Topic: Regulatory Studies

Nominal Earnings Growth and Money Illusion (Real Wages Are Rising)

Wall Street Journal columnist E.S. Browning presents a graph titled “Wages Still Soft …  hourly wage gains have been sluggish.”   It shows the percentage change in average hourly earnings from a year earlier.  That rate of change slowed from about 3.5 percent in early 2009 to 1.5 percent in late 2012 before rising to 2.2-2.4 percent in recent months.   The upside, in Browning’s view, is that “wage gains still aren’t big enough to push inflation higher.”  In reality, wage gains never push inflation higher, but inflation can certainly push real wages lower.

The trouble with Browning’s graph is that it shows only changes in nominal earnings – unadjusted for the huge drop in inflation after July 2008 when the year-to-year increase in consumer prices reached 5.5 percent in July 2008 (up from 1.9 percent in August of 2007).  Nominal wage gains miss the real story.

In the graph shown below, I adjust the same hourly earnings figures for inflation by using the PCE deflator.  Note that real earnings rose rapidly when inflation dropped to zero or less in 2009 – when Browning’s chart begins.  But employers could not afford to pay rising wages when their prices were falling, so employment collapsed.

Measured in 2009 dollars, real average hourly earnings for production and nonsupervisory workers have been rising slowly but surely for two years – from $18.55 in October 2012 to $18.95 in October 2014, or 1.1 percent a year.  That’s not so terrible considering the slow pace of growth of GDP and productivity.

Despite hazardous chatter from the likes of Paul Krugman and Larry Summers about U.S. inflation being too low, the truth is that low inflation has been raising U.S. real wages even as confused politicians and journalists erroneously bemoan slow growth in nominal wages.

Can a State Punish You for Advertising Your Business Without a License?

Under Ohio law, it isn’t illegal to buy gold, it isn’t illegal to sell gold, and it isn’t illegal to talk about buying and selling gold. But—and it’s a significant “but”—if you talk about buying gold, you’re not allowed to actually buy any. At least not without a license.

That’s right: in Ohio, it’s illegal for anyone who advertises a willingness to buy gold to do so without a license. Obtaining and maintaining that license isn’t easy, or cheap. Licenses must be renewed every year, and license holders have to make daily reports to the police detailing their purchases. This law creates a two-tiered system: dealers who have complied with the onerous licensing regime may freely advertise their businesses, while others can’t so much as put up a sign reading “We Buy Gold” without facing criminal prosecution and fines of up to $10,000 per transaction.

The U.S. Supreme Court has said that these sorts of regulations are tantamount requiring a “license to speak”—which are universally reviled as violations of the First Amendment (although some do exist). That should have been the end of this case: laws restricting commercial advertising are only constitutional if they are narrowly tailored to serve a significant state interest. The Ohio law, however, because it targets speech instead of the behavior connected to the speech couldn’t possibly survive that test. And that’s exactly what the federal district court held in this case brought by a coin and precious-metal business.

Unfortunately, the U.S. Court of Appeals for the Sixth Circuit was less willing to follow the First Amendment, and reversed the district court. While that is bad enough in itself, the Sixth Circuit’s reasoning law is especially frightening. The court didn’t hold that Ohio’s law survived strict scrutiny under the First Amendment, but instead that the First Amendment didn’t apply. The Sixth Circuit found that an advertisement—a simple statement offering to buy gold—was “unprotected speech” beyond the scope of the First Amendment.

Cato has filed an amicus brief urging the Court to take this case and reverse the Sixth Circuit’s erroneous conclusion about the nature of free speech. While there certainly are types of speech that are not protected by the First Amendment, such as incitement to violence and child pornography, the existing rule is that truthful commercial advertising is protected unless it advertises criminal conduct. 

It’s not a crime to buy gold in Ohio, so it shouldn’t be illegal to talk about buying gold, with or without a license. Upholding the Sixth Circuit’s rule—which allows states to freely prohibit speech about conduct which is only illegal if discussed in public—would deprive nearly all advertising of constitutional protection, undoing 70 years of jurisprudence in the process. 

The Supreme Court will decide whether to take the case of Liberty Coins v. Goodman later this year or early in 2015.

You Shouldn’t Have to Register with the Government to Engage in Political Advocacy

Vermont Right to Life Committee, Inc. (VRLC) is a non-profit advocacy group organized as a “social welfare organization” under Section 501(c)(4) of the tax code. It seeks to achieve “universal recognition of the sanctity of human life from conception through natural death.” To accomplish this, VRLC publishes pamphlets, newsletters, brochures, mass e-mails, newspaper articles, and radio ads. The group does not advocate for the election of any candidate or coordinate its actions with any candidate. It simply take donations from supporters and tries to educate people about the sanctity of human life.

Nevertheless, Vermont has required VRLC to register as a political committee because it takes in more than $1000 in donations and seeks to “influence elections.” This means that VRLC has to (1) register with the state, which includes appointing a treasurer and creating a special bank account; (2) keep extensive records about its activities; and (3) regularly give the government extensive reports. All of these requirements add up to a significant burden on VRLC’s educational activities and advocacy while not furthering any real government interest. After all, if VRLC is talking about issues not candidates, then, according to the Supreme Court, there is little or no chance that it will corrupt candidates.

Or, to put it another way, if VRLC has to register and report to the government—and just think for a moment how ridiculous and Orwellian (and Putinesque) that statement is—then who doesn’t have to register with the government to speak about political issues?

The registration and reporting burdens on VRLC are so great, in fact, that the group has said it’s “simply not worth it” to engage in constitutionally protected speech if it has to comply with Vermont’s regulations. VRLC thus brought a First Amendment challenge to many of the state’s convoluted campaign finance laws. The trial court and the U.S. Court of Appeals for the Second Circuit agreed with the state government, however, and held that the burdens on VRLC’s speech were constitutionally acceptable.

VRLC has now petitioned the Supreme Court. Cato, joining the Center for Competitive Politics, has filed a supporting brief.

We argue that the Court should take the case in order to clarify the test for when an organization’s “major purpose” is the “nomination or election of candidates.” The “major purpose test,” which derives from the foundational campaign finance case of Buckley v. Valeo (1976), exists to save issue-advocacy groups from burdensome requirements like Vermont’s. Unfortunately, courts throughout the country misapply this test and place heightened burdens on organizations that simply want to talk about issues of public concern.

We also argue that regulations like Vermont’s place unique and often insurmountable burdens on small organizations. These laws are expensive to comply with, so larger organizations with more resources for accountants and lawyers—overhead that can be better absorbed—have a comparative advantage over smaller players. If the Supreme Court doesn’t take this case, states will continue to find it easy to shut down the political speech—particularly of feisty small idea entrepreneurs—while labeling such censorship as ordinary campaign finance regulations.

The Supreme Court will decide later this year or early next year whether to review Vermont Right to Life Committee v. Sorrell.

Three Quick Thoughts on the Election’s Implications for the Judiciary

#1: Justice Ruth Bader Ginsburg may be reconsidering her decision not to retire. President Obama or a future President Hillary Clinton will have much less leeway with replacing her in a Republican-controlled Senate.

#2: There will be very few lower court judicial confirmations. Those that get through will be completely uncontroversial. Forget the nuclear option that removed judicial filibusters. At this point, with no political capital, President Obama will only get a small number of milquetoast nominees through the Senate.

#3: Expect even more litigation regarding executive actions. With no chance of getting his expansive regulatory project through Congress, President Obama will increasingly use the executive branch–particularly the EPA, the IRS, and HHS–to advance his policy agenda. That is good news only for litigators.

Midterm Impact on Financial Regulation

With Republicans taking the majority (but far short of control at 60) in the Senate and increasing their majority in the House, the regulation of our financial markets may see renewed attention, with particular focus on reforming Dodd-Frank. My former employer Senator Richard Shelby takes the Chair on the Senate Banking Committee, while Congressman Jeb Hensarling retains his leadership role on House Financial Services.

In my nearly twenty years following financial services, we have not had two chairmen more skeptical of government oversight of our financial markets. While neither could be called “libertarian,” both are suspicious of big government as well as big finance.  Both agree that “Too Big To Fail” is a real issue and one created by the actions of government, not the market.

Sen. Shelby, for instance, has repeatedly said “no one is too big to fail” - what he means here is that no company should be getting a bailout.  It was for that reason he led the charge in the Senate against the TARP, and also for that reason he voted against the Chrysler Bailout in 1979.  Shelby also led the efforts to reform Fannie Mae and Freddie Mac, warning years before their failure of the various flaws inherent in a mortgage model of privatized gains and socialized losses.  Shelby also tried to bring more competition to the credit rating agencies, passing legislation in 2006 to reduce barriers to entry in that market.

The above, however, should not be read to overstate the case.  Both Rep. Hensarling (who apparently had a subscription to the Cato Journal in college) and Sen. Shelby would like to see the federal safety net behind our financial markets reduced, allowing a greater role for market discipline.  Perhaps even more rare in D.C., they both believe their chairmanships come not just with privilege but great responsibility.  If it were simply up to these two to agree, I have confidence that our system of financial regulation would be greatly improved, reducing bailouts and increasing stability.  

But it isn’t up to these two. There are numerous protectors of the status quo in both major political parties.  Both would also have to reach agreement with the Obama Administration, which seems quite comfortable with bailouts and regulatory discretion.  Ultimately, the many obstacles our Founding Fathers wisely put in place for legislation will prove too high for Shelby and Hensarling to implement all but modest reform.  

But at least financial regulation is unlikely to get any worse.

The Endangered Species Act Isn’t Meant to Ignore the Human Species

While California endures its worst drought in a century, a small, finger-sized fish with no known redeemable qualities, the delta smelt, has become the centerpiece of extensive litigation. The U.S. Fish and Wildlife Service (FWS) classifies the delta smelt as “threatened,” and since 2008 it has said that large amounts of water should not be pumped out of the delta smelt’s habitat—the wetlands north of San Francisco—and into the state’s drought-stricken central and southern regions.

That “imported” water from northern California has become vital to the state’s important agricultural business, and the FWS’s decision has substantially harmed California’s farms, farm-laborers, and millions of others dependent on the water supply. In short, in order to protect the 3-inch fish, the state has pumped billions of gallons of water straight into the ocean rather than using it to help California’s struggling farmers.

The farmers, represented by the Pacific Legal Foundation, filed a lawsuit in response to these draconian measures to save the irrelevant fish. The farmers argued that the FWS should not have ignored the harsh financial and human costs of the FWS’s “reasonable and prudent alternatives” to pumping water out of the northern wetlands. The U.S. Court of Appeals for the Ninth Circuit disagreed, holding that the FWS’s decisions deserve deference and that the “FWS is not responsible for balancing the life of the delta smelt against the impact of restrictions” on water pumping. Congress, wrote the court, has already decided that the FWS should protect endangered species “whatever the cost.”

In an attempt to get the Supreme Court to review their case, the farmers argue that the circuit court misread the history of the Endangered Species Act (ESA) and should not have ignored the economic impact of so-called “reasonable and prudent alternatives.” Cato, joining the National Federation of Independent Business, filed a brief in support of their petition. We argue that the ESA has changed since the Supreme Court ruled, in 1978, that species must be protected “whatever the cost.”

The ESA has been amended many times and now commands the FWS to take “into consideration the economic impact” of its proposals. Moreover, the 1978 case that required species to be protected “whatever the cost” has been limited by subsequent decisions.

Finally, we argue that the Ninth Circuit’s decision is in conflict with the Fourth Circuit, which in 2013, vacated an FWS determination because it failed to take into account the economic impact of the reasonable and prudent alternative. This conflict between circuits should be rectified by the Supreme Court, and the ESA should be rightly interpreted as requiring the FWS to take into account the economic impacts of its decisions.

No offense to the delta smelt, but we prefer human beings.

The Supreme Court will decide whether to take the case of Stewart & Jasper Orchards v. Jewell later this year or early in 2015.

Yes, Florida, the Constitution Protects Property Rights

David and Susan Kentner own residential lots along San Carlos Bay in Sanibel, Florida. Because their property is along the high-tide line, the Kentners enjoy an age-old common-law right to build docks over the water abutting their property, subject to reasonable regulation. But Sanibel passed an ordinance forbidding the Kentners and others from taking advantage of this common-law right. The city claimed that the ordinance was necessary to protect seagrass, which it called an “invaluable natural resource.”

Whether or not seagrass is invaluable, the city passed the ordinance without considering whether seagrass was actually present in the areas subject to the ordinance and whether modern technology could effectively be used to avoid harming the seagrass. Moreover, there is evidence that the city passed the ordinance in order to satisfy the aesthetic preferences of certain interest groups and to enhance the property values of other dock-holders. On top of that, in 2006 the city issued itself an exemption to build a dock in San Carlos Bay, explaining that it should be allowed to build a dock because no seagrass was found on the site.

The Kentners, represented by the Pacific Legal Foundation, challenged the ordinance on the ground that it did not substantially advance any legitimate government interest. In other words, the Kentners claimed that the ordinance violated the due-process rights to their property, which is lawyer-speak for laws that don’t have a good-enough justification. Both the trial and appellate judges held that property rights aren’t “fundamental rights” protected by due process, thus ruling that the government didn’t need a good reason to pass these restrictions. In other words, property rights simply don’t enjoy protection against irrational government regulations.

On appeal to the Supreme Court, the Kentners argue that the lower courts were mistaken in treating property rights as no-class—not even second-class—rights. In support of the Kentners’ petition to have the Supreme Court hear the case, Cato joined the National Federation of Independent Business, Owners Council of America, and Rutherford Institute on a brief arguing that the lower courts were gravely mistaken in classifying property rights as not deserving of due-process protections. The Fourteenth Amendment, after all, explicitly says that no state shall deny “life, liberty, or property” without due process of law.

Further, the Court should review the case to clarify and solidify longstanding precedents that treat property rights as on par with other rights. After all, if the government is allowed to violate property rights with no justification whatsoever, then any ordinance that confiscates, destroys, or restricts property will be simply unassailable, regardless of how unreasonable or shocking it may be. The high court should take this case to reaffirm that property rights are indeed constitutionally protected and cannot be abridged with impunity by opportunistic, corrupt governments.

The Supreme Court will decide later this year or early in 2015 whether to take Kentner v. City of Sanibel.