Controlling the Regulatory State



People tend to think about big government in terms of taxes and government spending. Big governments are the ones that have high taxes and big expenditure programs. Government regulations are a major component of big government, and the regulatory state often leads to more oppressive and more corrupt government than big spending. Consider, for example, the Scandinavian countries that have a reputation for big government–that is, big spending–but that are less oppressive and less corrupt than governments that spend less, but regulate more.

The regulatory state in the United States is rapidly growing, in financial regulation, in health care, in environmental regulation, and really, in all areas of life. Too often, executive agencies (the EPA is a prime example) will write their own regulations that appear to go well beyond any legislative intent that the agencies cite as the legal basis for those regulations. Executive agencies have taken on the legislative powers that are supposed to reside with Congress.

One proposal to do something about out-of-control regulation is a recently-proposed Regulation Freedom Amendment to the US Constitution.

The complete text of the proposed amendment reads, “Whenever one quarter of the Members of the U.S. House or the U.S. Senate transmit to the President their written declaration of opposition to a proposed federal regulation, it shall require a majority vote of the House and Senate to adopt that regulation.”

This would allow Congress to take on the constitutional responsibilities they are supposed to have in the first place to determine the scope of the regulatory state. It would take away from the agencies the power to unilaterally create law. The process would be easy and transparent. If a significant minority of the House or Senate opposed a regulation, the Congress would then have the power to vote it up or down by a simple majority vote.

This is a legislative power Congress should have, and you’d think Congress would want this power. One route the proponents of the amendment are using to build support is to go to state governors and legislators to build pressure for a constitutional convention to adopt the amendment. The idea is, if there is enough pressure from the states, Congress would act to preempt the states.

I wonder about this strategy, especially in light of the fact that you’d think members of Congress would view the amendment as a way to shift power to them and away from the executive branch. And, the burden the amendment would place on Congress would be low.

Strategy aside, the Regulatory Freedom Amendment does appear to provide a potentially effective mechanism to constrain the increasingly burdensome regulatory state.

How Much Longer Can the U.S. Economy Bear the Burdens?



Ordinary people, and sometimes experts as well, tend to overreact to short-term economic changes. The current economic malaise in the United States and Europe has brought forth a bevy of commentators convinced that this time the economy has taken a permanent turn for the worse. Never again, they declare, will we enjoy growing prosperity as we did in days of yore. Some of these Chicken Littles do see a possible means of escape from the impending doom, but only if the government carries out an extraordinarily bold economic rescue program, flush with such Keynesian measures as unprecedented monetary “quantitative easing” and large ongoing deficits in the government budget. Anything else, they insist, condemns us to languish indefinitely in a “liquidity trap” characterized by diminished rates of employment and slow, if any, economic growth. Economic historians know, however, that such declarations are hardly new and that the economy’s long-run trend has continued to tilt upward for two centuries despite the short-run ups and downs around the trend line.

Nevertheless, even the experts perceive some ominous longer-term changes and appreciate that people, in the conduct of their economic affairs, may have limits to how many burdens they can bear. These burdens take the form of taxes, regulations, and uncertainties loaded onto them by governments at every level. Each year, for example, federal departments and regulatory agencies put into effect several thousand new regulations. Only rarely do these agencies remove any existing rules from the Code of Federal Regulations. Thus, the total number in effect continues to climb relentlessly. The tangle of federal red tape becomes ever more difficult for investors, entrepreneurs, and business managers to cut through. Business people have to bear not only a constantly changing, ever more complex array of taxes, fees, and fines, but also a larger and larger amount of regulatory compliance costs, now estimated at more than $1.8 trillion annually. Governments at the state and local levels contribute their full share of such burdens as well. Small wonder that the economic freedom rank of the United States among the world’s nations has fallen substantially in recent years.

So it is scarcely a wild-eyed question if we ask, as economist Pierre Lemieux does in the current issue of Regulation magazine, whether the U.S. economy is now reacting to these growing burdens by undergoing “a slow-motion collapse.” A substantial body of evidence supports the answer that indeed such is the case.

To examine some of the most important such evidence, I have divided the U.S. economy’s post-World War II history into three periods: 1948-1973, 1973-2007, and 2007 to the present (or the most recent date for which appropriate data are available). These periods are defined by apt demarcations in that each of the years 1948, 1973, and 2007 was a business-cycle peak. Measuring longer-term changes between business cycle peak years is a time-honored way in which economists guard against drawing faulty conclusions by comparing conditions in essentially noncomparable years, between, say, a cyclical peak year and a cyclical trough year or between a peak or a trough and an intermediate year somewhere in the intervening contraction or expansion.

Consider first the average annual rate of growth of real (that is, inflation adjusted) GDP per capita. From 1948 to 1973, this rate was 2.5 percent. Between 1973 and 2007, however, it was only 1.8 percent. And between the fourth quarter of 2007 and the fourth quarter of 2014, it was a mere 0.4 percent per annum. Thus, the average rate of real economic growth has slowed substantially during the past 67 years, and the current anemic recovery from the cyclical trough reached in mid-2009—the weakest recovery of any since World War II—may be only a continuation and worsening of a deteriorating growth performance that stretches back more than 40 years.

Let us examine next, therefore, the long-run growth performance of the major economic input, which is hours of labor applied in production processes. It is easy to muddy the water in this regard if we include all workers, because a a substantial number of workers are, and long have been, employed by governments, which need not make the same kinds of economic calculations and appraisals that private employers must make. No dispassionate observer can deny that much government employment is, and always has been, make-work—employment created for political motives by public-sector employers who need not worry about a bottom-line constraint and can rely on the capture of funds via taxes, fines, fees, and forfeitures to meet their payrolls. Indeed, many government employees—for example, tax collectors, drug warriors, vice cops, domestic spies, and most regulatory enforcers—are engaged not so much in make-work as in anti-work, efforts that serve only to harass and harm the public at large, and, truth be told, they subtract from rather than adding to the true social product. In assessing the economy’s long-term health, therefore, we must confine our attention to private workers, who help to produce goods and services that are genuinely valued by consumers in free markets.

Consider then the number of persons engaged as wage and salary earners in private nonfarm employment. Between 1948 and 1973, the average annual rate of growth of such workers was 1.9 percent. Between 1973 and 2007, it was only slightly less at 1.8 percent. Between December 2007 and December 2014, however, this rate of growth collapsed to a mere 0.3 percent per annum. Whatever else we may say about the current recovery, it has scarcely touched the heart of the problem in the labor markets. Indeed, millions of potential workers have dropped out of the labor force entirely, surviving on savings, disability insurance benefits, unemployment insurance benefits, other welfare benefits, and the generosity of kinfolk. Whatever the most accurate description of recent events in the labor markets may be, there is no gainsaying the reality that potential workers who are no longer working are doing nothing to assist in the overall economy’s genuine recovery.

Growing prosperity depends not only on a growing volume of employment but, more important, on the growth of labor productivity brought about by capital accumulation and by technological and organization changes. Again, to see what has happened on this critical front, we must concentrate on the private sector. Here we find that between 1948 and 1973, the average annual rate of growth of real output per hour worked in the business sector was 2.7 percent. From 1973 to 2007, however, this growth rate was only 1.9 percent per annum, and between the fourth quarter of 2007 and the third quarter of 2014 it was even less, just 1.3 percent per annum. Clearly many employers who have been reluctant to hire new workers since the economy’s cyclical trough in mid-2009 have been able to squeeze more output from the same number of workers during the past five years, but notwithstanding these efforts the rate of growth of labor productivity has been substantially slower than it was during the preceding 60 years. Perhaps we are indeed witnessing more than a weak cyclical recovery. In Figure 1, which is plotted on a logarithmic scale, the declining rate of growth of private output per hour can be seen clearly as a reduction in the slope of the line after 1973 and, even more so, after 2005 or thereabouts.

Figure 1. Real Output per Hour in the U.S. Business Sector, 1947-2014

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Death Valley? Peter Thiel and Steve Jobs on What Could Kill Silicon Valley



Peter Thiel speaking at Independent Institute event on January 27

Peter Thiel speaking at Independent Institute event on January 27

On January 27, legendary entrepreneur Peter Thiel told a packed house at the Olympic Club in San Francisco that to blaze new trails ask: “What important truth do very few people agree with me on?” One of mine is that California will not be the epicenter of the tech industry someday. But why would this happen and how long will it take?

Two tech titans, Peter Thiel and Steve Jobs have supplied answers. In a 1995 Wired article, Jobs said:

Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something. It seemed obvious to them after a while. That’s because they were able to connect experiences they’ve had and synthesize new things. And the reason they were able to do that was that they’ve had more experiences or they have thought more about their experiences than other people.

Unfortunately, that’s too rare a commodity. A lot of people in our industry haven’t had very diverse experiences. . . . The broader one’s understanding of the human experience, the better design we will have.

Steve Jobs’ diverse experiences included tinkering with machinery as a boy, dropping out of college and attending calligraphy classes, exploring India and studying Buddhism, living on an apple farm, pursuing electronics in a home-based computer club, and being a pot-smoking lifelong Beatles and John Lennon aficionado.

Free-spirited product gurus like Steve Jobs, who are driven by experience, curiosity, exploration, and synthesis, are not drawn to insular and regimented environments. They are drawn to Silicon Valley because, in the words of Peter Thiel, it is the “center of the counterculture in our society today.” But this crucible of innovation could be destroyed.

In his talk for the Independent Institute, based on his bestselling book Zero to One, Thiel said that we have lived recently in “a period of globalization with somewhat more limited technological progress—a lot [of innovation] in computers and the world of bits, not so much in the world of atoms.”

The reason for this is government regulation: “[F]or the last 40 years, we’ve lived in a world where bits were relatively unregulated, atoms were more or less regulated to death. And that’s a political explanation for why we’ve had this strange dichotomy.”

But as bits and bytes become integrated into the world of atoms, i.e., into physical products such as smartphones, automobiles, and “the internet of things,” there will be growing pressure by threatened interests to regulate these physical things “to death,” thereby killing the creative environment that gives rise to tech innovations. We are already seeing this in California and elsewhere, and it threatens the long-term survival of Silicon Valley.

To protect taxi companies, California lawmakers are imposing ever-more expensive and clunky regulations on ride-sharing companies such as Lyft, Uber, and Sidecar. Home-sharing services, such as Airbnb and HomeAway, are also in the crosshairs. Many local governments, worried about losing hotel and tourism taxes, are imposing increasingly burdensome rules on home-sharing services, which threaten their business models and tie them up with expensive litigation. And the Federal Aviation Administration recently shut down the flight-sharing service Flytenow. Bits tied to atoms are starting to be regulated to death.

As this continues, Silicon Valley will eventually resemble K Street in Washington, D.C., where lobbyists and lawyers fight over how to divide industry profits. Company CEOs, with sales and marketing backgrounds not product backgrounds, will focus on increasing market shares by 1 percent, instead of inventing the next insanely great thing.

Nothing is revolutionary or countercultural about the K Street model, and it will drive away creative talent, leaving behind an insular and stagnant Silicon Valley and perhaps entire U.S. tech industry. Other nations can rush in to fill the void.

If you think this doomsday scenario cannot happen in Silicon Valley, all you have to do is look to Detroit. As Thiel noted:

General Motors was a technology company in the 1920s–the car companies were all super innovative–it probably was still sort of a tech company in the ‘50s, by the ‘80s investment in GM was a bet against German and Japanese innovation. So there is an arch were these things change.

Detroit was a booming, innovative city with a vast network of automobile manufacturers, parts suppliers, and shippers. Scale and network economies were the glue that held it together. But a combination of excessive costs, foreign competition, and bloated local government caused the car companies and the city of Detroit to collapse spectacularly.

Thiel noted that there is incredible value to being part of a heavily networked location such as Silicon Valley, but it comes with a huge risk:

Disturbingly, California is able to get away with putting quite a significant regulatory burden on its industries. . . . [T]he state was able to dramatically increase marginal tax rates in 2012 and it did not actually lead to any exodus whatsoever. People are sort of stuck . . . stuck in these network-effect-like industries [tech in northern California and entertainment in southern California] where people can’t leave.

The part that is dangerous about the California dynamic: that when you have super networked industries it’s possible that policy can go incredibly far wrong before anybody notices [such as in Detroit]. . . . The risk in California is not that we have some gradual decline, but that it gets pushed and it goes over the cliff completely. But I think we are still a ways away from that.

Perhaps, but the tipping point might be closer than anyone thinks as the policy attacks on applied technology escalate. It is not too late to reverse course with new policies so that California can continue “building the future” and hopefully prove my “truth” wrong.

Milton Friedman on “Free” College



MiltonFriedmanSixty years ago Milton Friedman made the case in “The Role of Government in Education” that since individuals reap the benefits of college degrees, whether personally, professionally, or both, they should pay for them.

By 1979 Friedman noted that higher education subsidies had become such an Ivory Tower boondoggle, higher education should be taxed to help offset the negative effects. Were Friedman alive today, he’d likely be more convinced than ever. Consider a recent example from Arizona.

This month the Grand Canyon State became the first state to require that high school students must pass the same citizenship test immigrants must pass to become naturalized. Meanwhile over at Arizona State University’s Tempe campus, the English department is offering such classes as “the problem of whiteness.” As Campus Reform’s Lauren Clark reports:

At Arizona State University (ASU), students can now learn about the “problem of whiteness” in America.

The public university is offering an English class to its students this semester called “Studies in American Literature/Culture: U.S. Race Theory & the Problem of Whiteness.”

According to the class description on ASU’s website, students will be reading The Possessive Investment in WhitenessCritical Race TheoryEveryday Language of White RacismPlaying in the Dark, and The Alchemy of Race and Rights. ...

The course, first reported by the Pundit Press, is taught by Lee Bebout, an assistant professor of English at ASU. According to his faculty page, critical race theory is one of his research interests.

Bebout, who is white, has previously taught classes titled “Transborder Chicano Literature,” “Adv Studies Theory/Criticism,” and “American Ethnic Literature,” among others.

Keep in mind that as of fiscal year 2013, ASU (Tempe) received more than $24,000 in core revenue per full-time student—largely subsidized by taxpayers in the form of government appropriations, grants, and financial aid. Rather than use those funds to enrich undergraduates’ understanding of our core Founding principles, we have what one ASU student aptly describes as:

“... the significant double standard of higher education institutions,” James Malone, a junior economics major, told Campus Reform. “They would never allow a class talking about the problem of ‘blackness.’ And if they did, there would be uproar about it. But you can certainly harass people for their apparent whiteness.”

Our colleges and universities should be places of higher learning that help prepare graduates for life outside of the Ivory Tower—not taxpayer subsidized incubators of narrow, partisan agendas.

But if President Obama’s America’s College Promise of “free” college takes hold (thankfully, at this point it’s unlikely—here and here), that’s exactly what we’re likely to get.

About That CBO Report Claiming Obamacare’s Costs Are Down 20 Percent...



ObamacareCosts

In the January 2015 Budget and Economic Outlook, the Congressional Budget Office (CBO) pronounced that Obamacare’s future costs will be one-fifth lower than had been originally estimated:

In March 2010, CBO and JCT projected that the provisions of the ACA related to health insurance coverage would cost the federal government $710 billion during fiscal years 2015 through 2019 (the last year of the 10-year projection period used in that estimate). The newest projections indicate that those provisions will cost $571 billion over that same period, a reduction of 20 percent (p. 129).

What explains this windfall?

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Humala’s Hatchet Man May Be Key Figure in Peruvian Spy Scandal



OllantaHumalaThe Peruvian government is spying on its critics, real or imagined.

The first revelations came out a year and a half ago but were summarily dismissed by President Ollanta Humala. Now a profusion of videos, documents, and other evidence has been leaked out by insiders at the National Intelligence Directorate (DINI), an organization headed by a former soldier from the same graduating class as the President, also a retired officer, at the military academy.

President Humala repeatedly attacked and even mocked the new revelations—until evidence came out that his vice president, a dissident who was pushed aside by the president’s wife when she tried to become head of the Congress, was being spied on. Fearing a major crisis once she tweeted her disgust at the news that she was a target (many believe the vice president found out she was under surveillance and leaked the information), Humala has promised to “open” the DINI to a parliamentary committee . . . controlled by the ruling party.

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Arkansas: Caving In or Standing Up to Obamacare?



Healthcare_costs_small1The new governor of Arkansas, Asa Hutchinson, appears to have confused a lot of people in a recent speech about Medicaid, the joint state-federal welfare program for poor people’s health coverage.

According to the Washington Post’s Jason Millman, “Republicans are finally learning they can’t undo Obamacare,” because the governor wants to do something different to Medicaid than what his Democratic predecessor wanted. Politicio’s Sarah Wheaton, on the other hand, reports that the new governor wants to “end his state’s Obamacare Medicaid experiment.”

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National School Choice Week Starts Today!



school-choice-300x199This week more than 11,000 events will be held nationwide in celebration of school choice.

Also, for the first time ever, the U.S. Senate unanimously passed a resolution recognizing January 25-30, 2015, as National School Choice Week to help improve awareness of the benefits of greater opportunities in education. More than 100 governors, mayors, and county leaders are also expected to pass similar resolutions.

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Peter Thiel’s Contrarian Manifesto



zero_to_one_180x270[Editor’s Note: The Independent Institute is hosting a sold-out event, “Developing the Developed World: Entrepreneurship, Liberty, and the Future,” with Peter Thiel on Tuesday, January 27, 2015.]

Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.” —Peter Thiel

With this opening paragraph, legendary investor and entrepreneur Peter Thiel immediately launches into the central lesson of his new book Zero to One. Creating new things in the form of truly “fresh and strange” technology is what will propel the economies of the future, not minute tinkering or copying of existing practices. This is what he describes as going from 0 to 1. To get to the future, startups are the key.

Having launched or played critical roles in supporting multiple successful companies including PayPal, Facebook, Palantir, SpaceX, and LinkedIn, Mr. Thiel’s views on technology, innovation and entrepreneurship were of particular interest to me. Zero to One has proven to be a delightful read full of insights for students, young professionals, and as well as seasoned industry insiders. Each chapter contains ideas that are provocative and original.

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Are Falling Prices a Bad Thing?



Falling PricesPopular opinion seems to be that falling prices—or even stable prices—are bad for the economy, but I’ve never seen any good arguments about why. I’ve just read another article about this, that gives six clearly numbered reasons, so let’s look at what the article says to see if they hold up.

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