6 / Regulation / Fall 2016

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Bootleggers, Baptists,and Beer Labels✒ By E. Frank StEphEnSon

In July 2016, the Beer Institute announced its “Brewers’ VoluntaryDisclosure Initiative” whereby brewers will voluntarily includenutritional information on beer cans and bottles. Much like labels

on food, beer containers will now indicate calorie, carbohydrate, andalcohol content.

The ostensible reason for calorie label-ing is consumer information. Center forScience in the Public Interest presidentMichael Jacobson trumpeted the Beer Insti-tute’s calorie labeling announcement as“good news for consumers.” Kris Sollid ofthe International Food Information Coun-cil proclaimed that calorie labeling “maymake it easier to keep calorie consumptionin check” and concluded that with calorielabeling “maybe … some people will thinktwice” before drinking more beer.

Perhaps such information would helpbeer drinkers, but a recent literature reviewconcluded that “current evidence suggeststhat calorie labeling does not have the

intended effect of decreasing calorie pur-chasing or consumption.”

Raising rivals’ costs / looking beneath thefoamy claims about enhanced consumerwelfare reveals that familiar politicalmachinations are likely lurking beneaththe surface of the Brewers’ Voluntary Dis-closure Initiative. The Beer Institute is thetrade group for large industrial brewerssuch as anheuser-Busch and MillerCo-ors, and its announcement of the calorielabeling initiative indicated that six majorbreweries, which together comprise morethan 80% of the U.S. beer market, willadopt the voluntary calorie labeling.

Why would large brewers want to vol-untarily include such information on their

labels? large brewers like anheuser-Buschare losing market share to the hundreds ofsmaller craft brewers that have sprung upin recent years in the United States. Insteadof being limited to choosing from a hand-ful of nearly identical american light lagersproduced by the mega brewers, beer drink-ers may now choose from a wide array ofstyles such as wheats, stouts, Belgians, andpale ales. While individual craft brewerscomprise a negligible presence in the beermarket, collectively they are eating away atthe dominant position that large brewershave enjoyed since the end of Prohibi-tion. However, most craft beers have morecalories and higher alcohol content thanmass-market brews like Budweiser. Thus,beer labeling can be viewed as an attemptto persuade calorie-conscious consumersto shift back toward Bud and its ilk. assuch, calorie labeling would simply be aform of market competition, albeit col-lusively coordinated via the Beer Institute.

But there is likely more going on herethan good old-fashioned market competi-tion, especially given the evidence aboutcalorie labeling’s inefficacy. Beginning inMay 2017, U.S. Food and Drug adminis-tration rules will require chain restaurantsto include calorie information for beerson their menus. (The rules also apply tomany other beer sales outlets with mul-tiple locations such as convenience stores,sports venues, and bowling alleys.) Whenthe FDa issued its regulations about res-taurant menu labeling, the Beer Instituteissued a press release indicating its “sup-port [for] calorie labeling of each beerlisted on menus in restaurants and retailestablishments.”

The restaurant menu labeling require-ment advantages large brewers over craftbreweries. Calorie and nutritional label-ing requires costly laboratory testing thatreportedly runs $300–$1,000 per beer.Such fees for laboratory analysis amountto a fraction of a penny per bottle for mass-market producers because of their largevolumes, but they are a significant costburden for smaller craft breweries becausethey have to spread the costs over a smallerquantity of beer sold. Such effects are exac-

E. Fr ank StEphEnSon is professor of economicsand department chair at Berry College.

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IkE Br annon is a visiting fellow at the Cato Institute.

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The Government IsLousy at Lending✒ By IkE Brannon

Whatroleshouldourgovernmenthaveincapitalmarkets?Thisdebate has been ongoing since at least the Great Depression,and has intensified following last decade’s financial crisis.

At face value the current debate appears to revolve around the extentof government regulation. Should big banks have more regulationsor higher capital requirements than smallerbanks that are not “systemically important,”meaning their failure would not lead tobroader financial problems? To what extentshould regulators prevent discriminationagainst borrowers or ensure some modicumof competition?

But at a more basic level the battle isabout who gets to allocate capital. Theanswer for many on the political left is thatit should be the government, and they’vehad amazing success in bringing that aboutin some sectors. It’s not entirely clear thatthe right opposes that idea.

Student loans / For starters, consider themarket for student loans. It is completelydominated by the federal government, ofcourse. Under its virtual monopoly, bor-rowing for college has skyrocketed, andtotal student debt now exceeds $1.3 tril-lion. To say that this lending market hasproblems is an understatement: over 40%of people holding student debt are notmaking payments, according to a recentWall Street Journal analysis.

The reason for this failure is that thedisintermediation created by government-

guaranteed student loans frees schoolsfrom having to worry about whether stu-dents who secure their loans through thefinancial aid office will actually repay thedebt. The school won’t be out of luck ifthere’s a default; it’s the government. andsince college debt isn’t dischargeable underbankruptcy except under circumstances ofextreme poverty, the feds can eventually gettheir money from all but the poorest bor-rowers. More than a few schools exploit thisgovernment guarantee to target students ofdubious ability and means and sign themup for student loans to finance their classes.

Housing finance / Clearly this is not a recipefor a healthy lending market. But it is notunique; in fact, it bears a striking resem-blance to the lending market for housing.These days, government-controlled Fan-nie Mae and Freddie Mac essentially arethe market, as there is virtually no privateactivity in the creation of the mortgage-backed securities that ultimately financemost home loans. There’s also a discon-nect between the nominal lenders and theones who end up holding the capital: aslong as the local mortgage provider cansell a loan, it will make it. Fannie and Fred-

erbated for craft brewers that rotate beersfrequently, produce seasonal specialties, oroccasionally tweak their recipes.

The large breweries’ support for theFDa’s menu labeling is not a healthy signof market competition. It is an attemptto gain an advantage over rival produc-ers using government regulations. and

it is a reasonable guess that large brewer-ies’ voluntary calorie labeling is simply astep toward requiring calorie counts onall beers. Just as the Beer Institute sup-ported the FDa’s menu labeling regula-tions, expect the future to bring similarBeer Institute enthusiasm for extendingcalorie requirements to all beers.

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die are the only ones doing the buying.They have become more selective aboutwhat mortgages they buy, but they arereceiving the same political pressures theydid a decade ago to cease “discriminating”against the poor and minorities, and tobuy loans from less creditworthy appli-cants with less money down.

It was never the policymakers’ intent thatthese government-sponsored enterprisesessentially control most of the capital in thehome loan market. But that lack of intentdoes not mitigate the problems this domi-nancecreates.Whilenoteveryonenecessarilysees this as a problem, the Federal HousingFinance administration—Fannie and Fred-die’s overseer—has decided it will assuagethose who don’t like it by creating a “com-mon trading platform” that ostensibly willmake it easier for the private market to com-pete in the securitization of housing assets.

It’s a fool’s errand, however. as my Catocolleague Mark Calabria and I recentlywrote for Bloomberg BNA, the private marketis not sitting out of the mortgage-backed

securities market because it does not havethe right software (“Can the Private MarketReturn to Home lending?” July 14, 2016).The issue is that if there is another housingdownturn, investors holding Fannie andFreddie paper know they’re safe thanks togovernment protection; not so for privatehousing paper. Nobody wants to be on the

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hook if the housing market tanks again,so Fannie and Freddie have the market tothemselves these days.

Government as lender / The governmentis the only game in town in two differ-ent trillion-dollar lending markets, andthat should concern everyone. There’s noevidence that these markets function anybetter because of government’s outsizedrole—far from it, in fact.

The reality of financial markets is thatsometimes borrowers will find themselvesunable to pay back their lenders no mat-ter how much due diligence the lenderdid. Occasionally these defaults may createlarger systemic problems that can bank-rupt lenders or hobble the wider economy.Government can regulate capital marketsas much as it wants, but it cannot changethis eventuality. Punitively punishing the“bad actors” in the financial crisis thatdared compete and socializing entire lend-ing markets are not good policy solutions.

It’s impossible for any government toresist making investments for political rea-sons once it gets its hands on capital. Japandiscovered this decades ago and China islearning it now. less than a decade removedfrom a housing crisis that nearly destroyedglobal financial markets that was madeworse by bipartisan pressure to boost homeownership through any means necessary,our government has resumed puttingpressure on Fannie and Freddie to supportextending mortgages to riskier borrowers.

The government’s financial meddlingdoesn’t stop with student and home loans.If the U.S. Department of labor succeeds inmaking it easier for states to run their ownretirement accounts, those efforts couldevolve into the states using their inherentcompetitive advantages to squeeze outprivate fund providers. If we think we areabove the self-dealing and corrupt “invest-ments” that asian countries make withthe capital their governments control, weare delusional.

Before the government becomes aplayer in yet another financial market, weshould take steps to reverse its oversizedpresence in lending.

Do Presidents Rush Rulesto Avoid the CongressionalReview Act?✒ By Sam BatkInS

There is ample evidence and literature that outgoing adminis-trations tend to increase regulatory output after Election Day,up until the next president takes office. This “midnight regula-

tion” is a rational way for a departing president to cement as manydomestic priorities as possible. But it arguably is also an attack on

Sam BatkInS is director ofregulatory policy at theamerican action Forum.

the will of the people because it is mostpronounced when there is a party changein the White House, indicating a populardesire for policy change.

To address midnight regulating, Con-gress adopted the “carryover” provision ofthe Congressional Review act (CRa). Theprovision allows an incoming Congressto overturn a rule enacted in the waningweeks of the outgoing presidency. But isthis power effective? Or do presidents actto finalize regulations well before ElectionDay, beyond the provision’s reach? In otherwords, is there a “twilight” before the mid-night regulation period?

Carryover provision / The CRa allows asitting Congress to review final rules for60 legislative days after the rule has beenissued. In that period, Congress can passlegislation, subjectto presidential veto,blocking the rule. Thecarryover provisionextends this power toan incoming Congressfor a rule issued duringthe last 60 legislativedays before adjourn-ment of the previousCongress. In essence,this provision gives thenew Congress 75 leg-islative days to review

and block the new rule.But Congress has only used its CRa

power once, despite all of the late-termpresidential regulation. This raises thequestion, do outgoing presidents avoidthis review by finalizing controversial regu-lations before the final 60 legislative daysof a congressional term?

Prima facie, presidents would face somedifficulty with employing this strategy.First, the exact day the carryover provi-sion becomes effective cannot be knownuntil Congress adjourns its session. anypresident wishing to finalize a flurry ofrules would have only a vague idea aheadof time of the carryover provision’s startdate and it would be largely dependenton another branch of government. Forinstance, the carryover date for 2016 wasinitially estimated to be May 17th, a fig-

Figure 1

2016 REGUlaTIONS By MONTH

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ure later confirmed by the Congressio-nal Research Service. But Congress stayedin session a few extra days (relative to itsinitial calendar), pushing the carryoverday closer to May 23rd. So if there is aparty change in the White House followingthis November’s election, the (currently)opposition-controlled House and Senatecould decide to take off November andDecember, in which case the carryover datewould be closer to May 1. This might betoo much uncertainty for a president toplan a regulatory agenda around the CRa.

A rush? / To detect a twilight phenom-enon, we have only a limited amount ofdata to examine. There is some evidencethat the administration and regulators(the CRa applies to independent agencyactions as well) may be twilight-regulatingthis year. Figure 1 displays the rate of totaland major rulemakings so far this year,with a line denoting a probable CRa car-ryover date.

The figure is hardly a slam dunk infavor of the hypothesis that presidents actto finalize rules before the CRa takes effect,but there is a noticeable spike in May forboth total and major rules. Here are a fewespecially controversial rules released fromthe Office of Information and Regulatoryaffairs (OIRa) the month before the CRacutoff:

■ E-cigarette regulation■ Methane standards for oil and natural

gas■ Overtime expansion■ Renewable fuels standard

In May of 2016, OIRa approved 14significant rulemakings, which was morethan any other May in a presidential elec-tion year since 1996. Regulators also esti-mated the rules would impose $22 billionin costs, compared to just $2.8 billion incosts for the rules approved in May of2015. These data are suggestive, thoughit should be noted that they don’t provethat the carryover provision of the CRarushed certain decisions by the ObamaWhite House.

another source of data to test this

hypothesis is the Unified agenda, whichshows various rulemakings’ progressthrough the regulatory process. Werethere rules issued before their targetpublication dates (a rarity in the regula-tory world) in order to beat the carryoverdeadline? For example, the administra-tion said it was still analyzing commentsfrom its controversial fiduciary rule as lateas December 2015. However, OIRa startedreview of the proposed rule in Januaryand the rule was final by april, ahead ofschedule and well before the carryoverdate. likewise, the Environmental Pro-tection agency’s final fracking standardsfor oil and natural gas weren’t expectedto be final before June 2016, but OIRa

concluded review in early May. Finally,the overtime rule was expected to be finalin July of 2016, likely past the CRa date.However, OIRa concluded review on May17 and it was officially published shortlythereafter. These instances are suggestive,though they do not yield statistically sig-nificant findings.

We conducted a much larger review ofevery rulemaking from 1996 (when the CRawas adopted) to the present. We used theCRa deadline as computed by the Congres-sional Research Service, and then examinedrulemaking activity (both major and over-all rules) the month before that date. Thecontrol was non-presidential election yearswhen a CRa date is still computable.

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During presidential election years, OIRaapproved an average of 4.6 major rules(including eight in 2016) in the monthbefore the CRa carryover date took effect. Innon-presidential election years, this figurewas 4.1. looking at all rulemakings, not justmajor rules, regulators approved 21.5 finalrulemakings in the month before the carry-over date during presidential election years.During off-year elections, OIRa releasedjust 17.2 regulations the month before thecarryover date.

a t-test finds that these differencesare not statistically significant. However,this is a small sample size: there is only acomparison between average activity in sixpresidential election years since 1996 and15 non-presidential election years. Thehigher presidential election year averagesand a graphical look at the timeline ofregulations suggest that administrationsare cognizant of the CRa cutoff date.

For example, Figure 2 displays majorand overall regulatory activity from OIRain 1996 and 1997. as with 2016, there wasa noticeable spike in regulatory activitythe month before the CRa took effect in1996, with 28 regulations. Compare thatto 1997, which is shown in Figure 3. Thatwas a non-presidential election year, whenOIRa approved just 13 rulemakings andthere was actually a decrease in activitybefore the hypothetical CRa carryover datetook effect.

Conclusion / at first blush, the notion thatpresidents act to cement their regulatorypriorities before the next Congress has achance to repeal them sounds like a tru-ism, rather than a hypothesis in need ofempirical testing. There is some sugges-tive evidence indicating small spikes inregulation before the CRa carryover provi-sion becomes effective, but the differencebetween off–election years is not statisti-cally significant. This could be due to thesmall sample size or simply because thespeculative nature of the carryover datedoes not motivate presidents to rush majorregulation. From what we do know, presi-dents can always wait until the midnightperiod to implement major rules.

Trade and Adjustment Costs✒ By pIErrE LEmIEux

ANational Bureau of Economic Research paper releasedearly this year has caused a small commotion in economiccircles. In the paper, titled “The China Shock: learning

from labor Market adjustment to large Changes in Trade,” theauthors, David autor (Massachusetts Institute of Technology), David

pIErrE LEmIEux is an economist affiliated with theDepartment of management Sciences of the universitédu Québec en outaouais. his latest book is Who NeedsJobs? Spreading Poverty or Increasing Welfare (palgravemacmillan, 2014).

Dorn (University of Zurich), and GordonHanson (University of California, SanDiego), calculate that the costs of adjust-ment to the shock of Chinese imports fromthe early 1990s and especially since 2001(when China joined the World Trade Orga-nization)havebeenenormous.Workersneg-atively affected by Chinese imports sufferedjob losses or permanently lower incomes.

Some economic commentators haveinterpreted the paper as an indictment offree trade. Others—including The Economist—read it as dealing with adjustment costs,not as a statement that trade brings no netbenefits. Moreover, autor et al. note thatthe China shock was a one-time affair thatis now dampened by higher wages in China.yet, writes Bloomberg.com columnist NoahSmith, “Economists should still re-evaluatetheir benchmark theories, and ease up theiradamant rhetoric of free trade.”

Is it possible that, contrary to whateconomists have thought at least sinceadam Smith, free trade is bad?

One generally ignored caveat is thattrade between China and america is farfrom free. Trade agreements are as muchmanaged trade as free trade. as Paul Krug-man concisely put it in a 1997 article, “Theeconomist’s case for free trade is essentiallya unilateral case: a country serves its owninterests by pursuing free trade regardlessof what other countries do” (quoted byautor et al.). In america as elsewhere, weare very far from this.

Jobs and protectionism / Jobs have been lost

in manufacturing and “offsetting employ-ment gains in other industries have yet tomaterialize,” states the paper’s abstract. Weshould be very careful with this focus onjobs. The number of jobs should not be themetric. My rough estimates suggest thatthe mechanization of american agricul-ture has destroyed at least 15 million netjobs, but this is a plus, not a minus, sinceit was accompanied by lower food pricesand higher real income. (See my Who NeedsJobs? Palgrave Macmillan, 2014.) Incomeand ultimately welfare are what matters,not sweating and work.

Standard economic theory proves thatfree trade creates net benefits. as econom-ics students know, the geometric proof isbeautiful and compelling, but the gist ofit is not difficult to grasp. Consumers gainbecause they pay lower prices, and they gainmore than domestic producers lose. If thiswere not the case, domestic producers couldbribe consumers, through lower prices, topatronize their own products instead oftheir foreign competitors’. Moreover andless directly, free trade generates lower pricesfor many domestic producers’ inputs.

To be unqualified, this proof assumesthat the welfare of a foreigner has the sameweight as the welfare of a fellow citizen. Itis a safe moral assumption to make, if onlybecause one’s foreigner is the fellow citizenof another. you only need to have been bornacross a political border to be the “other.”Equal human value is also a safe politicalassumption if we don’t want the clash ofnational interests (which are the interestsof the de facto rulers) to launch prosperity-destroying trade wars or real wars.

Even if one assumes instead that anational government should defend itsR

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nationals’ interests against foreigners’ inter-ests, it is only in special circumstances—if itcan manipulate the terms of trade—that itcan succeed in doing so. and protectionismtypically leads to retaliation, which amountsto the retaliator sinking a ship in his ownharbor to get even with the trading partnerwho has done the same in his harbor. Pro-tectionism is not very rational policy.

Mutual prosperity / The ultimate founda-tion of free trade rests on what economistscall the benefits of exchange: both par-ties to an exchange benefit, otherwise onewould have walked out. The same prin-ciple applies to a consumer (and his mid-dleman such as Walmart) and his foreignsupplier: both parties benefit.

It is true that third parties are sometimesharmed in a non-violent sense. If domesticconsumers buy their widgets from a for-eign supplier because they are less expen-sive, domestic competitors lose. But as wehave seen, the losses of domestic producersand their employees will normally be morethan compensated by the lower prices thatconsumers get. In a free trade regime, theindividuals who lose in the labor (or capital)market will gain from purchasing their ownconsumption goods at lower prices becauseforeign suppliers compete with domesticsuppliers. Free international trade generatesmore prosperity, and we would expect fewto be net losers.

How do we know that free interna-tional trade creates general prosperity?Because the argument is exactly the samefor free domestic trade. Domestic tradebetween, say, Vermont and California cancause disruptions and shocks. Taxi driv-ers in Vermont are certainly disrupted byUber. Cheese manufacturers in Vermontare potential disrupters for their California

competitors. Creative destruction is neces-sary for prosperity. This is no less true atthe international level.

autor et al. estimate that one millionamerican manufacturing jobs were lostbecause of Chinese imports between 1999and 2011. They add to this loss another 1.4million jobs (which result, in part, from aquestionable aggregate demand effect).These are viewed as short-term distribu-tional and adjustment costs; they are not anet long-term efficiency cost. The authorsacknowledge that these costs do not negatethe net benefits of free trade. The benefitsof free trade come out more clearly in anEcontalk.org podcast interview of autor byRuss Roberts. In short, it is difficult for aneconomist to oppose free trade.

Market inflexibility / Why have these dis-tributional costs (including adjustmentcosts) been higher than expected?

The reason is that labor markets havebeen much less flexible than we wouldhave expected. Of the workers disrupted byChinese imports, few switched industriesor moved to another region. as noted byautor et al., government assistance pro-grams—Trade adjustment assistance andunemployment benefits, but mainly gen-eral assistance programs such as healthand disability benefits—gave perverseincentives to workers displaced by Chi-nese imports. I think the regulation oflabor markets should also be considered,from occupational licensure to minimumwages and European-flavored regulationof labor markets. Market inflexibility is theproblem, not trade as such.

Shocks, creative destruction, andchange are the bread and butter of prosper-ity. Consider again the example of agricul-ture. From 1950 to 1970 only, 3.7 million

jobs disappeared from agriculture, but thelabor market adjusted quite easily.

IntheUnitedStates,as inotherdevelopedeconomies,manufacturingemploymenthasbeen riding a long-term downward trend.The proportion of (non-farm) americansoccupied in manufacturing has gone fromabout 30% in the 1950s to 16% in 1990, andtolessthan10%from2006on.Thelostman-ufacturing jobs moved to services industries.EconomistsandrewBernard,ValerieSmeets,and Frederic Warzynski argue that, in manycases, theconceptionanddistributionactivi-ties have stayed in the same firms, whichhave simply been reclassified in governmentstatistics as non-manufacturing.

“We’ve always known,” writes economistScott Sumner, “that local labor markets canbe hit hard by import competition, andthus [autor et al.] don’t really change ourunderstanding of trade in any major way.”We must accept that any change, whetherfrom trade or technical change, will generatesome losers along with the many winners.We can never be sure that the former will befully compensated out of the larger gains ofthe latter. However, both theory and historyshow that free markets are the best systemto assure that net gains will be maximizedand the number of net losers minimized.

I think that the policy conclusion to bedrawn from autor et al. and similar esti-mates is that government interventions—subsidies to disrupted workers and perhapsespecially labor market regulations—havecreated rigidities that prevent the economyfrom adapting to shocks at minimum cost,as free markets would. This is the problemthat needs to be addressed.

READINGS

■ “autor, Dorn, and Hanson on the China Shock,”by Scott Sumner. Econlog.org, Feb. 26, 2016.

■ “Rethinking Deindustrialization,” by andrewB. Bernard, Valerie Smeets, and Frederic Warzynski.National Bureau of Economic Research WorkingPaper #22114, March 2016.

■ “The China Shock: learning from labor Marketadjustment to large Changes in Trade,” by Davidautor, David Dorn, and Gordon Hanson. NationalBureau of Economic Research Working Paper#21906. January 2016.

■ “What Should Trade Negotiators Negotiateabout? a Review Essay,” by Paul Krugman. Mas-sachusetts Institute of Technology, 1997.

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