On the same day that the Food and Drug Administration allowed women over-the-counter access to one progestin-only birth control pill, Rep. Mariannette Miller-Meeks (R‑Iowa) introduced the OTC (Orally-Taken Contraceptive) Act in the U.S. House of Representatives. The bill has seven Republican women co-sponsors. Notably, Rep. Miller-Meeks is also a medical doctor. As I have, the American College of Obstetrics and Gynecology, the American Academy of Family Physicians, and the American Medical Association have long supported making all hormonal contraceptives over-the-counter available.

Last session, Miller-Meeks co-sponsored the “Allowing Greater Access to Safe and Effective Contraception Act,” which instructed the FDA to prioritize contraceptive makers’ applications for over-the-counter status. But the OTC Act goes much further. The bill directs the FDA to provide guidelines to makers of hormonal contraceptives intended to facilitate their application for over-the-counter approval. 

The bill’s language appears inspired by how the FDA gradually nudged Emergent BioSolutions, the makers of Narcan naloxone nasal spray, to seek the agency’s approval for over-the-counter sales. In that case, the FDA told makers of Narcan, who could charge high prices to third-party payers for the prescription drug, that the agency was likely to approve a generic competitor for over-the-counter access. The company then sought approval for over-the-counter status. Providing guidelines to hormonal contraceptive manufacturers on how to expedite over-the-counter approval might have a similar effect.

Congress has the authority to order the FDA to reclassify all hormonal contraceptives as over-the-counter by a specific date. But this bill certainly helps move the ball in the right direction.

A few weeks ago, American Compass released Rebuilding American Capitalism, A Handbook for Conservative Policymakers. This Forbes column (American Compass Points To Myths Not Facts) provided a very brief critique of the handbook’s “Financialization” chapter, and Oren Cass, American Compass’s Executive Director, released a response titled Yes, Financialization Is Real.

Today’s Cato at Liberty post is the second in a series that expands on the original criticisms outlined in the Forbes column. (The first in the series is available here.) This post deals with American Compass’s claim that the financial sector has siphoned off “top business talent” to the detriment of the rest of the economy.

The evidence does not support American Compass’s claims. The post also points out the inconsistency between American Compass’s complaints about (allegedly) stagnant American income and an influx of people working in higher-paying fields.

To recap, American Compass’s handbook states the following:

American finance has metastasized, claiming a disproportionate share of the nation’s top business talent and the economy’s profits, even as actual investment has declined.” [Emphasis added.]

The original critique was that American Compass failed to provide supporting evidence for these claims, and that such supporting evidence doesn’t exist. It also pointed out the number of people employed in the Finance and Insurance industry, as a share of total nonfarm employees, has barely budged from 4.5 percent since 1990.

To provide evidence that the nation is, in fact, losing its top business talent to the financial industry, Cass’s response pointed to two paragraphs in a separate report that Cass wrote, Confronting Coin-Flip Capitalism. Our critique assumes that “coin-flip capitalism” is the same phenomenon as “financialization.” The first of the two paragraphs is reproduced here:

Graduates of America’s top business schools provide a useful proxy for the attraction of various industries and, from 2015 to 2019, nearly 30% of graduates from Harvard, Stanford, Wharton, Booth, Kellogg, Columbia, and Sloan went into finance. In 2020, the finance industry was the most popular and offered the most generous compensation packages for graduates of the MBA programs at both Harvard and Stanford. [See also, our Guide to Private Equity.]

This first paragraph does not provide evidence that finance has claimed a disproportionate share of the nation’s top business talent. It merely refers to several years of placement data from some of America’s top business schools, not a systematic study. The paragraph provides evidence that a large portion of top business school graduates choose to work in finance. That fact is hardly surprising, and it is not evidence that the proportion has changed or that businesses have been harmed.

The second paragraph is reproduced here:

Engineers have likewise flocked to Wall Street, as compensation at equivalent education levels surged in finance as compared to engineering after 1980. The probability of an engineer switching to a finance career increased more than four-fold from the 1980s to the 2010s; the share of “STEM” jobs in finance doubled over that period while the share in manufacturing fell by half. Lest one think these are the engineers who couldn’t hack it in engineering, Nandini Gupta and Isaac Hacamo of Indiana University’s Kelley School of Business find that “financial sector growth attracts exceptionally talented engineers from other sectors to finance.”

Citing three research papers, American Compass bemoans the finding that “Engineers have likewise flocked to Wall Street.” Our critique assumes that engineers should be included in the category of “top business talent.”

First, even if business majors and engineers do choose finance versus other fields, that fact alone says nothing about why they make such choices, much less whether such choices cause harm to the nation’s economy. Such choices could simply reflect that people tend to seek opportunities to earn higher compensation, and the outcome could be beneficial to the economy. And, in fact, between 1968 and 2022,[1] average annual real wage and salary growth was higher in finance than in several other sectors, including engineering. (See Figure 1.)

Average annual real wage and salary growth is 1.73 percent in finance since 1968, but 1.26 percent in engineering and 1.36 percent in computer services. Thus, even though wages in finance are lower than in computer sciences or engineering (see Figure 2), their higher growth rate could help explain why many people would choose finance jobs relative to other fields.

None of these facts are indicative of an economic problem. If American Compass believes that people earning so much more in the computer field harms Americans, they should say so. Similarly, if American Compass believes that a 0.47 percentage point difference in average income growth between the financial and engineering sectors reveals businesses have been harmed, they should state their hypothesis clearly and make an empirical case.

Surely, though, an organization such as American Compass, one that constantly complains about stagnant income, would not begrudge Americans for choosing to work in a higher paying field. (Figure 1 and Figure 2 also demonstrate that Americans’ income is not stagnant. Real wage and salary growth has been positive across almost all sectors and time periods, with cumulative growth of 71 percent even in the manufacturing sector. We’ll return to this issue in a future post.)

Of course, even this compensation growth data tells us very little about why the different rates of growth occurred in the various sectors. However, one of the academic research papers Cass cites in his response does provide an explanation for this difference. Specifically, we’re referring to the paper by Thomas Philippon and Ariell Reshef, titled “Wages and Human Capital in the U.S. Finance Industry: 1909–2006,” which was published in the prestigious Quarterly Journal of Economics in 2012.

In that paper, the authors show that the labor market in finance was artificially suppressed between 1940 and 1980 due to an over-bearing regulatory environment. In other words, overall wages and employment in finance would have been much higher without the heavy regulation in that sector. Consequently, the uptick in wages and employment after 1980 are likely due to the finance labor market reverting back to its non-suppressed state (similar to pre-1940) after the regulatory environment changed (precisely what economics would predict). Here’s a quote from page 1552:

We find a tight link between deregulation and the flow of human capital in and out of the finance industry. In the wake of Depression-era regulations, highly skilled labor leaves the finance industry and it flows back precisely when these regulations are removed in the 1980s and 1990s. This link holds for finance as a whole, as well as for sub-sectors within finance. Our interpretation is that tight regulation inhibits the creativity of skilled workers.

So, this paper does not support American Compass’s position that anything bad has happened; instead, it argues that any employment increase seen in finance is essentially a reversion to a state where skilled workers’ creativity is no longer inhibited.

Another of the three papers is a Kelley School of Business working paper from 2022 by Nandini Gupta and Isaac Hacamo. This paper is an even stranger choice for American Compass to cite as proof of some kind of harm caused by financialization (or coin-flip capitalism). It shows that the net effects of people working in finance boost entrepreneurship. Here is the relevant language (from two separate paragraphs on page 4 of the paper):

Our results show that the finance wage premium increases overall entrepreneurship. This may occur because engineer-financiers are more likely to become entrepreneurs. Or, because talented engineers in finance facilitate entrepreneurship by others. We find that engineers who take finance jobs are less likely to subsequently start firms. Therefore, we study a potential peer effects mechanism where engineer-financiers may help their classmates become entrepreneurs.

…

We find the following results: First, we show that top engineers exposed to a higher finance wage premium at graduation are more likely to take jobs in entrepreneurial finance (EF) jobs in venture capital, private equity, and investment banking. Second, we show that engineers who don’t take finance jobs are more likely to become transformational entrepreneurs the more classmates from the same school-major-graduation year who are in venture capital, private equity, and investment banking firms. For example, an engineer with 5 classmates in entrepreneurial finance jobs is 9% more likely to become an entrepreneur and 18% more likely to create a transformational firm that issues patents, employs workers, and has a successful exit, relative to the mean.

At the very least, the paper’s results are consistent with the literature on peer-effects “whereby engineers in investment banking type jobs help their classmates start transformational firms.” Obviously, it’s very odd to cite this paper as evidence that financialization is some kind of blight on capitalism. It implies the opposite: the overall labor market trend is good for the economy.

The third paper is a 2022 working paper by Giovanni Marin and Francesco Vona, and the evidence it provides does not show that finance is now claiming a disproportionate share of STEM talent. For instance, the authors show that the probability a STEM graduate starts working in finance rose between 1980 and 2019, from 4 percent to 6.8 percent. However, they also report a substantial increase for non-STEM graduates – it rose from 6.5 percent in 1980 to 8.2 percent in 2019. (See page 9.)

The authors of this third paper also report (see pages 3 and 4) that they “observe a pronounced task reorientation towards math in finance and business occupations, which is associated with a change in the types of education required in these occupations.” (Emphasis added.) In other words, they observe a change in education requirements for multiple occupations, one that (especially in finance) is “more pronounced among experienced workers.”[2] Additionally, the paper corroborates that the drift of STEM graduates to finance is simply a result of people finding the best match of talent and innovation:

These empirical patterns are associated with profound technological changes affecting the financial industry more than the rest of the economy. Finance is an information-intensive industry that benefited from improvements in information and communication technologies (ICT) more than other industries did. The STEM biasedness in the demand of college graduates is consistent with the complementarity between ICT technologies and STEM graduates.

Finally, Marin and Vona report (see graph B on page 10) the share of hours worked by college graduates in the finance industry for both STEM and non-STEM graduates between 1980 and 2020. Both STEM and non-STEM groups display an increasing trend, and the share for non-STEM graduates remains roughly two percentage points higher than for STEM graduates for the full period. Though not quite as damning as the previous two papers, this one, too, fails to support the idea that finance has started claiming a disproportionate share of talent.

So, on balance, none of this evidence – especially not the papers cited by American Compass – supports the idea that finance is responsible for robbing the nation’s businesses of talent. Nor, as American Compass argues in Confronting Coin-Flip Capitalism, does any of this evidence support that finance is robbing talent “from the real economy” and “further discouraging productive investment.”

On page 102 of his book, Cass supports the “tracking of less academically talented students toward vocational training,” so he may have some optimal employment arrangement in mind for the financial sector. Perhaps someone else at American Compass has some idea what the optimal quantity of workers should be in the financial sector, but the “Financialization” chapter does not mention it.

In the next post, we will discuss claims involving financialization’s alleged effect on profits.

Last November, I wrote about Senator Mike Lee’s (R‑UT) effort to reduce pharmaceutical expenditures by introducing the Biosimilar Red Tape Elimination Act. This was an attempt to streamline the Food and Drug Administration’s process to approve so-called biosimilar drugs. The bill didn’t pass in the last Congress, but yesterday Senator Lee introduced a new and improved version. Biological drugs were only 0.4 percent of U.S. prescriptions, yet they accounted for 46 percent of U.S. drug spending in 2018.

Unlike conventional medicines, which drug companies chemically synthesize to a specific molecular structure, biological medicines have natural sources. Vaccines and blood products are examples of biologicals. When conventional drug patents expire, pharmaceutical makers produce generic versions to compete with the original drugs. The competition usually causes prices to come down. When biological drug patents expire, drug makers make biosimilar versions to compete with the original, thus driving down prices.

When the FDA approves a biosimilar, it defines it as having “no clinically meaningful difference” from the original (reference) biologic. FDA regulations can make it cost up to $250 million and take up to eight years for a drug maker to bring a biosimilar to market. The barriers to entry for biosimilars are much more challenging to overcome than those typically seen for generics.

But it gets even more complicated. In addition to the FDA determining that a biosimilar has no clinically meaningful difference from the reference drug, Congress created a category called interchangeability. For the FDA to classify biosimilars as interchangeable with the reference drug, manufacturers must put them through switching studies, delaying and increasing the cost of bringing biosimilars to market. These are trials where participants alternate back and forth between the reference drug and biosimilars to prove safety and efficacy. Unless they pass switching studies, the FDA will not approve biosimilars as substitutes for the reference drug.

This is important because some states have passed laws prohibiting pharmacists from substituting biosimilars for more expensive reference drugs if the FDA has not classified them as interchangeable.

Years of research suggest that “interchangeability” is unnecessary. Writing in the Journal of Clinical Pharmacy and Therapeutics, Dr. Sarfaraz Niazi stated:

FDA proposition that retesting an approved biosimilar is needed to allow it to interchange is faulty and irrational. Clinical efficacy testing is not needed for products that are supposed to be the same or highly similar because of the lack of sensitivity to show any difference. Once declared to have “no clinically meaningful difference,” biosimilars should be interchangeable at the discretion of the prescriber. Two classes of biosimilars in the US will only help larger companies to prevent the entry of cost‐​effective biosimilars.

Furthermore, last year the European Medicines Agency (EMA)—the European Union’s equivalent of the FDA—announced that it would not require switching studies to approve biosimilars and that all approved biosimilars “can be interchanged.”

In April 2023, the American Society of Clinical Oncology called for ending the interchangeability requirement. One month later, the American Medical Association House of Delegates approved a resolution that stated:

RESOLVED, That our AMA advocate for state and federal laws and regulations that support patient and physician choice of biosimilars and remove the “interchangeable” designation from the FDA’s regulatory framework.

The bill Senator Lee introduced last year prohibited the FDA from requiring biosimilar drugs to undergo switching studies before the agency approves them as interchangeable with the original biological medicine. The new, improved version he introduced yesterday is more straightforward and definitive. It would amend the federal code to state that all biosimilars that receive FDA approval are, by definition, interchangeable. This wording addresses state laws blocking pharmacists from dispensing biosimilars that the FDA had not explicitly designated as interchangeable.

The new version of the bill improves on the previous version. It should help to lower health care costs and improve patient access to the rapidly growing biological medicines market. It will bring FDA regulations into better harmony with EMA regulations. Unfortunately, the Biosimilar Red Tape Elimination Act leaves the rest of the cumbersome pharmaceutical regulatory regime intact.

As Michael F. Cannon and I pointed out in our white paper, the pharmaceutical regulatory system badly needs a complete reformation.

Seven conservative state attorneys general led by Indiana’s Todd Rokita have sent a letter to the chairman and CEO of the Target Corporation, Brian Cornell, threatening ill-specified legal action because of the retailer’s sale of Pride merchandise including t‑shirts, onesies and other children’s apparel, as well as its financial support of the private advocacy group GLSEN (Gay, Lesbian, and Straight Education Network). The letter is an effort to chill the retailer’s liberty to engage in conduct protected by the First Amendment to the Constitution; beyond that, much of it is based on false, incoherent, or simply missing legal analysis.

Target’s sale of Pride merchandise has generated controversy and backlash, some of it factitious, but whether you consider the bibs and tote bags cute or cringe is neither here nor there. Let’s instead cut to the legal chase: inasmuch as they send a message by displaying controversial words and symbols, they are plainly speech for First Amendment purposes. That is why the authorities in Lexington, Ky., were plainly in the wrong ten years ago when they threatened charges under municipal anti-discrimination law against a screen printer that declined to print message shirts for a gay rights organization. (The complaint was eventually disallowed on other grounds.) I’d be surprised if prominent legal conservatives like these seven state officials don’t know about that compelled-speech case, which stirred justified outrage more than a decade before the case of Lorie Smith and 303 Creative v. Elenis. (Besides Rokita, the attorneys general are Andrew Bailey of Missouri, Tim Griffin of Arkansas, Daniel Cameron of Kentucky, Raul Labrador of Idaho, Lynn Fitch of Mississippi, and Alan Wilson of South Carolina.)

Rokita’s letter suggests that the merchandise Target offered for sale might be deemed obscene or “harmful to minors,” but as attorney Ari Cohn points out, it is vanishingly unlikely that any federal court would find the actual merchandise to fall under the existing legal definitions of these terms, which tend to require (among other things) the presence of nudity, sexual conduct, and the like. Perhaps grasping the weakness of this legal ground, Rokita’s letter goes on to cite entirely irrelevant legislation on such topics as what books should be stocked in public school libraries. It also curiously invokes parental rights, although its gist is to assert the authority of government rather than parents, to the point of dismissing the autonomy of parents who are presumably capable of deciding for themselves what bibs are welcome in their homes or as a gift at their baby showers.

Particularly disturbing is the letter’s suggestion that Target has somehow overstepped a legal line by contributing to the private advocacy group GLSEN. It seems based on the idea that not only is there something unlawful in being a group that advocates for some kinds of wrongheaded laws and policies, but it might be unlawful even to be a donor to such a group. Even if you don’t think drawings on t‑shirts exemplify core protected political speech, this clearly does. Writes Cohn: “This thinly-veiled threat that Target could face prosecution if it doesn’t stop donating to advocacy that government officials don’t like is wholly beneath contempt, and should be repulsive to every American.”

The letter falls into the unlovely official tradition of “jawboning” to apply pressure against otherwise protected speech — a pattern we’ve seen elsewhere, for example, in some progressive governments’ economic war against Second Amendment advocacy. As Cato colleague Will Duffield wrote the other day, commenting on a widely noted July 4 ruling by federal judge Terry Doughty in a case over White House jawboning of social media platforms, it can be quite difficult “to draw clear lines between constitutionally acceptable notification and even persuasion, and impermissible pressure and bullying.” That is, at least, unless the government actors get truly blatant about threatening to use their government powers in an effort to coerce the takedown — as here. 

In a piquant juxtaposition, Andrew Bailey, the attorney general of Missouri, took a victory lap after his state won a favorable ruling in the social media case, only to turn around the next day and appear as a signatory of the Rokita letter. It all depends on what level of government is doing the browbeating to accomplish the takedown, doesn’t it? 

Recent years have brought significant changes to Idaho public finances. In addition to rapid increases in population and tax revenue, the state experienced a sharp increase in its Medicaid costs. Legislators, worried that a continued escalation could jeopardize the state’s robust fiscal health, created a task force to investigate whether the state could better control Medicaid spending growth by implementing managed care. While switching beneficiaries from traditional fee-for-service coverage to managed care is intuitively attractive, it may not be the right choice for Idaho policymakers in 2023.

The accompanying figure shows the state’s actual costs for the ten fiscal years ending FY 2022, a near final estimate of FY 2023 expenditures based on a review of remittances from the State Controller’s Transparent Idaho platform, and budgeted amounts for FY 2024. The most rapid cost escalation occurred since FY 2020.

According to the Centers for Medicare and Medicaid Services, Idaho Medicaid enrollment soared from 242,000 in December 2019 to 419,000 in March 2023, the last month for which data are available. Although some of this growth may be linked to migration into the state, two other factors were more critical. First, Idaho implemented Medicaid expansion at the beginning of 2020, allowing all adults with incomes up to 138% of the federal poverty level to join the program. Second, the federal government prohibited states from removing beneficiaries who no longer qualified for the program from the Medicaid rolls during the COVID public health emergency. This prohibition ended in April and Idaho should be able to reduce its beneficiary count in the coming months by conducting systematic eligibility redeterminations.

So, it is reasonable to conclude that Idaho’s Medicaid cost growth is more the result of an expanded enrollment base than of rising costs per enrollee, which is the problem managed care is supposed to address. Managed care promises to lower costs by restricting and coordinating a plan member’s use of medical services. Instead of seeing any provider that accepts coverage, the enrollee receives care from within the Managed Care Organization’s (MCO) provider network. The MCO receives a fixed “capitation” payment from the state for each covered beneficiary each month.

While Medicaid MCOs can save money by restricting the range of available providers, they cannot use a second lever that MCOs usually rely upon in the private insurance market to control costs: patient responsibility payments. Federal policy generally does not allow Medicaid MCOs to impose copayments or deductibles. As a result, Medicaid patients have no financial disincentive to seek medical care.

Two other factors militate against the ability of Medicaid managed care to yield significant savings. First, the MCO must cover its costs and earn a profit for its owners (and even a not-for-profit MCO can be expected to pursue revenues greater than expenses to build internal reserves). The largest for-profit Medicaid MCO, Centene Corporation, reported a $2 billion pretax profit on $145 billion in revenue for 2022. This is a modest profit margin, but the company also had $12 billion in selling, general and administrative expenses. (These amounts are company-wide totals including Centene’s Medicare and private plan management activities, as well as its Medicaid Managed Care services.)

A second consideration is that MCOs are compensated for inactive Medicaid enrollees. If someone on Medicaid gets other coverage, he or she may start using that alternative coverage without advising the state Medicaid office. The individual thus remains on the rolls even though he or she is not using services. Under a fee-for-service model, this is not an issue from a state budgeting standpoint because the individual does not generate any provider claims. But if that same individual is in managed care, the MCO will continue receiving per member per month (PMPM) payments until the state determines that he or she is no longer eligible.

There is some evidence that this latter effect can be large. In response to a public records request, a Los Angeles-based publicly owned Medicaid MCO told this author that 327,000 or 29% of its 1.125 million members did not receive any services during the 2021–22 fiscal year. The proportion of inactive beneficiaries may have been especially high that year due to the federal prohibition on redetermining eligibility discussed earlier.

Empirical research on cost savings from Medicaid Managed Care has yielded mixed results. A 2012 meta-analysis found a “paucity of evidence on cost savings from Medicaid managed care.” A more recent meta-analysis cited by Idaho’s consulting firm, Sellers Dorsey, found some evidence of cost savings from Medicaid managed care in Florida, Kentucky, and Pennsylvania. However, the consultant characterized these findings as anecdotal and state specific. Sellers Dorsey concluded: “While managed care typically does not (at least, not initially) reduce costs to the State, it can bring budget stability and predictability through the rate setting process and the transition of financial risk to the managed care entities.”.

It is commendable that Idaho legislators stood up a task force to investigate a commonsense way to save state and federal taxpayers money on the state’s growing Medicaid program. But the case for Medicaid Managed Care is decidedly mixed, and so it is important that the task force consider not only how to extend managed care in Idaho but whether to do so. Although the task force report is due on January 31, 2024, we may not have enough data to know by then whether the return of Medicaid redeterminations has sharply bent the program’s cost curve. It may thus be wise to defer any decision on managed care for several additional months.

Earlier this week an unusual event took place: a U.S. shipyard delivered an oceangoing merchant ship. Named the Janet Marie, the vessel will transport goods between Hawaii and the U.S. mainland. Anyone tempted to toast the new ship as a symbol of U.S. shipbuilding prowess, however, should keep the champagne bottle corked. More an embarrassment than cause for celebration, the containership serves as a rich symbol of the heavily protected U.S. shipbuilding industry’s myriad shortcomings.

The most glaring problem with the Janet Marie is its price. Although the exact figure has not been published, its George III sister ship—a vessel delivered last year with the exact same specifications—was revealed to cost “$225 million-plus.” It’s a safe bet Janet Marie did not cost less. In comparison, two similarly-sized containerships were ordered from a South Korean shipyard in 2021 for $41 million each. The vast difference ($184 million) is no anomaly, comporting with previous assessments from maritime industry observers that U.S.-built cargo ships are five times the price of those constructed abroad. 

The length of time required to build the Janet Marie provides another unfavorable contrast. From the time steel was cut until the ship’s delivery was approximately 50 months. In contrast, the Ever Alot—one of the largest containerships in the world with a cargo capacity nearly 10 times that of the Janet Marie (and a price tag $80 million lower)—required just 19 months to build. Originally slated for delivery in the third quarter of 2020, the Janet Marie is a full three years late.

Unfortunately, construction times significantly longer than those of foreign shipyards have been a feature of the U.S. shipbuilding industry for decades. 

Faced with such high prices and lengthy construction times, the market for U.S.-built merchant ships is limited to those who must buy them to comply with the 1920 Jones Act, which requires vessels transporting goods within the United States to be constructed in U.S. shipyards. Understandably, these vessel operators delay purchasing new ships for as long as possible. Instead of buying new ships when existing ones approach the 20 year mark as is commonly done abroad, Jones Act-compliant ships are often not scrapped until age 40 or older.

As a result, few ships are built. In fact, with the Janet Marie now delivered there are currently no merchant ships under construction in the United States (there are, however, three containerships on the order book slated for delivery in 2026 and 2027 at the astounding price of $333 million each).

Since 2000 deliveries of oceangoing merchant ships by U.S. shipyards combined have averaged fewer than three per year.

In comparison, a single shipyard in South Korea is slated to deliver 47 ships this year alone.

But it’s not just the large shipbuilders in Asia that have left protected American shipyards in the dust. Even European shipyards are churning out more vessels than those in the United States. Dutch shipyards, for example, delivered nearly 118,000 gross tons of merchant vessels in 2021 (latest available numbers) compared to less than 33,000 gross tons for U.S. shipyards. At 147,000 gross tons, Norway delivered almost five times the U.S. figure.

That U.S. shipyards produce so relatively little while charging so much should come to the surprise of no one. Having a captive Jones Act market means reduced incentive for U.S. shipyards to achieve the specialization and scale required for competition in the international market. It also means less competitive pressure—why be world-class when a lesser standard will suffice?

Another prominent factor is the large government contracts reserved for U.S. shipyards that many shipbuilders have prioritized at the expense of commercial shipbuilding. Indeed, the CEO of Overseas Shipholding Group, which operates Jones Act-compliant tankers, recently described the construction of commercial vessels to comply with the Jones Act as “a minor sideline interest” for most U.S. shipyards. His assessment appears borne out by the numbers, with a U.S. Maritime Administration study finding that government contracts accounted for nearly 80 percent of U.S. shipyard revenue in 2019.

Despite the U.S. shipbuilding industry’s extraordinary costs and trivial levels of output, some may believe that protectionism is nonetheless warranted to avoid U.S. reliance on foreigners for its shipbuilding needs. But the Jones Act doesn’t even do that. The Janet Marie’s sister ship delivered last year, for example, is chock full of foreign components. A sampling of the ship’s suppliers includes the China State Shipbuilding Corporation (supplier of the ship’s provision cranes), Alfa Laval (Qingdao) Ltd. (fired exhaust gas boiler), Zhenjiang Tongzhou Propeller Co. (fixed pitch propeller), and Jiangsu Xiangsheng Heavy Industries Co. (anchors and anchor chains).

That’s par for the course. Tankers built by the Philly Shipyard from 2004-06 required approximately 500 containers per vessel of material from South Korea as well as roughly 25 bulk shipments for larger items such as the main engine. While there is nothing wrong with relying on imported parts (imagine how costly these ships would be if all the components had to be U.S.-made as well!), notions that U.S. shipyards can produce ships without the need of foreigners is wishful thinking.

The Jones Act’s requirement that vessels used in domestic trade be constructed in U.S. shipyards fails to pass even the faintest whiff of a cost-benefit analysis. Among its harms include higher costs for those that must rely on these ships, added stress on infrastructure and congestion as transport is shifted to less expensive modes, irritated relations with U.S. trading partners and allies, and a smaller and older U.S. fleet than would otherwise be the case.

The other side of the ledger, meanwhile, consists of a commercial shipbuilding industry that punches well below its weight. Indeed, when the United States first required ships flying the U.S. flag to be domestically built U.S. merchant shipbuilders were among the world’s best and most competitive. Now they are a global afterthought, and there is good reason to think the industry would be better off without such heavy-handed protectionism.

Rather than a triumph, the Janet Marie offers a cautionary tale of protectionism’s heavy toll. The Jones Act’s U.S.-built requirement—if not the law entirely—should be discarded immediately.

In 2020, Congress passed the Horseracing Integrity and Safety Act (HISA). HISA established a private nonprofit corporation called the Horseracing Integrity and Safety Authority (the Authority). HISA empowered the Authority to formulate detailed rules governing the thoroughbred horseracing industry. Through this rulemaking power, the Authority could create programs regulating anti‐​doping efforts, horse medication, and racetrack safety.

Several groups sued to challenge HISA on multiple grounds. Their case reached the U.S. Court of Appeals for the Fifth Circuit, which held that one of those claims was successful. The court found that HISA unconstitutionally granted unchecked governmental power to a private entity, namely the Authority. Although the Federal Trade Commission (FTC) had some power to review rules issued by the Authority, the FTC could not review the Authority’s policy judgments. Because the Authority had the final word on questions of government policy, the Court held that HISA was unconstitutional

In response to this decision, Congress amended HISA in 2022. In an attempt to save the law, Congress gave the FTC more supervisory power over the Authority than it had before. Now the FTC can issue its own rules that abrogate, add to, or modify the Authority’s rules, including on questions of policy. But unless and until the FTC chooses to do so, the Authority’s rules remain just as binding as before.

The case then went back to a federal district court in Texas, which reviewed the challengers’ claims against the new version of HISA. The district court rejected each of the challengers’ claims, holding that the 2022 amendments had brought HISA into compliance with the Constitution. Now the challengers have once again appealed their case to the Fifth Circuit. And Cato has filed an amicus brief supporting that appeal, joining Reason Foundation, The Competitive Enterprise Institute, The Goldwater Institute, The Manhattan Institute for Policy Research, and The Niskanen Center.

Our brief focuses on just one of the challengers’ many claims: HISA violates the Constitution’s “Appointments Clause.” The Constitution requires, as a default rule, that “Officers of the United States” must be nominated by the president and confirmed by the Senate. The Constitution allows only one potential exception to this default rule: If an officer is merely an “inferior officer,” Congress may waive Senate consent. But even if an officer is inferior, Congress is limited to only three choices for who may appoint that officer: “the President alone,” “the Heads of Departments,” and “the Courts of Law.”

The challengers argued that the directors of HISA are “Officers of the United States” because they still hold significant governmental power, even after the 2022 amendments. And if the directors are indeed officers, there is no doubt they were appointed unconstitutionally. None of the directors were appointed by the president, a department head, or a court.

In our brief, we explain how the district court failed to properly evaluate this Appointments Clause argument. Puzzlingly, the district court did not even cite the foundational modern Appointments Clause case, Buckley v. Valeo (1976). Buckley established the current legal test for whether a person is an “officer” in the constitutional sense. Buckley held that “officers” are those who have continuing positions and wield “significant authority pursuant to the laws of the United States.”

Instead of asking whether the Authority’s directors possess significant federal power, the district court instead focused on whether the Authority is “public” or “private.” Because the Fifth Circuit had held that the Authority was private, the district court concluded that the Authority’s directors cannot be officers. In the district court’s view, “private entities are not subject to the constitutional requirements governing appointment and removal of officers.”

But as our brief explains, that cannot be right. The government cannot evade constitutional limits by simply vesting governmental power in a private entity. Otherwise, the government could easily create private corporations and grant them legal authority to suppress the freedom of speech, violate due process, or engage in other constitutional violations. What matters is not whether an entity is private but whether it has been granted the government’s power. The Authority has the power to issue binding federal rules, which means its directors exercise significant federal authority.

The Authority’s directors are thus “Officers of the United States” who were never properly appointed. For that reason, the Fifth Circuit should once again hold HISA unconstitutional.