packers (it is comprised of 47 growers and packers, plus a public member).  The RAC sets annual raisin “reserve tonnage” requirements as a percentage of the overall crop, with the remainder comprising “free raisins.”  “Reserve raisins” are diverted from the market but may be released when supplies are low.  Under the Raisin Order, raisin producers convey their entire crop to raisin packer-distributors known as “handlers,” with producers receiving a pre-negotiated price for the free tonnage.  Handlers sell free tonnage raisins on the open market, and divert the RAC-required percentage of each producer’s crop to the account of the RAC.  The RAC tracks how many raisins each producer contributes to the reserve pool, and has a regulatory duty to sell them in a way that maximizes producer returns.  The RAC finances its activities from reserve raisin sales proceeds, and disburses whatever net income remains to producers.  Reserve raisins are diverted to “low value” markets, such as the export sector, while American consumers typically buy free raisins.  The Raisin Order imposes substantial harm on American consumers:  for example, in 2001 free raisins sold for $877.50 per ton compared to $250 per ton for reserve raisins, and the free raisins/reserve raisins price ration approached 10/1 in 1984 and 1991

California raisin producers Marvin and Laura Horne sought to evade these cartel strictures by handling their own raisin crop, rather than selling it to traditional handlers, against whom the reserve requirement of the Raisin Order clearly operated.  Similarly, by buying and handling other producers’ raisins for a per-pound fee, the Hornes believed that they could avoid the Raisin Order’s definition of “handler” with respect to those purchased raisins.  A USDA judicial officer disagreed, finding the Hornes liable for numerous Order violations and fining them over $695,000, including an assessment of nearly $484,000 for the dollar value of the raisins not held in reserve. 

The Hornes challenged this USDA order in federal district court, arguing that they were not “handlers” within the meaning of the Raisin Order and that the order violated the Fifth Amendment’s Takings Clause and the Eighth Amendment’s prohibition against excessive fines.  The district court granted summary judgment for USDA on all counts.  On appeal, the Ninth Circuit affirmed the application of the Raisin Order and the denial of the Eighth Amendment claim, but held that the Court of Federal Claims rather than the district court had jurisdiction over the takings claim.  The U.S. Supreme Court granted certiorari on the jurisdictional issue only, holding that the Hornes could assert their takings claim in district court.  The Supreme Court remanded for a determination of the merits of the takings claim, and on May 9 the Ninth Circuit, applying de novo review, affirmed the district court’s rejection of that claim.

The Ninth Circuit acknowledged that USDA linked a monetary exaction (the penalty imposed for failure to comply with the Raisin Order) to specific property (the reserved raisins) and that the Hornes faced a choice – give the RAC the raisins or face a penalty.  Because the government did not literally seize raisins from the Holmes’ land or remove money from their bank account, the court held that the USDA’s action had to be analyzed as a potential regulatory taking.  The court then noted that the Takings Clause affords less protection to personal property than to real property, and that the Hornes did not lose all economically valuable use of their property.  The court asserted that the Hornes’ rights with respect to the reserved raisins were not extinguished because they retained a claim on certain future proceeds from reserved raisin sales (even though, as the Hornes pointed out, the “equitable distribution” of reserved sales might be zero).  The court reasoned that even though the Hornes might not receive cash distributions in some years, the reserved raisins were not “permanently occupied,” and that the RAC’s diversion of reserved raisins inured to the Hornes’ benefit by stabilizing raisin prices.  The court viewed the raisin diversion program as granting a conditional government benefit in exchange for an exaction.  In short, by smoothing price fluctuations in the raisin industry, the Raisin Order made “market conditions predictable” and thereby bore a “sufficient nexus” to a legitimate interest the government sought to protect.  (The court never asked why the reduction of consumer welfare and the imposition of deadweight losses through industry cartelization is a legitimate government interest.)  Moreover, the RAC’s imposition of a reserve requirement on all producers was roughly proportional to the USDA’s market stabilizing goal as reflected in the Raisin Order.  Thus, applying the nexus/proportionaliy test of Nollan v. California Coastal Commission and Dolan v. City of Tigard, the Ninth Circuit held that the application of the Marketing Order to the Hornes’ activities did not constitute a taking.

Stripped of its convoluted reasoning and highly selective application of Supreme Court precedents, the Ninth Circuit’s holding indicates that industrious and entrepreneurial individuals will not be allowed to avoid and thereby undermine agricultural cartels through creative commercial innovations.  It means that individuals engaging in a legitimate business activity who wish not to contribute their product to a cartel that is imposed on them may suffer loss of their property, merely because the government approves of the cartel and wishes to protect it by punishing “cheaters.”  But when the government is the ringmaster, odious cartels are miraculously transformed into praiseworthy citizens who promote the public interest by “stabilizing” markets. 

Whatever the ultimate outcome of the Hornes’ legal saga, the Ninth Circuit’s crabbed analysis highlights the absurdity of imposing government financial exactions on private commercial conduct that unequivocally raises consumer welfare and enhances competition.  The egregiousness of this conduct is amplified when the government penalizes a business for refusing to transfer some of its property to a third party (here, the RAC), without assurance of being compensated.  Whether the business chooses to incur the penalty or instead accedes to the transfer, basic logic demonstrates that its property is being taken.  Hopefully, future courts will keep this in mind and be willing to apply the Takings Clause to analogous scenarios. 

If faced by a serious possibility of having to pay “just compensation” under the Takings Clause, the USDA may become less willing to sanction cartel avoiders through overly expansive interpretations of its agricultural marketing orders.  That in turn could encourage additional businesses to seek creative ways to opt out of these arrangements.  The end result could be the gradual weakening and ultimate dismantling of the marketing order framework.  Even better, the USDA could choose to act unilaterally tomorrow and move to rescind marketing order regulations.  (That might be asking too much, of course.)

Our TOTM colleague Dan Crane has written a few posts here over the past year or so about attempts by the automobile dealers lobby (and General Motors itself) to restrict the ability of Tesla Motors to sell its vehicles directly to consumers (see here, here and here). Following New Jersey’s adoption of an anti-Tesla direct distribution ban, more than 70 lawyers and economists–including yours truly and several here at TOTM–submitted an open letter to Gov. Chris Christie explaining why the ban is bad policy.

Now it seems my own state of Missouri is getting caught up in the auto dealers’ ploy to thwart pro-consumer innovation and competition. Legislation (HB1124) that was intended to simply update statutes governing the definition, licensing and use of off-road and utility vehicles got co-opted at the last minute in the state Senate. Language was inserted to redefine the term “franchisor” to include any automobile manufacturer, regardless whether they have any franchise agreements–in direct contradiction to the definition used throughout the rest of the surrounding statues. The bill defines a “franchisor” as:

“any manufacturer of new motor vehicles which establishes any business location or facility within the state of Missouri, when such facilities are used by the manufacturer to inform, entice, or otherwise market to potential customers, or where customer orders for the manufacturer’s new motor vehicles are placed, received, or processed, whether or not any sales of such vehicles are finally consummated, and whether or not any such vehicles are actually delivered to the retail customer, at such business location or facility.”

In other words, it defines a franchisor as a company that chooses to open it’s own facility and not franchise. The bill then goes on to define any facility or business location meeting the above criteria as a “new motor vehicle dealership,” even though no sales or even distribution may actually take place there. Since “franchisors” are already forbidden from owning a “new motor vehicle dealership” in Missouri (a dubious restriction in itself), these perverted definitions effectively ban a company like Tesla from selling directly to consumers.

The bill still needs to go back to the Missouri House of Representatives, where it started out as addressing “laws regarding ‘all-terrain vehicles,’ ‘recreational off-highway vehicles,’ and ‘utility vehicles’.”

This is classic rent-seeking regulation at its finest, using contrived and contorted legislation–not to mention last-minute, underhanded legislative tactics–to prevent competition and innovation that, as General Motors itself pointed out, is based on a more economically efficient model of distribution that benefits consumers. Hopefully the State House…or the Governor…won’t be asleep at the wheel as this legislation speeds through the final days of the session.

On Debating Imaginary Felds

Gus Hurwitz —  18 September 2013

Harold Feld, in response to a recent Washington Post interview with AEI’s Jeff Eisenach about AEI’s new Center for Internet, Communications, and Technology Policy, accused “neo-conservative economists (or, as [Feld] might generalize, the ‘Right’)” of having “stopped listening to people who disagree with them. As a result, they keep saying the same thing over and over again.”

(Full disclosure: The Center for Internet, Communications, and Technology Policy includes TechPolicyDaily.com, to which I am a contributor.)

Perhaps to the surprise of many, I’m going to agree with Feld. But in so doing, I’m going to expand upon his point: The problem with anti-economics social activists (or, as we might generalize, the ‘Left’)[*] is that they have stopped listening to people who disagree with them. As a result, they keep saying the same thing over and over again.

I don’t mean this to be snarky. Rather, it is a very real problem throughout modern political discourse, and one that we participants in telecom and media debates frequently contribute to. One of the reasons that I love – and sometimes hate – researching and teaching in this area is that fundamental tensions between government and market regulation lie at its core. These tensions present challenging and engaging questions, making work in this field exciting, but are sometimes intractable and often evoke passion instead of analysis, making work in this field seem Sisyphean.

One of these tensions is how to secure for consumers those things which the market does not (appear to) do a good job of providing. For instance, those of us on both the left and right are almost universally agreed that universal service is a desirable goal. The question – for both sides – is how to provide it. Feld reminds us that “real world economics is painfully complicated.” I would respond to him that “real world regulation is painfully complicated.”

I would point at Feld, while jumping up and down shouting “J’accuse! Nirvana Fallacy!” – but I’m certain that Feld is aware of this fallacy, just as I hope he’s aware that those of us who have spent much of our lives studying economics are bitterly aware that economics and markets are complicated things. Indeed, I think those of us who study economics are even more aware of this than is Feld – it is, after all, one of our mantras that “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” This mantra is particularly apt in telecommunications, where one of the most consistent and important lessons of the past century has been that the market tends to outperform regulation.

This isn’t because the market is perfect; it’s because regulation is less perfect. Geoff recently posted a salient excerpt from Tom Hazlett’s 1997 Reason interview of Ronald Coase, in which Coase recounted that “When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies – perhaps all the studies – suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been.”

I don’t want to get into a tit-for-tat over individual points that Feld makes. But I will look at one as an example: his citation to The Market for Lemons. This is a classic paper, in which Akerlof shows that information asymmetries can cause rational markets to unravel. But does it, as Feld says, show “market failure in the presence of robust competition?” That is a hotly debated point in the economics literature. One view – the dominant view, I believe – is that it does not. See, e.g., the EconLib discussion (“Akerlof did not conclude that the lemon problem necessarily implies a role for government”). Rather, the market has responded through the formation of firms that service and certify used cars, document car maintenance, repairs and accidents, warranty cars, and suffer reputational harms for selling lemons. Of course, folks argue, and have long argued, both sides. As Feld says, economics is painfully complicated – it’s a shame he draws a simple and reductionist conclusion from one of the seminal articles is modern economics, and a further shame he uses that conclusion to buttress his policy position. J’accuse!

I hope that this is in no way taken as an attack on Feld – and I wish his piece was less of an attack on Jeff. Fundamentally, he raises a very important point, that there is a real disconnect between the arguments used by the “left” and “right” and how those arguments are understood by the other. Indeed, some of my current work is exploring this very disconnect and how it affects telecom debates. I’m really quite thankful to Feld for highlighting his concern that at least one side is blind to the views of the other – I hope that he’ll be receptive to the idea that his side is subject to the same criticism.

[*] I do want to respond specifically to what I think is an important confusion in Feld piece, which motivated my admittedly snarky labelling of the “left.” I think that he means “neoclassical economics,” not “neo-conservative economics” (which he goes on to dub “Neocon economics”). Neoconservativism is a political and intellectual movement, focused primarily on US foreign policy – it is rarely thought of as a particular branch of economics. To the extent that it does hold to a view of economics, it is actually somewhat skeptical of free markets, especially of lack of moral grounding and propensity to forgo traditional values in favor of short-run, hedonistic, gains.

Not surprisingly, we’ve discussed Coase quite a bit here at Truth on the Market. Follow this link to see our collected thoughts on Coase over the years.

Probably my favorite, and certainly most frequently quoted, of Coase’s many wise words is this:

One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

Of course this, a more generalized statement of the above from The Problem of Social Cost, is the essence of his work:

All solutions have costs, and there is no reason to suppose that governmental regulation is called for simply because the problem is not well handled by the market or the firm. Satisfactory views on policy can only come from a patient study of how, in practice, the market, firms and governments handle the problem of harmful effects…. It is my belief that economists, and policy-makers generally, have tended to over-estimate the advantages which come from governmental regulation. But this belief, even if justified, does not do more than suggest that government regulation should be curtailed. It does not tell us where the boundary line should be drawn. This, it seems to me, has to come from a detailed investigation of the actual results of handling the problem in different ways.

 

As Gus said, there will be much more to say, and much more said by others, on Coase’s passing. For now, I offer this excerpt from a 1997 Reason interview he gave with Tom Hazlett:

Hazlett: You said you’re not a libertarian. What do you consider your politics to be?

Coase: I really don’t know. I don’t reject any policy without considering what its results are. If someone says there’s going to be regulation, I don’t say that regulation will be bad. Let’s see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn’t like to say that all regulation would have this effect because one can think of circumstances in which it doesn’t.

Hazlett: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation?

Coase: This is a very interesting question because one can’t give an answer to it. When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies–perhaps all the studies–suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn’t mean that if we reduce the size of government considerably, we wouldn’t find then that there were some activities it did well. Until we reduce the size of government, we won’t know what they are.

Hazlett: What’s an example of bad regulation?

Coase: I can’t remember one that’s good. Regulation of transport, regulation of agriculture– agriculture is a, zoning is z. You know, you go from a to z, they are all bad. There were so many studies, and the result was quite universal: The effects were bad.

Ronald Coase, 1910-2013

Gus Hurwitz —  2 September 2013

Many more, who will do far more justice than I can, will have much more to say on this, so I will only note it here. Ronald Coase has passed away. He was 102. The University of Chicago Law School has a notice here.

The first thing I wrote on the board for my students this semester was simply his name, “Coase.” I told them only on Friday that he was still an active scholar at 102.

With thanks to Geoff and everyone else, it’s great to join the cast here at TOTM. Geoff gave a nice introduction, so I won’t use this first post to further that purpose – especially when I have substance to discuss. The only prefatory words I’ll offer are that my work lies at the intersection of law and technology, with a focus on telecommunications and the regulation of technology. Most of my posts here will likely relate to those subjects. But I may occasionally use this forum to write briefly on topics further afield of my research agenda (and to which I therefore cannot dedicate more than blog-post-length musings to develop).

But one paragraph of navel-grazing is enough; on to substance:

The WSJ had a nice piece the other day about the Consumer Product Safety Commission’s (CPSC) ongoing persecution of Craig Zucker. Several years ago, Zucker founded a company that sold small, strong, rare-earth magnets that are a ton of fun to play with. He called them BuckyBalls. In 2011, the CPSC determined that BuckBalls are inherently unsafe because children may swallow them, which can result in serious injury. The CPSC effectively forced the company to shut down in 2012. Unsatisfied with forcing a profitable small firm out of the market, the CPSC is now going after Zucker individually to, at his own expense, recall and refund the purchase price of all BuckyBalls the company sold.

BuckyBalls(Full disclosure: I own a bunch of BuckyBalls. In fact, they’re all over my office. To date, they have not harmed anyone. The photo to the left is of the “BuckyBall decapode” that I have behind my chair. Note: the CPSC is not concerned about BuckyBall decapodes, which could pose a legitimate danger if they became sentient, but about the individual magnets.)

The CPSC’s action is a case study in bad judgment, arguably abusive and vindictive government conduct, and a basic lack of common sense. But I don’t want to focus on common sense here – I want to focus on the common law. My question is why in the world do we need the CPSC protecting consumers from these magnets when the common law clearly offers sufficient protection?

These cases almost always follow a similar pattern. Adults buy BuckyBalls. Adults either give children BuckyBalls or leave BuckyBalls where children can get them. Children, acting as children are wont to act, somehow swallow BuckyBalls.

The CPSC’s complaint identifies 5 specific cases of children ingesting BuckyBalls and notes that “over one dozen” reports have been received. The complaint doesn’t discuss in detail any injuries that resulted, beyond noting that in some cases surgery was required (and in one case, treatment included “monitoring for infection and internal damage”). It doesn’t say whether any of these cases resulted in permanent injury or disability (presumably not, or that would surely be mentioned). There have been no reported deaths or, that I have seen reported, debilitating injuries.

On the flipside, over the few years that Zucker was in business (roughly 2009, when the product became popular, through 2012, when the company closed down), he sold about $75 million worth of BuckyBalls (per the WSJ piece, “’Two and a half million adults spent $30’”). This product wasn’t a mere novelty, but something created substantial economic value for consumers.

So, what do we have? A relatively small number of injuries, with very few disputable facts, and readily identifiable harm. These would be some of the easiest possible cases to bring to court, and would occur in small enough numbers that they wouldn’t burden the court system. After the first of these cases was decided, most of the others – given the similarity of facts – would likely settle. If the harms caused by BuckyBalls were sufficient to outweigh the economic value created by this product, Zucker could have responded by altering the product, seeking insurance, or shutting down. This is exactly the sort of case we have the courts for!

That penultimate sentence should be dwelt upon: the incremental approach of the common law would allow the firm to alter and improve its product, to avoid or reduce future harm. In this way, the law develops along with new products and technologies, supporting a dynamic market. Compare this to the CPSC approach, which was to demand that Zucker comply with the agency’s demands in a short period of time (which he did), and then, the very next day, to bring the administrative suit that forced Zucker to shut the company down. The CPSC could not have reviewed his response to its demands in that timeframe; even if it did and found the response lacking, its next step should have been to engage him to address any problems, with the twain objectives of both remedying any problems but also preserving the business. Rather, the CPSC’s purpose seems to have been from the outset to shut Zucker down. It seems that in its fervor to protect the children from negligent adults, it is willing to harm the consumers who enjoy these products — perhaps we should rechristen it the Children’s Product Safety Commission.

Others have written about the CPSC’s lack of common sense in this matter. My contribution to that discussion would be to say that the CPSC has become the FTC’s successor as the “National Nanny” (not to say the FTC does not deserve the title, as demonstrated by the POM Wonderful case – but today CPSC may be even more deserving of the title).

But the BuckyBalls case raises a more fundamental concern. The CPSC surely should be lambasted for its decision to pursue this matter at all; and even more for persecuting Mr. Zucker. But beyond that, this case raises fundamental questions about the need for, and the basic legitimacy of, the CPSC.

From July 30 WSJ

Paul H. Rubin —  8 August 2012

Wall Street Journal

‘A Climate That Helps Us Grow’

By PAUL H. RUBIN

President Obama’s riff on small business—”If you’ve got a business, you didn’t build that, somebody else made that happen”—has become a major controversy. The Romney campaign has made this quote the subject of several speeches and ads, and there have been rallies all over the country of business people with signs saying that “I did build this business.”

Mr. Obama is now claiming that his words, delivered at a campaign stop in Roanoke, Va., on July 13, were taken out of context. “Of course Americans build their own businesses,” he said in a campaign ad last week. What he meant was simply that government sets the stage for business creation. In his speech, and again in his campaign ad, the example Mr. Obama pointed to was “roads and bridges.”

The context of the speech indicates the president really did mean that “you didn’t build that.” But let’s give him the benefit of the doubt; let’s assume he merely meant that business is impossible without government institutions that create the infrastructure for the economy to operate. As Mr. Obama’s deputy campaign chief Stephanie Cutter said, in clarifying his original remarks on July 24, “We build our businesses through hard work and initiative, with the public and private sectors working together to create a climate that helps us grow. President Obama knows that.”

But business is certainly not getting “a climate that helps us grow” from the current administration. That administration has instead created a hostile climate through its regulatory policies.

The news media report almost daily about new regulatory burdens. More generally, according to an analysis in March by the Heritage Foundation, “Red Tape Rising,” the Obama administration in its first three years adopted 106 major regulations (those with costs over $100 million), compared with 28 such regulations in the George W. Bush administration. Heritage notes that there are 144 more such major regulations in the pipeline.

Consider a major example of government investment—roads and bridges. A transportation system needs roads, but it also needs gasoline. This administration’s policies—its refusal to allow a private company to build the Keystone XL pipeline, its reduction in permits for offshore drilling and increased EPA regulation of pollutants—retard the production of gasoline. If transportation is an important input from government to creating a favorable climate for business, shouldn’t we be encouraging, not discouraging, gasoline production?

Other inputs needed by business are capital and labor. The Dodd–Frank Wall Street Reform and Consumer Protection Act, signed by Mr. Obama and enforced by his appointees, makes raising capital and investing more difficult. Since many regulations needed to implement this law have not even been written, business cannot know how to adapt to them. This increases uncertainty and so reduces incentives for investment.

The increased minimum wage, passed and signed in the early days of the administration, discourages hiring of entry-level workers. ObamaCare has increased uncertainty regarding future labor costs and so hindered business in hiring and expanding. The pro-union decisions by Obama appointees at the National Labor Relations Board do not create a climate to help the economy grow.

There are many other burdens placed on business. Example: The Americans With Disabilities Act is being interpreted by the Justice Department to require all hotel-based swimming pools to provide increased access to disabled persons. This will come at a high cost per pool. Many hotels and motels are small, family-run enterprises. This requirement will either lead to an increase in prices or to a decision not to have pools at all.

Either policy will induce patrons to shift to larger chain motels. Interestingly, the application of this rule has been delayed for existing pools until Jan. 31, 2013, after the election. Families vacationing this summer will not notice the new requirement.

If we accept the plain meaning of Mr. Obama’s speech, it indicates that he does not believe in the importance of entrepreneurs in creating businesses. But if we accept the reinterpretation of his speech in light of his administration’s deeds, it indicates a belief that a hostile regulatory climate poses no danger to economic growth. Either interpretation means that this administration is not good for business.

Mr. Rubin is professor of economics at Emory University and president-elect of the Southern Economic Association.

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Last week Thom posted about the government’s attempt to hide the cost of taxes and regulatory fees in commercial airfares. Apparently Spirit Airlines is highlighting another government-imposed cost of doing business by advertising a new $2/ticket fee that the airline has imposed. According a CNN report yesterday:

Spirit Airlines says a new federal regulation aimed at protecting consumers is forcing it to charge passengers an additional $2 for a ticket.

The fee, which Spirit calls the “Department of Transportation Unintended Consequences Fee,” has been added to each ticket effective immediately, according to Misty Pinson, a Spirit spokeswoman.

The new DOT regulation allows passengers to change flights within 24 hours of booking without paying a penalty. The airline says the regulation forces them to hold the seat for someone who may or may not want to fly. As a consequence, someone who really does want to fly wouldn’t be able to buy that seat because the airline is holding it for someone who might or might not end up taking it.

In short, DOT is requiring airlines to give consumers a real option to change their flight plans at zero cost within a 24 hour window. Spirit rightly recognizes that options have value. Not only is there a value to consumers in ‘buying’ such an option, there is a cost associated with providing the option; in this case, the opportunity cost of selling seats that may be held for someone that will exercise the option to cancel without a fee.

Obviously, DOT head Ray LaHood is unimpressed.

“This is just another example of the disrespect with which too many airlines treat their passengers,” Department of Transportation Secretary Ray LaHood said in an e-mailed statement. “Rather than coming up with new and unnecessary fees to charge their customers, airlines should focus on providing fair and transparent service — that’s what our common sense rules are designed to ensure.”

Perhaps Mr. LaHood doesn’t understand the concept of options and option value. The right, but not the obligation, to undertake an activity (particularly under pre-specified terms) is clearly an economic good.  The very notion that DOT’s new regulation is touted as “consumer friendly” recognizes that it creates additional value for consumers. That is, it’s giving something away that is of value…a property right to change one’s mind at zero cost. However, it is disingenuous of Mr. LaHood to object to the idea that giving away value imposes a cost on the one providing the value (and I don’t mean the DOT, but the airlines who must honor the consumer’s exercise of the option).

A better solution might be to require airlines to explicitly offer the option of a no-penalty change within a 24-hour window. Then consumers could choose whether to pay the fee and airlines might discover the true market value of that option. Spirits’ $2 may be too high. More likely, it’s too low. Many airlines already do offer the option of a no-fee cancellation and the fare differential is much higher than $2, but that option typically has a much longer maturity…any time after booking up until departure. A shorter maturity window should command a lower option value.

Spirit Airlines may be the epitome of nickle-and-diming air travel consumers, something many consumers (myself included in some cases) don’t appreciate. However, there is no denying that Spirit understands the nature of options and their value. And there’s also no denying that, based on its stock price over the past year, Spirit is doing at least as well as industry leaders in providing consumers value for the options they choose. Perhaps instead of casting aspersions, Mr LaHood and his staff should invite Spirit to teach them about this fairly fundamental concept of options and option value rather than imposing regulations with so little regard for their true costs.