Archives For commerce clause

U.S. antitrust law focuses primarily on private anticompetitive restraints, leaving the most serious impediments to a vibrant competitive process – government-initiated restraints – relatively free to flourish.  Thus the Federal Trade Commission (FTC) should be commended for its July 16 congressional testimony that spotlights a fast-growing and particularly pernicious species of (largely state) government restriction on competition – occupational licensing requirements.  Today such disciplines (to name just a few) as cat groomers, flower arrangers, music therapists, tree trimmers, frozen dessert retailers, eyebrow threaders, massage therapists (human and equine), and “shampoo specialists,” in addition to the traditional categories of doctors, lawyers, and accountants, are subject to professional licensure.  Indeed, since the 1950s, the coverage of such rules has risen dramatically, as the percentage of Americans requiring government authorization to do their jobs has risen from less than five percent to roughly 30 percent.

Even though some degree of licensing responds to legitimate health and safety concerns (i.e., no fly-by-night heart surgeons), much occupational regulation creates unnecessary barriers to entry into a host of jobs.  Excessive licensing confers unwarranted benefits on fortunate incumbents, while effectively barring large numbers of capable individuals from the workforce.  (For example, many individuals skilled in natural hair braiding simply cannot afford the 2,100 hours required to obtain a license in Iowa, Nebraska, and South Dakota.)  It also imposes additional economic harms, as the FTC’s testimony explains:  “[Occupational licensure] regulations may lead to higher prices, lower quality services and products, and less convenience for consumers.  In the long term, they can cause lasting damage to competition and the competitive process by rendering markets less responsive to consumer demand and by dampening incentives for innovation in products, services, and business models.”  Licensing requirements are often enacted in tandem with other occupational regulations that unjustifiably limit the scope of beneficial services particular professionals can supply – for instance, a ban on tooth cleaning by dental hygienists not acting under a dentist’s supervision that boosts dentists’ income but denies treatment to poor children who have no access to dentists.

What legal and policy tools are available to chip away at these pernicious and costly laws and regulations, which largely are the fruit of successful special interest lobbying?  The FTC’s competition advocacy program, which responds to requests from legislators and regulators to assess the economic merits of proposed laws and regulations, has focused on unwarranted regulatory restrictions in such licensed professions as real estate brokers, electricians, accountants, lawyers, dentists, dental hygienists, nurses, eye doctors, opticians, and veterinarians.  Retrospective reviews of FTC advocacy efforts suggest it may have helped achieve some notable reforms (for example, 74% of requestors, regulators, and bill sponsors surveyed responded that FTC advocacy initiatives influenced outcomes).  Nevertheless, advocacy’s reach and effectiveness inherently are limited by FTC resource constraints, by the need to obtain “invitations” to submit comments, and by the incentive and ability of licensing scheme beneficiaries to oppose regulatory and legislative reforms.

Former FTC Chairman Kovacic and James Cooper (currently at George Mason University’s Law and Economics Center) have suggested that federal and state antitrust experts could be authorized to have ex ante input into regulatory policy making.  As the authors recognize, however, several factors sharply limit the effectiveness of such an initiative.  In particular, “the political feasibility of this approach at the legislative level is slight”, federal mandates requiring ex ante reviews would raise serious federalism concerns, and resource constraints would loom large.

Antitrust law challenges to anticompetitive licensing schemes likewise offer little solace.  They are limited by the antitrust “state action” doctrine, which shields conduct undertaken pursuant to “clearly articulated” state legislative language that displaces competition – a category that generally will cover anticompetitive licensing requirements.  Even a Supreme Court decision next term (in North Carolina Dental v. FTC) that state regulatory boards dominated by self-interested market participants must be actively supervised to enjoy state action immunity would have relatively little bite.  It would not limit states from issuing simple statutory commands that create unwarranted occupational barriers, nor would it prevent states from implementing “adequate” supervisory schemes that are designed to approve anticompetitive state board rules.

What then is to be done?

Constitutional challenges to unjustifiable licensing strictures may offer the best long-term solution to curbing this regulatory epidemic.  As Clark Neily points out in Terms of Engagement, there is a venerable constitutional tradition of protecting the liberty interest to earn a living, reflected in well-reasoned late 19th and early 20th century “Lochner-era” Supreme Court opinions.  Even if Lochner is not rehabilitated, however, there are a few recent jurisprudential “straws in the wind” that support efforts to rein in “irrational” occupational licensure barriers.  Perhaps acting under divine inspiration, the Fifth Circuit in St. Joseph Abbey (2013) ruled that Louisiana statutes that required all casket manufacturers to be licensed funeral directors – laws that prevented monks from earning a living by making simple wooden caskets – served no other purpose than to protect the funeral industry, and, as such, violated the 14th Amendment’s Equal Protection and Due Process Clauses.  In particular, the Fifth Circuit held that protectionism, standing alone, is not a legitimate state interest sufficient to establish a “rational basis” for a state statute, and that absent other legitimate state interests, the law must fall.  Since the Sixth and Ninth Circuits also have held that intrastate protectionism standing alone is not a legitimate purpose for rational basis review, but the Tenth Circuit has held to the contrary, the time may soon be ripe for the Supreme Court to review this issue and, hopefully, delegitimize pure economic protectionism.  Such a development would place added pressure on defenders of protectionist occupational licensing schemes.  Other possible avenues for constitutional challenges to protectionist licensing regimes (perhaps, for example, under the Dormant Commerce Clause) also merit being explored, of course.  The Institute of Justice already is performing yeoman’s work in litigating numerous cases involving unjustified licensing and other encroachments on economic liberty; perhaps their example can prove an inspiration for pro bono efforts by others.

Eliminating anticompetitive occupational licensing rules – and, more generally, vindicating economic liberties that too long have been neglected – is obviously a long-term project, and far-reaching reform will not happen in the near term.  Nevertheless, while we the currently living may in the long run be dead (pace Keynes), our posterity will be alive, and we owe it to them to pursue the vindication of economic liberties under the Constitution.

In today’s New York Times, Richard Thaler argues that the Constitutional “slippery slope” argument in the Obamacare case (“Today health care, tomorrow broccoli”) is misguided.  This is a strange argument in this particular case.  We must remember that all of today’s commerce clause jurisprudence (which everyone agrees has greatly expanded the power of the Federal government to regulate economic activity) rests on Wickard v. Filburn, a 1942 case involving a small wheat and chicken farmer in Ohio.  If ever there was a slippery slope, this is it, and it seems rational to fear another in the same Constitutional line.

Imagine if you picked up your morning paper to read that one of your astronomy professors had publicly questioned whether the earth, in fact, revolves around the sun.  Or suppose that one of your economics professors was quoted as saying that consumers would purchase more gasoline if the price would simply rise.  Or maybe your high school math teacher was publicly insisting that 2 + 2 = 5.  You’d be a little embarrassed, right?  You’d worry that your colleagues and friends might begin to question your astronomical, economic, or mathematical literacy.

Now you know how I felt this morning when I read in the Wall Street Journal that my own constitutional law professor had stated that it would be “an unprecedented, extraordinary step” for the Supreme Court to “overturn[] a law [i.e., the Affordable Care Act] that was passed by a strong majority of a democratically elected Congress.”  Putting aside the “strong majority” nonsense (the deeply unpopular Affordable Care Act got through the Senate with the minimum number of votes needed to survive a filibuster and passed 219-212 in the House), saying that it would be “unprecedented” and “extraordinary” for the Supreme Court to strike down a law that violates the Constitution is like saying that Kansas City is the capital of Kansas.  Thus, a Wall Street Journal editorial queried this about the President who “famously taught constitutional law at the University of Chicago”:  “[D]id he somehow not teach the historic case of Marbury v. Madison?”

I actually know the answer to that question.  It’s no (well, technically yes…he didn’t).  President Obama taught “Con Law III” at Chicago.  Judicial review, federalism, the separation of powers — the old “structural Constitution” stuff — is covered in “Con Law I” (or at least it was when I was a student).  Con Law III covers the Fourteenth Amendment.  (Oddly enough, Prof. Obama didn’t seem too concerned about “an unelected group of people” overturning a “duly constituted and passed law” when we were discussing all those famous Fourteenth Amendment cases — Roe v. Wade, Griswold v. Connecticut, Romer v. Evans, etc.)  Of course, even a Con Law professor focusing on the Bill of Rights should know that the principle of judicial review has been alive and well since 1803, so I still feel like my educational credentials have been tarnished a bit by the President’s “unprecedented, extraordinary” remarks.

Fortunately, another bit of my educational background somewhat mitigates the reputational damage inflicted by the President’s unfortunate comments.  This morning, the judge for whom I clerked, Judge Jerry E. Smith of the U.S. Court of Appeals for the Fifth Circuit, called the President’s bluff.

Here’s a bit of transcript from this morning’s oral argument in Physicians Hospital of America v. Sebelius, a case involving a challenge to the Affordable Care Act:

Judge Jerry E. Smith: Does the Department of Justice recognize that federal courts have the authority in appropriate circumstances to strike federal statutes because of one or more constitutional infirmities?

Dana Lydia Kaersvang (DOJ Attorney): Yes, your honor. Of course, there would need to be a severability analysis, but yes.

Smith: I’m referring to statements by the President in the past few days to the effect…that it is somehow inappropriate for what he termed “unelected” judges to strike acts of Congress that have enjoyed — he was referring, of course, to Obamacare — what he termed broad consensus in majorities in both houses of Congress.

That has troubled a number of people who have read it as somehow a challenge to the federal courts or to their authority or to the appropriateness of the concept of judicial review. And that’s not a small matter. So I want to be sure that you’re telling us that the attorney general and the Department of Justice do recognize the authority of the federal courts through unelected judges to strike acts of Congress or portions thereof in appropriate cases.

KaersvangMarbury v. Madison is the law, your honor, but it would not make sense in this circumstance to strike down this statute, because there’s no –

Smith: I would like to have from you by noon on Thursday…a letter stating what is the position of the Attorney General and the Department of Justice, in regard to the recent statements by the President, stating specifically and in detail in reference to those statements what the authority is of the federal courts in this regard in terms of judicial review. That letter needs to be at least three pages single spaced, no less, and it needs to be specific. It needs to make specific reference to the President’s statements and again to the position of the Attorney General and the Department of Justice.

I must say, I’m pretty dang proud of Judge Smith right now.  And I’m really looking forward to reading that three-page, single-spaced letter.

Douglas Holtz-Eakin and my former George Mason colleague and Nobel Laureate Vernon Smith are in the WSJ today discussing the economic wisdom and constitutionality of ObamaCare.  From the WSJ:

The Obama administration defends the mandate on the ground that a person’s decision to not buy health insurance affects commerce by materially increasing the costs of others’ health insurance. The government adds that health care is unique and therefore can be regulated constitutionally in ways other markets cannot.

In reality, the mandate has almost nothing to do with cost-shifting. The targeted population—the young, healthy and not poor who choose to forgo coverage—has a minimal role in the $43 billion of uncompensated health-care costs. In 2008, for example (the latest figures available), the Department of Health and Human Service’s Medical Expenditure Panel Survey showed that the uncompensated care of the mandate’s targeted population was no more than $12.8 billion—a tiny one-half of 1% of the nation’s $2.4 trillion in overall health-care costs. The insurance mandate cannot reasonably be justified on the ground that it remedies costs imposed on the system by the voluntarily uninsured.

The government’s other defense is that the health-care market does not exhibit textbook competition. No market does. The economic features relied upon by the government—externalities, imperfect information, geographically distinct markets, etc.—are characteristic of many markets.  The presence of externalities and other market imperfections does not justify a departure from the normal rules of the constitutional road. Health care is typically consumed locally, and health-insurance markets themselves primarily operate within the states. The administration’s attempt to fashion a singular, universal solution is not necessary to deal with the variegated issues arising in these markets. States have taken the lead in past reform efforts. They should be an integral part of improving the functioning of health-care and health-insurance markets.

Holtz-Eakin and Smith conclude:

Without the individual mandate, ObamaCare imposes total net costs of $360 billion on health-insurance companies from 2012 through 2021. With the mandate, the law would provide a net $6 billion benefit—i.e., revenues in excess of costs—over that same time period. In other words, the benefits of the individual mandate to health-insurance companies, along with their additional revenues provided by ObamaCare’s Medicaid expansion, are projected to balance, nearly perfectly, the costs that the law’s various regulatory mandates impose on insurers.

The individual mandate and Medicaid expansions appear to many to be unconstitutional. They are certainly bad economic policy. When they go, the entire law must fall. The administration built an intricate, balanced policy on a flawed economic foundation. It is up to the Supreme Court to pull it down.

Go read the whole thing.

It’s hard to discern much that’s coherent — much less cogent — from the cacophony that is Occupy Wall Street, but one valid complaint continually sounds through the noise:  When business interests get in bed with the government, injustice tends to result.

The Wall Street Occupiers are of course focused primarily on bailed-out financial firms (though not on union favorites GM and Chrysler, which, unlike most of the bailed-out financial firms, will end up costing taxpayers a huge pile of money).  But surely the Occupiers will also take a firm stand against one of the crassest examples of crony capitalism in the last three decades.

I’m speaking of the deal the Obama Administration struck with the insurance industry, pursuant to which industry leaders initially agreed not to oppose Obamacare in exchange for a provision forcing all Americans to purchase the industry’s product or pay a fine.  Not only does this deal privilege powerful business interests at the expense of ordinary Americans, it also promises to exacerbate income inequality by allowing medical professionals, who face very little price competition when buyers purchase their services using third-party insurance, to sustain their high salaries. 

Surely the Wall Street Occupiers recognize that if Congress can use its power to regulate commerce to coerce citizens, as a condition of merely existing, to purchase a private company’s product, then future instances of crony capitalism are inevitable.

Tomorrow, I’ll be presenting my work with James Cooper (FTC), State Regulation of Alcohol Distribution: The Effects of Post & Hold Laws on Output and Social Harms, at the DOJ Antitrust Division in the Economic Analysis Group Seminar.  We’ve received great critical feedback and suggestions for the paper thus far in earlier presentations and suspect that the DOJ economists will be no exception.  I’m looking forward to it.

In an earlier post on the CARE Act, I highlighted the fact that the law would essentially immunize state laws regulating the distribution and sale of beer, wine and liquor wholesalers from challenge under the Commerce clause and the Sherman Act.  For more details on the CARE Act, see the earlier post, but the bottom line is that the CARE Act will put an end to successful challenges to anticompetitive state regulation protecting alcohol wholesalers such as the Costco v. Maleng or Granholm v. Heald.  In this post, I want to focus on a recent empirical research project that I undertook with FTC lawyer and economist James Cooper evaluating both the competitive effects and social harms from these state regulations of alcohol distribution.   For those who want to skip the background and get straight to the paper, here is the SSRN link to “State Regulation of Alcohol Distribution: The Effects of Post and Hold Laws on Output and Social Harms.”  The paper has also been released as part of the FTC Bureau of Economics working paper series.

But first, I want to set the table a little bit with a bit of background that motivated our research and then turn to discussing our results and their implications for the current CARE Act debate.

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The Comprehensive Alcohol Regulatory Effectiveness Act — yes, the “CARE Act” — or HR 5034, is a piece of legislation aimed at supporting “State-based alcohol regulation.”  Recall the Supreme Court’s decision in Granholm v. Heald, which held that states could either allow in-state and out-of-state retailers to directly ship wine to consumers or could prohibit it for both, but couldn’t ban direct shipment only for out-of-state sellers while allowing in for in-state sellers.  Most states thus far have opened up direct shipping laws to the benefit of consumers.    While we occasionally criticize the Federal Trade Commission from time to time here at TOTM, its own research demonstrating that state regulation banning direct shipment and e-commerce harmed consumers is an excellent example of the potential for competition research and development impacting regulatory debates.  Indeed, Justice Kennedy’s majority opinion in Granholm cites the FTC study (not to mention co-blogger Mike Sykuta’s work here) a number of times.  But in addition to direct shipment laws, there are a whole host of state laws regulating the sale and distribution of alcohol.  Some of them have obviously pernicious competitive consequences for consumers as well as producers.  The beneficiaries are the wholesalers who have successfully lobbied for the protection of the state.  Fundamentally, the CARE Act aims to place these laws beyond the reach of any challenge under the Commerce Clause as per Granholm, the Sherman Act, or any other federal legislation.  Whether the CARE Act has any ancillary social benefits is an important empirical question — but you can bet that the first-order effect of the law, if it were to go into effect, would be to increase beer, wine and liquor prices.  More on the CARE Act and state regulation of alcoholic beverages below the fold.

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