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"Light Bulb Law" Could Change US Manufacturing

How one state plans to get round the federal government...

SOMETHING intriguing is going on in South Carolina. The Palmetto State may be about to put one over on the US federal government, writes Martin Hutchinson, contributing editor at Money Morning.

If it succeeds, the result could have a serious impact on every US manufacturing industry from cars to toilets. 

It could even help balance state budgets.

I'm talking about South Carolina's Incandescent Light Bulb Freedom Act - a trivial-sounding piece of state legislation that could open a significant loophole for states that are desperate to create jobs and drum up revenue.

The Energy Independence and Security Act of 2007 - a predating piece of federal legislation - decreed that all incandescent bulbs be phased out by 2012, and permanently replaced by their fluorescent and halogen counterparts. 

That's where the loophole comes in. You see, South Carolina's light bulb legislation would let the state continue to manufacture and sell incandescent bulbs - so long as they were made and sold exclusively in South Carolina. 

While South Carolina's attempt to nullify a federal law smacks of an antebellum crisis, the move may well work. That's because, according to the Supreme Court's 1935 decision in the case of Schechter Poultry vs. United States, the federal government does not have the power to regulate commerce that is entirely conducted within a state.

So if South Carolina attempted to buy incandescent light bulbs from one of the country's leading manufacturers, it would be in trouble - since none of the major light bulb manufacturers are South Carolina companies. 

But if South Carolina makes the bulbs itself, and offers them for sale only within the state, the Schechter decision would seem to apply - though subsequent Supreme Court decisions in the opposite direction make the question a close one. 

Still, if successful, this would be a major coup for many US manufacturers, as it would set a significant precedent. Soon, any unpopular federal product regulations could potentially be nullified by a state that's seeking popular support. 

One trivial example: The state of Pennsylvania, perhaps using facilities leased to it by The Hershey Co., could start making Kinder Eggs - the popular chocolate egg treats that have been banned in the United States. Many children like my son, who became devotees of Kinder Eggs while living in Europe, would surely boost the Pennsylvania state economy if the treats were available there.

And there are bigger examples. 

Since the late 1990s, US consumers have been prevented from buying toilets that flush properly. That's because the 1992 Energy Policy Act mandated a maximum flush capacity of 1.6 gallons, which is inadequate for a truly proper flush job.

Nullifying this nonsense is the job of Wisconsin, home of Kohler Co. 

Surely, Wisconsin Gov. Scott Walker would enjoy setting up a manufacturer of illegal, generously flushing toilets with the old 3.5-gallon capacity. In accordance with the law, those toilets would be sold only in Wisconsin. But that wouldn't stop desperate out-of-state customers from flooding into the Cheese State to acquire adequate sanitary facilities. The sales tax revenue alone would go a long way towards alleviating that state's budget woes.

Then there's the granddaddy of nullifications - the Corporate Average Fuel Economy (CAFE) standards. This legislation crippled the US automobile industry and led to the rise of the sports utility vehicle (which initially was exempted) by mandating tight-fuel-economy standards - rather than simply using the price mechanism to reduce gasoline consumption.

Those CAFE standards will be tightened in 2016, making things even more difficult for US auto manufacturers. However, citing the South Carolina precedent, the state of Michigan could pose a potential solution. All the state would have to do is set up a manufacturing facility in a disused General Motors Co. plant and reproduce the big, gas-guzzling car US consumers have always dreamed about - the 1959 Cadillac Eldorado. 

The point is that, while South Carolina's initiative may have all the familiar signs of a boondoggle, it differs in one vitally important respect: It is being driven by intense consumer demand to be rid of costly product regulations. 

Remember, Congress banned the sale of incandescent light bulbs, saying the new wave light bulbs would be more efficient. In reality, they are more expensive, give off an unpleasant light, and contain significant quantities of toxic mercury.

So the populist South Carolina legislature is responding by trying to liberate its residents from an unpopular federal mandate.

South Carolina Rep. Bill Sandifer, a Republican and bill co-sponsor, said the "rights to have the kind of light bulbs we want and need are our rights. They are not given to the federal government."

And if manufacturing efficiencies are even close to optimal, the "Made in South Carolina" light-bulb initiative should be a glowing commercial success.

The only problem for investors is that there is no South Carolina light bulb company in which to invest.

Similarly, Kinder Eggs would be too small a business to make much difference to Hershey. Kohler has been privately held with no non-family shareholders since 1998.And General Motors is still government controlled and has too many other inefficiencies to properly benefit from a 1959 Caddy revival. 

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Now a contributing editor to both the Money Map Report and Money Morning, the much-respected free daily advisory service, Martin Hutchinson is an investment banker with more than 25 years’ experience. A graduate of Cambridge and Harvard universities, he moved from working on Wall Street and in the City, as well as in Spain and South Korea, to helping the governments of Bulgaria, Croatia and Macedonia establish their Treasury bond markets in the late '90s. Business and Economics Editor at United Press International from 2000-4, and a BreakingViews editor since 2006, Hutchinson is also author of the closely-followed Bear's Lair column at the Prudent Bear website.

See full archive of Martin Hutchinson.

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