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Friday, June 14, 2013

Regulating Snus in the E.U.

Should the E.U. be able to regulate sales of a product that can legally be sold only in one state? Would such regulations encroach too much on the governmental sovereignty of the state? In the U.S., Congress has steadily extended its power to regulate interstate commerce to the point that commercial transactions taking place entirely within one state are routinely covered. Is the E.U. headed toward the same outcome?
In 1830, Andrew Jackson, the seventh president of the U.S., vetoed a bill that would have permitted Congress to spend money on the Maysville Road in Kentucky.[1] That veto, and several others, effectively ended federal internal improvement spending on transportation. The Maysville Road was entirely within Kentucky, so Congress’s authority to regulate interstate commerce did not properly apply. Lest it be correctly pointed out that spending is not regulation, the veto can also be interpreted as an insistence that Congressional spending “for the general welfare” of the Union must be within one of the domains delegated to Congress by the U.S. Constitution. Otherwise, the "spending clause" could circumvent the listing of powers itself. Due to the power of money, it does not make sense to say Congress can legislate on only X, Y, and Z, but spend on anything. In short, Congress could not fund a road that runs entirely within a state because that is a state rather than a federal matter.
In 2013, about 50 years after the E.C., the E.U.’s predecessor, had begun, the issue of whether federal regulations should be permitted to touch a matter entirely within a state came to the fore as the E.U.’s executive branch, the Commission, considered whether to regulate a flavored tobacco product known as snu within Sweden. Selling the product had been banned in the E.U. in 1992. When it became a state in 1995, Sweden requested a permanent exemption, which the E.U. granted. The question is whether the E.U. can (or should) regulate snu in Sweden—the product being banned in the other states. Maria Larsson, a state official in Sweden, claimed that the Commission was intent “to both exclude us from the EU market, and regulate the contents of snus in Sweden.”[2] The question is whether the waiver is only on being able to sell snus within Sweden, or whether the authority to regulate the sales is also included. To regulate sales is not to forbid them.
The customary basis on which the Commission reaches within a state to regulate a product is anti-competitiveness, wherein other states are being discriminated against. For instance, the European Court of Justice ruled against Germany’s “Beer Purity Law” in 1987.  In its ruling, the court determined that Germany’s requirement that beer must have certain ingredients that French breweries just happened not to include discriminated against out-of-state producers and thus violated the principles of the common market. Hence, the E.C. could change a state regulation involving sales of a product in the state.
In the case of sales of snu within Sweden, the question is whether the Commission can issue regulations valid in Sweden and intending to prevent out-of-state producers from being discriminated against by Swedish regulations. That snu cannot be sold in other states does not mean that a company based in one of them could not sell its snu in Sweden. Sweden’s waiver does not extend to the authority to block out-of-state sellers from selling in the state. This does not mean, however, that the Commission could regulate the sales in Sweden to the point that the product is effectively banned there. To reach this far would be to violate the waiver.


[1]Andrew Jackson: Good, Evil & The Presidency,” PBS (accessed June 14, 2013)
[2] Niclas Rolander, “Sweden to EU: Hands Off Our Snus,” The Wall Street Journal, June 14, 2013.

Thursday, June 13, 2013

On the Impact of Political Rhetoric: From “Global Warming” to “Climate Change”

Words matter in politics. The side that can frame a question by definitively naming it in the public mind enjoys a subtle though often decisive advantage in the debate and thus in any resulting public policy as well. For example, “pro-choice”privileges the pregnant woman, while “pro-life” defines the abortion debate around the fetus. Similarly, “global warming” implies a human impact, whereas“climate change” defines the issue around nature. Even though the shift from“global warming” to “climate change” is more in keeping with the evolving science and won’t be bumped off by a cold winter, political players have been the driving force—language hardly being immune to ideological pressure.
 
Regarding the weather shifting popular perception on the issue, research published in Public Opinion Quarterly in 2011 claims that a bad winter can indeed discredit the “global warming” label.[1] The Washington Policy Center claimed two years later that the heavy snowfall during the latest winter had led to “climate change” replacing “global warming.”[2] The cold refusing to relent in March 2013 seemed to undercut or repudiate the scientific “global warming” hypothesis even though science demands long-term data.
 
However, the societal impact of “the usual suspects,” political actors who routinely attempt to manipulate the public toward particular policies by using words to frame debate, dwarfs the perceptual impact of one season. In 2002, for example, Frank Luntz wrote a confidential memo to the Republican Party suggesting that because the Bush administration was vulnerable on the climate issue, the White House should abandon the phrase “global warming” in favor of “climate change.”[3] As if by magic, although “global warming” appeared frequently in President Bush’s speeches in 2001, “climate change” populated the president’s speeches on the topic in 2002.[4] In other words, the president’s political vulnerability on the issue was answered by changing the label to reframe the debate. Not missing a beat, critics charged that the motive was politicalin downplaying the possibility that carbon emissions were a contributing factor.[5]
 
Similarly, the Obama administration likely went with “climate change” because it is less controversial among detractors. In September 2011, the White House decided to replace the term “global warming” with “global climate disruption.”[6] The administration subsequently annulled its own decision. So much attention to the matter of a mere label indicates that just how important it is to the outcome. Research published in the academic journal Public Opinion Quarterly in 2011 reported at the time, “Republicans are far more skeptical of ‘global warming’ than of ‘climate change.’” Whereas the vast majority of Democrats were indifferent to the label being used.[7] With “global warming” carrying “a stronger connotation of human causation, which has long been questioned by conservatives,” Obama stood to gain some republican support simply by changing how he refers to the issue.[8]
 
Beyond the media’s own agenda and public perceptions of the weather, politicians who understand that words can be used to manipulate people have been the major force behind the label change. In their exchange of letters, Jefferson and Adams agreed that the citizenry of a republic must be virtuous and educated in order for a democracy to survive. The debate on whether the climate is changing and what “imprint” we as a species might be leaving on the planet does not give me much confidence in the future of American democracy, let alone the future of our species climatically.
 
1. Tom Jacobs, “Wording Change Softens Global Warming Skeptics,” Pacific Standard, March 2, 2011.
 
2. Washington Policy Center, “Climate Change: Where the Rhetoric Defines the Science,” March 8, 2011.
 
3. Oliver Burkeman, “Memo Exposes Bush’s New Green Strategy,” The Guardian, March 3, 2003.
 
4. Oliver Burkeman, “Memo Exposes Bush’s New Green Strategy,” The Guardian, March 3, 2003.
 
5. Washington Policy Center, “Climate Change: Where the Rhetoric Defines the Science,” March 8, 2011.
 
6. Erik Hayden, “Republicans Believe in ‘Climate Change,’ Not ‘Global Warming’,” The Atlantic Wire, March 3, 2011.
 
7. Tom Jacobs, “Wording Change Softens Global Warming Skeptics,” Pacific Standard, March 2, 2011.
 
8. Tom Jacobs, “Wording Change Softens Global Warming Skeptics,” Pacific Standard, March 2, 2011.
 
 







 

 
 

Wednesday, June 12, 2013

Reinsurance as a Shell Game: Another Bailout to Come?

In the stock market, investors can be quite fastidious in demanding a certain quarterly profit or internal rate of return. The increasing activism of institutional investors exacerbates this trend, as they have the wherewithal to investigate the companies in which they hold stock and the incentive given the number of shares they typically hold in a certain company. This pressure can tempt managements to “go outside the box” in developing novel ways to inflate revenue or hid expenses and risk.[1] In theory at least, companies owned by their employees or customers do not have to contend with that sort of pressure, and thus can manage their books with more transparency and honesty. Has managerial capitalism become too reductionistic in relying so much on the corporate form of ownership? Have we as societies been opening ourselves up to too much financial risk as a result? Further, if shifting more regulatory authority from the state to the federal level in the US (and presumably in the EU as well), what would be the cost to the federal system? The answers for the U.S. and E.U. could differ, given where each union is in its development. The insurance industry in New York is a case in point.
 
According to Benjamin Lawsky,  the New York Superintendent of Financial Services, life insurance companies based in New York have been setting up shell companies in other states in the U.S. and around the world to buy some of the obligations to pay claims. Although reinsurance bought by a separate company does indeed reduce risk for the company that is selling, a subsidiary can get the obligations off the parent’s books but the overall risk is not reduced. With New York regulators seeing lower risk, they approve lower collateral requirements, which, according to Lawsky, means “the policyholders are at greater risk.”[2] The insurance companies have been able to get away with this shell game because the subsidiaries are located in other states, which have tight secrecy laws, so the parent company’s regulator never sees the whole picture.
 
Essentially, an insurance company understates its risk so it can reduce its required reserves. With the freed-up collateral, the company can boost profit in order to appease the stock market. Lawsky likens the practice to those that led up to the financial crisis in 2008. “Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices, [and] ultimately, those practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multi-trillion-dollar taxpayer bailout.”[3]
 
Unfortunately, several states had passed laws allowing the shell companies, which could buy reinsurance from their own parent companies. With the states having regulated insurance for more than 150 years, federalizing the authority would face resistance from the states, at least according to the New York Times. Considering all of the power that had already been concentrated in the U.S. Government from the states, it is difficult to suppose that Congress would find any formidable obstacle from the state governments. Moreover, the prospect of federal regulators would mean that insurance companies like Transamerica, MetLife, Prudential, Hartford, Genworth, John Hancock, ReliaStar and Lincoln National would not be able to hide the risk in other states from the regulators.
 
However, shifting the authority to the federal government would risk further consolidation at the expense of the American system of federalism. The U.S. Senate was already considering a bill that “would create a new federal system that would automatically qualify anyone who obtains [an insurance agent] license in any state to sell insurance in every state.”[4] The assumption here is that the states do not differ significantly in terms of insured risks such as hurricanes, earthquakes, and dust storms. In other words, the ability of the diversity from state to state to “breathe” politically, which is a benefit of federalism, would be further hampered. "We don't mind having some kind of national license approach, but individual states ought to be able to stand up and say, 'Wait a minute, we're unique and need some additional standard,'" said Bob Hunter, director of insurance at the Consumer Federation of America.[5] Moreover, the state governments would be even less able to check abuses of power in the federal government.
 
In the case of the E.U., on the other hand, transferring the regulation to the federal level would actually fortify the federal system because the state governments dominate in the system and the E.U. federal government strains to check abuses by the state governments. Generally speaking, the decision on whether to further federalize a power held by the states should take into account where the federal system currently lies in terms of federal relative to state power. Both the E.U. and U.S. are out of balance in this respect, but federalizing would help one and hurt the other in terms of federalism.
 
As an alternative to federalizing the regulation in the U.S., the corporate form could be replaced by the mutual company form for insurance companies. That is to say, having policyholders rather than stockholders own the companies, the managements thereof would not face the pressure to show good quarterly earnings and internal rates of return even when the insurance industry is in a slump. According to the New York Times, life insurers “that are owned by their policyholders . . . do not have that pressure, and some, like State Farm, Guardian and New York Life, appear not to be reinsuring through [shell subsidiaries] at all.”[6] This stunning difference points to the corporate form as not fitting well in the insurance industry. Lest the prospect of the mutual form being used, presumably by law, seems too “radical” for those of a particularly cautious disposition, it can be noted that many advanced industrial states have single-payer health-insurance. That is, the assumption that health insurance companies are necessary is not true; the assumption can be critiqued, that is, without thinking outside the box.
 


[1] I have come to the conclusion that the expression, “thinking outside the box,” means different things to different people. Accordingly, anyone can define the expression ex nihilo and presume it to be legitimate. Strangely, “critical thinking” also seems to have become fair game for anyone to define for not only oneself, but also others, who are somehow bound to accept one's definition as valid. The declaring is itself rather funny in all its primped dress of presumptuousness. I have noticed the trend more broadly since the turn of the twenty-first century wherein people presume that they can create knowledge out of what is in actuality merely their own opinion. Education is no longer necessary, they conveniently assume without the sort of foundation that only an education can provide. For example, “Marilyn,” writing on Daniel Dotson’s “Shares” at Keep & Share, claims that critical thinking means thinking outside the box. Actually, questioning assumptions does not necessarily mean doing that because one can be critical of an assumption without leaving its paradigm. According to “Emma,” critical thinking is to be open-minded and to have an opinion. Actually, thinking critically about assumptions and inferences of a theory or argument involves analysis rather than opinion, and whether one is open-minded or not is irrelevant because reasoning is not an attitude or ideology. Rather, thinking is a skill innate to humans—an ability that can be sharpened with learning and practice. Therefore, just because an executive claims that he is thinking outside the box does not necessarily mean that he is in fact doing so. He could simply be entertaining an idea that is new to him. The underlying problem here may be the modern proclivity of a subjectivity to consider itself a fact that other subjectivities are obliged to accept as a fact.
[2] Mary Williams Walsh, “Insurers Inflating Books, New York Regulator Says,” The New York Times, June 11, 2013.
[3] Mary Williams Walsh, “Insurers Inflating Books, New York Regulator Says,” The New York Times, June 11, 2013.
[6] Mary Williams Walsh, “Insurers Inflating Books, New York Regulator Says,” The New York Times, June 11, 2013.

Sunday, June 9, 2013

Should the ECB Spend an Unlimited Amount on Bonds?

The European Central Bank did not place any limit on its program in which the bank purchases bonds of heavily indebted states so as to keep their borrowing costs (i.e., the bonds’ interest rates) from increasing. The program, called Outright Monetary Transactions, had already accomplished that even before spending a euro. Anticipation that the ECB would enter a state bond market if its interest rate rose high enough was enough to keep the rates from skyrocketing.  So, the announcement that the ECB would spend what “would be adequate to meet [the] objectives” is perhaps more important than how much the central bank actually spends.[1]  According to Joerg Asmussen, an executive board member of the ECB, the OMT was “economically necessary, legally permissible and effective.”[2]  He made the comment as a court in the state of Germany was preparing to consider whether the OMT “infringes on the constitution’s insistence on sovereign parliamentary control over budget matters.”[3]  Hence, a tension between “legally permissible” and “infringes on . . . sovereign parliamentary control” threatened to kill a program that had already succeeded before buying one bond. Fortunately, legal experts were saying that the German court might defer to the European Court of Justice, the E.U.’s supreme court.

Analysis:

Is spending by a central bank included in “budget matters?” The E.U. has its own budget, distinct from those of the state governments.  OMT is not included in the federal budget, just like the Federal Reserves “creation of money” to bail out banks is not contained in the U.S. Government budget. The question is therefore whether OMT exceeds the authority of the ECB. On that matter, analysis by a specialist would be needed.
In terms of “sovereign parliamentary control,” the wording alone hints of denial that the states had already ceded a significant amount of fiscal governmental sovereignty to the E.U. and the ECB. To say that in respect to “budget matters,” Germany is a sovereign state is simply not true. The question, which is not unheard of in federalism, is whether the actual division of sovereignty corresponds to the federal basic, or constitutional, law. In other words, the tension itself suggests that the E.U. is a federal system.
In addition to the tension within federalism itself, Europeans, and Americans too, could do worse than consider the danger in a central bank being able to create an unlimited amount of money to spend on a program. Besides the risk of inflation, the lack of limitation implies a lack of balance in the financial and governmental systems. In the words of Gregory Bateson in his Steps to an Ecology of Mind, when an unlimited, or schizogenic, variable exists within a system that is homeostatic, or in a steady state, that system itself can be “pierced” by the expanding variable and the equilibrium broken. As one example, the unlimited growth of a species, such as the human species, can shatter the equilibrium of the Earth’s climate. Unlimited spending by either the ECB or the Federal Reserve is in theory if not in practice dangerous to the E.U. and U.S., respectively. Particularly in fiscal matters, balance rather than hypertrophy is highly valuable even if self-restraint is difficult for human nature to sustain, let alone accomplish.


[1] Reuter, “ECB Says Bond-Buying Program Is Unlimited,” The New York Times, June 9, 2013.
[2] Reuter, “ECB Says Bond-Buying Program Is Unlimited,” The New York Times, June 9, 2013.
[3] Reuter, “ECB Says Bond-Buying Program Is Unlimited,” The New York Times, June 9, 2013.