avoiding the regulatory cliff - 2013 agenda for congress

7/28/2019 Avoiding the Regulatory Cliff - 2013 Agenda for Congress

1/80C o m p e t i t i v e e n t e r p r i s e i n s t i t u t e

A Bipartisan Agenda to

Restore Limited

Government and Revive

Americas Economy

avoiding

the

RegulatoRy

Cliff


2/80

Avoiding the Regulatory Cliff

A Bipartisan Agenda to Restore LimitedGovernment and Revive Americas Economy

Edited by Ivan Osorio and Wayne Crews

Competitive Enterprise Institute


3/80

Competitive Enterprise Institute

1899 L Street NW, 12th FloorWashington, D.C. 20036

Ph: (202) 331-1010Fax: (202) 331-0640

http://cei.org

Copyright 2013 by Competitive Enterprise Institute


4/80

Table of Contents

Introduction vAvoiding All the Cliffs vii

Deregulate to Stimulate: An Economic Liberalization Agenda for the Future 1Rein in the $1.8 Trillion Regulatory State 3Reform U.S. Agriculture Programs 5Recognize the Deadly Effects of Overregulation of Medicines and Medical Devices 6Improve Food Safety and Quality Through Greater Information, Consumer Choice,

and Legal Accountability 9Reject the Precautionary Principle, a Threat to Technological Progress 11Protect Incentives for Pharmaceutical Innovation 13Forge a Bipartisan Approach to End Corporate Welfare 15End Bailouts and Government Ownership in Fannie-Freddie, GM, AIG and Other Entities 17Free Startups to Go Public by Rolling Back Burdensome Sarbanes-Oxley Accounting Rules 19Make Accounting Regulators Accountable 21Encourage Innovation in Access to Credit 23Rethink Anti-Consumer Antitrust Regulation 25Keep the Internet Free For Pricing Experimentation 27Limit Government Access to Data but Leave Web Entrepreneurs Free to Innovate 29Protect Free Speech by Rejecting Content Regulation 31Resist New Burdens on the Transportation Sector 32Put Mobility First in Surface Transportation 34Reform or De-Nationalize Airport Security 36Reject Attempts to Re-Regulate the Railroad Industry 38

Deregulate to Enhance Auto Safety 39Recognize the Elitist Nature of Anti-Sprawl Measures 40Oppose Illegal Efforts by the NLRB to Impose Pro-Union Rules 41Eliminate Wage Ceilings for Unionized Workers 43End Government-Subsidized Union Activity 44End the Pension Benefit Guaranty Corporations Insurance Subsidy 45


5/80

202-331-1010 www.cei.org Competitive Enterprise Instituteiv

Avoid Energy and Global Warming Policies that Pose More Risk Than Global Warming 47Improve Oversight of the Environmental Protection Agency 49Repeal the Utility MACT Rule 50Trash Counterproductive Waste Disposal Policies 52

Purify Federal Water Policies 54Embrace Private Conservation of Land and Natural Resources 55Restore the Constitutional Right to Property 56Protect Endangered Species 57Clarify the Role of Invasive Species 58Reform Wetlands Policies 59Affirm the Role of Property Rights in Water Rights Policies 60Develop Free-Market Policies to Help Homeowners Deal with Natural Catastrophes 61Liberalize Home, Automobile, and Life Insurance Regulation 62Phase Out the National Flood Insurance Program 63

Advance a Global Pro-Trade Agenda 64Let Market Forces Regulate Internet Gambling 65Respect the Constitution and Reduce the Government Burden on Alcohol-Related Businesses 66Rein in the FDA and Protect Consumer Access to Dietary Supplements 67Protect Federalism 68

Contributors 69


6/80

202-331-1010 www.cei.org Competitive Enterprise Institute v

IntroductionBy Lawson Bader

Whether you are new to Congress or haveweathered many a political campaign welcome(back) to Washington. I too have recently

taken on a new role as the president of theCompetitive Enterprise Institute. I trust we arewise to remember, however, that our respectivenew (or renewed) roles are nothing more thana transfer of a precious intellectual inheritance.We all should be focused on implementing thelegacy of centuries of ideas about how individ-ual and economic liberty combined with lim-ited public institutions improve human dignity,from Adam Smith to the U.S. Founders to LordActon to F. A. Hayek and many others.

To put ideas into action, CEI has alwaysbeen more than just a think tank. Instead, wetake a full-service approach to public policycombining rigorous policy work with an activ-ists ability to market, educate, and propagateour research findings and principles. We atCEI are always willing to explain, to anyonewho will listen why economic liberty makeus all better off, but we do not stop there. Weare committed to being honest idea brokers.

We are eager to engage, build coalitions, fileFreedom of Information Act requests, broad-cast our message near and far, and, when nec-essary, sue to ensure our economic future re-mains grounded in these timeless principles.

Many agree on the importance of free enter-prise, but perceptions vary on what exactly it is.Some think it is a system about money and how

to make ita method for how to foresee theups and downs of Wall Street, the movement ofinterest rates, or the right time to buy a house.These are woefully inadequate and shallowunderstandings of the idea, but unfortunatelythey are widespread. Thus, it is no surprise thatmany think market perspectives are of littlehelp to policy makers as they wrestle with realand challenging problems.

CEI views markets not as an ideology or aset of specific policy prescriptions, but as a toolfor understanding the world. Money does notneed be involved to make a decision be eco-nomic. The free enterprise way of thinkinghelps us to understand what happens wheneverpeople make choices in pursuit of goals. Whenwe apply it this way, it becomes very effectivein exploring how the world works. A centralinsight we gain from free enterprise is that theworld is enormously complex and intercon-nected. We believe that markets are a key form

of this interconnectedness that is not only cru-cial to the functioning of a modern economy,but that enables us to understand what is notalways obvious.

We are not nave, however. We also under-stand that political discourse often focuses on


7/80


Competitive Enterprise Institute www.cei.org 202-331-1010vi

what is visible and immediate. This can createconflicts between the economically sensibleand the politically fashionable. Consequently, Iam pleased to present Avoiding the Regulatory

Cliff: A Bipartisan Agenda to Restore LimitedGovernment and Revive Americas Economy.In this document, CEI policy experts have cre-ated concrete, achievable proposals to liberatethe creative energies of American entrepreneurs,companies, and workers.

Our compendium highlights four importantlessons.

The first is that markets are dynamic.Contrary to textbook models, real-world mar-

kets are not static, predictable, or perfectlyefficientlike machines. Rather, they are dy-namic, unpredictable, and self-organizinglikeorganisms.

The second lesson is that markets encourageexperimentation, and through trial-and-error,innovations produce progress. Markets leadto economic progress because they encourageand test on-the-spot experimentation amongmillions of individuals. From this decentralized

trial-and-error process come innovations andcoordination that no single mind could haveplanned.

The third lesson is when altering rules ofthe game, be aware of unseen consequences.The institutions governing markets are crucial.Given that markets are so complex and everchanging, and given that people respond to in-centives created by institutions, minor changes

in market institutions can have far-reaching ef-fectsboth positive and negativethat are dif-ficult to see and even harder to predict.

The fourth lesson is act like market-grow-

ing gardeners, not blueprint-writing engineers.Public policies that pick winners or prescribeone-best-way solutions will tend to freeze mar-kets and reduce innovation. The better role forpublic policy is to ensure underlying rules ofthe game that (a) maintain the openness anddynamism of already-established markets; and(b) encourage the evolution of decentralized,self-organizing markets where they do not yetexist.

On a personal level, Free enterprise is justanother phrase for what I call the freedom toprosper. And, as Adam Smith knew well, mate-rial prosperity is only a means to an end. Thequestion is: To what end? Some pursue wealthto stockpile villas and private planes. Somestart charities to fight sex trafficking and cureAIDS. Along the way one creates new jobs forthousands, another soothes shattered souls. Wewho advocate economic liberty recognize these

endeavors as the choices that free individualsmake to realize their dreams and all are neces-sary to improving the human condition. And bydoing so, we contribute to a more dynamic andinnovated American economy.

Promoting this freedom to prosper shouldbe Congresss top priority for the next fouryearsand beyond. CEI stands ready to be aresource to you to help make this a reality.


8/80

202-331-1010 www.cei.org Competitive Enterprise Institute vii

Avoiding All the CliffsBy Fred Smith

The 113th Congress faces some of its great-est challenges since the Great Depression. Wesee the disasters imminent in Europe as mar-

ket democracies there fail to address the steadyerosion of their economic strength. Yet, todate, neither the President nor Congress hasresponded. They have avoided taking the deci-sive steps that are critical if we are to pull backfrom the brink of economic catastrophe.

As we at CEI have long argued, entrepre-neurial creativity is endemic to the Americanspirit. Government should set it free. One doesnot need to teach the grass to grow. Simply movethe rocks off the lawn! However, Congress andthe administration have yet to accord economicliberalization the importance it merits.

Instead, policy makers in Washingtonmerely seek ways to make government moreefficient, streamlined, and less costly. But itis the hidden, off-budget, less transparent, lessaccountable nature of regulations that is thefundamental problem. And, unwilling to chal-lenge powerful interest groups, Washingtonpolicy makers have turned increasingly to this

less honest, less accountable form of govern-ment intervention.

In todays political environment, regula-tory costs have been largely ignored inside theBeltway, despite many business surveys find-ing that regulations are a moreperhaps the

mostsignificant factor in suppressing the eco-nomic growth that is critical if we are to sur-mount our current economic malaise.

It is not enough to stop enacting new regu-lations. We must find ways of reducing the cur-rent burdento move rocks off our potentiallycreative economic lawn. That requires devot-ing far more attention to the burdens imposedby the modern regulatory state. It also requiresgreater realization of the ways in which regula-tory authority has steadily found ways to ex-pand through judicial deference, executive ag-gressivenessExecutive Orders, White HouseCzarsand the weakness of reform efforts inCongress.

Regulations are a particularly costly formof taxation. The burdens depend upon the skillsof the firms covered in negotiating exemptionsand agencies decisions on the level and timingof enforcement (which allow agencies to lowerresistance to their rules). Most importantly, theprimary costs of regulation are not direct costsbut rather opportunity coststhe foregonewealth creating activities foregone because of

regulation. These can be massive. The 2012 edi-tion of our annual survey of the federal regu-latory state, Ten Thousand Commandments,found that the costs of federal regulationsamounted to 48 percent of the total federalbudget.


9/80


Competitive Enterprise Institute www.cei.org 202-331-1010viii

Economic growth is being crushed by regu-latory and other interventionist policies. Yet,while Congress finally seems to be becomingaware of the unsustainability of our current tax,

spending, and entitlement policy regime, thehidden and growing burdens of regulation havelargely escaped attention. Regulatory reformis critical. We could resolve our tax, spending,and even entitlement problems, but if we let theregulatory Leviathan run loose, we would stillface economic stagnation.

Regulations must receive the attention theyhave long deserved. Toward that goal, Avoidingthe Regulatory Cliff: A Bipartisan Agendato Restore Limited Government and Revive

Americas Economy details specific steps in thatreview process. We can only hope that bothCongress and the administration move thesereform ideas quickly to the forefront of theiragenda.


10/80

202-331-1010 www.cei.org Competitive Enterprise Institute 1

Deregulate to Stimulate: An EconomicLiberalization Agenda for the Future

When it comes to our economy, we face acrucial question: How did we get into this messand how do we get back to sustained growth?

The need to liberalize the nations productivesector shouts at us, but no one in Washingtonseems to hear it.

Government spending is out of control, butwhen we fail to confront regulation, we aremissing most of the story behind the expand-ing state. Even before the financial crisis, thesubsequent huge bailouts and stimulus bills tosupposedly address that crisis, government wasalready expanding to gargantuan levels.

Today, Americas government is the larg-est that has ever existed. President George W.Bushs $3.1 trillion budget was the first ever toreach that level. His administration also pro-duced the first-ever $2 trillion budget. PresidentObama has shown little inclination to reversethis trend.

Regulations on the private sector continueto mount alongside this spending spree. Thelatest edition of CEIs annual Ten ThousandCommandments report cites regulatory costs

approximating $1.8 trilliona hidden taxnearly half the size of the federal budget.

Yet regulatory costs draw much less publicrebuke than taxes, because they are often con-cealed in the prices of the goods and serviceswe buy, as businesses pass the added costs on

to consumers in order to remain competitive.Thus, when politicians find it difficult to raisetaxes to pay for their policy goals, they regulate.

This is justified under the notion that govern-ment must help society manage risks. Yet thestate does not provide the answer to every riskin society.

Instead, we must turn to the marketplacesdisciplinary role in consumer protection, whichboosts safety as a competitive feature. What weneed is to improve competitive markets abilityto impose discipline in the form of reputationand disclosure.

Consider further that some of our most eco-nomically distressed industries have long beenoverwhelmingly directed by Washington regu-lators, rather than market forces. I do not knowof a time over the past 100 years when the gov-ernment did not regulate money, credit, andinterest rates in Americayet markets alwaystake the brunt of the blame for financial crises,as the recent Dodd-Frank financial reform billindicates. Markets can deal with firms too bigto failwhat we cannot afford is a government

too big to succeed!Until now, most regulatory reform efforts

have amounted to going after Moby Dick witha rowboat and tartar sauce. What we need nowis sweeping liberalization, to remove the im-pediments that today hobble wealth creation


11/80


Competitive Enterprise Institute www.cei.org 202-331-10102

and enterprise on an unprecedented scale. Weneed rational alternatives to state intervention-ism and to our regulatory nanny state. In short,we need to liberate to stimulate.

The issue is not whether industry has to beregulated, or planned, but over who will dothat planning, as the legendary Nobel Prize-winning economist F.A. Hayek put it so well.Consciously maintaining a sensible wall of sep-aration between economy and state must guidethe agenda to restore Americas competitivenessand economic health.

The United Statesnow only 237 yearsoldbecame richer than the rest of the world

in a historical blink of an eye. We need to keepin mind how that remarkable achievement oc-curred, and how it can be sustained as othernations embrace the institutions of liberty thatallow competitive markets to flourish.

We need to hold the federal regulatorystates 60 agencies, thousands of annual rules,and Federal Register pages to at least the samestandards of disclosure and accountability thatapply to the federal budget.

Congress should implement a moratoriumon non-essential new rulemaking. It also shouldimplement a bipartisan regulatory reductioncommission and task it to review the entire fed-eral regulatory edifice and enact a comprehen-sive package of cuts, to be voted up or down byCongress.

Congress must end regulation withoutrepresentation by requiring Congressional ap-proval for major business regulationsthose

that impose $100 million or more in annualcosts. In addition, Congress should make sunset

provisions a permanent and automatic featureof all new rules, which should have an expira-tion date like a carton of milk.

Finally, Congress should create a Regulatory

Report Cardpossibly modeled on TenThousand Commandmentsto accompany theFederal Budget, in order to shed light on thecurrently hidden tax of regulation.

Our economic downturns are not attribut-able to market failure but to the failure to havemarkets. The bold political action and genuineleadership needed in todays crisis is differentfrom what has been seen in Washington to date.Indeed, the political price can be too high for

election-bound lawmakers or career bureau-crats. Yet we must make every effort.

As Hayek pointed out, the politiciansblamed during an inevitably bumpy transitionto something closer to healthy free enterpriseare usually the ones who unwind market-dis-torting regulationsnot the ones who startedthe costly interventions years before.

Real stimulus requires comprehensive liber-alization of a fettered economy. It requires po-

litically difficult changes in what people expectfrom government. Leadership requires takingon that challenge.

Capitalism is one of the greatest democra-tizing innovations in human history, a way forindividuals unknown to one another to worktogether to create unprecedented wealth. Weneed to defend it as the precious value it is. Inthat spirit, CEI is proud to lead this fight forcapitalisms future.

Wayne Crews


12/80


Rein in the $1.8 Trillion Regulatory State

The federal government spends close to $4trillion annually. Everyone knows it, and every-one frets about it. Less known is that federal

regulationsenvironmental, energy, financial,labor and other mandatescost the economywell over $1 trillion. Regulation is a hidden taxthat has grown rapidly under both the Bushand Obama administrations, and the trajectorycontinues upward. Rules flowing from energyefficiency mandates, the Dodd-Frank financiallaw, and the Affordable Care Act are widelyrecognized looming burdens.

Regulations are frequently anti-competitiveand anti-consumer. They cost consumers hun-dreds of billions of dollars every year. Policymakers still largely do not know the full ben-efits and costs of the regulatory enterprise.Meanwhile, regulatory agencies grow in powerand budgets like feudal baronies. This situationmust not go unchallenged.

From transportation to trade, from com-munications to banking and technology policy,policy makers of both parties have at timeschallenged the moral legitimacy, intellectual

underpinnings, and economic rationality offederal regulatory intervention. Democratshelped spearhead transportation deregulation.Lawmakers from both parties rolled back un-funded mandates in the 1990s. The time is nowripe for a new round of reform.

There are many avenues for reform. Cost-benefit analysis, while informative, does not ac-tually bring the largely unaccountable regula-

tory state under congressional control. Greatercongressional accountability and cost disclo-sure matter most for regulatory reform.

Congress should vote on every major orcontroversial agency rule before it takes ef-fect. Regulatory cost transparency, throughsuch tools as improved annual cost and trendreporting, would help voters to better holdCongress responsible for the regulatory state.Reining in excessive delegation of power to fed-eral agency bureaucrats would help close thebreach between lawmaking and accountability,while forcing Congress to internalize the needto demonstrate regulatory benefits. Congressshould: Establish a bipartisan Regulatory Reduction

Commission to survey and purge existingrules.

Develop a review and sunsetting schedulefor new regulations and agencies.

Explicitly approve major agency regulations

with an up-or-down vote. Publish an annual Regulatory Report Card

to accompany the federal budget. Require that agencies report costs (Congress

itself must assess relative benefits and com-pare agency effectiveness).


13/80



Have agencies and the Office of Managementand Budget rank rules effectiveness, andrecommend rules for elimination.

Wayne Crews and Ryan Young


14/80


With Americas economy struggling to roarback to strong growth and a deficit that hasexceeded $1 trillion for four years, policy mak-

ers should take a hard look at reforming oneof the most wasteful and egregious governmentprogramsU.S. agricultural support programs.

The recently expired 2008 Farm Bill was anearly $300-billion (over five years) boondogglethat paid off every special interest under the sun.Farmers got their direct payments, their countercy-clical payments, their price support loan amounts,their disaster funds, and much more. Cities andtowns got their nutrition programs and their foodstamps. Environmentalists got their conservationprograms, though not as many as they wanted.Energy producers got some biofuel monies.

Some producers who were not subsidizedbeforesuch as fruit, vegetable, and nut pro-ducersreceived significant R&D money thatopens the door to future subsidies.

The 2012 farm bills that were introduced,however, while repealing direct and countercy-clical payments to farmers, left many subsidiesintact and would expand other entitlements,

such as vastly increasing subsidies for crop in-surance. The Senate bill passed, while the Housebill had not yet come up for a vote.

Under the new bills, many agricultural pro-ducers will continue to enjoy subsidies and pricesupports, which cost taxpayers, increase food

costs, and disproportionately impact low-incomeconsumers who pay a larger percentage of their in-come for food. And many government agricultural

programs continue to restrict imports of variousproducts, such as sugar and ethanol, leading tohigher costs for food and fuel. This must change.

The U.S. sugar programone of the mostegregious farm programsneeds drastic reform.The 2008 Farm Bill increased sugar price sup-ports, provided incentives for using sugar for etha-nol rather than food, further restricted imports ofsugar, and may violate existing trade agreements.

With the current financial crisis and reces-sion, policy makers should immediately look forways to reduce large-scale government waste.A good place to start is to streamline a farmbill so that it deals specifically with agriculture,rather than with the myriad of issues that bloatsuch legislation and entrench special interests.Nutrition programs, for example, should bespliced off and dealt with separately. Energy is-sues also should be addressed through separatelegislation. Policy makers should take a hardlook at existing farm programs that waste tax-

payer money, increase consumer costs, threatenU.S. credibility in promoting open trade, andharm developing countries ability to competein the world market.

Fran Smith

Reform U.S. Agriculture Programs


15/80

202-331-1010 www.cei.org Competitive Enterprise Institute6

Recognize the Deadly Effects ofOverregulation of Medicines and MedicalDevices

Over the past century, American consumershave benefited from thousands of new phar-maceuticals and medical devices to help them

combat disease, alleviate the symptoms of ill-ness and infirmity, and improve their well being.However, the public often demands that suchtreatments meet a near-perfect level of safetyat bargain basement prices. In turn, Congressand the federal Food and Drug Administration(FDA) have steadily raised the regulatory hur-dles that medical product manufacturers mustclear before marketing a new treatment. But,just as patients may be injured if the FDA ap-proves a treatment that is later found to be un-safe, they are also harmed in a very real waywhen needed treatments are delayed by regula-tory hurdles.

A strong dose of caution when the FDA ap-proves new drugs and devices may sound likea virtue, but for patients in need of new treat-ments, regulatory over-caution can be deadly.Under the Food, Drug and Cosmetic Act, theFDA is tasked with ensuring that new drugs anddevices are safe and effective. But no treatments

are perfectly safe in the sense that they haveno potentially negative side effects. For manyproductsespecially drugs and devices used totreat serious life-threatening or disabling condi-tionstherapies may be considered safe enougheven in the presence of substantial known risks.

The FDAs challenge is not to prevent poten-tially risky products from making it to market,but to ensure that the expected benefits of ap-

proved products outweigh the expected harms.For political reasons, however, the FDA ispredominantly focused on risks rather thanon maximizing benefits. Agency approval of adrug or device that turns out to be unsafe willlead to front-page headlines and congressionalhearings, while delay or denial of a needed newtreatment stirs little public notice. Patients maysuffer or die as a result of FDA delays, with-out them or their families ever knowing that apossible treatment exists, let alone that it wasblocked by the agency. As a result, the FDA isunder constant pressure to assure the safety ofnew medical products, but under little pressureto speed up their availability.

In recent years, Congress has begun to rec-ognize the importance of moving treatment op-tions for the desperately ill from the laboratoryto the pharmacy, and it has enacted some mod-est statutory changes intended to incrementallyimprove the FDAs review of innovative new

treatments. However, none of these changesaddress the fundamental problems associatedwith the FDAs new drug approval regime, andit is becoming increasingly clear that the agen-cys drug development and approval model isoutdated and has struggled to keep up with


16/80



the latest scientific advances. Its 1960s-eraapproach to drug development does not takefull advantage of recent discoveries in geneticsand physiology, the evolution of personalized

medicine, or statistical models that allow foradaptability and fast-paced learning. In orderto take advantage of this growing body of sci-ence, Congress and the FDA will need to radi-cally reinvent the clinical testing and approvalprocess for new medicines.

When making safety evaluations, the FDA isrequired by statute to determine the appropri-ate balance between patient safety and medicalproduct effectiveness. Manufacturers must con-

duct three phases of progressively larger clinicaltrials, a process that takes an average of eightto 12 years. However, due to the FDAs growingdemand for data, the length and complexity oftrials has been rapidly increasing over the pastdecaderequiring more patients, studied overa longer period of time, and with many addi-tional tests conducted per patient. These newhurdles have also made it more difficult to en-roll patients in clinical trials and to keep them

in the trials until completion.In addition, heightened expectations re-

garding drug effectiveness, tightening concernsabout rare but serious side effects, and uncer-tainty regarding which drugs might ultimatelymeet the FDAs shifting approval standardshave caused many manufacturers to abandonprojects long before a New Drug Application(NDA) is even submitted. Because only one inevery five drugs that make it to market recov-

ers its development costs, manufacturers havehad to become far more selective about whichproducts they move through the clinical trialand NDA process.

But more thorough study of drugs anddevices during clinical trials has its ownweaknesses.

First, even very large clinical trials generallycannot include enough subjects to detect rareside effects. So, the occurrence of a few indi-vidual adverse events after a drug or device has

been approved does not necessarily mean thata product was tested or approved too hastily.

Second, large trials involve diverse popula-tions with many subgroups that often are noteasy to identify at the outset. But when a man-ufacturer identifies subpopulations within anongoing trial who experience especially greatbenefit or risk, the FDA will generally rejectindividualized results for patient subgroupsand force the manufacturer to conduct an en-

tirely new trial covering only patients with thesubgroups characteristics. Such a requirementgenerates more statistically clean data, butit unnecessarily prolongs the testing process attremendous expense.

Finally, longer, more complex clinical tri-als and a slower NDA review rarely results insafer products, but it does keep new treatmentoptions out of the hands of patients who needthem. Significant political pressure generally

pushes the agency toward over-caution. Theend result is fewer new drugs and devices, aswell as greater loss of life due to what shouldbe treatable illnesses.

Each patient is different from all others,both in physiology and in risk-level preference.Not only will a given drug or device affect eachpatient slightly differently, but each patient willplace a different value on the products ben-efits and the attendant risks associated with

it. Therefore, treating the entire United Statespopulation as identical means the FDA inevita-bly makes regulatory decisions that will be toocautious for some and not cautious enough forothers.

Those who view the FDAs approval pro-cess as too quick may freely choose to use only


17/80



products that have been on the market for sev-eral years, with a more well-established recordof safety and efficacy. Unfortunately, thosewho seek access to medical products before the

agency has fully approved them have little orno choice. Individual patients and their doctorsare in a far better position than the FDA to bal-ance the risks and benefits of individual newtreatments.

To correct this imbalance, the FDA shouldfocus on providing patients with information,

rather than on restricting their choices. Moremust be done to move treatment choices out ofthe hands of the FDA and into those of patientsand their doctors. And Congress should con-

tinue to adopt statutory changes intended toincrease the pace at which the agency reviewsnew drug and device applications and to givepatients access to treatments that the FDA hasnot yet approved.

Gregory Conko


18/80


Improve Food Safety and QualityThrough Greater Information, ConsumerChoice, and Legal Accountability

Few issues are as important to consumersas the safety and quality of their foodfrommicrobial contaminants to pesticides, and from

organics to obesity. Recent health scaresfromsalmonella-contaminated eggs and cantaloupesto E. coli-contaminated spinach and toma-toesshow just how fragile the food chain canbe. Food-borne illnesses kill as many as 3,000Americans each year and sicken millions more.But, while these tragic events have led to callsfor greater government oversight of the foodsupply and new legislation enacted in 2011,the nature of these scares shows that addi-tional regulations or inspections are likely todo little to improve food safety. Indeed, poorlyconceived government regulation often does asmuch to compromise food safety, affordability,and choice as to promote itespecially whenthe regulatory framework is focused on a fear-driven activist agenda rather than on basicprinciples of science and genuine safety.

Following a massive egg recall in2010, Congress enacted the Food SafetyModernization Act to increase Food and Drug

Administration (FDA) inspections and requirefood processors and vegetable growers to adoptthe risk-prevention controls that had been ap-plied to meat, poultry, and seafood producerssince the 1990s. The former will waste billionsof taxpayer dollars doing little or nothing to

improve food safety. The latter may have somebenefits, but only if the regulations written toimplement the statutory provisions allow for

substantial flexibility.Government inspections generally consist ofoutmoded visual examinations that are incapa-ble of detecting microbial pathogens. The U.S.Department of Agriculture (USDA) has regula-tory authority over meat, poultry, and certainegg products, while the FDA has authority overother foods, including fruits, vegetables, andseafood. Slaughterhouses must have a USDAinspector on the premises at all times they arein operation, while the FDA inspects food pro-duction facilities only once every few years.Nevertheless, meat and poultry account forabout half of food-borne illness outbreaks inthe United States because inspectors cannot seebacteria and other microorganisms. Therefore,a Food Safety Modernization Act requirementthat the FDA increase its inspections from notless than once every decade to at least once ev-ery five years is likely to do nothing to increasefood safety.

Risk-prevention control regulations, on theother hand, have done some good, though thefood industry had been moving to adopt thesepractices voluntarily long before regulationforced them to do so. The Hazard Analysis andCritical Control Points (HACCP) risk man-


19/80



agement program requires firms to examinetheir production streams, identify points wherepathogens or other hazards may enter the sys-tem, and take steps to make those processes

safer. HACCP programs were first developedwithin the food industry and only imposedby regulation many years later. At the margin,HACCP has resulted in modest safety improve-ments for meat and poultry, but has had essen-tially no impact on seafood safety.

In part, this failure can be attributed to theway in which HACCP regulations have beendrafted by regulators. As originally envisioned,the concept is highly flexible and lets producers

tailor risk reduction efforts to their individualcircumstances. As implemented by the FDA andUSDA, however, the HACCP program tends toimpose rigid, costly, and outdated practices thathave not kept up with changes in the food in-dustry. That rigidity also disincentivizes firmsfrom developing innovative new processes andpractices that could deliver real food safetyimprovements.

At the same time, heavy regulatory bur-

dens on technologies such as food irradiation,agricultural biotechnologies, novel antisepticpractices and anti-microbial treatments, andveterinary medicineswhich could cut the in-cidence of those pathogens by half or moremake it difficult for producers to introduceinnovative safety practices. Policy makersshould abandon the misguided notion thatso-called natural products and establishedpractices are inherently safe and new ones

inherently dangerous. Rules that hold innova-tive technologies to higher safety standardsthan natural or organic practices, andthose that mandate labeling to warn consum-ers about use of these technologies are based

on a faulty understanding of science and aretherefore bad public policy.

Rules governing what food producers mayput on their products labels also have an im-

pact on the safety and nutritional value of ourfood. Regulators control the content of foodlabels so stringently that sellers are often for-bidden from informing consumers of manybeneficial product attributes. Food safety andlabeling regulations should be designed withmaximum flexibility, to allow food producersto use the production methods and labelinginformation that best meet their customersdemands. Government studies have shown that

reduced labeling and advertising restrictionson food products actually lead producers tosupply healthier and more nutritious products,increasing consumer well being, because foodproducers must compete for consumer dollarsby making their products more attractive to pur-chasers. But rules that prevent food producersfrom telling consumers about health-enhancingproduct attributes make it less profitable to in-vest in health and nutrition improvements.

Americans consume nearly 1 billion mealsevery day, and microbial pathogens can beintroduced at any stage in the food produc-tion and distribution system. Food companiesshould not be forced to adopt standardized,one-size-fits all rules. Instead, they should beallowed the flexibility to adopt technologiesand practices that can cut the incidence offood-borne contaminants. And the legal systemshould punish producers and sellers who are

negligent in the handling or purchasing of thefoods we eat.

Gregory Conko


20/80


Reject the Precautionary Principle, aThreat to Technological Progress

During the past two decades, state andlocal governments in the United States anddozens of foreign governments have begun

to adopt an environmental philosophy calledthe precautionary principle: the view that newtechnologies should not be introduced andnew projects should not be undertaken whenthere is any chance they might pose risks forhumans or the environment. Although thisbetter safe than sorry attitude may seemlike a reasonable approach to risk regulation,health and environmental risk issues are notso simple. Ironically, basing regulatory deci-sions on the precautionary principle could domore harm than good.

Nothing is totally without risk, and thereason for adopting new technologies in thefirst place is that they often improve our wellbeing by protecting us from the risks of older,more established products and practices. Evenvery risky new technologies may often be bet-ter than alternatives. However, from industrialchemicals to consumer products and everythingin between, advocates of precautionary regula-

tion insist that the mere possibility of one in-creased risk should be sufficient to take usefulproducts off the market or prevent them fromever being used.

New medicines protect us from diseases,even though there is always a risk of side ef-

fects. Automobile innovations, from airbagsto antilock brakes, make traveling safer, eventhough they pose their own risks. And food and

agricultural technologiessuch as preserva-tives, pesticides, and bioengineered cropshelpmake our food supply safer and less expensiveand lighten farmings impact on the environ-ment. By demanding perfect safety, a precau-tionary regulatory philosophy can actuallymake our world less safe by denying societythe benefits of new technologies. Regulationsproper goal should be to permit experimenta-tion and the introduction of new technologies,while balancing the risk of moving too quicklyinto the future against the very real risk of lin-gering too long in the past.

Just as importantly, the precautionary prin-ciple too often is applied in a highly politicizedmanner to disadvantage technologies that areunpopular or viewed as controversial. Althoughmany established practicessuch as organicfarming, natural and homeopathic remedies,and alternative energy sourcespose knownrisks that are often far greater than those posed

by the new innovations that might supplantthem, the precautionary principle has rarelybeen applied to rein in those risks.

If it were applied fairly, the precaution-ary principle would rule out new wind powerand solar energy projects, organic agricultural


21/80



practices, waste recycling, and countless otherso-called green activities, whether or notthose activities are, on balance, beneficial forhumans and the environment. As it is actually

applied by governments, however, the prin-ciple is used only to stop politically unfavor-able activities. Politicians get away with thisbecause the precautionary principle containsno procedural protections for innovators, andit gives regulators nearly unbridled discretionto ban or burden technologies and practicesthey disfavor.

A better approach to risk regulation wouldbe to more explicitly recognize the humanhealth and environmental benefits that newproducts bring with them, while recognizing

that existing practices are not risk-free. Wherepossible, regulatory authorities should be re-quired to demonstrate with clear and convinc-ing evidence that new products and practiceswill do more harm than good before they canbe kept off the market.

Gregory Conko


22/80


Protect Incentives for PharmaceuticalInnovation

In recent years, Congress has faced mount-ing public pressure to do something about therapidly rising prices of prescription drugs and to

rein in what are believed to be excessive indus-try profits. Although prescription drug spendingcomprises just 10 percent of overall health carecosts, it is one of the fastest growing componentsof health care spendingexpected to rise by anaverage of more than 7 percent per year over thenext decade, slightly higher than overall healthexpenditures, according to the Department ofHealth and Human Services.

Faced with this public pressure, as well asmounting federal and state government ex-penditures on drug purchases, members ofCongress have proposed a variety of measuresto cut the price of prescription drugs. These in-clude reimportation of lower-priced drugs fromforeign countries with price controls, direct ne-gotiation of reduced drug prices by the Centersfor Medicare and Medicaid Services, and directrestrictions on drug and medical device indus-try marketing and promotion practices.

More recently, would-be health care cost

cutters have proposed integrating cost-benefitand comparative-benefit analysis into gov-ernment-run health programs and in the FDAapproval process. For example, the PatientProtection and Affordable Care Act createda new Patient Centered Outcomes Research

Institute (PCORI) to study the comparative ef-fectiveness of different treatment options withthe expectation that drugs and other treatments

that do not deliver sufficient bang for thebuck will cease being prescribed.Unfortunately, most advocates of such poli-

cies have a tunnel-vision dedication to reducedrug costs, with little concern for the effect thatforced price reductions would have on industryincentives for innovation. Pharmaceutical pricesare high because development is expensive, manynew drugs treat relatively small patient popula-tions, and most fail in laboratory tests or clinicaltrials before making it to market, where they cangenerate revenue to recoup R&D expenses.

A 2006 study by U.S. Federal TradeCommission economists concluded that theaverage cost to develop and test a new drug isbetween $839 and $868 million. Others haveestimated that the true cost of bringing a newdrug to market now tops $4 billion, due to thegrowing number of patients that must be in-cluded in clinical trials and the rising numberof tests that must be conducted on each patient.

Thus, policies such as reimportation and cost-benefit analysis would, in the short run, resultin lower prices for drugs already on the mar-ket, but in the long run reduce both the numberof treatment options available and the flow ofnew drugs entering the marketplace.


23/80



The primary argument for incorporatingcomparative-effectiveness or cost-benefit anal-ysis into government purchasing and approvaldecisions is that many expensive new drugs of-

fer little advantage over older drugs, but costfar more than the closest comparable olderdrugs. If government health programs paid foronly the best in class medicine for each thera-peutic category, the higher volume of purchaseswould justify significant price reductions. Thatwould be bad for patients, however.

Although the average therapeutic benefitof various drugs in a particular class may besimilar, individual patients will often respond

quite differentlyeven to very similar drugs.Fewer than 70 percent of patients respond posi-tively to any given cholesterol-lowering statindrug, for example. But nearly all patients dorespond positively to at least one of the drugsin that class. So, while it is advisable for publicprograms to trim excessive costs, implementingcost-benefit or comparative-effectiveness anal-ysis in purchasing or approval decisions couldnegatively affect patient care.

The Affordable Care Act stipulates thatrecommendations by the Patient CenteredOutcomes Research Institute shall not be usedas the basis for rationing care, but the Act alsocreated a new Independent Payment AdvisoryBoard for the purpose of reducing the growthrate in Medicare spending. That body is ex-pected to rely, in part, on PCORI recommenda-tions to evaluate physician and hospital quality,which means that PCORI recommendations

will covertly be used as at least part of the basisfor restricting available treatment options forpatients. Even more pernicious is a proposalby the Centers for Medicare and MedicaidServices and the FDA to establish a parallel re-view process for medical products, which manyfear could result in comparative-effectiveness or

cost-benefit considerations being improperly in-troduced into the new drug and medical deviceapproval process.

The argument for reimportation is no more

convincing. Although the prices of off-patentand generic drugswhich comprise more thanhalf of all prescriptions filled in the U.S.aretypically higher in other countries, the prices ofthe latest on-patent drugs are often much lowerin countries that impose direct or indirect pricecontrols. Consequently, reimportation advocatespromise to relieve high drug costs by allowingAmerican consumers to free-ride on other na-tions price controls. But allowing reimportation

would effectively import foreign price controls,resulting in less revenue for the industry and areduction in the capital available to drug compa-nies for continued research and innovation.

Finally, it is not true that drug industry profitsare excessive by any honest measure. Industrycritics often note that the brand name pharma-ceutical industry is typically among the mostprofitable sector in the economy. However, asthe Congressional Budget Office (CBO) notes,

standard reporting tends to misrepresent theindustrys actual profits. Accounting measuresoverstate profitability for R&D-intensive in-dustries by treating most research spending asan expense rather than as a capitalized invest-ment that increases the companys value. Notaccounting for that value overstates a firms truereturn on its assets, says the CBO.

Ultimately, high pharmaceutical retail pricesreflect the vast expense of developing those

products and getting them approved for sale.Without correspondingly high prices, few in-vestors would be willing to take the risks inher-ent in supplying capital to the pharmaceuticalindustry. The result would be fewer and fewerlifesaving medicines.

Gregory Conko


24/80


Forge a Bipartisan Approach to EndCorporate Welfare

Today, the U.S. government transfers largeamounts of wealth from one pocket to an-other. Public debate over such transfers often

focuses on welfare and poverty alleviation, butmany are from taxpayers to wealthy corpora-tions. Before the financial crisis and recession,these transfers were mainly known as corpo-rate welfare. Since the downturn, they havegained many other namesstimulus, bailouts,or infrastructure investments. But a rose by anyother name.

The federal budget contains more than $97billion in corporate welfare, according to a 2012study by the Cato Institutes Tad DeHaven. Themoney for these wealth transfers must comefrom somewhere. If current taxpayers do notpay the costs for such handouts, future taxpay-ers will. The economy pays a price, too. That$97 billion cannot be used for what its originalowners might have preferred.

Direct payments are not the only transfermechanism. Regulations are another. Price, en-try, and antitrust regulations benefit politicallyfavored firms at the expense of consumers and

competitors that are less politically connected.Even innocuous-sounding health and safetyregulations can benefit some firms at rivals ex-pense. The owner of a new plant might lobbyfor expensive regulations with which an older

competitor may not be able to comply in a costeffective manner.

Similarly, entry barriers hit smaller compa-

nies especially hard, because additional costswhich a large company can absorb can crippleits smaller competitors.

Corporate welfare, whether subsidies orcompetition-hampering regulations, createsdistortions and inefficiencies, injures consum-ers, and undermines the evolving, competitivemarket process. Members of Congress whowant to restrain the size of government shouldbe vigilant, and often ask themselves: Are lob-byists seeking to reduce burdens on entrepre-neurship and employment or do they seek toadd burdens that benefit them and their clientsat the expense of competitors? In short, arethey seeking corporate welfare?

There is much Congress can do rein inits nearly $100 billion corporate welfarehabit. The Export-Import Bank, which doesnearly half of its business with Boeing alone,should be abolished outright, as should theEconomic Development Administration. The

Department of Agriculture spends $25 bil-lion on giveaways to farmers. These shouldbe zeroed out. According to 2010 census data,farmers have an average household income25 percent higher than non-farmers. Federalhandouts overwhelmingly go to large, politi-


25/80



cally connected agribusinesses, not to smallfamily farms.

By transferring billions of dollars from poorand middle class to the rich and connected,

corporate welfare is fundamentally regressive.Congress should put a stop to it.

Wayne Crews and Ryan Young


26/80


End Bailouts and Government Ownershipin Fannie-Freddie, GM, AIG and OtherEntities

The federal governments authority underthe Troubled Asset Relief Program (TARP) of-ficially expired on October 3, 2010. Rushed

through amid fears of financial Armageddon inthe wake of the financial crisis, the thrust ofthe program shifted several timesfrom buy-ing toxic mortgage securities to ownershipstakes in financial institutions and troubledautomakers.

Supporters have hailed the program as asuccess, claiming that it calmed a panic and costtaxpayers only about $50 billion. But thisfigure does not include the $700 billion thatmany prominent economists say the taxpayerswill have to spend to rescue the government-sponsored enterprises Fannie Mae and FreddieMac, which were put into a government con-servatorship a few weeks before TARP was en-acted in 2008.

While it is true that many financial institu-tions paid the TARP money back with interest,many never wanted to take it in the first place.They were pressured into doing so by then-Treasury Secretary Henry Paulson or bank reg-

ulators, so that the truly troubled banks wouldnot have to bear the stigma of being singled outfor bailout.

TARP supporters claim that, had the plannot been enacted, unemployment would haveskyrocketed to 20 percent. But it is also plau-

sible that without TARPs channeling of moneytoward established financial institutions con-sidered too big to fail by the government,

other financial institutions would have emergedto get the economy moving faster. As StanfordUniversity economist John Taylor wrote in hisbook, Getting Off Track, TARPs passage likelyincreased risks and drove the markets down.

The remaining companies under govern-ment ownership continue to damage theAmerican economy, and the harm is not con-fined to the spending of taxpayer money. Firmsoperating with government support create anuneven playing field for their competitors, hin-dering job growth and innovation. AIG has beenaccused of using its $183 billion in taxpayerfunds to undercut its unsubsidized competitorsby slashing premiums. General Motorsnowderisively known as Government Motorshasused its $50 billion in taxpayer funds to buysubprime auto lender AmeriCredit, giving it apossible government-granted advantage overcompetitors, including Ford, Toyota, and othermajor automakers with plants in the U.S. And

Fannie and Freddie are now virtually the onlyfirms securitizing mortgages.

As important as it is to recover taxpayermoney, it is even more important for the gov-ernment to devlop an exit strategy out of theseprivate firms before its involvement can do any


27/80



more damage to their private-sector competi-tors and to the economy as a whole. Congressshould:

Setfirmtimelimitsforthebailoutsfor

FannieMaeandFreddieMac,GeneralMotors,AmericanInternationalGroup,andotherbailoutsandrequirethegov-ernments shares in companies to besoldasofadatecertain. The U.S. gov-ernment should not own banks or otherfirms. Permanent nationalization hasnot worked too well in places like Cubaor Venezuela in promoting stable andsustained economic growth. The fact

that the government sold its first trancheof shares in GM at a considerable dis-count, and that GMs share price hasfallen dramatically since, demonstratesthat government ownership is bad forthe company and for taxpayers.

Make the bailout deliberations trans-parent and make government-ownedfirmsabidebythesamerulesasthosein the private sector. Insist on open

meetings whenever possible, quickcompliance with the Freedom ofInformation Act, and judicial review ofthe Federal Reserve Bank and TreasuryDepartments actions. The initial pub-lic offering to sell part of the govern-ments stake in General Motors disturb-ingly stated that the government wasshielded by sovereign immunity fromlaws against stock fraud and securities

fraud lawsuits. Congress should enactlegislation waiving this sovereign im-

munity for the government so that in-vestors have the same protection fromfraud committed by government-ownedcorporations as they do against those in

the private sector. Respectpropertyrightsandprivatecon-

tractsinfinancialandhousingpolicies.The government is one of many ownersin the corporations participating in theTARP. It should not interfere with anyfirms fiduciary duty to its shareholdersto deliver profits by pushing it to achievepolitically determined social goals. Andit should not favor some creditors over

others, as it did in the GM and Chryslerbankruptcies when unions were givendisproportionate equity stakes in the re-organized firms at the expense of bond-holders and secured creditors.

Similarly, in trying to help fami-lies with foreclosures, the governmentshould not require or encourage theabrogation of contracts to investors inmortgages. Congress should halt funding

for President Obamas Home AffordableModification Program and its variants,which subsidize mortgage-servicingbanks to modify a borrowers loan butdisregard the interests of the investorswho own the mortgages. Many of theseinvestors are also middle-class families,holding mortgage-backed securities intheir 401(k) accounts and mutual funds.

John Berlau


28/80


Free Startups to Go Public by RollingBack Burdensome Sarbanes-OxleyAccounting Rules

In past Agendas for Congress, we arguedthat smaller public companies should be exemptfrom Sarbanes-Oxleys Section 404. Substantial

progress was made toward this goal in 2012with the passage of the Jumpstart Our BusinessStartups (JOBS) Act, which exempts firms go-ing public with a market cap of $700 millionor less from the internal control mandates ofSection 404, as well as burdensome rules fromDodd-Frank and other securities laws. This wasa significant step, but Congress should go muchfurther to permanently lift Sarbox barriers tobusiness and job growth for all types of firms.

New firms, of all sizes, create the vast ma-jority of net new jobs in the U.S., according tothe Kauffman Foundation. But for these firmsto expand and create more jobs, they need tobe able to go public. And right now, Sarbox isone of the biggest barriers to small and midsizefirms going public.

Sarbox was rushed through Congress in2002 following the Enron and WorldComscandals. In recent years, the law has come un-der criticism from all sides. Rep. Nancy Pelosi

(D-Calif.) has said she supports revising the lawto mitigate its unintended consequences.

Moreover, these costly rules did virtuallynothing to prevent the careless risks taken withmortgage securities that led to the financial cri-sis. How can we have these levels of fictions

in financials after Sarbanes-Oxley? asks JimCramer, host of CNBCs Mad Money. Theanswer is because Sarbanes-Oxley is actually

counterproductive at ensuring financial trans-parency. As the Financial Times has noted, theinordinate amount of time boards of compa-nies such as the former Bear Stearns spend onSarbox compliance came at the expense of theirscrutinizing overall business risk.

Sarbanes-Oxleys Section 404 requirementfor accountants to sign off on vaguely definedinternal controls is costing American com-panies $35 billion a year in direct compliancecosts, according to the American ElectronicsAssociation. For the average public company, itadds $2.3 million in compliance costs, accord-ing to the Securities and Exchange Commission(SEC), and adds 35,000 extra man-hours, ac-cording to Financial Executives International.Congress should relieve this heavy regulatoryburden by doing the following: Expandthereliefforsmallercompaniesin

theJOBSActsothatmorefirmsareexemptfrom Sarbanes-Oxleys Section 404 and

otherSECrulesthatactasadragontheeconomy. As seven Democratic membersof the House Small Business Committeenoted in a letter, senior managers at thesesmaller companies now have to choosebetween spending their time on vital busi-


29/80



ness development functions or Section 404compliance.

Repeal the internal control rules ofSection404ormakethemvoluntary. The

term internal controls is undefined inthe statute and has been broadly definedby regulators. The SEC has found that in-ternal control practices are seldom a tip-off to fraud. Let investors choose if theywant the companies they own to pay thiscompliance cost or spend more of their re-sources creating new jobs and enhancinginvestor return

AbolishtheunaccountablePublicCompany

Accounting Oversight Board (PCAOB)and makeaccounting standard setters ac-countable to the President and Congress.Although the Supreme Court put some lim-its on the authority of the PCAOBit made

the agency subject to at-will removal by theSECthe PCAOB still wields tremendouspower without accountability. It levies taxeson all public companies, it can discipline and

fine auditors, and it is responsible for thebroad interpretation of Section 404s in-ternal control provision. And the PCAOBwields this power without any presidentialsupervision and minimal SEC oversight.Congress should abolish the Boardgivingauthority over accounting back to the presi-dential appointees at the SEC, where it wasbefore Sarbanes-Oxley.

John Berlau


30/80


Make Accounting Regulators Accountable

Mark-to-market accounting, which requiresfinancial instruments such as loans to be val-ued at the price of an ill-defined market, has

exacerbated the financial crisis by spreadingthe credit contagion from bad banks to good.Congress should require regulatory agencies tosuspend mark-to-market accounting mandatessuch as Financial Accounting Standard 157until better guidance is developed for illiquidmarkets.

In the spring of 2009, Congress camepretty close to doing just that. The FinancialAccounting Standards Board (FASB) was hauledbefore Congressional hearings and members ofboth parties expressed concern that FAS 157was exacerbating the crisis by causing banksto take huge paper losses and tighten lendingunnecessarily. Sensing the threat of legislation,FASB announced a relaxation of the rule, an ac-tion that sent the Dow Jones Industrial Averagesoaring that day to above 8,000 for the firsttime in months. This simple change to account-ing rules led to a stabilization of the economythat billions in bailouts had failed to achieve.

But now that the legislative focus on ac-counting rules has faded, FASB is trying to pushthrough an expanded mark-to-market rule thatwould cover virtually all bank loans. Mark-to-market mandates have generated questionsabout their accuracy and their economic im-

pact. They exaggerate losses by forcing finan-cial institutions to write down performingloans based on another institutions fire sale

even if the market for such loans is highly il-liquid and the financial institution in questionhas no plans to sell the loans.

Underlying all these problems is the factthat there are relatively few checks on the ac-counting standards body that makes these rules.FASB is a private body, yet Congress requirespublic companies to support it through a typeof tax, known as an accounting support fee.Moreover, federal regulatory agencies like theSecurities and Exchange Commission and theFederal Deposit Insurance Corporation almostalways defer to FASB in setting standards foreverything from investor reports to solvencyrules.

Starting in 2005, FASB greatly limited theuse of employee stock optionswhich are veryeffective at creating wealth and giving morepeople access to itby requiring companiesto expensethat is, subtract the estimatedvalue of stock optionsfrom current earn-

ings, even though stock options never resultin a cash outflow. This policy has had little ef-fect on levels of executive compensation, buthas caused companies to greatly reduce stockoptions for rank-and-file workers. It has alsoresulted in misleading financial reports for in-


31/80



vestors of companies that utilize stock options,as companies are required to report phantomlosses when there has been no money leavingthe firms coffers. Congress should: Require regulatory agencies to suspend any

new mark-to-market accounting mandatesfrom FASB until better guidance is devel-oped for illiquid markets.

Reverse the options expensing standard. Hold hearings to examine FASBs process of

setting accounting standards and whetherthe agency should continue to have a de

facto monopoly on setting those standards.

John Berlau


32/80


Encourage Innovation in Access to Credit

The abuses of the subprime crisis have madeit all too easy to overlook the myriad benefitsof consumer credit. Innovations in mortgages,

credit cards, and unsecured loans such as pay-day advances, have made it possible for morepeople to borrow money they need for a va-riety of purposesfrom starting a business toadvancing ones education to catching up onbills. In the mid-1990s, a college student namedSergey Brin used personal credit cards to startthe search engine business that would becomeGoogle, the revolutionary firm that has broughtcountless benefits to America and the world

In 2007, Austan Goolsbee, who becamea top economic adviser to President BarackObama, warned in The New York Times that,regulators should be mindful of the potentialdownside in tightening too much. Such restric-tions, he wrote, would hurt someone with alow income now but who stands to earn muchmore in the future with the help of access tocredit.

The Obama administration and Congresshave seemingly ignored this advice. The Credit

Card Accountability, Responsibility andDisclosure (CARD) Act of 2009 limits the abil-ity for card issuers to raise rates and impose pen-alty fees on high-risk borrowers. It has limitedoverall creditworking against other policiesaimed at getting credit flowingand caused

overall rates to rise sharply for responsible cardholders who pay on time or who pay their en-tire balance. Rules issued by the new Bureau of

Consumer Financial Protection (CFPB) createdby the Dodd-Frank Act of 2010 will likely havethe similar effect of punishing the prudent withmore costly credit as a result of paternalisticallyprotecting the imprudent.

Government has a role in preventing fraud-ulent lending practices, but it should leavepayment terms and interest rates up to theinterested parties to negotiate. It should alsoreduce the paperwork burden of traditionallending institutions, which raises costs that arepassed on to borrowers. It should lift the capon business lending by credit unions and liftthe moratorium on retailer-affiliated industriallending companies to spur competition amongcredit providers. And it should create new fed-eral charters to allow no-bank lenders to offerbusiness and consumer loans across state linesCongress should: Rejectattemptstoputinterestrateorprice

controlsoncreditvehicles. Repeal most of

the CARD Act and prevent the CFPB fromimposing nanny-state prohibitions of inno-vative credit products.

Repealorscalebackavarietyofregulationsthat impose myriad paperwork require-mentsonfinancial institutions. Such regula-


33/80



tionsfrom Sarbanes-Oxley provisions tothe Internet gambling banindirectly makeservices more expensive to borrowers and de-positors at all income levels by adding to their

overall costs. These rules hit small communitybanks and credit unions particularly hard.

Reduce know your customer require-mentsonbanksandotherfinancialinstitu-tions to investigate their customers back-grounds. These rules often overwhelm lawenforcement with useless reports and haveadverse impacts on the low-income un-banked population by making it more dif-ficult to open a bank account.

Lift thecapon lending that credit unionscanmake tomember businesses. The capcurrently stands at just 12.25 percent of acredit unions assets, keeping these institu-tions from competing to serve the small busi-ness lending market. The cap has only beenin place since 1998, and no such caps existfor other types of loans, such as mortgagesand car loans. From a safety and soundnessperspective, there is nothing about business

lending that is inherently more dangerousthan other loans.

Createanoptionalfederalcharterfornon-bank lenders issuedbytheComptrolleroftheCurrencytoallownonbankloanstobeofferedacrossstatelines

Nonbank lendersincluding pawn shops,payday loan providers, and title lendershave picked up the slack in consumer and,

to some extent, business lending as bankshave reduced loan volume. And these non-bank entities have done so with their owncapital and without any federal guarantee

of a bailout. Yet they are stifled not just bythe threat of federal regulation from theCFPB, but also by arcane state interest ratecaps. Under the National Bank Act, bankshave been able to offer credit products witha federal charter that are not subject to stateinterest caps. Congress should enact legis-lation to allow non-bank institutions to dothe same.

Lift themoratoriumonnonfinancialbusi-

nesses forming limited-purpose banks,known as Industrial Lending Companies(ILCs).This moratorium, first imposed bythe Federal Deposit Insurance Corporationand then codified for two years by the Dodd-Frank Act, has led some of the nations mostwell managed firmsincluding Walmart,Home Depot, and Berkshire Hathawaytoshelve plans to form ILCs to offer financialservices to their customers. Consumers suf-

fer from lack of competition in the bankingsectorthe kind that these businesses havebrought to the retail sector. And it is absurdto argue that somehow these banks pose aninherent risk, given the risks that practicesof traditional banks posed during the finan-cial crisis.

John Berlau


34/80


Rethink Anti-Consumer AntitrustRegulation

Before the recent financial crisis and themassive surge in federal regulation, policy mak-ers seemingly understood how economic regu-

lation can harm consumers. During the latterdecades of the 20th century, a pro-competitivemindset in Washington led to the liberaliza-tion of transportation, telecommunications,banking, electricity, and several other sectors.In market after market, consumers reaped theenormous benefits of deregulation, as prices felland competition flourished.

Antitrust regulation, however, continues toenjoy broad support in the business community,in the media, and among policy makers. Yet,overzealous antitrust laws endanger successful,innovation businesses, and are at odds with jobcreation and economic growth. Recent targetsof misguided antitrust interventionsor, insome cases, mere threats of interventionin-clude Google, Microsoft, AT&T, Apple, Intel,IBM, Dish Network, and SiriusXM. Each ofthese wealth-creating firms was stopped in itstracks either by the Department of Justice orthe Federal Trade Commission for allegedly re-

straining trade.But a growing body of economic evidence

has demonstrated that mergers, acquisitions,and single-firm conductno matter the sizeor market power of the firm in questionarefar more likely to stimulate competition than

stifle it. And when big companies misbehave, ashappens from time to time, they do not act ina vacuum. Investors, upstream rivals, and even

consumers themselves stand ready to police con-duct that endangers competition itself. Indeed,a core function of the marketplace is providingthe necessary competitive responses to deterfirms from choking off healthy competition.

Federal judges and antitrust enforcementrarely understand the markets they seek toregulate, especially when novel technologiesare involved. It is no surprise that nearly everyhigh-tech success story has met resistance fromantitrust authorities, as outside observers andlegal advisors often do not know what formsof conduct are likely to cause a firm to faceantitrust scrutiny. As the FTCs recently-closedinvestigation of Google demonstrated, perhapsthe only way a major firm can stay out of com-petition cops crosshairs is by avoiding vigor-ous competition.

Antitrust laws often create perverse incen-tives and cause wealth to be misallocated fromproduct development to lobbyists and law-

yers. In this way, antitrust undermines efficientmarkets, and even thwarts the natural evolu-tion of the marketplace and competition itself.Antitrust is increasingly seen by struggling firmsas a competitive weapon against more nimblerivals. When antitrust complainants succeed in


35/80



persuading enforcement agencies to intervene,consumers are deprived of competitive market-place responses to aggressive firms.

Reforming the antitrust laws to rein in un-

justified litigation and free up companies to

enjoy the advantage of scale should be a toppriority for policy makers in todays competi-tive, dynamic, global marketplace.

Wayne Crews and Ryan Radia


36/80


Keep the Internet Free For PricingExperimentation

Congress has never authorized the FederalCommunications Commission (FCC) to regu-late how broadband Internet Service Providers

manage the flow of information on their net-works. But in late 2010, the FCC nonethelessadopted so-called network neutrality rules,which bar most Internet providers from engag-ing in network discriminationexcept whendeemed reasonable by the FCC.

This net neutrality rule is currently beingchallenged on jurisdictional and constitutionalgrounds by several Internet providers before theCourt of Appeals for the District of ColumbiaCircuit. In late 2013, many observers anticipatethat the court will hold that the FCC exceededits authority in promulgating its net neutralityrules. But whether or not the D.C. Circuit up-holds the FCCs net neutrality rule, the battle-ground over Internet regulation is sure to shiftto Congress in 2014with advocates of netneutrality lining up on the offense if the rule isoverturned, or on the defense if it is upheld.

Congress should reject calls to permit theFCC to mandate net neutrality. Such regula-

tions would do little to preserve the openInternet, which is alive and well thanks tomarket forces that drive providers to serve theirusers needs. Rather, net neutrality obstructscreative methods by which Internet providerscan price scarce network resources. Ultimately,

this stifles the wealth creation in network in-dustries by undermining property rights andturning pricing disputes into political battles.

The FCC points to a handful of incidents ofInternet providers blocking traffic to show thatregulation is necessary. But mistakes are inevita-ble in any competitive market, especially one asdynamic as the Internet. Policy makers shouldembrace the trial-and-error processes that drivethe evolution of markets, not stifle them withoverly burdensome regulation. As for Internetproviders that meddle with their users accessto lawful content, the companies that main-tain the Internets rich platformsincludingGoogle, Hulu, Facebook, and Microsoftarewell positioned to stand up against any Internetprovider who would be so brazen as to unrea-sonably restrict access.

As the wireless Internet flourishes, andevolves into a viable substitute for traditionalwire line broadband, competition amongInternet providers will only intensify. Yet thefew airwaves devoted to wireless broadbandface increasing congestion, while less-congested

wireline networks face tough questions abouthow to pay for costly infrastructure upgrades.From all-you-can-eat pricing to charging permegabyte, there is no right approach tocharging users of Internet networks. Nor areconsumers necessarily best served when the


37/80



government denies content companies the abil-ity to contribute to the expansion of last-milebroadband networks.

Regardless of whether regulation of

Internet providers pricing policies benefitsconsumers, the First Amendment guaranteesprivate property owners the freedom to refuseto expressor disseminateviews with whichthey disagree. Just as a newspaper generallycannot be forced by the government to runan essay contrary to the views of its editorialboard, an Internet provider cannot be forced

to make its network available for the distribu-tion of all opinionsunless, that is, the gov-ernment demonstrates such regulation is theleast restrictive means of achieving a compel-

ling governmental interest.Unless the FCC or Congress can meet this

high bar, net neutrality regulation amounts tobad public policy and an affront to constitu-tional rights. It should be rejected.



38/80


Limit Government Access to Data butLeave Web Entrepreneurs Free toInnovate

Internet privacy is an increasingly conten-tious issue in Washington, D.C. Among law-makers in Congress, there is growing support

for privacy legislation, while the Federal TradeCommission is playing a more active role in po-licing data collection and use. But most govern-mental solutions to privacy concerns wouldharm consumers by endangering beneficial per-sonalized advertising and burdening innovativeWeb startups.

If Congress genuinely wishes to act in fur-therance of privacy on the Internet, it shouldenact legislation curtailing the authority of lawenforcement to compel companies to disclosetheir users private information. Under existinglaw, the contents of user emails, photos, anddocuments stored in the cloud may in somecases be accessed by law enforcement withouta warrant issued upon a showing of probablecause. And government officials routinely forcewireless companies to hand over locationaldata derived from individuals mobile devices.These present serious privacy threats, especiallygiven the lackluster performance of governmen-

tal bodies in safeguarding private informationfrom improper access.

Congress should also curtail the routine,mandatory collection by government agen-cies of sensitive personal information, such asindividuals income information, the DNA of

arrestees, and photographs of drivers licenseplates. Policy makers should also resist calls bysome in law enforcement to mandate the inclu-

sion of backdoors in Internet communica-tions platforms or the retention of IP addressesby Internet service providers.

Congress should not grant the Federal TradeCommission the broad new powers it seeks toregulate Internet privacy, or enact legislationdictating how private companies may collectand use online data. Existing federal and statestatutes that bar unfair and deceptive prac-ticesalong with longstanding common lawprinciples such as contracts and tortsprovideample vehicles for government officials and in-jured parties to punish bad actors who engagein harmful practices that deprive individuals oftheir privacy.

Even if Congress were to determine that datacollection merits legislation, lawmakers shouldremember that one-size-fits-all regulations thatpurport to increase privacy may chill experi-mentation in privacy-promoting technologies.The appropriate level of privacy and data secu-

rity varies dramatically depending on the typeof information in question and on the needs ofeach individual. No two consumers share thesame set of privacy preferences. Flexible, vol-untary private arrangements, bolstered by thecompetitive process, are well equipped to effec-


39/80



tively balance privacy concerns against othervital interests as technology evolves.

When companies violate user privacy, thebest punishment is dished out not by lawsuits

or regulators, but by the perennial gale of com-petitive discipline. Markets continuously rewardbusinesses that tackle tough privacy problems,

and punish companies that fail to deliver the pri-vacy that users increasingly demand. Legislativeor regulatory mandates on data security are morelikely to stifle innovation and ossify technology

standards than to truly protect our privacy.



40/80


Protect Free Speech by Rejecting ContentRegulation

Americas media industry is in a golden age.Cable, broadcast, and premium television chan-nels offer an unprecedented array of content,

from reality shows to childrens programming toserial dramas. Video gaming on computers, con-soles, and mobile devices has also experienced arapid explosion in variety, quality, and realism.

Yet, many in government view this trendwith a skeptical eye. Thanks in part to severalrecent high-profile massacres in schools andcommercial venues, a growing number of advo-cates and politicians are blaming fictional rep-resentations of violence in the media for fuelingacts of violence in the real world.

While the mass media may well influencehow each of us thinks and behaves, there issimply no evidence that our society is becomingmore violent due to television shows, movies,or video games. To the contrary, violent crimein the United States has held steady for severalyears after a period of prolonged decline. Thisis so despite the growing realism and popular-ity of violence in media.

Politicians should resist the temptation to

scapegoat violent games and television shows

as a primary factor in the incidence of violentcrime. And while popular calls to restrict chil-drens access to supposedly-inappropriate me-

dia may be well-intentioned, it is not the roleof government to determine the messages andstories their children will witness. Rather, thesedecisions properly rest with parents, who inturn are free to base their decisions on expertcommentary and other voluntary educationalinstitutions.

As the U.S. Supreme Court recently recog-nized in Brown v. Entertainment MerchantsAssociation, violent forms of mediaincludingvideo gamesenjoy the full protection of theFirst Amendment. Congress may not restrictobjectionable content in the name of protect-ing children unless a compelling governmentalinterest is at stake and Congress formulates theleast restrictive means of advancing this inter-est. Requiring that sellers of violent video gamesverify the ages of buyers has a chilling effect onthe creation of such games, harming adults wholawfully enjoy these forms of media.



41/80

202-331-1010 www.cei.org Competitive Enterprise Institute32

Resist New Burdens on theTransportation Sector

The transportation industriesairline, rail-road, shipping, and truckingare network in-dustries. They rely on connectivity and involve

both a flow and a grid. The flow element re-lates to what is being transportedsuch as air-planes and trainsand the grid is the physicalinfrastructure used to manage the flowsuchas track and air traffic control. Some transpor-tation industries have been freed of extensivefederal regulation over both elements, includ-ing railroads and trucking. However, air travelhad only its flow elementthe airlineseco-nomically liberalized under the 1978 AirlineDeregulation Act.

The Federal Aviation Administration re-mains a command-and-control governmentagency that poorly manages air transport in-frastructure to the detriment of consumers. Airtraffic control services should be privatized,and landing slots and airport space should beallocated using market prices and new technol-ogy rather than through administrative fiat.

As air travel is a global industry, the U.S.must continue to open up international mar-

kets, especially by implementing a genuineopen skies agreement with the EuropeanUnion, and remove laws that restrict foreigninvestment in American airline companies. Encourageprivateinvestmentinfreightrail.

Attempts to roll back the successful 1980

Staggers Act and re-regulate Americasfreight railroads must be resisted. TheStaggers Act has enabled the operation of

a genuine market in which the railroads arefinally able to make a sustainable rate ofreturn and invest in badly needed new in-frastructure. Re-regulation would suffocatenew infrastructure investment and lead togreater highway congestion. Rail also suf-fers in that its main infrastructural competi-tionthe nations highway systemis gov-ernment-owned. Congress should considertax reforms to make it easier to invest in railinfrastructure.

Privatizepassengerrail.Amtrak is an inef-ficient waste of taxpayer money. Congressshould pursue privatization of Amtraksroutes and limited infrastructure, throughsuch preliminary reforms as breaking upthe network. Competition in passenger railchoices can only benefit travelers, althoughmany routes are so underutilized that it isunlikely they could ever turn a profit. Theseshould be eliminated.

Liberalizeairtravel.Congress should rejectattempts to tax airlines on environmentalgrounds, which would be extremely harm-ful to the industry. Congress should also re-vise, or repeal,

avoiding the regulatory cliff - 2013 agenda for congress

Documents