CEI - Liberate to Stimulate

8/8/2019 CEI - Liberate to Stimulate

http://slidepdf.com/reader/full/cei-liberate-to-stimulate 1/84C 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

Liberate to Stimulate A Bipartisan Agenda to Restore Limited

Government and Revive America’s Economy


http://slidepdf.com/reader/full/cei-liberate-to-stimulate 2/84

Liberate to Stimulate

A Bipartisan Agenda to Restore LimitedGovernment and Revive America’s Economy

Edited by Ivan Osorio and Wayne Crews

Competitive Enterprise Institute



Competitive Enterprise Institute

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

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

http://cei.org

Copyright © 2010 by Competitive Enterprise Institute



Table of Contents

IntroductionReining in America’s Regulatory Leviathan: America Gets a Second Chance v

Secure the EconomyDeregulate to Stimulate 3Rein in the $1.75 Trillion Regulatory State 5Reform Federal Agriculture Programs 6End Bailouts and Government Ownership in Fannie/Freddie, GM, AIG, and Other Entities 7Free Smaller Companies to Go Public by Rolling Back Burdensome

Sarbanes-Oxley Accounting Rules 9Suspend Mark-to-Market Rules and Make Accounting Regulators Accountable 11Recognize the Value of Hedge Funds and Private Equity for Entrepreneurs and Shareholders 13Encourage Credit Access Innovation 15Avoid Energy and Global Warming Policies that Pose Greater Risks than Global Warming 17Increase Access to Energy 19End Federal Support for Renewable Energy 21Oppose Efforts to Impose Pro-Organized Labor Rules through Regulation 22Eliminate Wage Ceilings for Unionized Workers 24Oppose Taxpayer Bailouts of Underfunded Union Pension Funds 25Resist Forced Unionization of Public Safety Personnel 26Resist Anti-Consumer Antitrust Regulation 27Regulate Government Data Collection while Avoiding Prescriptive Privacy Regulation 28Forge a Bipartisan Approach to End Corporate Welfare 30Develop Smart Policies to Help Homeowners Deal with Natural Catastrophes 31

Liberalize Homeowners’, Automobile, Life, and Commercial Insurance Regulation 32Phase Out the National Flood Insurance Program 33Let Market Forces Regulate Internet Gambling 34Allow Immigrants Full Access to the American Economy 35Protect Federalism 37Avoid Hindering the Internet’s Evolution through Net Neutrality Regulation 38



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

Protect Free Speech by Rejecting Content Regulation 40Advance a Global Pro-Trade Agenda 41Counteract Politicization of Federal Science Policy 43Resist New Burdens on the Transportation Sector 44

Put Mobility First in Surface Transportation 46Reform the Transportation Security Administration 48

Protect the EnvironmentRestore the Constitutional Right to Property 53Embrace Private Conservation of Land and Natural Resources 54Protect Endangered Species 55Clarify the Role of Invasive Species 56Develop New Approaches to Preserve Ocean Resources 57Trash Counterproductive Waste Disposal Policies 58

Recognize the Elitist Nature of Anti-Sprawl Measures 60Affirm the Role of Property Rights in Water Rights Policies 61Reform Wetlands Policies 62

Improve Health and SafetyReject the Precautionary Principle, a Threat to Technological Progress 65Reduce Burdensome Regulation of Medicines and Medical Devices 67Purify Federal Water Policies 69Ensure Consumers’ Access to Bottled Water 70Enhance Auto Safety 71

Improve Food Safety and Quality through Greater Information, ConsumerChoice, and Legal Accountability 72

Protect Incentives for Pharmaceutical Innovation 74

Contributors 76



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

Introduction

Reining in America’s RegulatoryLeviathan: America Gets a Second Chance

By Fred Smith

My grandmother used to tell me, “It doesn’tmatter whether your socks are red or blue, youshould change them frequently.” Americans did

just that recently. To change metaphors, votershave chosen many new horses to run on the po-litical race track. So far, this new team seemspromising. They have killed the House climate-change subcommittee and refused to increasetaxes. Yet the Washington race track still veersleft. Our challenge is to pull the reins of thesenew entries toward limited government.

We at the Competitive Enterprise Institute(CEI) have spent 26 years raising the saliency of regulations on our economy. Taxes and spend-ing receive plenty of public scrutiny, whichmakes regulation an increasingly attractive op-tion for those who favor greater political inter-vention in the economy. Our goal is to ensurethat regulations are subject to the same degreeof oversight as taxes, spending, and legislationin general. The Tea Party movement’s successin the recent elections suggests that awarenessof these burdens is growing. Thus, we are morehopeful that economic liberty and regulatory

reform will make some significant headwayin 2011. To further that goal, CEI is unveilinga Liberate to Stimulate deregulatory agenda,which is summarized in this document.

The mixed economy has weakened marketdisciplines, while overreaching regulations have

encouraged irresponsible and erratic actions.The continuation of the recession owes muchto the fact that few entrepreneurs find it pru-

dent to invest in a world where rules changeunpredictably and constantly at the whim of regulators.

Opportunities abound for true reform in thenew Congress, and CEI is proposing a strategyto pursue them. We are confronting all forms of state intervention head on—including govern-ment mandates, regulations, subsidies, privatesector rent-seeking, and the moral hazards cre-ated by the socialization of risk. To that end,this Agenda for Congress outlines actions to ad-vance a world of freedom and responsibility—arestoration of the Founders’ vision of limitedgovernment.

Unlike their European counterparts, whosought outright government ownership of in-dustry, 20th-century American Progressivesleft the illusion of free markets in place, whileimposing an array of mandates on businessesvia taxes, regulations, and subsidies. Under theEuropean model of direct government owner-

ship, the costs of statist policies are more ap-parent and easily attributable to politics. Incontrast, the American regulatory welfare statehides costs from government balance sheets,and those costs are borne by businesses andconsumers. Political failures are blamed on the




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

private sector, making it all the more difficult torein in the regulatory state. We seek to find cre-ative ways of disciplining the excesses of gov-ernment, a task needed now more than ever.

In 2011, we will have a new team inWashington. Freshman legislators, backed bytheir constituents, have promised to reduce thesize of government. But that effort will not beeasy. After all, the weakening of the limits ongovernment power took over a century, begin-ning with the Progressive era in the early 20th century. There are no magic bullets to dismantleLeviathan. Decades of overspending, overregu-lating, and overintervening must be rolled back

incrementally, as they were imposed. Recall thatin 1994, small-government Republicans roaredinto Washington with an ambitious reformagenda—and soon became mired in the bogsof the Beltway. If today’s Republicans replicatetheir predecessors’ mistakes, their tenure willbe even briefer.

Real change is needed. The economic“emergency” measures advanced by the Bushand Obama administrations have done little to

alleviate the financial crisis—and likely madeit worse. Top-down solutions have failed.Attempts to continue this approach are un-likely to result in political gains. The disastersunfolding in Greece and Ireland, and threaten-ing all of Europe, drive that lesson home. Backhome, California, Illinois, and other statesteetering on bankruptcy from overspendingand unfunded state retirement pensions createpressures for further bailouts that must be re-

sisted.CEI will work with the new Congress onadvancing solutions to these issues. We lookforward to sharing our ideas on how to jump-start the nation’s economic engine, to reengageAmerica’s entrepreneurial spirit. We have a lotof work to do.

Botched, partial deregulations have ham-pered many sectors of the economy—includingsuch crucial network industries as electricity,telecommunications, and airlines. The solution

is not increased state control or infrastructuresubsidies, but true liberalization. The imme-diate challenge is to fight against the typicalWashington “do something” mantra—that is,to “do something” to expand the government’srole—and, instead, ask legislators to removeand reduce the barriers to economic growth.CEI believes that “doing something” can meandoing less: Congress doesn’t need to tell thegrass to grow; rather it need only move the

rocks off of it! With major opportunities, come major

risks. As a Louisianan, I am well aware of populism’s allure in the name of “helping thelittle guy,” even when that help hurts everyoneelse and creates long-lasting economic damage.The Bush-Obama interventions in areas likehealth, education, finance, and the environ-ment threaten the dynamism of America’s mar-ket economy. We will work, as we always have,

with lawmakers of both parties to oppose badideas, and to advance good ones.

In recent Congresses, both Republicansand Democrats massively expanded the federalgovernment—and voters punished them for it.Now the voters have granted the Republicansa tentative trust to set the ship of state aright.They can deliver on this charge in today’s glo-balized world and retain their power only if they succeed in crafting, marketing, and imple-

menting a truly pro-growth agenda.Economic liberalization must lie at theheart of that agenda. This volume offers policyproposals to the reformers of all parties to helpboost economic and personal liberties. It willbe an interesting few years. We plan to see thisrace to the finish.



Secure the Economy





202-331-1010 • www.cei.org • Competitive Enterprise Institute 3

Deregulate to StimulateBy Wayne Crews

When it comes to our economy, how didwe get into this mess and how do we get backto sustained growth? The need to deregulate

the nation’s productive sector shouts at us, butCongress doesn’t seem to hear it.Government spending is out of control, but

when we fail to confront regulation, we aremissing most of the story behind the expandingstate. Even before the financial crisis and thesubsequent huge bailouts and stimulus bills tosupposedly address that crisis, government wasalready expanding to gargantuan levels.

Today, America’s government is the larg-est that has ever existed. President George W.Bush’s $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. CEI’sannual Ten Thousand Commandments reportcites regulatory costs of well over $1 trillion—ahidden tax one-third the size of the federal bud-

get!Yet regulatory costs draw much less pub-

lic rebuke than taxes, because they are oftenconcealed in the prices of goods. Thus, whenpoliticians find it difficult to raise taxes to payfor their policy goals, they regulate. This is jus-

tified under the notion that government musthelp society manage risks. Yet the state does notprovide the answer to every societal risk.

Instead, we must turn to the marketplace’sdisciplining role in consumer protection, whichboosts safety as a competitive feature. We mustimprove competitive markets’ ability to im-pose discipline in the form of reputation anddisclosure.

Consider further that some of our most eco-nomically distressed industries have long beenoverwhelmingly directed by Washington regu-lators, not market forces. I do not know of atime over the past 100 years when the govern-ment did not regulate money, credit, and inter-est rates in America—yet markets always takethe brunt of the blame for financial crises, asthe new Dodd-Frank financial reform bill in-dicates. Markets can deal with firms too big tofail—what we cannot afford is a governmenttoo big to succeed!

Until now, most regulatory reform effortshave amounted to going after Moby Dick witha rowboat and tartar sauce. What we need

now is sweeping liberalization, to remove theimpediments that hobble wealth creation andenterprise on unprecedented scales. We needrational alternatives to interventionism and tothe regulatory nanny state. In short, we need toliberate to stimulate.




Competitive Enterprise Institute • www.cei.org • 202-331-10104

The issue is not whether industry has to beregulated, or “planned.” Rather, it is over whowill do that planning, as the legenday NobelPrize-winning economist F.A. Hayek put it so

well. Consciously maintaining a sensible wallof separation between state and economy mustguide the agenda to restore America’s competi-tiveness and economic health.

The United States—now only 235 yearsold—became richer than the rest of the worldin a historical blink of an eye. We need to keepin mind how that remarkable achievement oc-curred, and how it can be sustained as other na-tions embrace institutions of liberty and create

increasingly competitive markets.We need to hold the federal regulatory

state’s 60 agencies, thousands of annual rules,and Federal Register pages to at least the samestandards of disclosure and accountability thatapply to the fiscal budget.

Congress should implement a moratoriumon non-essential new rulemaking.

It should implement a bipartisan regulatoryreduction commission and task it to review the

regulatory state as a whole and enact a compre-hensive package of cuts.

In addition, Congress should strengthen per-manent and automatic rule sunsetting reviews.All rules should have an expiration date like acarton of milk.

Congress must end regulation without repre-sentation by requiring fast-track Congressionalapproval for controversial major business regu-lations.

Finally, Congress should create a RegulatoryReport Card—possibly modeled on TenThousand Commandments—to accompany thefederal budget, in order to shed light on the cur-

rently hidden tax of regulation.Our economic downturns are not attribut-

able to market failure but to the the failureto have markets. The bold political actionand genuine leadership needed in today’s cri-sis is different from what has been seen inWashington to date. Indeed, the political pricecan be too high for election-bound lawmakersor career bureaucrats. Yet we must make everyeffort.

As Hayek pointed out, the politiciansblamed during an inevitably bumpy transitionto something closer to healthy free enterprisewill be the ones who stop the flow of govern-ment benefits to the politically connected, bringdown inflation, and unwind market-distortingregulations—not the ones who started thosecostly interventions decades earlier.

Real stimulus—involving comprehensiveliberalization of a fettered economy—requires

politically difficult changes in what people ex-pect from government. Leadership requires tak-ing on 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, the Competitive Enterprise Institute isproud to lead this fight for capitalism’s future.




Rein in the $1.75 Trillion Regulatory State

Regulations are frequently anti-competitiveand anti-consumer. They cost consumers hun-dreds of billions of dollars every year. Policy

makers still largely do not know the full ben-efits and costs of their regulatory enterprise.Meanwhile, regulatory agencies grow in powerand budget 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, intellectualunderpinnings, and economic rationality of federal 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 disclosurematter most for regulatory reform.

Congress should vote on every major orcontroversial agency rule before it takes effect.

Regulatory cost transparency, through suchtools as improved annual cost and trend report-ing, would help voters to better hold Congress

responsible for the regulatory state. Reining inexcessive delegation of power to federal agencybureaucrats would help close the breach betweenlawmaking and accountability, while forcingCongress to internalize the need to demonstrateregulatory benefits. Congress should:

Establish a bipartisan Regulatory Reduction•

Commission to survey and purge existingrules.Develop a review and sunsetting schedule•

for 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).Have agencies and the Office of Management•

and Budget rank rules’ effectiveness, andrecommend rules for elimination.

Wayne Crews and Ryan Young



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

With America’s economy struggling to roarback to strong growth and a deficit approach-ing $1 trillion, policy makers need to take a

hard look at reforming one of the most wastefuland egregious government programs—the 2008Farm Bill, which expanded U.S. agriculture sup-port programs significantly, with dire effects.

This nearly $300-billion (over five years)boondoggle paid off every special interest.Farmers got their direct payments, their coun-ter-cyclical payments, their price support loanamounts, their disaster funds, and much more.Cities and towns got their nutrition programsand their food stamps. Environmentalists gottheir conservation programs, though not asmany as they wanted. Energy producers gotsome biofuel monies.

Some producers who were not subsidizedbefore—such as fruit, vegetable, and nut pro-ducers—received significant R&D money thatopens the door to future subsidies. The bill in-cludes what was lauded as the “first-ever live-stock title” for yet another group that was notpreviously subsidized. And special earmarks got

some others on board—the “trail to nowhere,”a taxpayer-funded land swap; forests that housefish got some money, as did salmon fisheries.

And for what? Many farm subsidies go torich farmers. The per-person annual limit forsubsidy eligibility is $500,000 for non-farm in-

come and $750,000 per year for farm income.Thus, a married couple could have farm incomeof $1.5 million per year and still collect taxpay-

er-funded payments.The U.S. sugar program—one of the mostegregious farm programs—needs drastic reform.The 2008 Farm Bill increases sugar price sup-ports, provides incentives for using sugar for eth-anol rather than food, further restricts imports of sugar, and may violate existing trade agreements.

Thus, many agricultural producers continueto enjoy subsidies and price supports, which costtaxpayers, increase food costs, and dispropor-tionately impact low-income consumers who paya larger percentage of their income for food. Andmany government agricultural programs con-tinue to restrict imports of various products, suchas sugar and ethanol. This leads to higher costsfor food and fuel. This situation must change.

With the current financial crisis and recession,policy makers should immediately address waysto reduce large-scale government waste. Congresswill negotiate the 2012 Farm Bill in 2011. Policymakers should take a hard look at existing farm

programs that waste taxpayers’ money, increaseconsumer costs, threaten U.S. credibility in pro-moting open trade, and harm developing coun-tries’ ability to compete in the world market.

Fran Smith

Reform Federal Agriculture Programs




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

On October 3, 2010, the federal govern-ment’s authority under the Troubled Asset Relief Program (TARP) officially expired. Rushed

through amid fears of financial Armageddon,the thrust of the program shifted several timesfrom buying “toxic” mortgage securities noone would touch to buying ownership stakesin order to provide a “capital cushion” to rela-tively healthy financial institutions—and evento propping up automakers.

Supporters are now hailing the programas a success because they claimed it calmed apanic and cost the taxpayers “only” about $50billion. But this figure doesn’t include the $700billion that many prominent economists saythe taxpayers will have to spend to rescue thegovernment-sponsored enterprises Fannie Maeand Freddie Mac, which were put into a gov-ernment conservatorship a few weeks beforeTARP was enacted in 2008.

While it is true that many financial institutionspaid the TARP money back with interest, manynever wanted to take it in the first place. Theywere pressured into doing so by then-Treasury

Secretary Henry Paulson or bank regulators, sothat the truly troubled banks would not carry thestigma of a government bailout on their own.

And it is hard to say this program program“saved” the economy, when unemploymentpersists at nearly 10 percent two years after it

was enacted. Supporters claim that had TARPnot been enacted, unemployment would haveskyrocketed to 20 percent. But it is also plau-

sible that without TARP’s 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 inhis book, Getting Off Track, TARP’s passagelikely “increased risks and drove the marketsdown.”

The remaining companies under governmentownership continue to damage the Americaneconomy, and the harm is not confined to thespending of taxpayer money. Firms operatingwith government support create a skewed play-ing field that disadvantages their competitors,undermining both job growth and innovation.AIG has been accused of using its $183 billionin taxpayer funds to undercut its unsubsidizedcompetitors by slashing premiums. GeneralMotors—now derisively known as GovernmentMotors—has used its $50 billion in taxpayer

funds to buy subprime auto lender AmeriCredit,giving it a possible competitive advantage overprivate-sector rivals, including Ford, Toyota,and other major automakers with plants in theU.S. And Fannie and Freddie are now virtuallythe only firms securitizing mortgages.





As important as recovering taxpayer moneyis, more important is an exit strategy to get thegovernment out of these private firms beforethey can do more damage to their private-sec-

tor competitors and to the economy as a whole.Congress should:

Set firm time limits for the bailouts forFannie Mae and Freddie Mac, General Motors,American International Group, and other bail-outs and require the government’s shares in com-panies to be sold as of a date certain. The U.S.government should not own banks or other firms.Permanent nationalization has not worked toowell in places like Cuba or Venezuela in promot-

ing stable and sustained economic growth. Thefact that the government sold its first tranche of shares in GM at a considerable discount demon-strates that government ownership is bad for thecompany and bad for taxpayers.

Make the bailout deliberations transparentand make government-owned firms abide by thesame rules as those in the private sector. Insiston open meetings whenever possible, quickcompliance with the Freedom of Information

Act, and judicial review of the Federal ReserveBank and Treasury Department’s actions. Theinitial public offering to sell part of the gov-ernment’s stake in General Motors disturbinglystated that the government was shielded by sov-ereign immunity from laws against stock fraudand securities fraud lawsuits. Congress should

enact legislation waiving this sovereign immu-nity for the government so that investors havethe same protection from fraud committed bygovernment-owned corporations as by those in

the private sector.Respect property rights and private con-

tracts in financial and housing policies. Thegovernment is one of many owners in the cor-porations participating in the TARP. It shouldnot interfere with any firm’s fiduciary duty toshareholders to deliver profits by pushing it toachieve politically determined social goals. Andit should not favor some creditors over others,as it did in the GM and Chrysler bankruptcies

when unions were given disproportionate eq-uity stakes in the reorganized firms at the ex-pense of bondholders and secured creditors.

Similarly, in trying to help families withforeclosures, the government should not re-quire or encourage the abrogation of contractsto investors in mortgages. Congress shouldhalt funding for President Obama’s HomeAffordable Modification Program, which sub-sidizes mortgage-servicing banks to modify a

borrower’s loan but disregards the interests of the investors who own the mortgages. Many of these investors are also middle-class families,holding mortgage-backed securities in their401(k) accounts and mutual funds.

John Berlau




Free Smaller Companies to Go Publicby Rolling Back Burdensome Sarbanes-Oxley Accounting Rules

In CEI’s last Agenda for Congress, we rec-ommended that “smaller public companies beexempt from Sarbanes-Oxley’s Section 404.”

Indeed, despite the rampant fervor of the pastCongress to reregulate, enough members of both parties in Congress were concerned aboutthe impact of the Sarbox accounting rules onsmaller firms that they permanently exemptedfirms with market valuation of $75 million orbelow.

This was a significant step, but Congressneeds to go much further to lift Sarbox barri-ers to business and job growth. For new 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 WorldCom scan-dals. These costly rules did virtually nothing toprevent the careless risks taken with mortgagesecurities that led to the financial crisis. “Howcan we have these levels of fictions in financialsafter Sarbanes-Oxley?” asked Jim Cramer, the

colorful host of CNBC’s “Mad Money.” Theanswer is because Sarbanes-Oxley is actuallycounterproductive at ensuring financial trans-parency. As the Financial Times noted, theinordinate amount of time boards of compa-nies such as the former Bear Stearns spend on

Sarbox compliance came at the expense of theirscrutinizing overall business risk.

Mid-size companies need access to equity

markets. The Act’s Section 404 requirementfor accountants to sign off on vaguely defined“internal controls” is costing American com-panies $35 billion a year in direct compliancecosts, according to the American ElectronicsAssociation. And it adds 35,000 extra man-hours for the average public firm, according toFinancial Executives International. Congressshould relieve this heavy regulatory burden bydoing the following:

Expand the modest relief for smaller com-•

panies in the Dodd-Frank financial reformlaw so that more firms are exempt fromSarbanes-Oxley’s Section 404 and otherSEC rules that are a drag on the economy.As seven Democratic members of the HouseSmall Business Committee have noted, se-nior managers at these smaller companies“now have to choose between spendingtheir time on vital business developmentfunctions or Section 404 compliance.”

Repeal the “internal control” rules of •

Section 404 or make them voluntary. Theterm “internal controls” is undefined inthe statute and has been broadly definedby regulators. The Securities and ExchangeCommission (SEC) has found that internal





control practices are seldom a tip-off tofraud.Abolish the unaccountable Public Company•

Accounting Oversight Board (PCAOB)

and make accounting standard setters ac-countable to the President and Congress.Although the Supreme Court put somelimits on the authority of the PCAOB—itmade the agency subject to at-will removalby the SEC—the PCAOB still wields tre-mendous power without accountability.It levies taxes on all public companies, it

can discipline and fine auditors, and it isresponsible for the broad interpretationof Section 404’s “internal control” provi-sion. And the PCAOB wields this power

without any presidential supervision andminimal SEC oversight. Congress shouldabolish the Board—giving authority overaccounting back to the presidential ap-pointees at the SEC, where it was beforeSarbanes-Oxley.

John Berlau




Suspend Mark-to-Market Rules and Make Accounting Regulators Accountable

In CEI’s last Agenda for Congress, we notedthat “mark-to-market accounting—which re-quires financial instruments such as loans to be

valued at the price of an ill-defined “market”—has been blamed by both Democrats andRepublicans for spreading the credit contagionfrom bad banks to good.” We recommended,“Congress should require regulatory agenciesto suspend mark-to-market accounting man-dates such as Financial Accounting Standard157 until better guidance is developed for il-liquid markets.”

In the spring of 2009, Congress camepretty close to doing just that. The FinancialAccounting Standards Board (FASB) was hauledbefore Congressional hearings and members of both 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 performing loansbased on another institution’s fire sale evenif the market for such loans is highly illiquidand the financial institution in question has noplans to sell the loans.

Underlying all these problems is the fact thatthere are relatively few checks on the account-ing standards body that makes these rules. FASBis a private body, yet Congress requires publiccompanies to support it through a type of tax,known as an accounting support fee. Moreover,federal regulatory agencies like the Securities andExchange Commission and the Federal DepositInsurance Corporation almost always defer toFASB in setting standards for everything frominvestor reports to solvency rules.

Earlier this decade, FASB greatly limited theuse of employee stock options—which are veryeffective at creating wealth and giving morepeople access to it—by requiring companiesto “expense”—that is, subtract the estimated

value of stock options—from 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 also





resulted in misleading financial reports for in-vestors of companies that utilize stock options,as companies are required to report phantom“losses” when there has been no money leaving

the firm’s coffers. Congress should:Require regulatory agencies to suspend•

FASB’s mark-to-market accounting man-dates until better guidance is developed forilliquid markets.

Reverse the options expensing standard.•

Hold hearings to examine FASB’s process of •

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

facto monopoly on setting those standards.

John Berlau




Recognize the Value of Hedge Fundsand Private Equity for Entrepreneursand Shareholders

Hedge funds and private equity are ve-hicles for wealthy investors to take risks andpotentially reap high returns. But the benefits

of these types of funds—and of funds thatcombine features of both—extend beyondtheir investors to all entrepreneurs and share-holders. Private equity funds build wealthin distressed and startup companies. Hedgefunds have forced incentivized companies tocreate more wealth for shareholders throughstreamlining—cutting costs and, when neces-sary, selling off divisions.

In addition, both types of funds provide li-quidity and have reduced risks of disruptionsto capital markets. Private equity firms havehelped to ease the credit crunch by helping torecapitalize commercial banks and stepping into fill the void of investment banks in financingnew business growth. Hedge funds were aheadof the curve in short-selling subprime securi-ties—thereby sending out valuable market in-formation about the risks of those instruments.Cumbersome restrictions would impede theirability to perform in these vital roles. Rather

than curtail these vehicles, Congress shouldconsider how to make their benefits availableto more investors, by doing the following:

Reject attempts to subject hedge funds and•

private equity to the Security and ExchangeCommission’s (SEC) one-size-fits-all reg-

istration process for ordinary investment ve-hicles. These entities are already subject tosecurities fraud statutes, as well as numerous

regulations from agencies, such as theCommodity Futures Trading Commission.Congress should modernize this regulatorystructure to get rid of overlapping jurisdic-tions for more effective oversight. Since theDodd-Frank financial reform law gave theSecurities and Exchange Commission open-ended authority to require registration of some hedge funds, Congress should makesure such rules don’t burden capital forma-tion and distract the SEC from more press-ing systemic threats.Stop the SEC from raising the minimum in-•

come requirements for hedge fund and pri-vate equity investors. On several occasions,the SEC has proposed raising the minimumnet worth needed to invest in hedge fundsfrom $1 million to $2.5 million. Obviously,the SEC does not need to protect “poor”millionaires. This increase will further drainthe pool of capital for innovative new busi-

nesses. An attempt to codify this foolish in-crease was stripped from Dodd-Frank afterconcerns expressed by the “angel” investorcommunity attracted bipartisan opposi-tion. But the SEC still has the authority im-pose this draconian increase, and Congress





should reject any proposed rule taking suchan actionRevise the Investment Company Act of 1940.•

This would allow mutual and exchange-

traded funds more freedom to pursue someof the strategies of hedge funds and privateequity, such as short-selling, and give someof the hedge fund benefits to ordinary inves-

tors with minimal risk. This allows usefulinformation to get out to the market earlier.For instance, had mutual funds had morefreedom to engage in short selling during the

subprime boom, the mortgage bubble likelywould never have grown as large as it did.

John Berlau




Encourage Credit Access Innovation

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 purposes—from starting a business toadvancing one’s education. In the mid-1990s,a college student named Sergey Brin used per-sonal credit cards to start the search enginebusiness that would become Google.

In 2007, Austan Goolsbee, now a top eco-nomic adviser to President Barack Obama,warned in The New York Times that, “regula-tors should be mindful of the potential down-side in tightening too much.” Such restrictions,he wrote, would hurt “someone with a low in-come now but who stands to earn much morein the future” with the help of access to credit.

The Obama administration and Congresshave seemingly ignored this advice. The CreditCard Accountability, Responsibility andDisclosure (CARD) Act of 2009 limits cardissuers’ ability to raise rates and impose pen-

alty fees on high-risk borrowers. It has limitedoverall credit—working against other policiesaimed at getting credit flowing—and causedoverall rates to rise sharply for responsible cardholders who pay on time or who pay their en-tire balance. Rules issued by the new Consumer

Financial Protection Bureau (CFPB) will likelyhave the similar effect of punishing the prudentwith more costly credit as a result of paternalis-

tically protecting the imprudent.Government certainly has a role in prevent-ing fraudulent lending practices, but it shouldleave payment terms and interest rates up to theinterested parties to negotiate. It should also re-duce the paperwork burden of traditional lend-ing institutions that raises costs that are passedon to borrowers. It should lift the cap on busi-ness lending by credit unions and lift the mora-torium on retailer-affiliated industrial lendingcompanies to spur competition among creditproviders. Congress should:

Reject attempts to put interest rate or price•

controls on credit vehicles. Repeal most of the CARD Act and prevent the CFPB fromimposing nanny-state prohibitions on inno-vative credit products.Repeal or scale back a variety of regulations• that impose myriad paperwork require-ments on financial institutions. Such regula-tions—from Sarbanes-Oxley provisions to

the Internet gambling ban—indirectly makeservices more expensive to borrowers anddepositors at all income levels by addingto their overall costs. These rules hit smallcommunity banks and credit unions espe-cially hard.





Reduce “know your customer” requirements•

on banks and other financial institutions toinvestigate their customers’ backgrounds.These rules often overwhelm law enforce-

ment with useless reports and have adverseimpacts on the low-income “unbanked”population by making it more difficult toopen a bank account.Lift the cap on lending that credit unions•

can make to member businesses. The capcurrently stands at just 12.25 percent of acredit union’s assets, keeping these institu-tions from competing to serve the small busi-ness lending market. The cap has only been

in place since 1998, and no such cap existfor other types of loans, such as mortgagesand car loans. From a safety and soundnessperspective, there is nothing about businesslending that is inherently more dangerousthan other loans.

Lift the moratorium on nonfinancial busi-•

nesses forming limited-purpose banks,known as Industrial Lending Companies(ILCs). This moratorium, first imposed by

the Federal Deposit Insurance Corporationand then codified for two years by the Dodd-Frank Act, has led some of the nation’s mostwell managed firms—including Wal-Mart,Home Depot, and Berkshire Hathaway—toshelve plans to form ILCs to offer finan-cial services to their customers. Consumerssuffer from this lack of competition in thebanking sector. It is laughable to argue thatsomehow these banks pose an inherent risk,

given the risks that practices of traditionalbanks posed during the financial crisis.

John Berlau




Avoid Energy and Global WarmingPolicies that Pose Greater Risks thanGlobal Warming

Global warming has been described asthe greatest threat facing mankind, but thepolicies designed to address global warming

actually pose a much greater threat. The in-ternational and domestic policies to rationcarbon-based energy would do—and are do-ing—little to slow carbon dioxide (CO

2) emis-

sions, but would have enormous costs. Thesecosts would fall most heavily on poor people,not only in the United States, but also in theworld’s poorest nations. The correct approachis not energy rationing, but rather long-termtechnological transformation and building re-siliency in developing societies by increasingtheir wealth.

Since the Kyoto Protocol was negotiated in1997, atmospheric CO

2concentrations have

increased by over 5 percent. The global meantemperature peaked in 1998 and has since re-mained flat. Precipitate and colossally expen-sive measures to reduce greenhouse gas emis-sions are not warranted at this time—and likelynever will be warranted.

Per capita carbon dioxide emissions in the

United States have remained flat since 1980,according to the federal Energy InformationAdministration. Meanwhile, the U.S. popula-tion has increased by slightly more than 1 per-cent per year. Population growth means thatthe U.S. needs more energy, not less.

The European Union (EU) ratified theKyoto Protocol and has implemented manda-tory greenhouse gas reduction programs, but

emissions in the EU-15 (the 15 member coun-tries before the recent EU expansions) haverisen considerably since Kyoto was negotiatedin 1997. The EU’s Emissions Trading Schemehas raised energy prices for consumers and pro-ducers, but has not lowered emissions. Gasolinetaxes have been raised to $3 to $4 per gallon inmost EU countries, yet emissions from trans-portation continue to increase.

The most thorough economic studies by lead-ing academic economists (who are not globalwarming skeptics) have found that mandatoryemissions reductions add to the total potentialcosts of global warming. For example, Yaleeconomics professor Dr. William Nordhaus,one of the world’s leading resource economists,concluded that attaining the emissions reduc-tions advocated by former Vice President AlGore would avert $12 trillion of the projectedcosts of global warming impacts, but at a costof $34 trillion.

A cap-and-trade program would be the big-gest government intrusion in the economy sincethe rationing system adopted during the SecondWorld War. It would also be the biggest gov-ernment limitation of, and interference with,people’s personal freedoms since that war.





Rapid economic growth in major develop-ing countries has been accompanied by rapidemissions increases. Total Chinese emissionshave surpassed U.S. emissions, according to

several international agencies. The Chinese gov-ernment has made it clear that it will not under-take mandatory emissions reductions becauseit would limit the country’s economic growth.Instead, China hopes to be paid by developednations, and corporations in developed nations,to reduce its emissions.

The economic rise of China and India islifting hundreds of millions of people out of poverty. Hundreds of millions of more people

in poor countries hope to follow down a simi-lar path. That requires much more affordableenergy than can be provided by non-carbonsources, like windmills, solar panels, and nu-clear plants. Any successor agreement to theKyoto Protocol requiring emissions reductionsin developing countries would consign billionsof people to prolonged poverty.

Recommendations:Do not enact cap-and-trade legislation or a•

carbon tax in order to reduce greenhousegas emissions.Do not enact further mandates, subsidies, or•

incentives for alternative energy technolo-gies or for “green jobs” programs.

Do not close more federal areas for energy•

production.Do not place regulatory obstacles in the way•

of building energy infrastructure, including

transmission lines, pipelines, coal-fired powerplants, nuclear plants, and windmills.Revoke the federal government’s authority•

to regulate greenhouse gases.Reject any new international agreement to•

succeed the Kyoto Protocol that would re-quire mandatory emissions reductions bythe United States.Repeal existing mandates, subsidies, and in-•

centives for all types of energy production,

efficiency, and conservation.Require the Department of Interior to open•

federal Outer Continental Shelf areas andthe coastal plain of the Arctic NationalWildlife Refuge to oil and gas explorationand production.Replace the current depreciation schedules•

for investments in new capital stock andequipment with immediate expensing.

Myron Ebell




Increase Access to Energy

Economic prosperity and our standard of living depend on affordable energy. However,since the 1970s, successive Congresses have

largely pursued anti-energy policies to constrictenergy supplies and raise energy prices. The112th Congress should strike out in a new di-rection.

Mandates and subsidies for renewable, al-ternative, and conventional energy technologieshave done far more harm than good. Tens of billions of taxpayer dollars have been wastedon subsidies, and subsidies and mandates to-gether have provided a disincentive for alterna-tive technologies to become competitive. It isunlikely that wind and solar power will everbecome viable means of energy production aslong as they can count on continuing subsidiesand mandates. Congress should:

Repeal all energy mandates and subsidies. The 2005 and 2007 ethanol mandates, coupledwith the 45-cents-per-gallon refundable taxcredit, have had particularly unfortunate indi-rect consequences. The exact contribution of theethanol mandate to world hunger due to higher

grain prices is uncertain, but still real, and quiteevident in food riots around the world in recentyears. The ethanol mandates should be repealedimmediately. All other mandates, subsidies, andincentives—including those for conventionalenergy—also should be repealed. Subsidies

and mandates for uncompetitive forms of en-ergy pose grave threats to our future electric-ity needs. Wind and solar power can at most

provide only a fraction of additional electricitydemand over the next decade.Open the nation’s infrastructure to private

investment.Congress should remove regulatoryobstacles that are preventing private invest-ments in new energy infrastructure. A “smartgrid” will never be built until Congress changesregulations so that investors have an opportu-nity—but not a guarantee—to profit from thehundreds of billions of dollars of investmentsrequired.

Allow access to America’s domestic energyresources. Having vowed to “never let a crisisgo to waste,” the Obama administration hasused the BP Gulf disaster to inhibit all domes-tic oil and gas production. Bureaucratic pro-crastination has slowed permitting to a tricklein deep water, shallow water, along the RockyMountains, and in Alaska. Congress shouldvigorously investigate this de facto morato-rium on all domestic oil and gas production. In

addition, Congress should push the adminis-tration to put offshore federal water with highoil and gas potential up for leasing throughcompetitive bidding. Congress also shouldopen the coastal plain of the Arctic NationalWildlife Refuge to oil and gas exploration and





production, and repeal many of the administra-tive withdrawals of federal lands from energyproduction in the Rocky Mountains. Together,these actions will increase domestic oil and

gas production, create hundreds of thousandsof high-paying jobs, lower the trade deficit bytens of billions of dollars annually, and con-tribute billions of dollars in royalty paymentsto the federal Treasury.

Enable technological innovation. The mosteffective way to increase energy efficiency is toreplace existing technology with new technol-

ogy. One of the reasons that greenhouse gasemissions have been rising more slowly (in per-centage terms) in the United States than in mostEuropean countries is more rapid technological

turnover because of higher economic growth.Congress can accelerate this trend by changingthe tax code to allow immediate expensing of investment in new technology instead of ac-cording to a depreciation schedule over a num-ber of years.

Myron Ebell




End Federal Support forRenewable Energy

Eliminate mandates and subsidies for biofuels.Congressional legislation has given much unnec-essary support for biofuels. The 2007 energy bill

greatly expanded the Renewable Fuel Standard inthe United States, requiring almost 13 billion gal-lons of ethanol and other renewable fuels to beblended into the gasoline supply by 2010—ramp-ing up to 36 billion gallons by 2022. The mandatehas increased the cost of driving. Meanwhile, thediversion of nearly a third of the corn supply fromfood to fuel use has raised food prices. The man-date comes on top of favorable tax treatment forethanol and other biofuels, including a 45 cents-per-gallon tax credit, as well as protectionist tar-iffs that shield domestic corn ethanol from globalcompetition. Few experts think that ethanol pro-duced from corn in the United States is a scalablereplacement for foreign petroleum imports. Itsenvironmental benefits are minimal at best andcome at a huge cost. Ironically, ethanol remainshighly reliant on petroleum and natural gas for itsproduction and delivery.

Do not enact a Renewable Electricity Standardand repeal renewable subsidies. As with biofuels,

the very fact that wind power and other renew-able sources of electricity need mandates and sub-sidies in order to compete indicates that they haveserious limitations. In addition to being costly toproduce and transmit, wind power is intermittentand thus must be backed up by conventional en-

ergy sources sufficient to carry the entire load. Innations like Denmark and Spain that have man-dated renewable electricity, as well as states that

have done so, the mandates have raised the costof producing electricity and have destroyed morejobs than they have created. Congress should notfollow their lead and enact a federal RenewableElectricity Standard (RES, nor should it extendexisting subsidies for renewables.

The supposed greenhouse gas emissions re-ductions and other environmental benefits froma RES are also questionable. The backup sourcesof power, like coal and natural gas, have to beoperated in an inefficient—and thus higheremitting—manner in order to accommodatethe fickle nature of wind. Thus, the difficultiesof integrating wind into the larger electricitysystem make it both an economic and environ-mental disappointment—two good reasons forWashington to let the marketplace decide howto generate electricity. Congress should:

Cap the Renewable Fuels Standard at 2010•

levels or remove it completely.End biofuel subsidies.•

Refrain from enacting a federal Renewable•

Electricity Standard.Repeal subsidies for wind, solar, and other•

renewable sources of electricity.

Ben Lieberman




Oppose Efforts to Impose Pro-OrganizedLabor Rules through Regulation

One of the American economy’s greateststrengths is individuals’ and businesses’ abil-ity to adapt to changing conditions. However,

in the case of labor markets, many workersand employers remain subject to an array of obsolete New Deal-era labor regulations thatdiscourage innovation and hamper flexibility.The old adversarial model of labor relationshas little to offer to the 21st century workforce,which is characterized by horizontal companystructures and greater job mobility—flexibilitywhich employers and workers need to betterride out economic downturns.

The collective bargaining model that haspredominated in the U.S. since the New Deal,when 1935 the National Labor Relations Act(NLRA) was enacted, has been one based oncompulsory monopoly representation. Underthis system, when employees at a given work-place vote on whether they want to be repre-sented by a union, that union becomes theexclusive bargaining agents for all the workersthere—including workers who did not vote tobe represented by the union.

This violates workers’ First Amendmentrights to freedom of association and freedomof speech—by forcing them to join unions asa precondition of employment and to supportpolitical activity with which they may not agreethrough the compulsory payment of union

dues. Abolishing unions’ monopoly bargainingprivilege, which is codified in the NLRA wouldend this anachronistic system.

Meanwhile, Congress should resist mea-sures that would make the situation worse,such as the misleadingly named Employee FreeChoice Act (EFCA), which would allow unionsto circumvent secret ballot elections through“card check organizing, enjoin a federally ap-pointed arbitrator to impose a contract on anewly unionized companies if the union andmanagement do not reach an agreement after120 days, and increase employer penalties for“unfair labor practices,” which would giveunions another blunt instrument with which topressure employers.

Having failed to enact EFCA into law, or-ganized labor and the Obama administrationhave indicated a willingness to make an end runaround Congress by imposing some of EFCA’sprovisions through the regulatory process,mainly through the National Labor RelationsBoard (NLRB).

The NLRB is now considering allowing re-

mote electronic voting (E-Voting), which wouldallow unions to conduct organizing electionsvia phone or the Internet. The NLRB says itwants to keep the voting secret but it would notbe hard for a union organizer using a laptopcomputer or some other mobile device to pres-





sure an individual worker to vote for the union.Allegations of mail fraud and voter intimida-tion were rampant in a 2009 mail election fightin California. E-Voting could lead to similar

intimidation and fraud.The NLRB is also considering expedited elec-

tions, which essentially would function as am-bush elections. Employers would have very littletime to respond to union organizing campaigns,thus giving the union a significant advantage.

In addition, the NLRB has decided to revisitits 2007 Dana Corp. decision, which affirmedemployees’ right to call for a secret-ballot de-certification election in instances where a union

has been certified through card check.Congress should resist any efforts to impose

parts of EFCA, or other rules that tilt the play-ing field in favor of unions against employers.

Ivan Osorio and F. Vincent Vernuccio




Eliminate Wage Ceilingsfor Unionized Workers

Workers need incentives to perform to theirutmost capability. Working hard and perform-ing your job well is usually rewarded with

greater compensation. Unfortunately, this isnot the case at many unionized workplaces,where collective bargaining agreements imposea wage ceiling, in addition to a wage floor. Thevast majority of these agreements grant pay in-creases based on seniority rather than merit.

The National Labor Relations Board andthe courts have held that employers with collec-tive bargaining agreements can only deal witha union and not with an individual employee.This means in most cases an employer cannotreward a union employee for being more pro-ductive without violating the National LaborRelations Act (NLRA).

The Rewarding Achievement andIncentivizing Successful Employees (RAISE)Act, sponsored in the 111th Congress by Rep.

Tom McClintock (R-Calif.) and Sen. DavidVitter (R-La.), would amend the NLRA to al-low employers to pay especially productiveworkers more than the base amount set in theunion’s collective bargaining agreement. If theRAISE Act becomes law, union workers’ earn-ings could rise by between $2,600 and $4,300per year, according to an estimate by HeritageFoundation labor expert James Sherk. This is acommon sense idea that is long overdue.





Oppose Taxpayer Bailouts of Underfunded Union Pension Funds

In trying to attract new members, laborunions often tout the promise of a secure re-tirement to their members in the form of de-

fined benefit pensions. However, many unionpension plans today are severely underfunded.Some have been in trouble for years, and thelatest economic downturn has only exasper-ated the problem. In 2008, the Department of Labor listed the status of 230 union plans aseither endangered—less than 80 percent fund-ed—or critical—less than 65 percent funded.In 2009, Moody’s Investors Service estimatedall union pensions to be underfunded by $165billion.

As a result, one of organized labor’s top pol-icy priorities is to get taxpayers to bail out theseseverely underfunded union pension plans. In the111th Congress, this effort took the form of theCreate Jobs and Save Benefits Act, introduced inthe House by Rep. Earl Pomeroy (D-N.D.) andin the Senate by Rep. Robert Casey (D-Penn.).The Pomeroy-Casey bailout bill would create anew fund within the Pension Benefit GuarantyCorporation (PBGC), an agency chartered by

Congress that insures private sector pensions.

The PBGC is funded through premiumspaid by private employers to insure retirees if a plan sponsor were to become insolvent. The

Pomeroy-Casey legislation would direct tax-payer dollars to shore up some underfundedunion pension plans. It would create a newfund to the PBGC, known as the “fifth” fund,whose obligations would be “obligations of theUnited States”—that is, taxpayers. The use of public funds to insure private pension plans isa first for PBGC and stark departure from theway it has operated since its creation in 1974.

Earl Pomeroy lost his reelection bid, but justbecause unions lost one champion of this legis-lation does not mean they cannot find anotherin the incoming Congress. Pomeroy was an oddsponsor of such legislation anyway—unionsare not exactly political powerhouses in NorthDakota. Still, given enough support from thenational Big Labor establishment, another un-likely lawmaker could take this up. Membersof Congress who are serious about reining inspending and protecting taxpayers should op-pose any revival of this legislation.





Resist Forced Unionization of Public Safety Personnel

Today, for the first time in American history,a majority of union of union members work forgovernments. In January 2009, the Bureau of

Labor Statistics reported that the number of union members working for government enti-ties surpassed the number of those working forprivate businesses. This change in the composi-tion of organized labor’s membership is signifi-cant for the nation’s politics.

As unions have become increasingly gov-ernment employee-based, public sector unionshave become an organized, motivated, andwell-funded permanent lobby for bigger gov-ernment. With the federal and state and localgovernments facing tightened finances, law-makers must confront this lobby. The first thingthey must do is to not feed it.

The so-called Public Safety Employer-Employee Cooperation Act, sponsored in the111th Congress by Rep. Dale Kildee (D-Mich.)and Sen. Harry Reid (D-Nev.), would indeedfeed this behemoth. The bill would have im-posed union collective bargaining on stateand local public safety—police, firefighter,

and EMT—personnel. For states and citiesstruggling to balance their overstretched bud-gets, higher labor costs are the last thing they

need.Moreover, such legislation would violateworkers’ First Amendment rights to freedom of association and freedom of speech by forcingthem to join unions and to support, through thecompulsory payment of union dues, politicalactivity with which they may not agree.

The Kildee-Reid legislation instructs theFederal Labor Relations Authority, which over-sees collective bargaining for non-postal federalemployees, to promulgate union representationand collective bargaining regulations for stateand local public safety employees in states whichhave not enacted laws giving unions those privi-leges. Such legislation, by increasing state and lo-cal governments’ labor costs, would amount tounfunded mandates upon states, counties, andcities. It is terrible policy. Congress should rejectany attempt to revive it.

Ivan Osorio and F. Vincent Vernuccio)




Resist Anti-Consumer Antitrust Regulation

Before the recent financial collapse and themassive increase in economic regulation, policymakers were often willing to question the pre-

sumption that governmental economic regula-tion benefits consumers. Over several decades,that pro-competitive mindset helped drive theliberalization of transportation, telecommuni-cations, banking, electricity, and several othersectors. In market after market, consumersreaped the enormous benefits of deregulationas prices fell and competition flourished.

Antitrust regulation, however, continues toenjoy broad support among the business com-munity, in the popular press, and among policymakers. Despite its popularity, antitrust consti-tutes a serious hazard for successful, wealth-creating businesses, and it threatens to disruptinnovation and economic growth. Recent tar-gets of misguided antitrust interventions—or, insome cases, mere threats of intervention—haveincluded Microsoft, Intel, IBM, Google, and theSirius/XM Satellite Radio merger. These innova-tive firms have been stopped in their tracks bygovernment regulators for allegedly threatening

competition. But as a growing body of economicevidence has demonstrated, mergers, acquisi-tions, and single-firm behavior—no matter thesize or market power of the firm in question—

tend to benefit, rather than hinder, competitionand innovation. Even when big companies mis-behave, they do not act in a vacuum. Providing

the necessary competitive responses to success-ful firms is exactly what markets are for.Antitrust enforcement and the resulting

uncertainties scuttle innovative new productofferings, preclude efficient market arrange-ments, and thwart the natural evolution of themarketplace and competition itself. The avail-ability of antitrust as a competitive weaponfrequently attracts firms seeking entry or priceregulation as a means of hobbling more nimblerivals. Persuading antitrust enforcers to penal-ize successful competitors undermines compe-tition, ultimately harming consumers by driv-ing prices higher and output lower. Antitrustregulation destabilizes the very industries itpurports to foster by depriving consumers of competitive marketplace responses to aggres-sive firms.

Resisting such interventions—whetheragainst “collusion,” “predatory pricing,” or“vertical integration”—should be a top prior-

ity for policy makers in today’s competitive,dynamic, global marketplace.

Wayne Crews and Ryan Radia




Regulate Government Data CollectionWhile Avoiding Prescriptive PrivacyRegulation

There are two notable ironies in proposalsby politicians and self-styled consumer advo-cates to protect consumer privacy by regulating

businesses that handle sensitive personal data.First, the most egregious privacy violations aretypically perpetrated not by firms, but by gov-ernments against their own citizens. Second,those violations of privacy that do result frombusiness and consumer transactions are oftenfacilitated by government.

The laws safeguarding individuals and busi-nesses from unwarranted law enforcementaccess to sensitive information stored in the“cloud” (remote Internet-based servers oper-ated by third parties) are woefully outdated.Today, government can compel service provid-ers to disclose the contents of many kinds of private correspondence without first obtaininga search warrant or any other court order au-thorized by a judge. Lawmakers should reviseU.S. electronic privacy statutes to better reflectthe realities of the information age by applyingrobust protections to the contents of all privatecommunications stored electronically.

Government routinely collects and stores in-dividuals’ personal information, including SocialSecurity numbers, names, and birth dates—theholy trinity for identity thieves. In some cases,government has even promoted the use of theseidentifiers by financial and medical institu-

tions. In the name of homeland security, somelawmakers hope to require citizens to discloseeven more information that would be stored

in federal databases. Some policy makers haveproposed mandatory biometric national identi-fication cards. Yet the real key to safeguardingour privacy is to grant government less access toever more personal information, not more.

Federal efforts to regulate private sector pri-vacy standards are fundamentally misguided.One-size-fits-all regulations that purport to in-crease privacy and security invariably have seri-ous downsides. In many cases, privacy regula-tion actually renders sensitive information evenmore vulnerable. Evolving digital devices andtelecommunications technologies are constantlycreating new privacy and security concerns thatcannot be properly addressed by static laws en-forced by distant bureaucrats. The appropriatelevel of privacy and data security varies dra-matically depending on the type of informationin question and on the needs of every specificindividual. No two consumers share the sameset of privacy preferences. Flexible, voluntary

private arrangements, bolstered by the compet-itive process, are the best means of effectivelybalancing privacy concerns against other vitalinterests as the information age evolves.

Technologies that enable users to safeguardtheir privacy on an individualized basis are





constantly improving. The perennial gale of competitive discipline continuously encouragesbusinesses to devise better solutions to toughprivacy problems. Federal regulation cannot

anticipate or properly address the ever-chang-ing threats to digital information. Legislative orregulatory mandates on data security are morelikely to stifle innovation and ossify technologystandard than to truly protect our privacy.

Consumers today demand both security andfunctionality in online commerce and commu-nication. As the public grows more cognizant

of privacy risks, market institutions evolve tocreate more robust and diverse privacy stan-dards. These institutions—including insurancecompanies, reputational forces, and third-party

watchdog groups—are all equipped to punishwrongdoers and incentivize smart privacy prac-tices. And when private agreements are broken,government has an important role to play inallowing injured parties to obtain recoursethrough the judicial system.

Wayne Crews and Ryan Radia




Forge a Bipartisan Approachto End Corporate Welfare

One of government’s primary current un-dertakings is transferring wealth. Many suchtransfers are from taxpayers to corporations.

Before the financial crisis and recession, thesetransfers were called corporate welfare. Nowthey are called stimulus, bailouts, or infrastruc-ture investments. But a rose by any other namehas thorns just as sharp. The money for thesewealth transfers must come from somewhere. If current taxpayers do not pay the costs for suchboondoggles, future taxpayers will.

Direct payments are not the only transfermechanism. Price, entry, and antitrust regula-tions benefit politically favored firms at theexpense of consumers and competitors thathappen to be less politically connected. Even in-nocuous-sounding health and safety regulationscan benefit some firms at competitors’ expense.

Corporate welfare, whether in the form of subsidies or competitor-hampering regulations,creates distortions and inefficiencies, injures

consumers, and undermines the evolving, com-petitive market process. Congress should keep awatchful eye on the businesses that set up lobby-ing shops in Washington, D.C. Are they seekingto reduce burdens on entrepreneurship and em-ployment, or do they seek to add burdens thatbenefit them at the expense of competitors?

Entry barriers hit smaller companies espe-cially hard. Additional costs that a large companycan absorb can cripple its smaller competitors.Congress should be skeptical toward any appealsfor political favors, which all too often come un-der the guise of consumer welfare.

Wayne Crews and Ryan Young




Develop Smart Policies to HelpHomeowners Deal with NaturalCatastrophes

Natural catastrophes such as hurricanes,forest fires, earthquakes, and severe blizzardsthreaten nearly every state in the Union. Each

year, such catastrophes impose billions of dol-lars’ worth of costs on taxpayers, insurers, andgovernments; claim scores of lives; and destroythousands of homes. Congress should:

Avoid policies that encourage unwise build-•

ing. Lawmakers in both the House andSenate continue to introduce measures inan attempt to add wind coverage to theNational Flood Insurance Program andestablish an implicitly government-backedentity to reduce reinsurance prices. Neithermeasure has much promise for providingcoverage that would actually cost less thanthat in the private market. Instead, bothwould encourage development where itshould not occur while sticking taxpayerswith the bill. Thus far, none of the measureshave made it far in the legislative process,but efforts are likely to reappear in futuresessions. Congress should reject any mea-sure that could involve the federal govern-

ment in the insurance or reinsurance busi-ness in disaster-prone regions.Help states decontrol homeowners’ insur-•

ance rates. States—not the federal govern-ment—perform nearly all oversight of hom-eowners’ insurance rates. In the long term,

federal policy should encourage states to letinsurers charge risk-based rates that takeall relevant risk factors into account. Many

state insurance bureaucracies suppress ratesin order to cater to homeowners who live inunsafe areas—often simultaneously raisingrates for those who live in safer areas. Thefederal government should offer tax creditsover a phase-out period to homeowners instates that act properly and allow rates torise. This would temporarily offset higherinsurance premiums and allow homeown-ers to secure their homes against naturaldisasters. The tax credits should expire withthe program.Allow private insurers to reserve against•

catastrophes without paying taxes up front. Current U.S. tax law makes it difficult forinsurers and reinsurers to build up reservesagainst catastrophes. Larger reserves couldmake reinsurance more affordable. TheUnited States should implement laws simi-lar to those in Switzerland, Bermuda, andelsewhere that make it possible for insurers

to build up “catastrophic” reserves. Moneyin these reserves could be held tax-free untilspent to pay claims stemming from a majorcatastrophe.

Michelle Minton




Liberalize Homeowners’, Automobile,Life, and Commercial InsuranceRegulation

Currently, insurance in the United States isgoverned by a patchwork of regulations. Somestates have more cumbersome and confusing

rules than others. This hampers innovation, raisesinsurance rates for those who behave prudently,and needlessly expands government bureau-cracy. In the realms of homeowners’, automo-bile, and life insurance—the types of insurancethat most Americans buy for themselves—theUnited States needs a national insurance marketthat leaves rate regulation to market forces. Twomajor options exist for creating such a market.

Interstate insurance choice. Allowing state-regulated insurers to operate across state linesunder the laws of their home state could yieldmany positive consequences without the needto create a new federal agency to administer it.

State-level liberalization. The second op-tion requires only that Congress stay out of the way of states wishing to improve and har-

monize their laws to the point that insurersand consumers have the benefits of a nationalmarket for insurance. All 50 states have en-acted some form of the Uniform CommercialCode as a way of dealing with transactions of personal—that is, moveable—property. Thus,a sufficiently liberal uniform insurance regu-latory law could also accomplish many of thepurposes that a national regulatory regime forinsurance would create without bringing thefederal government into the business of insur-ance regulation.

Michelle Minton




Phase Out the National FloodInsurance Program

Since it emerged in its current form in 1973,the National Flood Insurance Program (NFIP)has done little to meet its supposed purpose

of protecting the nation from flood damage.Instead, it has encouraged development inflood-prone areas, endangered lives, and dam-aged the environment by suppressing rates andfailing to mitigate repeatedly damaged proper-ties in high-risk floodplain areas. Moreover, theprogram’s existence has impeded the emergenceof private flood insurance and imposed billionsof dollars in costs. As of 2010, the program wasdeeply in debt to the U.S. Treasury and askingfor a bailout of nearly $20 billion. Partial priva-tization of the program would require threesteps: improved flood mapping, rate changes,and a free market auction of policies within thecurrent program.

Improved flood mapping. Writing flood in-surance coverage requires complex rate mapsthat make probabilistic determinations of therisk of flooding in various areas. The currentmaps that underlie the flood program are out of date and, despite hundreds of millions of dollars

spent modernizing them, still are not very good.

Good maps would make it possible for privatecompanies to write practical, affordable insur-ance on a large scale. Because flooding involves

so many unknowns, it makes the most sense toallow multiple players to develop flood maps ina competitive market.

Rate adjustment. New improved mapswould allow companies that want to write floodpolicies to adjust rates to make them accuratelyreflect the risk involved. Some rates would goup based on new data while others would fall.In time, a large portion of the NFIP flood poli-cies could be taken over by private insurers.

Auction of remaining NFIP policies. Following a period under this quasi-privatesystem, the National Flood Insurance Programcould auction off its remaining portfolio of policies. Certain high-risk areas likely would berendered not insurable at rates that would offerany real value to those purchasing insurance,which would discourage building in the high-est risk areas—a desirable outcome in terms of both costs and safety.

Michelle Minton




Let Market Forces RegulateInternet Gambling

In June 2010, the 2006 Unlawful InternetGambling Enforcement Act (UIGEA) was imple-mented after years of delays. The law regulates

banking and credit processes related to onlinegambling. This does nothing to protect Americansfrom crime. Instead, it increases the regulatoryburden on American banks and obscures the le-gality of Internet gambling in the United States.Other federal laws, including the Wire Act (whichbans interstate wagering) and the Professional andAmateur Sports Protection Act (which bans moststates from sports gambling), prevent Americansfrom operating within the law.

People enjoy gambling and can legally do soin 48 states. Regardless of its legality, Americansgamble for money online and will continue todo so. Banning the activity or making licens-ing prohibitively difficult will simply encour-age gamblers to play on foreign sites and takegreater risks. In a country where gambling hasbecome a respected, mainstream pastime, theselaws make no sense.

Online gambling of all kinds should belegalized. Letting the free market regulate

Internet gambling will result in the best out-come for gamers, Internet casino owners, andpayment processing companies. Governments

should enforce existing contract and criminallaws against force and fraud. Companies basedin the United States and income earned by play-ers should be treated by the U.S. tax code likeincome from any other lawful endeavor.

Because gambling is essentially an enter-tainment activity where participants enjoy thepossibility of profit, there is no reason to as-sume that private market oversight or certifi-cation programs would be insufficient. Likecruise ship casinos, which voluntarily abide byspecific regulations and agree to audits of theiroperations. Internet casinos could submit toreview by a regulator. Inevitably, competitionamong private auditors would result in greateroversight than one federal watchdog. Auditorscould offer a certificate or rating to guide con-sumers to the sites at which they are most likelyto have fair play.

Michelle Minton




Allow Immigrants Full Accessto the American Economy

As with the free movement of goods and ser-vices across borders, the legally unencumberedmovement of people reaps net benefits for all

parties concerned. Congress should enhancethe benefits of immigration by implementingless restrictive immigration laws, with the ul-timate goal of an immigration system that letsnon-criminal, non-terrorist, and healthy immi-grants from anywhere in the world move to theUnited States.

Government should have no more controlover the flow of people across borders than theflow of capital, goods, and services. Only anunfettered free market in laborers and entrepre-neurs can operate without distorting the econ-omy. As in all other areas of the economy, pricesignals, opportunity and transactions costs, andthe interplay of other economic forces will de-termine the number and quality of immigrants.

The standard argument in favor of our cur-rent restrictive immigration laws—that suchlaws are necessary for security and to protectAmerican workers from an influx of cheap for-eign competition—do not hold up to scrutiny.

Immigration critics charge that immigrants, re-gardless of lawful status, depress the wages of American workers. At the most, this is true fora small subset of the American population thatcompetes directly with foreign labor. But forthe vast majority of Americans, freer immigra-

tion would result in an increase in their wagesand returns on investments. This is because theskills immigrants possess tend to complement

the skills of American workers. Except in themost menial of jobs, immigrant and Americanworkers are rarely substitutes for each other.

Immigrants are also entrepreneurial.According to the Kauffman Foundation, immi-grants are 60 percent more likely to be self-em-ployed than native-born Americans. The ben-efits of immigrant entrepreneurship spill overinto the rest of the American economy, creat-ing employment opportunities for Americansand greater profits for many American serviceindustries, like accounting, financial services,and the legal professions. Failure to reformAmerica’s immigration policy risks denying en-trance to entrepreneurs like Google co-founderSergey Brin, who came to the U.S. from theSoviet Union as a child.

Congress should free immigration authori-ties to focus on security. America’s immigrationauthorities are stretched thin raiding work-places, checking permits, and screening clearly

non-violent people for entrance. Congressshould move the immigration system awayfrom work permits and back toward a systemthat only excludes criminals, terrorists, or thosecarrying serious, deadly, and highly contagiousdiseases. In the meantime, Congress should:





Lift all quotas for work visas.•

Allow employees, rather than employers, to•

hold work visas.Allow visa holders to change jobs without•

government approval.

Allow visas to be issued for an unlimited pe-•

riod of time, subject to revocation if the visaholder commits a serious felony.

Alex Nowrasteh




Protect Federalism

The Framers of the Constitution intendedfederalism to act as a check not only on the na-tional government, but on state governments as

well. In addition to the relatively well-knownlimits on Congress, the Constitution imposes anumber of limitations on the states. For exam-ple, the Compact Clause (Article I, Section 10)prohibits states from entering into agreementswith other states without congressional ap-proval. This was intended to restrict the abilityof groups of states to gang up on other states oron the federal government.

But the constitutional restraints on boththe federal government and on the states havebeen severely weakened. Quite clearly, therehas been a growing federal intrusion into stateand local issues, epitomized by ObamaCare’smassive imposition of new obligations onstates.

Less obviously, states themselves have be-gun to create a new level of national regulationthrough state attorneys general (AGs) acting in

concert. In areas ranging from financial regula-tion and tobacco control to global warming andfuel economy mandates, state attorneys generalare entering into new alliances aimed at impos-ing national regulatory schemes via litigation.These joint litigation campaigns are often fueledby lucrative deals between state AGs and privatelawyers, and many states join simply because suchlawsuits have the potential to generate huge sumsof money. Under the Constitution, such joint cam-paigns by the states require advance congressionalapproval. Congress should actively review them,rather than sit on the sidelines while state officialsimpose new national regulations by default.

Sam Kazman




Avoid Hindering the Internet’s Evolutionthrough Net Neutrality Regulation

In 2010, Congress failed to enact legisla-tion authorizing the Federal CommunicationsCommission (FCC) to enforce network neutral-

ity rules. In 2011, Congress is widely expectedto again take up net neutrality, a policy thatwould make it illegal for broadband provid-ers to “unreasonably” discriminate among dif-ferent kinds of Internet traffic. Net neutralityregulations would obstruct beneficial marketarrangements for distributing digital content.Worse, they would stifle infrastructure wealthcreation in network industries by underminingproperty rights and turning market contestsover network pricing and access disputes intopolitical battles.

Advocates of neutrality regulation arguethat is necessary to prevent Internet service pro-viders (ISPs) from either censoring or degrad-ing certain kinds of traffic. However, neitherof these concerns justifies federal regulation of Internet providers.

Censorship.• Many consumers do not believethat Internet service providers and othernetwork operators, like wireless telephone

carriers, should be in the business of judgingthe appropriateness of lawful network traf-fic. But not all consumers oppose filtering atthe network level, which can be a valuabletool for safeguarding children from inap-propriate content, for example. Broadband

providers will not be able to satisfy their us-ers’ diverse preferences, if network filteringis regulated by the federal government—

whether in the form of an outright ban onfiltering or a requirement that providersfilter certain types of content. If broadbandproviders engage in overbroad filtering,they will face consumer backlash and com-petitive responses. In recent years, a handfulof providers—including Verizon Wireless,T-Mobile, and Cox—have dabbled withcontent filtering. In each instance, popu-lar opposition has been swift and fierce.Like all firms competing in a marketplace,broadband companies care about theirreputation. Unreasonably blocking lawfulcontent that users desire is a surefire way tolose friends and make enemies. Firms willmake mistakes from time to time, but thistrial-and-error process is the only effectivemethod of ensuring that consumers’ evolv-ing preferences are satisfied in the long run.Network Management.• Perhaps the mostcontentious question in the neutrality de-

bate is how network traffic should be man-aged. Proponents of neutrality regulationbelieve that Internet providers should berequired to obtain the federal government’sblessing before engaging in any networkmanagement technique that involves the






Protect Free Speech by RejectingContent Regulation

In recent years, the First Amendment’s pro-tections have been increasingly extended tocommercial speech, such as product advertise-

ments and even political messages. However,significant gaps in these protections still exist.Many states have attempted to regulate thecontent of video games in recent years, whilefederal regulations on drug and medical de-vice advertisements inhibit individuals’ abil-ity to learn about well-documented scientificfindings.

As new technologies provide an ever-grow-ing array of media, Congress will face increas-ing pressure to impose content regulations—in-cluding regulations on video games, blogs, andsocial networking websites such as Facebook.

As portable devices such as iPods and cellphones become increasingly equipped for videoand multimedia playback, regulation advocates

will push for laws governing what can and can-not be viewed in public areas, under the guiseof protecting children from harmful material.Such regulations should be avoided. Parents,not government regulators, are best equipped todetermine what content is appropriate for theirchildren. Moreover, all such regulatory venturespose a threat to free speech. Regulations aimedat protecting children from “inappropriate”content often have a chilling effect on adultspeech as well.

Ryan Radia and Wayne Crews




Advance a Global Pro-Trade Agenda

Increasing liberalization of world trade isa key factor behind the dramatic increase inglobal prosperity since the 1950s. However, in

recent years, free trade and globalization havecome under assault from populist politicians.This demagogy has led to some costly real-world consequences. Free trade agreements(FTAs) with friendly nations negotiated yearsago remain stalled by Congress. Some lawmak-ers decry China’s currency “manipulation” asan unfair subsidy and seek to impose retaliatoryduties on Chinese imports, even though lowerprices on Chinese goods benefit American con-sumers. And internationally, the World TradeOrganization’s (WTO) Doha Round remainsstalled due to rich countries’ reluctance to re-duce their extensive agricultural support pro-grams, which distort the world market andharm developing countries’ ability to compete.

The progress that more open trade can bringis increasingly threatened by efforts to insertenvironmental and labor standards into tradeagreements, which function as a form of dis-guised protectionism. Imposing American- or

European-level environmental and labor stan-dards on developing countries would deprivepoor people of jobs and harm the environment inthose countries by undermining their economies’varying competitive advantages. There is also amore recent push to introduce carbon border

taxes to penalize countries that have not takensteps to enact Kyoto Protocol–like regimes. Yetincreasing wealth—via liberalized trade—is a

key to raising both labor standards and environ-mental protection in the developing world.Some constituencies seek this disguised pro-

tectionism. In the United States, organized laborwould like to restrict labor market competitionfor its members by thwarting internationaltrade liberalization as well as bilateral tradenegotiations. Environmentalists likewise wouldlike to “export” U.S. environmental mandatesto poor countries.

In addition to its economic benefits, tradeliberalization can help improve relationswith neighbors, allies, and emerging nations.Congress should approve pending bilateraltrade agreements with Colombia, Panama, andSouth Korea. These free trade agreements werenegotiated years ago, and all three countriesare U.S. allies. The U.S.-Korea FTA has beenendorsed by the Obama administration, but itsimplementing legislation has to be approvedby Congress. That agreement would not only

be an economic boon to both countries, butwould strengthen political ties with one of theU.S.’s staunchest allies in East Asia.If closer tieswith trading partners are not negotiated, theU.S. stands to lose out on increased economicgrowth through trade.





More open trade greatly benefits consum-ers. Too often, consumers have been neglectedin the mercantilist assumptions that framemost trade debates: “Exports good, imports

bad.”Since the end of the Second World War,

American presidents and majorities in Congressfrom both parties have consistently pursued

trade liberalization as a key American inter-est. The Obama administration and the newCongress should resist calls for divisive andmisguided protectionist measures that would

harm our fragile economy and isolate the U.S.from its international interests.

Fran Smith




Counteract Politicizationof Federal Science Policy

The federal politicization of science in manyareas is harming science itself. Ethics rules andadvisory panel guidelines are imposing signifi-

cant restrictions on scientists’ involvement withfor-profit entities, thereby freezing commercialinterests out of the science policy debate andin effect isolating the market from the market-place of ideas. With industry R&D investmentnow double federal funding for the same, this isa significant problem.

Moreover, government patronage todaythreatens to distort science in several areas. Wehave seen stark evidence of this in the Climategatescandal, where a clique of scientists who were

recipients of large amounts of federal sciencefunding, even some based overseas, conspired toensure their interpretation of science remained

the dominant one to the exclusion of those out-side the system. If science is to be insulated fromthe risks associated with patronage, a new, in-novative system of federal funding needs to beadopted. One option is the replacement of thecurrent grant system with one based on prizes,lotteries, and loans—a system that would reducethe influence of the politician and grant officerand increase the freedom of the scientist.

Iain Murray




Resist New Burdens onthe Transportation Sector

The transportation industries—airline, rail-road, shipping, and trucking—are networks in-volving both a flow and a grid. The flow element

relates to what is being transported—such asairplanes and trains—and the grid is the physi-cal infrastructure used to manage the flow—such as airports and air traffic control. Sometransportation industries have been freed of ex-tensive federal regulation over both elements,including railroads and trucking. However, airtravel had only its flow element—the airlines—economically 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 genuine

“open skies” agreement with the EuropeanUnion, and remove laws that restrict foreigninvestment in American airline companies.

Encourage private investment in freightrail. Attempts to roll back the successful 1980Staggers Act and reregulate America’s freight

railroads must be resisted. The Staggers Act hasenabled a genuine market to operate in whichthe railroads are finally able to make a sustain-

able rate of return and invest in badly needednew infrastructure. Re-regulation would suf-focate new infrastructure investment and leadto greater highway congestion. Rail also suffersin that its main infrastructural competition—the nation’s highway system— is government-owned. Congress should consider tax reforms tomake it easier to invest in rail infrastructure.

Privatize passenger rail. Amtrak is an ineffi-cient waste of taxpayer money. Congress shouldpursue privatization of Amtrak’s routes and in-frastructure, through such preliminary reformsas breaking up the network. Competition in pas-senger rail choices can only benefit travelers.

Liberalize air travel. Congress should re-ject attempts to tax airlines on environmentalgrounds, which would be extremely harmfulto the industry. Congress should also revise, orrepeal, outdated rules that forbid industry con-solidation or foreign ownership. Privatizationand modernization of the air traffic control

system would allow faster flights, reduce delaysat airports, save up to 400,000 barrels of oilper day, and reduce greenhouse gas emissionsaccordingly. There is no need to reinvent thewheel. Canada’s successful air traffic controlprivatization offers a useful model.





Move to a risk-based transportation securitymodel. According to experts, the long lines atairports since the increase in general security fol-lowing 9/11 cost the U.S. economy $8 billion a

year, and divert passengers onto the roads, witha significant increase in road traffic deaths as aresult. Yet most of this security effort is wasted,aimed at people who could not possibly posea security risk. To speed up lines and therebyremove this barrier to air travel, policy-makers

should allow private firms to compete withthe Transportation Security Administration,introduce a risk-based security model that al-lows low-risk passengers to move more quickly

through the system, and permit a RegisteredTraveler scheme for those willing to subjectthemselves to extra security clearance in orderto allow business travelers expedited travel.

Iain Murray




Put Mobility First inSurface Transportation

Surface transportation policy has becomeless rational and more ideological in recent de-cades. Environmentalists, urban planners, and

their allies have succeeded in diverting resourcesfrom expanding highway capacity to mass tran-sit, even as road congestion has dramatically in-creased. Highway user-generated tax revenuesare being diverted to fund mass transit, whiletransportation planners are choking off neededhighway infrastructure upgrades by supportingpolitically favored but economically inefficientprograms at the state and local levels.

When the Highway Trust Fund’s HighwayAccount was depleted in 2008, William W.Millar of the American Public TransportationAssociation ironically claimed a proposal fromthe Bush administration to loan the HighwayAccount funds from the Mass Transit Accountwas akin to “robbing Peter to pay Paul.” He gotthis backwards. In fact, mass transit subsidieslargely rely on robbing Peter the driver to payfor Paul’s train ticket. Congress should seek toenhance mobility by doing the following:

Eliminate the Highway Trust Fund’s Mass•

Transit Account. The Highway Trust Fundwas established to fund highway mainte-nance and expansion. It captures revenuefrom excise taxes on products such as gaso-line and diesel—in other words, from usersof the highway system. The Mass Transit

Account receives more than 15 percent of gasoline tax revenue (some in Congress pro-pose increasing this to 20 percent), which

subsidizes mass transit capital investmentand users in the form of artificially lowfares. If there is to be a Highway Trust Fund,revenue should be dedicated to projects thatbenefit those who pay the excise taxes tofund it.Allow “free” highways to be converted to•

turnpikes. Currently, 23 USC 129 prohib-its the federal funding of turnpikes on theInterstate system, both construction andconversion. Striking subparagraph (a)(1)(D)would permit Interstate “free-road” conver-sion to toll roads, allow for fairer and moreefficient user-generated revenue, and permitmore innovative private-sector involvementin financing and management. Congressshould consider a longer-term phase-in pe-riod of tolled Interstate highway segmentsand the phase-out of “free” roads and theHighway Trust Fund. In addition, Congressshould encourage the development of high-

occupancy toll (HOT) lanes, rather than un-priced high-occupancy vehicle (HOV) lanes.Promote highway concessions and divesti-•

tures. As states across the country continueto struggle with meeting their balanced-budget requirements, easing their trans-





portation expenditure burdens throughprivate-sector involvement should be wel-comed and promoted. Congress should al-low the Federal Highway Administration to

greatly expand the SEP-15 program, whichpermits the FHWA administrator to waiveproject compliance obligations under Title23 on a case-by-case basis, as well as vigor-

ously promote the potential benefits to statetransportation authorities. Several stateshave already implemented innovative pub-lic-private partnerships through the SEP-15

process, which has saved taxpayers billionsof dollars.

Marc Scribner




Reform the TransportationSecurity Administration

Reform of the Transportation SecurityAdministration (TSA) is long overdue—as therecent passenger backlash against both the

TSA’s new backscatter full body scanners andthe enhanced pat-downs for those who opt outof the machines suggests. These new measuresmerely attempt to “fight the last war” ratherthan genuinely increase security for flyers.Meanwhile long lines at airports impose a sig-nificant economic cost on the nation and forcesome people on to the roads, where they aremore likely to die in traffic accidents. Racialprofiling, which some have suggested, is not theanswer, as it is far too blunt a tool to providegenuinely increased security.

Instead, the TSA should be reformed toallow more flexibility and to introduce risk-based security into passenger flights. A compre-hensive TSA reform package would have threeelements:

End the TSA’s monopoly on airport screening• .A 2007 study for the TSA found that privatescreeners consistently outperformed the TSAbureaucrats, so the TSA suppressed it, earn-

ing the agency censure from the GovernmentAccountability Office. Airports should be al-lowed to opt out of the federal system andhire their own screeners, who will be moreresponsive to customers, and must complywith federal regulations in any event.

Remove certain categories of passengers•

from the intensive screening process. As in-ternational security guru Edward Luttwak

put it in a Wall Street Journal op ed, “easilyrecognizable groups that not even the mostingenious terrorists could simulate” shouldnot be viewed as equal in risk to othersgroups or individuals. Examples include“touring senior citizens traveling together(a category that contains a good portionof all American, European and East Asiantourist traffic), airline flying personnel whocome to the security gate as a crew, familiescomplete with children.” As Luttwak sug-gests, the critical question would be whethermembers of those groups “recognize eachother as such.”Introduce a robust frequent traveler system• .This would enable members who undergoextensive background checks to bypasscertain security checks. Background checkssimilar to those required for airport work-ers would be appropriate.Removing large numbers of travelers from

the pool of potential suspects would enableairport screeners to concentrate on those whomight pose genuine risks. It would also reducethe number of agents needed, in turn enablingthe hiring of more highly qualified personnel,who would treat people as customers rather





than cattle. These reforms would in turn makeIsraeli-style screening far more achievable,something that might otherwise turn into a te-dious box-checking exercise for the agents if it

were implemented under the current securityregime.

Iain Murray





Protect the Environment






The right to property is an essential part of a free society, and widespread private propertyownership is a chief limitation on government

power and growth. Property rights have tradi-tionally been more secure in the United Statesthan in any other country. However, this is be-ing severely eroded with respect to ownershipof real property, as the Supreme Court dramati-cally underscored in its 2005 Kelo decision,which deprived homeowners of their right toprivate property to allow commercial develop-ment. Private property has also been under-mined by the Endangered Species Act (ESA),wetlands regulation under the Clean Water Act,and other environmental laws and treaties.

Lawmakers should advance the constitu-•

tional principle of private property by re-

forming laws that adversely impact land-owners to demand that government at leastprovide compensation when property values

are decreased by regulatory measures.Lawmakers should ensure that govern-•

ments—at all levels—do not have the rightto seize private property for the purposesof commercial development. When theFramers of the Constitution establishedeminent domain, they did not intend it tobe used to allow one private party to bene-fit at the expense of others. Public policiesshould ensure that use of eminent domainbe restricted to cases of legitimate publicuse.

Angela Logomasini

Restore the ConstitutionalRight to Property




Embrace Private Conservation of Landand Natural Resources

Private stewardship and markets play acritical role in land and natural resource con-servation. Much of America’s land and other

natural resources have suffered because gov-ernment ownership encourages mismanage-ment and overuse, because no individual has along-term stake in protecting resources ownedin common. In addition, public lands are man-aged based on political priorities that oftenproduce misguided political management deci-sions. Examples include the devastation causedby uncontrolled forest fires, overgrazing, anddestruction of species and habitat.

Lawmakers should consider marketplace•

incentives and private property-based ap-proaches to encourage land and natural re-source conservation.

Existing laws impede private conservation•

by making property owners lose use of theirland. These laws should be reformed. These

include measures in the Endangered SpeciesAct, wetlands regulations, and potential in-vasive species laws.Lawmakers should look for ways to priva-•

tize resources owned in common to allowprivate conservation. Areas in which thishas been done successfully but could beexpanded include the establishment of fish-ing rights, privatization of coral reefs, andprivatization of species and their habitats inprivate wildlife refuges.

Angela Logomasini and CEI Staff




Protect Endangered Species

The Endangered Species Act (ESA) of 1973is bad for wildlife, because it is bad for people.It has largely failed to protect endangered plants

and animals because the threat of regulatory“takings” creates perverse incentives, inducingproperty owners to ensure that their land neverbecomes habitat or potential habitat for an en-dangered species.

Congress should replace the ESA with a•

non-regulatory, incentive-based conserva-tion program to encourage private landown-ers to protect and provide habitat. Propertyowners’ natural incentive to be good stew-ards of their land can work in concert witheffective species protection.Absent reforms that eliminate the ESA’s pu-•

nitive land use regulations, policies should

require just compensation for landownerswho are deprived of the right to use theirland and whose lands are devalued by gov-

ernment regulation.Another policy change that would help•

species would be elimination of the estatetax. The costs of these taxes often forcefamilies to sell off estate properties to de-velopers to pay for the estate taxes on theproperty. In many cases, individuals wouldrather keep the properties free from devel-opment, but high inheritance taxes makethat impossible.

Angela Logomasini and Robert J. Smith




Clarify the Role of Invasive Species

In the past, policies addressing problemplants and animals followed a rational path:They focused on controlling organisms that

posed serious threats to agricultural crops andother valued American plants and animals aswell as public health. However, the issue associ-ated with so-called invasive species is movingin a new direction, leading to an almost re-ligious crusade to rid the nation of all “non-native” plants and animals. Despite claims tothe contrary, many non-native species providevaluable public benefits. Wholesale eradication,instead of management, promises to cause moreproblems than it would solve. It would resultin wasted taxpayer dollars and reduced accessto many valuable plant and animal products.

In addition, these polices are likely to expandfederal land use regulations, undermining theconstitutional right to property.

Policy makers in Congress and in the admin-istration should focus on developing a scientifi-cally sound definition of invasive species—onethat focuses on harmful and noxious character-istics rather than on country of origin.

In addition, lawmakers should includelanguage in all legislation involving this is-sue stating that all affected landowners willreceive compensation for any economic costsplaced on them to meet any invasive speciesregulations.

Angela Logomasini and Robert J. Smith




Develop New Approaches to PreserveOcean Resources

The world’s fisheries face severe decline.Because many of the world’s ocean resources arenot “owned,” they tend to be overexploited—as

everyone attempts to fish out of the ocean as muchas possible before competitors can consume theresources. Several governments actively subsidizesuch destructive practices in attempts to protecttraditional fishing industries. However, wheregenuine, tradable rights have been assigned toocean resources (as in New Zealand), owners of these rights help ensure long-term conservationand at the same time increase their profitability.Meanwhile, where those rights are bureaucrati-cally controlled, as with the National Oceanicand Atmospheric Administration’s (NOAA)“catch share” program, fishermen have insteadsuffered needlessly.

Similarly, private establishment and owner-ship of artificial reefs have helped preserve habi-tats, while government attempts to create artifi-

cial reefs have been catastrophic failures. Manyof these man-made structures provide criticalhabitat and ensure plentiful fish supplies.

Such promising policies hold the key to en-suring long-term sustainability of the world’sfishery resources. A recent study published inScience magazine found that if property rightsin fisheries had been instituted globally from1970, then the incidence of fishery collapsewould have been reduced by two-thirds. Fishstocks, furthermore, would be rising rather thanfalling. Failure to implement such schemes—orimplementing such schemes in a distorted man-ner—for ideological reasons represents a grossdisregard for the future of our oceanic ecologyand resources. Congress should end NOAA’sbureaucratic schemes and extend genuine prop-erty rights to this valuable resource.

Iain Murray




Solid waste. Many of the nation’s currentsolid waste policies follow an outdated, po-liticized, and government-centered model. State

and local regulators focus on deciding howmuch waste should be recycled, placed in land-fills, or burned in incinerators. This approachfails to discover the most environmentally andeconomically sound mix of options. Policy mak-ers lack the necessary information and thereforefocus on misplaced perceptions about the vari-ous disposal options. As a result, they producerecycling programs that cost more than theysave and use more resources than they save. Incontrast, private sector competition between re-cycling, landfilling, and incineration produces amarket that reduces costs and saves resources.

Federal policy makers should resist attemptsto increase federal regulation in solid waste dis-posal. Local governments should seek ways toincrease private markets in the waste disposalindustry. They should change waste policiesto allow market-driven competition betweenvarious disposal options—allowing recycling,landfilling, and incineration companies to com-

plete so that the most environmentally and eco-nomically sound mixture of disposal optionsresults.

Electronic waste. Increasingly, news reportsand environmental activists claim that we arefacing a new solid waste crisis. As a result of

such rhetoric, Europe has passed several “e-waste” laws, U.S. states have begun lookinginto their own regulations, and members of

Congress have proposed federal legislation.Unfortunately, misinformation and the mis-guided notion that government is positioned toimprove electronic waste disposal is leading tomisguided policies and legislation.

Despite claims to the contrary, there is no•

“e-waste crisis.” E-waste risks and costs aremanageable by allowing private recyclingand disposal efforts to continue.Manufacturers should not be forced to take•

back electronic equipment, since they are inthe manufacturing, not disposal, business.Some firms have voluntary programs forrecycling computers, which offer a market-based approach for some products.Congress should avoid creating new govern-•

ment e-waste programs, as they promise topromote inefficiencies, increase environmen-tal problems, and hinder market solutions.Consumers should not be taxed when they•

purchase computers or other electronics,

but they should be responsible for dispos-ing of discarded products in a safe and legalfashion. Disposal may include paying some-body to dispose of the product via a vol-untary private party agreement or disposalthrough local government trash collection.

Trash CounterproductiveWaste Disposal Policies





Hazardous waste. Federal hazardous wastepolicy—as embodied in the Superfund law andthe Resource Conservation and Recovery Act—has long been governed by federal misman-

agement, perverse incentives, unjust liabilityschemes, and misuse of science. The Superfundregime of randomly taxing and suing partiesnot actually responsible for hazardous wastecontamination needs reform. Policies shouldtarget those who have produced harm—anapproach that rewards good behavior and dis-courages bad.

Hazardous waste sites are exclusively a•

state and local concern. Given the demon-

strated success of states in managing suchsites locally, there is little reason for federalinvolvement. Thus, Congress should seekways to further devolve the program to thestates.

Absent devolution, hazardous waste pro-•

grams should be reformed to provide regu-latory relief by setting standards that con-sider the use of the land and that are not

needlessly onerous.Liability schemes should be reformed to•

ensure that only the parties directly respon-sible for polluting should be held liable.Currently, the Superfund law holds any-body remotely connected to a disposal siteliable even if that party did not have anycontrol over the site or the contamination.Parties unfairly held liable include genera-tors of waste that was eventually disposed

of at a site, parties that hauled waste to asite, and parties that gained ownership of polluted property.

Angela Logomasini




Recognize the Elitist Natureof Anti-Sprawl Measures

For the greater part of the last century,many people have sought the American Dreamby raising their families in suburbs. But to-

day, anti-sprawl activists blame the suburbsfor a host of environmental and social ills,and push initiatives to limit housing growthto high-density patterns. In fact, the headsof the Environmental Protection Agencyand the Departments of Housing and UrbanDevelopment and of Energy have jointly is-sued a set of “livability principles” for “sus-tainable communities.”

Such initiatives often end up raising hous-ing prices while exacerbating the very problemsthey claim to fix, such as traffic and pollution.

Their main effect is to make suburban livingaffordable only for the well-to-do.Federal programs that subsidize suburban

development should be restricted or eliminated,but so should programs that boost urban de-velopment, whether via subsidies or outrightcoercion.

Sam Kazman




Affirm the Role of Property Rightsin Water Rights Policies

Battles over limited water supplies in theUnited States and around the world have longproduced conflicts and costs to affected com-

munities. While limited supplies are a problemin and of themselves, political management of water is the key problem. Government controlof water allocation generally produces ineffi-cient and unfair results.

A property rights-based system could alle-•

viate water shortages and pollution prob-

lems by properly pricing water resourcesand giving parties a stake in ensuring waterquality.

Policy makers should rethink current ap-•

proaches to facilitate water markets, whichhave developed in some areas and showgreat promise.

Angela Logomasini




Reform Wetlands Policies

Wetlands regulations do a poor job of pro-tecting wetlands habitat. Much federal regu-lation focuses on preventing development on

lands that are dry most days of the year andthat do not provide useful habitat for wildlife.In contrast, private initiatives have successfullyensured the protection, restoration, and cre-ation of vital wetlands habitat around the na-tion. Yet federal wetlands regulations have seri-ously impeded such private wetlands protectioninitiatives, and even have forced some partiesto abandon attempts to provide such habitat.Policies that can better ensure private wetlandsprotection, while eliminating destructive andneedless red tape, include the following.

Congress should replace the Section 404•

regulatory program, which regulates the

dredging and filling of lands, with a non-coercive, incentive-based program.At a minimum, the federal government•

should provide financial compensation toproperty owners who lose the use of theirland due to wetlands regulations.State efforts, non-regulatory federal pro-•

grams, and private conservation would doa better job of protecting ecologically sig-nificant wetlands than could the existingfederal regulatory approach. These stepswould enhance the protection of wetlandsand private property without increasingthe costs of conservation to taxpayers or tolandowners.




Improve Health and Safety






Reject the Precautionary Principle,a Threat to Technological Progress

Increasingly, governments and environ-mental activists are demanding that produc-ers of both new and old technologies prove

that their products are totally safe. Althoughthis “better safe than sorry” attitude mayseem like a reasonable approach to risk regu-lation, health and environmental risk issuesare not so simple. Nothing is totally withoutrisk, and the reason for adopting new tech-nologies in the first place is that they oftenimprove our well-being by protecting us fromthe risks of older, more established productsand practices. Even very risky new technolo-gies may often be better than the alternatives.However, from industrial chemicals to con-sumer products and everything in between,advocates of precautionary regulation insistthat the mere possibility of one increased riskshould be sufficient to take useful productsoff the market or prevent them from ever be-ing used.

New medicines protect us from diseases,even though there is always a risk of side ef-fects. Automobile innovations, from airbags

to antilock brakes, make traveling safer,even though they pose their own risks. Andfood and agriculture technologies—such aspreservatives, pesticides, and bioengineeredcrops—help make our food supply safer andless expensive, and lighten farming’s impact

on the environment. So, by demanding perfectsafety, a precautionary regulatory philosophycan actually make our world less safe by de-

nying society the benefits of new technolo-gies. Regulation’s proper goal should be topermit experimentation and the introductionof new technologies, while balancing the riskof moving too quickly into the future againstthe very real risk of lingering too long in thepast.

Just as importantly, the precautionaryprinciple too often is applied in a highly po-liticized manner to disadvantage technologiesthat are unpopular or controversial. Althoughmany established practices—such as organicfarming, “natural” and homeopathic rem-edies, alternative energy sources, and count-less others—pose known risks that are oftenfar greater than those posed by the new in-novations that might supplant them, the pre-cautionary principle has never been applied torein in those risks. The principle contains noprocedural protections for innovators, and itgives regulators nearly unbridled discretion to

ban or burden technologies and practices theydisfavor.

A better approach to risk regulation wouldbe to more explicitly recognize the human healthand environmental benefits that new productsbring with them, while recognizing that existing





practices are not risk-free. Where possible, regu-latory authorities should be required to demon-strate with clear and convincing evidence thatnew products and practices will do more harm

than good before they can keep those productsand practices off the market.

Gregory Conko




Over the past century, American consumershave benefited from thousands of new pharma-ceuticals and medical devices to help them com-

bat disease, alleviate the symptoms of illnessand 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 they can market a new treatment.

A strong dose of over-caution when the FDAapproves new drugs and devices may sound likea virtue, but for patients in need of new treat-ments, regulatory over-caution can be deadly.Patients can be injured if the FDA approves atreatment that is later found to be unsafe, butthey are also harmed when needed treatmentsare delayed by regulatory hurdles.

FDA, however, is predominantly focused onthe first of these two risks, for political reasons.Agency approval of a drug or device that turnsout to be unsafe will lead to front-page head-

lines and congressional hearings, while delayor denial of a needed new treatment stirs littlepublic notice. Patients may suffer or die as aresult of FDA delays, without them or theirfamilies ever knowing that a possible treat-ment exists, let alone that it was blocked by the

agency. As a result, the FDA is under constantpressure to assure the safety of new medicalproducts, but under little pressure to speed up

their availability.Many doctors, patient groups, and publicpolicy experts recognize that FDA’s lengthyprocess for approving new drugs and devicesoften costs lives by denying patients potentiallybeneficial new treatments. Polls of medicalspecialists commissioned by the CompetitiveEnterprise Institute over the past 15 years haveconsistently found that majorities of doctors invarious specialties believe that FDA is too slowin approving new medical products and thatthese delays mean that patients are not receiv-ing the best possible care.

When making safety evaluations, the FDA isrequired, by statute, to determine the appropri-ate balance between patient safety and medi-cal product effectiveness. But more thoroughstudy of drugs and devices during clinical tri-als (both pre- and post-approval) has its ownweaknesses. First, even very large clinical trialsgenerally cannot include enough subjects to de-

tect rare side effects. Second, large trials involvediverse populations with many subgroups thatoften are not easy to identify. Consequently, afew individual adverse events do not necessar-ily mean that a product is inherently unsafe forall patients. A given adverse event may not have

Reduce Burdensome Regulationof Medicines and Medical Devices





been caused by the treatment, or if it was, itmay be confined to a small subpopulation.

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 product’s ben-efits and the attendant risks associated with it.Therefore, treating the entire population of theUnited States as identical means that FDA in-evitably makes regulatory decisions that will betoo cautious for some and not cautious enoughfor others. Significant political pressure gener-ally pushes the agency toward over-caution,

and the end result is fewer new drugs anddevices, as well as greater loss of life to whatshould be treatable illnesses. Those who viewthe FDA’s approval process as too quick mayfreely choose to use only products that havebeen on the market for several years with amore well-established record of safety and ef-ficacy. Unfortunately, those who seek access tomedical products before the FDA has fully ap-proved them have little or no choice.

Beginning in the early 1990s, the tremen-dous social cost of FDA overregulation hadbecome apparent, so Congress and the agencytook several steps to streamline the approvalprocess. The Prescription Drug User Fee Act of 1992 sped up the drug approval process, sav-ing an estimated 180,000 to 310,000 years of life for patients who relied on newly approvedproducts. The 1997 FDA Modernization Act,for example, granted the agency authority to re-

duce the number of clinical trials needed for ap-proval and to expedite the review of treatments

for serious conditions. But today, FDA is againunder tremendous pressure from Congress andself-styled consumer advocates to slow downthe approval process and to reject drugs that

appear to offer only modest benefits or benefitsfor only small patient sub-populations.

In 2007, Congress passed the FDAAmendments Act, which provided the agencywith additional authority to make pre- andpost-market safety studies and clinical trialsstricter. The Act also requires FDA to announcepublicly even very minor or hypothetical safetyconcerns, which tends to raise undue alarmamong patients. It also requires the agency to

consider using Risk Evaluation and MitigationStrategies for each new approved drug, whichcan restrict which doctors may prescribe newdrugs, which patients may use them, and whichpharmacies may fill certain prescriptions.Rather than increase drug safety, these changes,combined with the FDA’s innate risk aversion,tend to harm patient health by reducing theavailability of new medical products.

Individual patients and their doctors are in

a far better position than the FDA to balancethe risks and benefits of individual new treat-ments. The agency should focus on providingthem with information rather than on restrict-ing their choices. In forthcoming legislation,Congress should seek to accelerate the pace atwhich the FDA reviews new drug and deviceapplications, and it should repeal many of therecent policies that make FDA regulation dan-gerously overcautious.

Greg Conko and Sam Kazman




Drinking Water.Drinking water policy shouldfocus on how best to ensure that Americanshave clean and safe water to drink. Currently,

many communities are forced to spend limitedresources to meet misguided and scientificallyquestionable federal mandates. States and lo-calities are better able to set priorities based ontheir particular needs. Moreover, drinking waterpolicy would benefit from a more market-drivenmodel, one that allows for more private innova-tion in the provision of drinking water services:

Congress should return full authority to set•

standards to the states, allowing them towork with localities to meet their specificneeds.Should the federal government remain in-•

volved, there are ways to help empowerlocalities within a federal framework.Congress should engage in greater reviewof safe drinking water rules to ensure thatthe Environmental Protection Agency hasemployed the “best available science” as de-manded under the law. If large questions re-main over science, and standards are likely to

impose considerable costs, Congress shouldpreempt overly stringent standards.Congress should consider ways to grant•

states discretion on how to regulate naturallyoccurring contaminants, such as radon andarsenic, to reflect localized levels of risk.

Water Quality. Waterways throughout theUnited States have suffered from various pollu-tion problems because they have long been held

in common, so no one was in charge of keepingthem clean. Congress passed the Clean WaterAct in the 1970s, which has been a mixed bless-ing. While many waterways have seen improve-ments, the program is very bureaucratic, andit has promoted too much expensive litigationthat focuses on paperwork violations ratherthan on improving water quality. The scienceunderlying many of the regulations is weak. Inaddition, parts of the Act have proven ineffec-tive, such as programs addressing non-pointsource water pollution (water runoff fromlands). Policy makers should look at innova-tive, market-based systems for advancing waterquality:

Instead of focusing on paperwork viola-•

tions, policy makers should hold pollutersliable for the actual harm they cause toother persons or to their property.States need flexibility. Because the science of •

water pollution control is evolving, and be-

cause each state and watershed has differentneeds and problems, Congress should givestates flexibility in water quality manage-ment approaches.


Purify Federal Water Policies




Ensure Consumers’ Accessto Bottled Water

Bottled water offers many important bene-fits—including portability, emergency applica-tions, and convenience. The bottled water indus-

try had been particularly valuable during majorcrises, such as the September 11, 2001, terroristattacks, Hurricane Katrina, and other calamities.Nonetheless, recent attacks against bottled waterby environmental activists threaten to underminethis industry and impede consumer freedom.

Some states have enacted regulations andtaxes largely on the basis of unfounded claimsabout bottled water. For example, some envi-ronmental groups claim that most bottled wa-ter is simply re-bottled tap water. Yet only 25percent of bottled water comes from munici-pal sources—the rest comes from springs andunderground sources—and most of the munic-ipal-source water undergoes extensive treat-ment before bottling that involves additionalpurification and other processing to improveflavor and quality.

In addition, all bottled water must meet spe-cific standards before bottling, and unlike pipedelivery systems for tap water, sanitary packag-

ing enables transport of bottled water with avery low risk of contamination. All bottled watermust also meet Food and Drug Administration(FDA) regulations—most of which mirror

Environmental Protection Agency (EPA) tapwater regulations and some of which exceedthose regulations. Accordingly, the EPA and

the Centers for Disease Control and Preventionrecommend bottled water as a safer alternativeto tap water for individuals with compromisedimmune systems.

Because of the hype, Congress may considerregulation of bottled water such as new label-ing mandates. Yet most bottles of water containinformation on water source. Consumers whocare to do so can choose bottles with such in-formation on the market, thus creating demandfor specific types of labeling. Currently, FDAregulates the terminology to prevent fraudulentclaims. Regulations requiring additional infor-mation are unlikely to change consumer pur-chasing habits and could simply increase confu-sion and costs.

Bottled water is popular with the public forits convenience, freshness, and healthfulness.Congress should not impose new regulationsthat will impede consumer choice and raisecosts. Consumers who do not want to drink

bottled water can choose other alternativesrather than regulate options for others.

Angela Logomasini




Enhance Auto Safety

Automotive safety is the primary mis-sion of the National Highway Traffic SafetyAdministration (NHTSA). In recent decades,

however, NHTSA’s mission has increasingly be-come distorted by political correctness and en-vironmental agendas. For example, the agencyhas focused on the alleged safety hazards of sportutility vehicles while paying little attention tothe safety risks of subcompact cars. Moreover,NHTSA has moved to mandate safety featuresthat are already becoming widely adopted dueto consumer demand, such as electronic stabil-ity control systems. Such mandates end up lim-iting design flexibility and constitute little morethan an exercise of regulatory muscle.

One major NHTSA program actually in-creases traffic deaths by significantly reducingvehicle crashworthiness. The agency’s autofuel economy standards, known as CAFE (forcorporate average fuel economy), force vehi-

cles to be downsized in order to boost milesper gallon. Downsized vehicles have less massto absorb collision forces and less interior

space in which to safeguard passengers. Asa result, CAFE causes several thousand addi-tional traffic deaths per year in the name of saving gasoline. Several years ago the agencyreformed CAFE to reduce its downsizing in-centive, but this reform is now being over-whelmed as the Obama administration seeksever higher—and therefore more lethal—fueleconomy standards. Unbelievably, 62 mpg isnow under study as a possible target for 2025.Congress should halt any increases in CAFEstandards. At a minimum, NHTSA should un-dertake a comprehensive study of the deathsattributable to CAFE, both on a yearly basisand over its 30-year history.

Sam Kazman




Improve Food Safety and Quality throughGreater Information, Consumer Choice,and Legal Accountability

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

organics to obesity. Recent health scares—fromsalmonella-contaminated eggs to E. coli-con-taminated spinach and tomatoes—show justhow fragile the food chain can be. But, whilethese tragic events have led to calls for greatergovernment oversight of the food supply, thenature of these scares shows that additionalregulations or inspections are likely to do littleto improve food safety. Poorly conceived gov-ernment regulation often does as much to com-promise food safety, affordability, and choice asto promote it—especially when the regulatoryframework is focused on a fear-driven activistagenda rather than on basic principles of sci-ence and genuine safety.

Too often, the government’s regulatoryagenda favors politically expedient outcomesover those that would actually promote safetyand availability. For example, the U.S. govern-ment maintains outmoded visual examinationand “poke and sniff” food inspectors whose

methods are incapable of detecting microbialpathogens. At the same time, heavy regulatoryburdens make it difficult to introduce tech-nologies, such as irradiation, that could cut theincidence of those pathogens by half or more.Americans consume nearly 1 billion meals ev-

ery day, and microbial pathogens can be intro-duced at any stage in the food production anddistribution system. Merely adding additional

inspectors cannot realistically be expected toprevent future contaminations. Instead, the le-gal system should punish producers and sellerswho are negligent in the handling or purchas-ing of the foods we eat. Food companies shouldbe allowed the flexibility to adopt technologiesand practices that can cut the incidence of food-borne contaminants.

In addition, regulators control the content of food labels so stringently that sellers are oftenforbidden 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 customers’demands. Government studies have shown thatliberalizing labeling and advertising restrictionson food products actually leads producers tosupply healthier and more nutritious products,increasing consumer well-being.

Lawmakers should eliminate regulatory barriers that make it harder to adopt beneficialnew food production technologies, such as irra-diation and crop biotechnology. Mandatory la-beling of irradiated food provides no useful ormaterial information to consumers, but it does





scare consumers and retailers away from safeirradiated foods. Existing U.S. Department of Agriculture rules make it impossible for cattleranchers to voluntarily test their herds for mad

cow disease and then advertise the attribute toconsumers.

Policy makers should abandon the misguidednotion that natural products are inherently safeand synthetic products inherently dangerous. Synthetic compounds, as a class, are no moretoxic or carcinogenic than compounds thatexist in nature. The dose makes the poison—many substances that are dangerous at veryhigh levels are totally harmless at lower levels.

This is true for both natural and manmade sub-stances. Rules that mandate labeling of even

trace amounts of certain synthetic chemicalsare based on a faulty understanding of scienceand are therefore bad public policy.

Government should not make lifestyle

choices for consumers regarding the foodsthey eat. All foods, whether they contain largeamounts of fat, calories, sugar, sodium, or otherconstituents, can be a part of a healthy diet.Consumers may benefit from having accurateinformation about nutrition, calories, and fatcontent, but government should not ban or oth-erwise limit consumer access to certain foodssimply because public health officials believethat some consumers overindulge in them.

Gregory Conko




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 has been one of the fastest growing com-ponents of overall health care spending duringthe past two decades—rising by an average of 11 percent annually during the 1990s and by 9percent in 2006, compared to just 6 percent forspending on physician services, according to theKaiser Family Foundation.

Faced with this public pressure, as well asmounting federal and state government ex-penditures on drug purchases, members of Congress 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 di-rect restrictions on drug and medical deviceindustry marketing and promotion practices.

More recently, would-be health care cost cut-ters have proposed integrating cost-benefit andcomparative-benefit analysis into government-run health programs and in the Food and DrugAdministration’s (FDA) approval process. Forexample, the Patient Protection and Affordable

Care Act created a new Patient CenteredOutcomes Research Institute (PCORI) to studythe comparative effectiveness of different treat-

ment options with the expectation that drugsand other treatment options that do not deliverwhat it considers sufficient “bang for the buck”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 indus-try incentives for innovation. Pharmaceuticalprices are high because drug development is ex-pensive, many new drugs treat relatively smallpatient populations, and most pharmaceuticalsfail in laboratory tests or clinical trials beforeever making it to market. A 2006 study by U.S.Federal Trade Commission economists con-cluded that the average cost to develop and testa new drug is between $839 million and $868million. Thus, policies such as reimportationand comparative-effectiveness analysis would,in the short run, result in lower prices for drugsalready on the market, but in the long run re-

duce both the number of treatment optionsavailable and the flow of new drugs entering themarketplace.

The primary argument for incorporat-ing comparative-effectiveness or cost-benefitanalysis into government purchasing and ap-





proval decisions is that many expensive newdrugs offer little therapeutic advantage overolder drugs, but that they cost far more thanthe closest comparable older drugs. If govern-

ment health programs paid for only the “best inclass” medicine for each therapeutic category,the higher volume of purchases would justifysignificant price reductions. However, while onaverage the therapeutic benefit of various drugsin a particular class may be similar, individualpatients will often respond quite differently—even to very similar drugs. While it is advisablefor public programs to trim excessive costs,implementing cost-benefit or comparative-ef-

fectiveness analysis in purchasing or approvaldecisions would negatively affect patient care.

Although the health care reform legislationstipulates that PCORI recommendations shallnot be used as the basis for rationing care, theAct also created a new Independent PaymentAdvisory Board for the purpose of reducing thegrowth rate in Medicare spending. That body isexpected to rely, in part, on PCORI recommen-dations to evaluate physician and hospital qual-

ity, which means that PCORI recommendationswill covertly be used as the basis for restrictingavailable treatment options for patients. Evenmore pernicious is a proposal by the Centersfor Medicare and Medicaid Services and FDAto establish a parallel review process for medi-cal products, which many fear could result incomparative-effectiveness or cost-benefit con-siderations being improperly introduced into thenew drug and medical device approval process.

The argument for reimportation is no moreconvincing. Although the prices of off-patentand generic drugs—which comprise more thanhalf of all prescriptions filled in the U.S.—are

typically higher in other countries, the prices of the latest on-patent drugs is often much lowerin countries that impose direct or indirectprice controls. Consequently, reimportation

advocates promise to relieve high drug costsby allowing American consumers to free-rideon other nations’ price controls. But allowingreimportation would effectively import foreignprice controls, resulting in less revenue for theindustry and a reduction in the capital availableto drug companies for continued research andinnovation.

Finally, drug industry profits are not “exces-sive” by any honest measure. Pharmaceutical

industry critics like to point out that, in 2005,pharmaceutical firms in the Fortune 500 placedninth out of the 50 industries ranked by returnon assets, 12th in 2004, and second in 2003.However, as the Congressional Budget Office(CBO) notes, “those figures misrepresent theindustry’s actual profits.” Standard account-ing measures overstate profitability for R&D-intensive industries by treating most researchspending as an expense rather than as a capi-

talized investment that increases the company’svalue. “Not accounting for that value over-states a firm’s true return on its assets,” saysthe CBO.

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

industry. The result would be fewer and fewerlifesaving medicines.

Gregory Conko




John Berlau , Senior Fellow, Center for EconomicFreedom

Gregory Conko, Senior Fellow, Center for

Technology and InnovationWayne Crews, Director, Center for Technologyand Innovation

Myron Ebell, Director, Center for Energy andEnvironment

Sam Kazman, Director, Center for Law andLitigation

Ben Lieberman, Senior Fellow, Center forEnergy and Environment

Angela Logomasini, Senior Fellow, Center forEnergy and Environment

Michelle Minton, Insurance Studies Fellow,Center for Economic Freedom

Iain Murray, Director, Center for EconomicFreedom

Alex Nowrasteh, Policy Analyst, Center forTechnology and Innovation

Ivan Osorio, Editorial Director and Labor PolicyFellow, Center for Economic Freedom

Ryan Radia, Associate Director, Center for

Technology and InnovationMarc Scribner, Land-use and TransportationPolicy Analyst, Center for EconomicFreedom

Fran Smith, Board Member and Adjunct Fellow,Center for Economic Freedom

Fred Smith, President and FounderRobert J. Smith, Distinguished Fellow, Center

for Energy and EnvironmentF. Vincent Vernuccio, Labor Policy Counsel,

Center for Economic FreedomWilliam Yeatman, Associate Director, Center

for Energy and EnvironmentRyan Young, Regulatory Studies Fellow, Center

for Technology and Innovation

Contributors



CompetitiveEnterpriseInstitute

8.00

The Competitive Enterprise Institute is a non-profit public policy organization ded-

icated to the principles of free enterprise and limited government. We believe that

consumers are best helped not by government regulation but by being allowed to

make their own choices in a free marketplace. Since its founding in 1984, CEI has

grown into an influential Washington institution.

We are nationally recognized as a leading voice on a broad range of regulatory

issues ranging from environmental laws to antitrust policy to regulatory risk. CEI is

not a traditional “think tank.” We frequently produce groundbreaking research onregulatory issues, but our work does not stop there. It is not enough to simply iden-

tify and articulate solutions to public policy problems; it is also necessary to defend

and promote those solutions. For that reason, we are actively engaged in many

phases of the public policy debate.

We reach out to the public and the media to ensure that our ideas are heard, work

with policymakers to ensure that they are implemented and, when necessary, take

our arguments to court to ensure the law is upheld. This “full service approach” to

public policy makes us an effective and powerful force for economic freedom.

1899 L Street, NW

Documents

CEI - Liberate to Stimulate