John Berlau

Post image for First Ever Constitutional Ruling against Dodd-Frank Voids Destructive “Conflict Minerals” Section

Today’s ruling of the D.C. Circuit Court of Appeals that Dodd-Frank’s “conflict minerals” disclosure mandate violates the First Amendment is the first time ever a court has ruled that a provision of Dodd-Frank violates the Constitution. Regulations issued under Dodd-Frank have been struck down for reasons such as inadequate cost-benefit analysis and other procedural violations, but this is first time a provision has been found to be unconstitutional.

And it couldn’t happen to a more misguided and destructive provision of the law! As my Competitive Enterprise Institute colleague Hans Bader and I have written in blog posts, articles, and regulatory comments, the conflict disclosure mandate creates a compliance nightmare, hurts American miners and manufacturers, and does the greatest harm to those it was intended to help — the struggling worker in and nearby the Democratic Republic of Congo.

As explained by Mercatus Center scholars Hester Peirce and James Broughel in their book Dodd-Frank: What It Does and Why It’s Flawed, the “conflict minerals” mandate of Section 1502 is one the law’s many “miscellaneous provisions” that offer “a clear example of how a statute invoked as the answer to the financial crisis is, in reality, an odd conglomeration of responses to issues, many of which had nothing to do with the financial crisis.” Section 1502, championed by celebrities, including Ashley Judd and Ben Affleck, requires all types of firms to disclose their products’ use of five “conflict minerals” — including gold, tin, and tungsten — that can be sourced to war-torn regions of the Congo.

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Former Competitive Enterprise Institute Research Associate Michael Mayfield provided invaluable assistance with this post.

Matt Drudge’s widely discussed tweet that he has already paid Obamacare’s “liberty tax” highlights the uncertainties the self-employed face both from the health care law and the tax code in general. As pointed out by an editorial in Investor’s Business Daily, “self-employed entrepreneurs ranging from Drudge to small-shop proprietors and independent contractors have long been aware of the requirement to estimate their tax liability and send a quarter of it in every three months, and that this amount includes ‘other taxes’ such as the ObamaCare opt-out penalty.”

The threat of the IRS penalty from Obamacare’s individual mandate, perhaps more than the president yukking it up with comedians like Zach Galifianakis, may be driving the apparent pickup in enrollment in advance of the law’s March 31 deadline. “Worries over fines aid health insurance sign-ups,” reads the headline of a March 23 Wall Street Journal article. Even if the penalty this year is relatively small for many Americans, fear of the IRS can be a great motivator.

The good news — for Drudge and other Americans who don’t want to buy an Obamacare-compliant plan due to personal objections or just plain cost — is that in many cases there is a practical escape hatch from the IRS penalty. And this option may end up offering better and more affordable care than Obamacare. The only catch is you’ve got to have a little faith.

Buried in Section 1501 on page 148 of the so-called Patient Protection and Affordable Care Act is an exemption from the individual mandate for a “health care sharing ministry,” a group whose members “share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs.” For any member of such group, the law says, “No penalty shall be imposed.”

It’s somewhat of a mystery how those pushing the law allowed such a potentially large exemption to the individual mandate to be inserted in the first place. This is definitely a case in which the law’s supporters, four years after the law has passed, don’t seem to know what’s in it. But fortunately, many Americans are finding and utilizing this escape hatch.

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Post image for Draconian Dodd-Frank Durbin Debit Controls Need Not Be More Destructive, Court Rules

As the weather finally turns to spring, the D.C. Circuit Court of Appeals today blew a nice cool breeze of common sense.

A bipartisan three-judge panel unanimously overturned district Judge Richard Leon’s July 31 ruling that the Federal Reserve had not made the price controls stemming from Dodd-Frank’s Durbin Amendment draconian enough. Today’s decision by Clinton-appointed Judge David Tatel found that the Federal Reserve “reasonably construct[ed]” the law in considering costs in setting the price caps, and the ruling in fact opens the door to allowing banks and credit unions make retailers pay more of the costs of processing debit cards.

In the wake of cybersecurity attacks on credit and debit cards, this ruling came in the nick of time. In what I had called incredible chutzpah, the trade associations for some of the nation’s largest retailers argued in federal court even after the Target breach that retailers should pay less for fraud prevention and cleanup after fraud losses. That, of course, would mean that innovation would continue to lag behind and even more of the costs of payment processing would be shifted to consumers, as they had ever since the passage of this amendment, which had been inserted into the 2010 Dodd-Frank financial overhaul by Senate Majority Whip Dick Durbin.

The interchange fees that banks and credit unions charge merchants for debit card transactions — what retailers pejoratively call “swipe fees” — have been subject to price controls ever since then. Dodd-Frank’s Durbin Amendment, which came about as a result of heavy lobbying by Target, Wal-Mart and other big retailers, states that the debit interchange fees charged to retailers must be “reasonable and proportional to the cost incurred by the issuer [bank or credit union issuing the card] with respect to the transaction.”

CEI opposed the Durbin Amendment from the start, because we believe price controls are a violation of individual property rights and turn out to be impractical. But many who voted for the Durbin Amendment believed that the price-setting process would be similar to rate regulation of electricity and phone service, in that the fee set would allow for infrastructure and service costs plus what is judged as a “reasonable rate of return.”

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Post image for Johnson-Crapo Is Phony Fannie-Freddie Reform

Ever since the phrase appeared in Shakespeare’s Romeo and Juliet, “A rose by any other name would smell as sweet,” and its variations, have become familiar expressions. A corollary is that garbage by any other name would stink just as badly, if not worse.

The latter phrase seems applicable to the “reform” of the government-sponsored housing enterprises Fannie Mae and Freddie Mac just introduced by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho). The media often describe this plan as “ending” Fannie and Freddie.

And yes, it does “end” them in the sense that there will no longer be entities named Fannie and Freddie. But most of their functions would simply be transferred to a new giant government entity called the Federal Mortgage Insurance Corporation. Not only would the government’s role in subsidizing and micromanaging housing not be reduced, in some ways it would substantially be increased.

The legislation would create, for the first time, an explicit taxpayer guarantee of the GSEs’ $5.6 trillion in debt. The “affordable housing trust fund,” a slush fund for “housing advocacy” groups such as ACORN with political agendas until it was closed due to Fannie and Freddie’s financial woes, would be reopened and parked in the new FMIC.

Worst of all, and sending the worst possible signal to potential private sector investors in the housing market, Fannie and Freddie common and preferred shareholders would be wiped out permanently under the bill’s Section 604.

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Post image for Obama and Camp’s “Carried Interest” Canard Adds Cost and Complexity to Code

Once again, according to a White House summary of his 2015 budget to be unveiled later today, President Obama will call for “closing loopholes” that he says help “Wall Street.” Once again, upon closer examination, these “loophole closures” are actually tax hikes that will hit Main Street the hardest.

There is something different this year, but that “something” is bad news for taxpayers and entrepreneurs. The difference is that House Ways and Means Committee Chairman Dave Camp (R-Mich.) has unfortunately signed onto some of these destructive proposals in the “tax reform” bill he introduced last week.

In particular, both Obama and Camp’s “carried interest” proposals would tax much of the capital gains of partnerships as ordinary income as well as subject them to hefty payroll taxes for Medicare and Social Security. Small business folks and innovative entrepreneurs who structure their firms as partnerships will be hindered by both the cost and complexity of Obama and Camp’s provisions aimed at “Wall Street” fat cats.

In his Wall Street Journal op-ed that ran last week on the day he unveiled his much awaited “tax reform” bill, Camp proclaimed that tax code “should not hinder small businesses from growing into large businesses. And the individual income tax needs to be simpler, fairer and flatter for everyone.”

Camp’s bill does make some needed and long overdue changes to the tax code. He gets rid of the deduction for state and local taxes, which has for decades favored high-taxing “blue” states. It trims the mortgage-interest deduction, a regressive deduction that encourages McMansions and was a big factor in the housing bubble.

It also gets rid of Obamacare’s “medicine cabinet tax,” which severely restricts the purchase of over-the-counter drugs in tax-preferred health savings accounts and flexible spending accounts. As I have written here before, this stealth tax has the perverse effect of tilting consumers toward prescription drugs that would be cheaper to the insured individual but cost the health care system much more.

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george-washingtonHappy Washington’s birthday, everyone! Although the holiday was on Monday, George Washington’s actual date of birth is tomorrow, February 22, in the year 1732.

And one of the many ways to celebrate Washington is to reflect on his pioneering entrepreneurship. That’s right, the father of our country was also one of the first of America’s many visionary entrepreneurs who was largely self-made. As I write in National Review, “Washington’s background wasn’t exactly poor, but he was not as wealthy as many of his contemporaries among the Founders. His father died when he was eleven, and the family lacked money to give him a formal education.”

But Washington learned not only the value of perseverance but of innovation. He abandoned Mount Vernon’s main cash crop of tobacco to cultivate wheat. Then, “pioneering the integration of related enterprises, he became a manufacturer of two products from his crop: flour and distilled whiskey.” As I note, Mount Vernon has reconstructed Washington’s flour mill and whiskey distillery, and they are definitely worth a visit!

Today, we are still a nation of entrepreneurs, but entrepreneurs have much red tape to deal with. One area of bipartisan agreement for barriers that need to be eased is in the area of equity crowdfunding. It is legal to raise funds for music, movies or other ventures on crowdfunding sites such as Kickstarter and IndieGoGo, but only if funders of these projects are offered nothing of real value. Any promise of profit sharing or potential return on investment trigger the same securities laws that apply to Fortune 500 companies.

The Jumpstart Our Business Startups (JOBS) Act signed by President Obama in 2012 was supposed to change this. And indeed the JOBS Act has made it easier for small and midsize companies to go public by delaying onerous provisions of Dodd-Frank and Sarbanes-Oxley for most new initial public offerings (IPOS), spurring the U.S. IPO market. But unfortunately its promise remains elusive for the smallest of entrepreneurs and the ordinary investors who could benefit. The Securities and Exchange Commission proposed a severely restrictive rule for crowdfunding that, as I wrote in CEI’s comments to the agency, “may cost an entrepreneur as much as $39,000 to raise $100,000 through crowdfunding” by the SEC’s own estimate.

I pointed out that equity crowdfunding is not at all radical given the other electronic transaction we engage in every day. “Investors buying the smallest portions of the smallest businesses face more ‘protections’ than if they pay thousands more for a business outright.”

And we should remember that crowdfunding really began while Washington was serving as president in 1790, when merchants and investor who got together in Philadelphia’s taverns and coffee shops formed the Philadelphia Stock Exchange in those very watering holes. Crowdfunding, minus computers but with the (physical) social networking, was how the first stock exchange in the U.S. was formed.

Happy 282nd, Mr. President! May we restore freedom for entrepreneurs following in your footsteps.

Post image for No Obamaloans at the Post Office!

While Sen. Elizabeth Warren may proudly brand herself a populist, in her latest crusade, she is casting her lot with fat cats. Warren wants to bestow banking privileges upon the United States Postal Service (USPS), an organization with executives living high on the hog even as, by Warren’s own admission, its “financial footing” is in doubt.

The USPS pleaded poverty last month as it raised the price of a first-class stamp from 46 to 49 cents and promised that more rate increases are on the way. Yet in 2012, it managed to pay Postmaster General Patrick Donahoe $512,000 in total compensation, according to page 67 of the annual report filed by the Postal Regulatory Commission. And in 2008, then-Postmaster General John E. Potter received more than $800,000 in total compensation and retirement benefits. As The Washington Times noted, “that is more than double the salary for President Obama.”

Dozens of other USPS executives also rank among the vaunted “one percent.” According to the Federal Times, “As the U.S. Postal Service was careening toward a record $8.5 billion loss in 2010, it was paying more than three dozen top executives and officers salaries and bonuses exceeding that of Cabinet secretaries.” In fact, in 2012, Rep. Kathy Hochul, D-N.Y., and other House Democrats sponsored legislation to limit USPS executive salaries to those of cabinet secretaries under the president.

The USPS and its defenders respond that this compensation isn’t as high as that of executives at competitors Federal Express and United Parcel Service, and Warren might argue that it’s not as high as the that of the CEOs of the nation’s biggest banks. But it’s certainly higher than the average compensation of the top folks at community banks and credit unions, as well as other lenders that will be hurt if the USPS expands into banking. And it is certainly more that that made by the average taxpayer, who will almost certainly be even further on the hook for the USPS’s woes.

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Post image for Target, Retailers Use Dodd-Frank to Skimp on Data Security

Chutzpah, thy name is the National Retail Federation!

In the wake of the recent credit and debit card breach at Target that may have compromised the data of up to 110 million consumers, the leading retail trade association argued in federal court on Friday that it should pay even less for fraud prevention and cleanup after fraud losses.

Joined by the National Association of Convenience Stores and the National Restaurant Association, the NRF claimed to the court that it is actually against the law for banks and credit unions to charge retailers for fraud losses in debit card processing fees. “The inclusion of fraud losses in the allowable costs recoverable … cannot be justified,” the groups maintained in a legal brief (page 20).

The interchange fees that banks and credit unions charge merchants for debit card transactions — what retailers pejoratively call “swipe fees” — have been subject to price controls since the passage of the Dodd-Frank financial overhaul in 2010. Dodd-Frank’s Durbin Amendment, which came about as a result of heavy lobbying by Target, Wal-Mart and other big retailers, states that the debit interchange fees charged to retailers must be “reasonable and proportional to the cost incurred by the issuer [bank or credit union issuing the card] with respect to the transaction.”

CEI opposed the Durbin Amendment from the start, because we believe price controls are a violation of individual property rights and turn out to be impractical. But many who voted for the Durbin Amendment believed that the price-setting process would be similar to rate regulation of electricity and phone service, in that the fee set would allow for infrastructure and service costs plus what is judged as a “reasonable rate of return.”

What happened, though, was that ever since the Fed began implementing the provision, the retail lobby has argued that the provision not only bars banks and credit unions from profiting on the fees charged to retailers, only a very limited portion of costs could actually be recovered in the fee.

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Post image for “Wall Street” Regs Devastate Main Street Banks and Credit Unions

Again and again, when regulators implement a new Dodd-Frank regulation aimed at “Wall Street,” it is Main Street banks and credit unions that are forced to push the panic button. Amazingly, over the last couple weeks, it seems like some of Dodd-Frank’s biggest cheerleaders have suddenly heard Main Street’s alarm.

At House Financial Service Committee hearings this week on implementation of the Volcker Rule and the “qualified mortgage” rule from the Dodd-Frank “financial reform” law enacted in 2010, some of the most liberal members of Congress expressed concern about overreach. While praising most of the Volcker Rule at yesterday’s full-committee hearing, Ranking Member Maxine Waters still emphasized the need for “important relief to community banks..”

She added that “most of the Democratic members of this committee urge regulators to provide an exemption” for community banks holding trust-preferred securities. As I wrote last month, the Volcker Rule is forcing banks far away from Wall Street, such as Zions Bancorp in Utah, to sell these long-held debt securities at hundreds of millions of dollars — per bank — in losses. A letter to regulators signed by nearly all the Democratic members of the House committee noted that “hundreds of community banks” could be negatively impacted by Volcker.

Yet as Committee Chairman Jeb Hensarling pointed out in his opening statement, a witness invited by the Democrats at a previous hearing argued that “only a few banks” would be affected. Volcker isn’t the only new Dodd-Frank rule that hurts more than “a few” banks and hits them in locations far away from Wall Street.

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Post image for The Great Italian Auto Bailout — Courtesy of U.S. Taxpayers

At the beginning of 2014, Detroit may be bankrupt, but they’re cheering the five-year-old U.S. auto bailout in Italy. That’s because after being the beneficiary of billions in U.S. taxpayer largesse, Fiat, the leading Italian auto company, is going to buy its final stake in Chrysler from that other big bailout recipient, the United Auto Workers (UAW).

“Chrysler’s Now Fully an Italian Auto Company,” reads the Time magazine online headline. But wait a minute! Wasn’t the bailout supposed to be about saving the American auto industry?

As Mark Beatty and wrote in The Daily Caller in November 2012, after presidential candidate Mitt Romney made the controversial claim that Fiat would be expanding production of Chrysler’s Jeep in China (a claim that turned out to be correct),

The real outrage arising from the 2009 Chrysler bailout is not that its parent company, Fiat, is planning to build plants in China. It’s that the politicized bankruptcy process limited Chrysler’s growth potential by tying it to an Italian dinosaur in the midst of the European fiscal crisis. The Obama administration literally gave away ownership of one of the Big Three American auto manufacturers to an Italian car maker struggling with labor and productivity issues worse than those that drove Chrysler to near-liquidation.

As we noted in the piece, much of Chrysler’s profits from its overhauled line are going to prop up Fiat’s failing, money-losing Italian business, rather than to expanding production and jobs in the U.S. Moody’s had downgraded Fiat’s credit rating to “junk” even before the Obama administration arranged for it to acquire a Chrysler stake, and in Autumn 2012, Moody’s gave Fiat another downgrade that the Financial Times described as even “further into ‘junk’ territory.”

Around this time, Barron’s put it like this in a headline, “This time, Chrysler could bail out Fiat.” Actually, the Barron’s headline is slightly misleading in one respect — Fiat didn’t contribute much of anything to the Chrysler’s bailout.

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