Economics

Breaking the Tech Chain To Slow the Growth of Single-Family Rentals

April 17, 2022
Antitrust, Artificial Intelligence, Competition, Data, Discrimination, Economics, Economy, New Technology

Sarah Bauer, MJLST Staffer

For many of us looking to buy our first homes during the pandemic, the process has ranged from downright comical to disheartening. Here in Minnesota, the Twin Cities have the worst housing shortage in the nation, a problem that has both Republican and Democratic lawmakers searching for solutions to help both renters and buyers access affordable housing. People of color are particularly impacted by this shortage because the Twin Cities are also home to the largest racial homeownership gap in the nation.

Although these issues have complex roots, tech companies and investors aren’t helping. The number of single-family rentals (SFR) units — single-family homes purchased by investors and rented out for profit — have risen since the great Recession and exploded over the course of the pandemic. In the Twin Cities, black neighborhoods have been particularly targeted by investors for this purpose. In 2021, 8% of the homes sold in the Twin Cities metro were purchased by investors, but investors purchased homes in BIPOC-majority zip codes at nearly double the rate of white-majority neighborhoods. Because property ownership is a vehicle for wealth-building, removing housing stock from the available pool essentially transfers the opportunity to build wealth from individual homeowners to investors who can both profit from rents as well as the increased value of the property at sale.

It’s not illegal for tech companies and investors to purchase and rent out single-family homes. In certain circumstances, it may actually be desirable for them to be involved in the market. If you are a seller that needs to sell your home before buying a new one, house-flipping tech companies can get you out of your home faster by purchasing the home without a showing, an inspection, or contingencies. And investors purchasing single-family homes can provide a floor to the market during slowdowns like the Great Recession, a service which benefits homeowners as well as the investors themselves. But right now we have the opposite problem: not enough homes available for first-time owner-occupants. Assuming investor-ownership is becoming increasingly undesirable, what can we do about it? To address the problem, we need to understand how technology and investors are working in tandem to increase the number of single-family rentals.

The Role of House-Flipping Technology and iBuyers

The increase in SFRs is fueled by investors of all kinds: corporations, local companies, and wealthy individuals. For smaller players, recent developments in tech have made it easier for them to flip their properties. For example, a recent CityLab article discussed FlipOS, “a platform that helps investors prioritize repairs, access low-interest loans, and speed the selling process.” Real estate is a decentralized industry, and such platforms make the process of buying single-family homes and renting them out faster. Investors see this as a benefit to the community because rental units come onto the market faster than they otherwise would. But this technology also gives such investors a competitive advantage over would-be owner-occupiers.

The explosion of iBuying during the pandemic also hasn’t helped. iBuyers — short for “instant buyers” — use AI to generate automated valuation models to give the seller an all-cash, no contingency offer. This enables the seller to offload their property quickly, while the iBuyer repairs, markets, and re-sells the home. iBuyers are not the long-term investors that own SFRs, but the house-flippers that facilitate the transfer of property between long-term owners.

iBuyers like Redfin, Offerpad, Opendoor (and formerly Zillow) have increasingly purchased properties in this way over the course of the pandemic. This is true particularly in Sunbelt states, which have a lot of new construction of single-family homes that are easier to accurately price. As was apparent from the demise of Zillow’s iBuying program, these companies have struggled with profitability because home values can be difficult to predict. The aspects of real estate transactions that slow down traditional homebuyers (title check, inspections, etc…) also slow down iBuyers. So they can buy houses fast by offering all-cash offers with no inspection, but they can’t really offload them faster than another seller.

To the degree that iBuyers in the market are a problem, that problem is two-fold. First, they make it harder for first-time homeowners to purchase homes by offering cash and waiving inspections, something few first-time homebuyers can afford to offer. The second problem is a bigger one: iBuyers are buying and selling a lot of starter homes to large, non-local investors rather than back to owner-occupants or local landlords.

Transfer from Flippers to Corporate Investors

iBuyers as a group sell a lot of homes to corporate landlords, but it varies by company. After Zillow discontinued its iBuying program, Bloomberg reported that the company planned to offload 7,000 homes to real estate investment trusts (REITs). Offerpad sells 10-20% of its properties to institutional investors. Opendoor claims that it sells “the vast majority” of its properties to owner-occupiers. RedfinNow doesn’t sell to REITs at all. Despite the variation between companies, iBuyers on the whole sold one-fifth of their flips to institutional investors in 2021, with those sales more highly concentrated in neighborhoods of color.

REITs allow firms to pool funds, buy bundles of properties, and convert them to SFRs. In addition to shrinking the pool of homes available for would-be owner-occupiers, REITs hire or own corporate entities to manage the properties. Management companies for REITs have increasingly come under fire for poor management, aggressively raising rent, and evictions. This is as true in the Twin Cities as elsewhere. Local and state governments do not always appear to be on the same page regarding enforcement of consumer and tenant protection laws. For example, while the Minnesota AG’s office filed a lawsuit against HavenBrook Homes, the city of Columbia Heights renewed rental occupancy licenses for the company.

Discouraging iBuyers and REITs

If we agree as a policy matter that single-family homes should be owner-occupied, what are some ways to slowdown the transfer of properties and give traditional owner-occupants a fighting chance? The most obvious place to start is by considering a ban on iBuyers and investment firms from acquiring homes. The Los Angeles city council voted late last year to explore such a ban. Canada has voted to ban most foreigners from buying homes for two years to temper its hot real estate market, a move which will affect iBuyers and investors.

Another option is to make flipping single-family homes less attractive for iBuyers. A state lawmaker from San Diego recently proposed Assembly Bill 1771, which would impose an additional 25% tax on the gain from a sale occurring within three years of a previous sale. This is a spin on the housing affordability wing of Bernie Sanders’s 2020 presidential campaign, which would have placed a 25% house-flipping tax on sellers of non-owner-occupied property, and a 2% empty homes tax on property of vacant, owned homes. But If iBuyers arguably provide a valuable service to sellers, then it may not make sense to attack iBuyers across the board. Instead, it may make more sense to limit or heavily tax sales from iBuyers to investment firms, or the opposite, reward iBuyers with a tax break for reselling homes to owner-occupants rather than to investment firms.

It is also possible to make investment in single-family homes less attractive to REITs. In addition to banning sales to foreign investors, the Liberal Party of Canada pitched an “excessive rent surplus” tax on post-renovation rent surges imposed by landlords. In addition to taxes, heavier regulation might be in order. Management companies for REITs can be regulated more heavily by local governments if the government can show a compelling interest reasonably related to accomplishing its housing goals. Whether REIT management companies are worse landlords than mom-and-pop operations is debatable, but the scale at which REITs operate should on its own make local governments think twice about whether it is a good idea to allow so much property to transfer to investors.

Governments, neighborhood associations, and advocacy groups can also engage in homeowner education regarding the downsides of selling to an iBuyer or investor. Many sellers are hamstrung by needing to sell quickly or to the highest bidder, but others may have more options. Sellers know who they are selling their homes to, but they have no control over to whom that buyer ultimately resells. If they know that an iBuyer is likely to resell to an investor, or that an investor is going to turn their home into a rental property, they may elect not to sell their home to the iBuyer or investor. Education could go a long way for these homeowners.

Lastly, governments themselves could do more. If they have the resources, they could create a variation on Edina’s Housing Preservation program, where homeowners sell their house to the City to preserve it as an affordable starter home. In a tech-oriented spin of that program, the local government could purchase the house to make sure it ends up in the hands of another owner-occupant, rather than an investor. Governments could decline to sell to iBuyers or investors single-family homes seized through tax forfeitures. Governments can also encourage more home-building by loosening zoning restrictions. More homes means a less competitive housing market, which REIT defenders say will make the single-family market less of an attractive investment vehicle. Given the competitive advantage of such entities, it seems unlikely that first-time homebuyers could be on equal footing with investors absent such disincentives.

Counter Logic Broadband

November 13, 2021
Economics, Internet

Justice C. Shannon, MJLST Staffer

In 2015 Zaqueri “Aphromoo” Black won his first North American League of Legends championship series “LCS” championship playing support for Counter Logic Gaming. Since 2013 at least forty players have made the starting lineups for eight to ten LCS teams. Aphromoo is the only African American to win an LCS MVP. Aphromoo is the only African American player to win multiple LCS finals. Aphromoo is the only African American player to win a single LCS Final. Aphromoo is the only African American player to make it to an LCS final. Aphromoo is the only African American player to participate in LCS playoffs. Indeed, Aphromoo is the only African American player to have a starting role on an LCS team. Why? At least in part, because due to the digital divide.

More than a quarter of African Americans do not have broadband. Further, nearly 40% of the African Americans in the rural south do not have broadband. One quarter of the Latinx population does not have broadband. These discrepancies allow fewer African Americans and Latinx to play online video games like League of Legends. Okay, but if the digital divide only affects esports, why should the nation care? The digital divide, as seen in esports, is also seen in the American educational system. More than 15% of American households lacked broadband at the start of the pandemic. This gap was more pronounced in African American and Latinx households. These statistics demonstrate a national need to address the digital divide for entertainment purposes and, more importantly, educational purposes. So, what are some legal solutions to the digital divide? Municipal internet, subsidies, and low-income broadband laws.

Municipal Internet

Municipal broadband is not a new concept, but recently it has been seen as a solution to help address the digital divide. While the up-front cost to a city may be substantial, the long-term advantages can be significant. Highland, IL, and other communities across the United States provide high-speed internet for as low as $35 a month. Cities providing low-cost broadband through municipalities frequently have competitive prices for gigabit speeds as well. The most significant downside to this solution is that these cities are frequently in rural locations that do not provide for large populations. In addition, when municipalities attempt to provide broadband outside of their borders, state laws preempt them to protect ISPs. ISPs lobby for laws to deter or prevent municipal internet on the basis that they are necessary to prevent unfair competition; this fear of unfair competition, however, restricts communities from getting connected.

To avoid the preemption issue during the pandemic, some cities have established narrow versions of municipal broadband. In addition, these cities are providing free connectivity in heavily populated communities. For example, during the pandemic, Chattanooga, Tennessee, offered free broadband to low-income students. If these solutions stay in place, they will set an industry precedent for providing broadband to low-income communities.

Subsidies

The emergency Broadband Benefit provides up to $50 per month towards broadband services for eligible households and $75 a month for households on tribal lands. To qualify for the program, a household must meet one of five standards. Congress created the program to help low-income households stay connected during the pandemic. Congress allocated $3.2 billion to the FCC to enable the agency to provide the discount. This discount also comes with a one-time device discount of up to $100 so that users not only have broadband but have the tools to utilize broadband. The advantage of this subsidy is it directly addresses the issue of low-income recipients not being able to afford broadband, which can immediately affect the 15% of Americans who do not have broadband.

The downside of this solution is to qualify, a recipient must share their income on a webpage they have not visited before, which can be invasive. Further, this plan does not permanently address the cost of broadband, and once it ends, it is possible that the same groups of Americans who could not afford broadband before lose access to the internet. Additionally, when the average cost of a laptop in America is $700, a discount of $100 does not do very much to ensure that users are correctly benefitting from their new broadband connection. If the goal is to ensure that users can attend classes, complete homework assignments, and maybe play esports on the side, then a lower-cost tablet ($350 on average) would not address the problem of needing hardware to access broadband.

However, a program like this could be valued as a reasonable start if things continue to go in the right direction. A fair price for broadband is $60 a month. Reducing the cost of broadband to $10 per recipient for competitive speeds and reliability after subsidization could be a great tool to eliminate the digital divide so long as it persists after the pandemic.

Low-Income Broadband Laws

Low-cost broadband laws would require internet service providers to provide broadband plans for low-income recipients at a low-cost price. This approach would directly address Americans with physical access to broadband but who cannot pay for broadband solutions due to cost, thus, helping to bridge the digital divide. Low-cost broadband plans such as New York’s proposed Affordable Broadband Act would require all internet service providers serving more than 20,000 households to provide two low-cost plans to qualifying (low income) customers. However, New York’s law was stymied by ISPs arguing that it is an illegal way to close the digital divide as states are preempted from rate regulation of broadband by the Federal Communications Commission.

The ISPs argued that the Affordable Broadband Act operated within the field of interstate commerce and was thus likely preempted by the Federal Communications Act of 1934. However, as broadband is almost always interstate commerce, other state laws similar to New York’s Affordable Broadband Act would probably run into the same issue. Thus, a low-income broadband law would likely need to come from the federal level to avoid the same road bumps.

The Future of Broadband and the Digital Divide

An overlapping theme between many of these solutions is that they were implemented during the pandemic; this begs the question, are these short-term solutions to an unexpected life-changing event or rational long-term solutions for various long-term problems, including the pandemic? If cities, states, and the nation stay the course and implement more low-cost broadband solutions such as municipal internet, subsidies, and low-income broadband laws, it will be possible to address the digital divide. However, if jurisdictions treat these solutions like short-term stopgaps, communities that cannot afford traditional broadband solutions will again lose broadband access. Students will again go to McDonald’s to do homework assignments, and Aphromoo may continue to be the only active African American LCS player.

Whitelist for Thee, but Not for Me: Facebook File Scandals and Section 230 Solutions

November 6, 2021
Data, Economics, Privacy, Social Media, Social Welfare, Uncategorized

Warren Sexson, MJLST Staffer

When I was in 7^th grade, I convinced my parents to let me get my first social media account. Back in the stone age, that phrase was synonymous with Facebook. I never thought too much of how growing up in the digital age affected me, but looking back, it is easy to see the cultural red flags. It came as no surprise to me when, this fall, the Wall Street Journal broke what has been dubbed “The Facebook Files,” and in them found an internal study from the company showing Instagram is toxic to teen girls. While tragic, this conclusion is something many Gen-Zers and late-Millennials have known for years. However, in the “Facebook Files” there is another, perhaps even more jarring, finding: Facebook exempts many celebrities and elite influencers from its rules of conduct. This revelation demands a discussion of the legal troubles the company may find itself in and the proposed solutions to the “whitelisting” problem.

The Wall Street Journal’s reporting describes an internal process by Facebook called “whitelisting” in which the company “exempted high-profile users from some or all of its rules, according to company documents . . . .” This includes individuals from a wide range of industries and political viewpoints, from Soccer mega star Neymar, to Elizabeth Warren, and Donald Trump (prior to January 6^th). The practice put the tech giant in legal jeopardy after a whistleblower, later identified as Frances Haugen, submitted a whistleblower complaint with the Securities and Exchange Commission (SEC) that Facebook has “violated U.S. securities laws by making material misrepresentations and omissions in statements to investors and prospective investors . . . .” See 17 CFR § 240.14a-9 (enforcement provision on false or misleading statements to investors). Mark Zuckerberg himself has made statements regarding Facebook’s neutral application of standards that are at direct odds with the Facebook Files. Regardless of the potential SEC investigation, the whitelist has opened up the conversation regarding the need for serious reform in the big tech arena to make sure no company can make lists of privileged users again. All of the potential solutions deal with 47 U.S.C. § 230, known colloquially as “section 230.”

Section 230 allows big tech companies to censor content while still being treated as a platform instead of a publisher (where they would incur liability for what is on their website). Specifically, § 230(c)(2)(A) provides that no “interactive computer service” shall be held liable for taking action in good faith to restrict “obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable [content] . . . .” It is the last phrase, “otherwise objectionable,” that tech companies have used as justification for removing “hate speech” or “misinformation” from their platform without incurring publisher like liability. The desire to police such speech has led Facebook to develop stringent platform rules which has in turn created the need for whitelisting. This brings us to our first proposal, eliminating the phrase “otherwise objectionable” from section 230 itself. The proposed “Stop the Censorship Act of 2020” brought by Republican Paul Gosar of Arizona does just that. Proponents argue that it would force tech companies to be neutral or lose liability protections. Thus, no big tech company would ever create standards stringent enough to require a “whitelist” or an exempted class, because the standard is near to First Amendment protections—problem solved! However, the current governing majority has serious concerns about forced neutrality, which would ignore problems of misinformation or the mental health effects of social media in the aftermath of January 6^th.

Elizabeth Warren, similar to a recent proposal in the House Judiciary Committee, takes a different approach: breaking up big tech. Warren proposes passing legislation to limit big tech companies in competing with small businesses who use the platform and reversing/blocking mergers, such as Facebook purchasing Instagram. Her plan doesn’t necessarily stop companies from having whitelists, but it does limit the power held by Facebook and others which could in turn, make them think twice before unevenly applying the rules. Furthermore, Warren has called for regulators to use “every tool in the toolbox,” in regard to Facebook.

Third, some have claimed that Google, Facebook, and Twitter have crossed the line under existing legal doctrines to become state actors. So, the argument goes, government cannot “induce” or “encourage” private persons to do what the government cannot. See Norwood v. Harrison, 413 U.S. 455, 465 (1973). Since some in Congress have warned big tech executives to restrict what they see as bad content, the government has essentially co-opted the hand of industry to block out constitutionally protected speech. See Railway Employee’s Department v. Hanson, 351 U.S. 225 (1956) (finding state action despite no actual mandate by the government for action). If the Supreme Court were to adopt this reasoning, Facebook may be forced to adopt a First Amendment centric approach since the current hate speech and misinformation rules would be state action; whitelists would no longer be needed since companies would be blocked from policing fringe content. Finally, the perfect solution! The Court can act where Congress cannot agree. I am skeptical of this approach—needless to say, such a monumental decision would completely shift the nature of social media. While Justice Thomas has hinted at his openness to this argument, it is unclear if the other justices will follow suit.

All in all, Congress and the Court have tools at their disposal to combat the disturbing actions taken by Facebook. Outside of potential SEC violations, Section 230 is a complicated but necessary issue Congress must confront in the coming months. “The Facebook Files” have exposed the need for systemic change in social media. What I once used to use to play Farmville, has become a machine that has rules for me, but not for thee.

Clawing Back the “Jackpot” Won During the Texas Blackouts

March 28, 2021
Economics, Energy Law, Regulatory

Isaac Foote, MJLST Staffer

For most Texans, the winter storm in February 2021 meant cold temperatures, uncertain electricity at best, and prolonged blackouts at worst. For some energy companies, however, it was like “hitting the jackpot.” We here at MJLST (in Madeline Vavricek’s excellent piece) have already discussed the numerous historical factors that made Texas’s power system so vulnerable to this storm, but in the month after power was restored to customers, a new challenge has emerged for regulators to address: who will pay the estimated $50 billion in electricity transactions carried out during the week of blackouts. A number estimated to eclipse the total sales on the system over the previous three years!

At the highest level, the Texas blackouts were a result of the electric grid’s need to be ‘balanced’ in real time, i.e. always have sufficient electricity supply to meet demand. As the winter storm hit Texas, consumers increased demand for electricity, as they turned up electric heaters, while simultaneously a lack of winterization drove natural gas, wind, and nuclear electricity producers offline. So, to “avoid a catastrophic failure that could have left Texans in the dark for months,” Texas grid operator, the Electric Reliability Council of Texas (ERCOT), needed to find a way to drastically increase electricity supply and reduce electricity demand. Blackouts were the tool-of-last-resort to cut demand, but ERCOT also attempted to increase supply through authorizing an extremely high wholesale price of electricity. Specifically, ERCOT and the Texas Public Utility Commission (PUC) authorized a price of $9,000 per megawatt hour (MWh), over 340 times the annual average price of $26/MWh.

These high prices may have kept some additional generation online, but they also resulted in devastating impacts for consumers (especially those using the electric provider Griddy) and electric distributors (like Brazos Electric Power Cooperative that has already filed for Chapter 11 bankruptcy protection). Now, the Independent Market Monitor (IMM)for the PUC is questioning whether the $9,000/MWh electricity price was maintained for too long after the storm hit: specifically, the 32 hours following the end of controlled blackouts between February 17th and 19th. The IMM claims that the decision to delay reducing the price of electricity “resulted in $16 billion in additional costs to ERCOT’s market” that will eventually need to be recovered from consumers.

The IMM report on the issue has created a showdown in Texas Government between the State Senate, House, and the PUC. Former Chair of the PUC, Arthur D’Andrea, argued against repricing as “it’s just nearly impossible to unscramble this sort of egg,” while the State Senate passed a bill that would require ERCOT to claw back between $4.2 billion and $5.1 billion in from generators for the inflated prices. D’Andrea’s opposition to the clawback has already resulted in his resignation, but it appears unlikely this conflict will be resolved as the State House may concur with the PUC’s position.

There is further confusion over whether such a clawback would be legal in the first place. Before his resignation, D’Andrea implied such a clawback was beyond the power of the PUC. However, Texas Attorney General Ken Paxton issued an opinion that: “the Public Utility Commission has complete authority to act to ensure that ERCOT has accurately accounted for electricity production and delivery among market participants in the region. Such authority likely could be interpreted to allow the Public Utility Commission to order ERCOT to correct prices for wholesale electricity and ancillary services during a specific timeframe . . . provided that such regulatory action furthers a compelling public interest.”

Going forward it appears that the Texas energy industry will be facing a wave of lawsuits and bankruptcies, whatever the decisions made by the PUC or legislators. However, it is important to remember that someone will end up bearing responsibility for the billions of dollars in costs incurred during the crisis. While most consumers will not see this directly on their electricity bill, like those using Griddy had the misfortune to experience, these costs will eventually be transferred onto consumers in some ways. Managing this process in conjunction with rebuilding a more resilient energy system will be a challenge that Texas energy system stakeholders, policymakers, and regulators will have to take on.

Decode 16 tons (of bitcoin), what do you get? Nevada considers redefining the phrase “corporate governance”

March 14, 2021
Corporate Ethics, Cryptocurrency, Economics, Regulatory

Jesse Smith, MJLST Staffer

On January 16, 2020, Nevada Governor Steve Sisolak, as part of his state of the state address, announced a new legislative proposal allowing certain types of private companies to essentially purchase the ability to govern as public entities. The proposal applies specifically to tech firms operating within the fields of blockchain, autonomous technology, the internet of things, robotics, artificial intelligence, wireless technology, biometrics, and renewable resources technology. Those that purchase or own at least 50,000 contiguous acres of undeveloped and uninhabited land within a single county can apply to create “innovation zones” within the property, or self-governed cities structured around the technology the company develops or operates. The company must apply to Nevada’s Office of Economic Development and provide a preliminary capital investment of at least $250 million, along with an additional $1 billion invested over ten years. Upon approval by the state, the area would become an “innovation zone,” initially governed by a three-member board appointed by the governor, two members of which would be picked from a list provided by the company creating the zone. This board would be able to levy taxes and create courts, school districts, police departments, and other offices empowered to carry out various municipal government functions.

One of the main companies lobbying for the passage of the bill, and the likely its first candidate or adopter, is Blockchains LLC, a Nevada based startup that designs blockchain based software in the areas of “digital identity, digital assets, connected devices and a stable means of digital payment.” The company purchased 67,000 acres of largely undeveloped land near Reno in 2018 for $170 million, in pursuit of building what it calls a “sandbox city,.” There, the company would further develop and use its blockchain technology to store records and administer various public and private functions, including “banking and finance, supply chains, ID management, loyalty programs, digital security, medical records, real estate records, and data sharing.”

Natural and rightful criticism of the legislation has mounted since the announcement. Many pointed out that Jeffrey Berns, the founder of Blockchains LLC, is a large donor to both Sisolak and Democratic PACs in Nevada. Furthermore, months before the proposal was unveiled, Blockchains purchased water rights hundreds of miles away to divert to its Nevada land, prompting various outcries from water rights and indigenous activists. From a broader perspective, skeptics conjured up dystopian images of zone residents waking up to “focus group tested alarm[s]” in constantly monitored “corporate apartments.” Others reflected on the history of company-controlled towns in the U.S. and the various problems associated with them.

Proponents of the plan seem fixated on two particular arguments. First, they note that the bill in its current incarnation requires an innovation zone to hold elections for the offices it sets up once its population hits 100. This allegedly demonstrates that while any company behind the zone “retains significant control over the jurisdiction early on, that entity’s control quickly recedes and democratic mechanisms are introduced.” Yet this argument ignores the fact that there is no requirement that a zone ever reach 100 residents. Additionally, even where this threshold is met, the board still retains significant control over election administration, and may divide or consolidate various types of municipal offices as it sees fit, and dismiss officials for undefined “malfeasance or nonfeasance” (§ 20 para. 2). Such powers provide ripe opportunity for gaming how an innovation zone’s government operates and avoiding true democratic control through consolidation of various powers into strategic elected offices.

Second is the more traditional argument that these zones will attract new businesses to the state and bestow an influx of money and jobs upon the citizens of Nevada. Setting aside various studies and arguments that question this assumption, this argument is yet another tired talking point that ignores the damage large businesses already wreak on the local communities they take over. Many overuse the limited resources of various departments. Others use the “value” that big businesses supposedly bring to communities to pit local governments against each other in bidding wars to see who can offer more tax breaks and subsidies to bring the business to their town, money and revenue that could and likely should be used to fund other local programs. Thus, the ability to actually govern appears to be the logical end in a progression of demands big businesses expect from the cities they set up shop in. Perhaps the best argument in favor of innovation zones is also the saddest, in that they allow big businesses to, as is said in corporate speak, “cut out the middleman” by directly collecting the tax dollars they already consume by the billions and directly controlling the municipal resources they already monopolize.

Sisolak, Berns, and other proponents of the proposal fight back against the idea that innovation zones will become the equivalent of “company towns” and argue that it will make Nevada a tech capital of the world by attracting the businesses specified in the bill. They would be well suited to remember two maxims that summarize the criticism of their idea: that history repeats itself and the road to hell is paved with good intentions. There is a reason these phrases are overused cliches. Last week’s MJLST blog post left us with the sweet sounds of Billy Joel to close out its article. As suggested by Tony Tran of “The Byte,” I’ll end mine with the classic, yet unknowingly cyberpunk ballad “16 tons” (the Tennessee Ernie Ford version), and leave the reader thinking about the future plight of the Nevada Bitcoin miner, owing her or his uploaded cloud soul to the company store, aka Blockchains LLC, in their innovation zone job.

The International Whaling Commission Sans Japan: What it Means for the Whales

February 10, 2019
Animal Law, Economics, International Law

Allie Jo Mitchell, MJLST Staffer

On December 25, 2018 Japan announced that it would withdraw from the International Convention for the Regulation of Whaling (“ICRW”) and leave the international whaling commission (“IWC”) in order to resume commercial whaling. A statement by Japan’s Chief Cabinet Secretary explained that the decision to withdraw was based on the failure of the IWC to take into account all stated objectives of the ICRW, including the “orderly development of the whaling industry” and the creation of sustainable commercial whaling. Citing the cultural and economic significance commercial fishing has played in Japan, the country rested its decision on its determination that commercial whaling could resume without negatively impacting cetacean resources.

International condemnation over Japan’s decision was swift, with Greenpeace Japan questioning the health of Japan’s whaling stock and calling the decision “out of step with the international community, let alone the protection needed to safeguard the future of our oceans and these majestic creatures.” The UK’s environment secretary tweeted that “[t]he UK is strongly opposed to commercial whaling and will continue to fight for the protection and welfare of these majestic mammals” and a diplomat of Norway called the decision to break away from the global agreement “dangerous.” On January 14, 2019 the IWC issued a statement that it had received notification from Japan that it would withdraw from the ICRW in 2019. Recognizing the role Japan had played, the chair of the IWC specifically mentioned the controversy surrounding commercial whaling within its member group, offering hope that the IWC would continue to work on a variety of issues in which there was common ground.

Now that Japan has left the IWC, it will begin the commercial hunting of whales in July of 2019 within its territorial seas and exclusive economic zone that exists within 200 miles of Japan’s coasts. Japan will also remain an observer of the IWC and “continue to contribute to the science-based sustainable management of resources.” Importantly, without it’s permit to kill whales for research under the ICW, Japan will now cease the taking of whales in the high sea, including the Antarctic Ocean and the Southern Hemisphere, as required by international law. Japan had previously killed whales in the Antarctic Ocean under the auspicious guise of research. In fact, in 2014 the International Court of Justice found that Japan’s whale research program was violating the IWC’s moratorium on commercial whaling because Japan was using lethal methods where none were required. Despite this holding, in 2016 a Japanese “research” expedition in the Antarctic killed 333 whales (207 of which were pregnant) with the meat from the whales sold on the commercial market.

But what does all this really mean for the whales of the world? There are some positives that may come from Japan withdrawing from the IWC, but these could easily be outweighed by the negatives. Because Japan will have to limit its commercial whaling to 200 miles within Japanese coasts, whales outside of this region, particularly whales in the Antarctic and southern hemisphere, will be in luck. However, whales within Japan’s territorial sea and economic zone, where studies suggest stock levels are low, won’t fare so well.

Furthermore, Japan may not only shift its catch to Japanese waters but could actually increase the number of whales it kills each year with little to no oversight from the international community. This could severely impact whale species, both endangered and non-threatened, and deplete whale stocks within Japan’s territorial sea. As Astrid Fuchs, program lead of the Whale and Dolphin Conservation explained, “[t]he oversight that the IWC was having over Japan’s whaling will now be lost. We won’t know how many whales they are catching, we won’t know how they will report it. It might spell doom for some populations.”

Perhaps the greater danger lies in what Japan’s withdrawal from the IWC may signal to other countries. As Japan stated in its public announcement, “Japan hopes that more countries will share the same position to promote sustainable use of aquatic living resources based on scientific evidence, which will thereby be handed down to future generations.” Fuchs is worried about the precedent this might set, particularly in countries with an interest in commercial whaling and whale meat including South Korea and other Pacific and Caribbean island nation states.

On the bright side, decreasing interest and consumption of whale meat may play a bigger role in protecting whales from commercial hunting than Japan’s involvement with the IWC. Demand for whale meat is the lowest in Japan since WWII, with the average consumption of whale just one ounce per person a year. A recent poll also showed that only 11% of Japanese people strongly support the whaling industry. If the economics of commercial whaling are not as strong as imagined, commercial whaling my peter out on its own in Japan.

The world will likely have to wait and see what the real effect of Japan’s withdrawal from the IWC is on the health and vitality of whale species and whale stocks. In the meantime, there are a myriad of other human caused dangers to whales from bycatch, plastic pollution, noise pollution, oil & chemical pollution, marine traffic, and climate change. Humans have a history of driving whale species to extinction, wreaking havoc on whaling stocks, and threatening the very survival of whales for their personal use and consumption. Despite Japan’s withdrawal from the IWC, it will be necessary for all nations to look beyond commercial whaling and address the continual threats humans pose to whales and other marine life.

The Music Modernization Act May Limit Big Name Recording Artists’ Leverage in Negotiations with Music Streaming Companies

October 28, 2018
Business Law, Competition, Copyrights, Economics, Economy, Intellectual Property, Property Law

By: Julia Lisi, MJLST Staffer

Encircled by several supportive recording artists, President Trump signed the Music Modernization Act (“MMA”) into law on October 11, 2018. Supporters laud the MMA as a long overdue update for U.S. copyright law. Federal law governs roughly 75% of recording artists’ compensation, according to some estimates. The federal regulatory scheme for music license fees dates back to 1909, before the advent of music streaming. Though the scheme has been tweaked since 1909, the MMA marks a major regulatory shift to accommodate the large market for music streaming services like Spotify and Apple Music.

Prior to the MMA, streaming services virtually had two options for acquiring music catalogs: (1) either acquire licenses for each individual song or, (2) provide music without licenses and prepare for infringement suits. Apple Music adopted the first strategy and as a result initially suffered from a much leaner music catalog. Spotify went with the second strategy, setting aside funds to weather litigation.

The MMA offers a preexisting mechanism, the mechanical license, on a broader scale. Once the MMA takes full effect, streaming services can receive blanket licenses to entire catalogs of music, all in one transaction. The MMA establishes the Mechanical Licensing Collective (the “Collective”), a board of industry participants, which will set license prices. The MMA is, in part, meant to ensure that more participants in the music industry will be paid for their work. For example, music producers and engineers can expect to receive more compensation under the MMA.

While the MMA may broaden the pool of industry participants who get compensation from streaming, the MMA could weaken big name artists’ bargaining positions with streaming services. Recording artists like Taylor Swift and Adele have struggled to keep their albums off streaming services like Spotify. Swift resisted music streaming based on her conviction that streaming services did not fairly compensate artists, writers, and producers. While Swift may have come to an agreement with Spotify and allowed her albums to be streamed, there are still holdouts. More than two years after its release, Beyoncé’s Lemonade still is not on Spotify.

With the Collective controlling royalty rates, big name artists might not have the holdout power that they wield now. If Swift’s music had been lumped into a collective mechanical license, she may not have had the authority to withdraw or withhold her albums from streaming services. The MMA’s mechanical licenses are compulsory, indicating the lower level of control copyright owners may have. Despite this potential loss of leverage, the MMA is widely supported by artists and industry executives alike. Only time will tell whether the Collective’s set prices will make compensation within the music industry fairer, as proponents suggest.

Sulfur-Ore Mining in Minnesota: Are Near-Term Economic Gains Worth Long-Term Losses?

October 15, 2018
Economics, Environmental Law

Sam Duggan, MJLST Staffer

Mining copper and nickel from sulfur-ore in Northern Minnesota is different than mining iron from taconite, and the environmental consequences are orders of magnitude greater. Unfortunately, the public discourse around developing copper and nickel reserves largely fails to consider this. As a result, the public is not armed with information needed to rationally debate whether sulfur-ore mining is a good choice for Minnesota.

Taconite is a relatively unreactive iron-containing mineral. Although miners exposed to asbestos-like compounds from taconite dust are likely at increased risk of mesothelioma, proper dust mitigation practices and sound environmental planning/reclamation can limit long-term consequences to a scarred landscape. However, as with other types of mining, there are consequences associated with boom-or-bust economics.

In stark contrast to taconite, sulfur-ore is highly reactive and has a particularly insidious property. A decommissioned mine slowly fills with rain, snowmelt and ground water. Sulfur reacts with water and oxygen to produce sulfuric acid, which dissolves metals contained in the sulfur-ore. Like a liquid miner, this acid liberates geologically sequestered metals into a dissolved, bioavailable and toxic form. As metals dissolve from the mine walls, more sulfur is exposed to oxygen and water. This produces more sulfuric acid which dissolves more metals. Through this chain reaction, the mine “mines” itself for centuries or more after its decommission. Importantly, mining target metals (i.e., copper, nickel) never occur alone. They co-occur with non-targets (i.e., lead, cadmium, manganese, arsenic, sulfate) that also dissolve from mine walls. Over time, concentrations of toxic compounds grow higher. Once the mine fills, acidic and metal-rich water (acid mine drainage) leach down-gradient and poison the watershed. Similar processes also occur in tailings piles stored outside the mine.

Sulfur-ore mines are responsible for numerous Superfund sites, including the infamous Berkley Pit copper mine. In 2016, thousands of snow geese landed in Berkley Pit’s toxic water and died en masse. Consider also the 2015 Gold King mine spill. At Gold King, a mine entrance cap was accidentally ruptured during routine monitoring and 3 million gallons of acidic, metal-rich water poured into the Animas River in Southwest Colorado. Related lawsuits seek many millions in damages. The history of mining in the Western U.S. is replete with other examples of sulfur-ore mines contaminating watersheds.

Methods exist for mitigating sulfur-ore mine pollution including capping, chemical neutralization, and constructing water treatment facilities specifically dedicated to the mine. However, these options cost millions and must be perpetually maintained, as it is nearly impossible to prevent water and oxygen from entering a mine. The chain reaction can linger for millennia, continually dissolving metals from rock and leaching toxins into the watershed.

Notably, the mining corporations who reap the lion’s share of a mine’s economic benefit escape long-term environmental liability because bankruptcy law and parent-subsidiary corporate structure often shield parent corporations from their mining subsidiaries’ environmental liabilities. For precisely this reason, the mine permitting process often requires corporations to offer financial assurances for potential environmental damages. However, financial assurances underestimate damages, and taxpayers are left with the bulk of sulfur-ore mine cleanup costs for generations.

The long-term consequences of sulfur-ore mines were recognized by the Obama Administration, particularly regarding mining in Minnesota’s Boundary Waters watershed. In 2016, the Obama Administration instituted a 2-year moratorium on mining permits near the Boundary Waters to study effects of sulfur-ore mining. That study could have led to a 20-year permitting moratorium. However, in 2018, after only 15 months, the Trump Administration decided that the study did not reveal new information and lifted the moratorium. Now, parent companies such as Chile’s Antofagasta can apply for mining permits within the Boundary Waters watershed via their subsidiary company Twin Metals. The permitting process is already underway for Polymet — an open pit, sulfur-ore copper mine just outside the Boundary Waters watershed. Importantly, Minnesota’s sulfur-ore resources could support dozens of mines.

Given that sulfur-ore mines are economically viable for a few decades and an environmental scourge for centuries or more, decision makers should consider whether near-term economic gains are worth long-term losses.

The Next Chapter for Mining and Energy Law: The Cryptocurrency Miners

March 26, 2018
Cryptocurrency, Economics

Zach Sibley, MJLST Staffer

Traditionally, miners enjoyed a position on the supply side of energy production, providing energy inputs like coal that power the grid. The cryptocurrency boom during the last decade, however, has given rise to a new type of “miner” that turns this relationship on its head. Mining for cryptocurrencies like Bitcoin and Ethereum is not providing energy inputs but rather adding a new, massive load to the power grid. Bitcoin globally consumes an estimated 54.88 terawatt hours (TWh) of electricity annual, while Ethereum comes in at 15.74 TWh per year. For comparison, mid-sized countries like Denmark—home to over 5.7 million people—consume approximately 31.5 TWh per year.

And like the miners of old, these new miners are flocking to rural American cities and towns. Rather than gold or coal deposits, though, these cryptominers are searching for something more valuable: low energy bills. And rural areas in Washington state and New York running primarily on hydroelectric power are the new goldmines. The influx of new technology—and its high energy demand—now inevitably clashes with the simpler, energy-cheap lifestyle these rural Americans once enjoyed. Now locals are pushing back, leaning on local governments, energy utilities, and public utility commissions to respond.

The energy consumers who resided in these areas prior to the cryptocurrency boom fear that all these new loads will require new grid infrastructure investments, incurring capital costs that would be spread across all ratepayers. These concerns have been mitigated to a degree by large hook-up fees charged to new cryptomining operations, but such efforts likely do not fully insulate the prior residents and businesses from upgrade expenses. The concerns stem from constant fluctuation in cryptocurrency pricing, which can lead to two detrimental effects on non-mining residents’ energy bills.

First, when the value of cryptocurrencies are high, in increase in transactions creates a high demand for mining. Miners may push the limits of current infrastructure capacity or spike demand peaks faster than the local energy utilities plan for or more rapid than they can get generation assets online to handle. Unanticipated spikes require distribution utilities to purchase power from “spot markets,” which is often a double or triple digit multiplier compared to their normal generation expenses. These measures also fail to protect residents from footing the bill if the cryptocurrency boom becomes a bust. If prices dip low enough for long enough, bankruptcies and sudden departures of cryptomining operations leave remaining residents and business to pay the costs of stranded assets.

Concerned over the local effects of a volatile commercial cryptomining industry, the mayor of Plattsburgh, New York introduced an 18-month local moratorium on commercial cryptomining operations in the city’s common council. If passed, the moratorium will test constitutional challenges based on the Fifth Amendment’s substantive due process jurisprudence or its regulatory takings jurisprudence. It is likely that substantive due process claims will fail because the moratorium is substantively justified, i.e. reasonably related to the mayor’s police power to protect the health, safety, and wellbeing of the residents from economic shock and high utility costs. This reasoning would follow a 2006 Western District of New York decision upholding a town’s development moratorium on a wind energy project. The temporary duration of the moratorium and that substantive police powers underpinning would likely also defeat categorical and non-categorical regulatory takings claims, respectively.

The legitimacy of cryptomining moratoria will allow local governments to engage in meaningful debate with commercial cryptocurrency miners, energy utilities, and the local ratepayers. Establishing sufficient connection prices, demand charges, and contingency pricing to compensate for the risk of stranded assets takes time. These tariffs must be carefully crafted to comply with state retail electricity rate standards, such as just and reasonable and non-discriminatory. Allowing any cryptomining boom to continue uncoordinated only increases the exposure of innocent, permanent residents.

The tension between the commercial cryptomining market and the rural residents of low-cost electricity towns begins a new chapter for energy justice advocates and miners. The new miners, however, find themselves on the opposite side of the scales, potentially harming residents and businesses in rural America. Local governments require regulatory tools like land use moratoria to better coordinate energy loads and protect its citizens from financial uncertainty unique to cryptocurrency rapid boom-and-bust cycles. Residents do not enjoy the same locational flexibility as these cryptomining operations nor are these cryptominers bringing significant business or jobs to the area—a large cryptomining facility can be monitored by a single employee. The division between cryptomining’s small local benefits and its high local cost will likely lead to interesting litigation as rural localities and sophisticated cryptominers attempt to navigate the crossroads of energy law, land use regulation, and emerging technologies.

An Automated Armageddon

March 2, 2018
Artificial Intelligence, Economics

Jacob Barnard, MJLST Staffer

In the 1970’s, hundreds of millions of people starved to death – 65 million of them Americans. In the 1980’s, world oil production peaked and it was soon followed by the depletion of all available sources of lead, zinc, tin gold, and silver in 1990. To make matters worse, all computers stopped working on January 1, 2000. Fortunately, we were all put out of our misery when the world ended on December 21, 2012.

But now, after all of that, we must face a new threat. This one comes in the form of (killer)robots. That is correct; now, in addition to immigrants and other countries, robots are stealing our jobs.

Of course, this is not an entirely new threat. The industrial revolution threatened farmers through advancements in agricultural productivity, as well as increasing worker productivity in general. Yet, as economist Walter Williams explains, this was never actually a problem. In the United States, farmers were 90% of the labor force in 1790, but this decreased to 41% in 1900 (and is down to under 3% currently). All this means, however, is that increases in productivity allowed individuals who would have otherwise been farmers to seek employment in other fields (no pun intended).

Say’s law, commonly misunderstood as “supply creates its own demand,” can be more correctly understood through the insight of W.H. Hutt: “All power to demand is derived from production and supply. . . . The process of supplying—i.e., the production and appropriate pricing of services or assets for replacement or growth—keeps the flow of demands flowing steadily or expanding.” As each person becomes more productive, therefore, they are able to demand more in return for their increased production, which allows others to maintain their employment as well.

Empirical studies on the current effects of automation support this view of the situation as well. A 2017 study by Greggory, Salomons, and Zierahn with the Mannheim Centre for European Economic Research found that routine-replacing technological change accounted for a net increase in labor demand of about 11.6 million jobs across 27 EU countries from 1999-2010 (in comparison to a total growth of 23 million jobs over the same period). In 2015, Graetz and Michaels, working with the Centre for Economic Performance, found “the increased use of robots raised countries’ average growth rates by about 0.37 percentage points. We also find that robots increased both wages and total factor productivity. While robots had no significant effect on total hours worked, there is some evidence that they reduced the hours of both low-skilled and middle-skilled workers.”

This last point is what may create an actual problem. Automation is unlikely to eliminate employment as we know it, but it will likely require a shift away from low-skilled labor. Like the farmers of the 18th and 19th centuries, many low-skilled workers may find their specific jobs being eliminated in favor of more technical employment. If people are given incentive to avoid this shift, it may result in unnecessary hardship for low-skilled workers.

Predictably, this has led some to advocate exactly that. A universal basic income, as suggested by Elon Musk and others fearing a robot takeover, would only give low-skilled workers greater incentive to avoid investing in their educations, slowing the increase in human capital that would maintain high levels of employment as automation becomes more prevalent.

A more reasonable policy recommendation would be to amend the tax code to reduce the disincentive to enter new fields of employment. Currently, education expenses for entering a new trade or business are not deductible. In addition, expenses incurred seeking employment in fields other than an employee’s current trade or business are not deductible because they are not “carrying on” the trade or business when they incur the expense. Simply allowing these two deductions would make it easier for workers to adapt to the changing demands of an evolving economy.

Even if these changes are not enough and the Luddites are correct about robots stealing all of our jobs, there still would not be a problem because there will be plenty of lucrative work available as robot-smashers.

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