Topic: Regulatory Studies

ALJs and the Home Court Advantage

The SEC has come under fire lately for its use – some might say overuse – of internal administrative proceedings.  The SEC’s use of administrative proceedings and administrative law judges (ALJs) is by no means unique within the federal government.  Thirty-four agencies currently have ALJs.  Nor is the SEC the heaviest user of administrative proceedings or ALJs; the Social Security Administration has that distinction, with more than 1,300 ALJs according to the most recent data available.  The SEC, by comparison, has only five ALJ positions, two of which are recent additions. 

The SEC’s ALJs have been in the spotlight due to a provision in Dodd-Frank that expands their ability to impose fines.  In the past, the SEC could impose monetary sanctions only on individuals and entities registered with the Commission – typically brokers, investment advisors, and similar entities and their employees.  By registering with the SEC, it was reasoned, these individuals and organizations had submitted to the SEC’s jurisdiction.  Others could be brought before the SEC’s tribunals for violating federal securities laws, and the ALJs could make findings of fact (that is, decide which side’s version of the facts was correct) and issue cease and desist orders, but could not impose fines.  Instead, the SEC’s lawyers would have to bring a separate case in federal district court.  Under Dodd-Frank, registered and unregistered persons are treated the same.

Administrative proceedings have their advantages.  Like a federal judge, an ALJ can issue subpoenas, hold hearings, and decide cases.  Because an ALJ’s cases deal with a very narrow area of law – only that related directly to the ALJ’s agency – the ALJ’s knowledge of that area tends to be deeper than that of a federal judge who hears a broad range of civil and criminal cases.  The proceedings before ALJs tend to be somewhat truncated, with fewer procedural requirements than federal district court, allowing the case to be decided more quickly. 

Against Racial Preferences in Contracting

Since before the Declaration of Independence, equality under the law has long been a central feature of American identity—and was encapsulated in the Constitution. The Fourteenth Amendment expanded that constitutional precept to actions by states, not just the federal government.

For example, if a state government wants to use race as a factor in pursuing a certain policy, it must do so in the furtherance of a compelling reason—like preventing prison riots—and it must do so in as narrowly tailored a way as possible. This means, among other things, that race-neutral solutions must be considered and used as much as possible.

So if a state were to, say, set race-based quotas for its construction contracts and claim that no race-neutral alternatives will suffice—without showing why—that would fall far short of the high bar our laws set for race-conscious government action.

Yet that is precisely what Montana has done. Montana’s Disadvantaged Business Enterprise (“DBE”) program implements a federal program aimed at remedying past discrimination against minority and women contractors by granting competitive benefits to those groups. While there may be a valid government interest in remedying past discrimination, in its recent changes to the program, Montana blew through strict constitutional requirements and based its broad use of racial preferences on a single study that involved weak anecdotal evidence—a study that recommended more race-neutral alternatives, not fewer.

Announcing the Spin Cycles and Our First Award

Judging from the November electoral tsunami, whose epicenter was in coal country, people aren’t taking very kindly to the persistent exaggeration of mundane weather and climate stories that ultimately leads to, among other things, unemployment and increased cost of living. In response, we’ve decided to initiate “The Spin Cycles” based upon just how much the latest weather or climate story, policy pronouncement, or simply poo-bah blather spins the truth.

Like the popular and useful Fujita tornado ratings (“F1” through “F5”), or the oft-quoted Saffir-Simpson hurricane severity index (Category 1 through Category 5), and in the spirit of the Washington Post’s iconic “Pinocchios,”, we hereby initiate the “Spin Cycle,” using a scale of Delicates through Permanent Press. Our image will be the universal vortex symbol for tropical cyclones, intimately familiar to anyone who has ever been alive during hurricane season, being spun by a washing machine. Here’s how they stack up, with apologies to the late Ted Fujita and Bob Simpson, two of the true heroes of atmospheric science with regard to the number of lives their research ultimately saved.

And so, here we have it:

Delicates. An accidentally misleading statement by a person operating outside their area of expertise. Little harm, little foul. One spin cycle.

Failing Aviation Administration (FAA)

The federal government operates the air traffic control (ATC) system as an old-fashioned bureaucracy, even though ATC is a high-tech business. It’s as if the government took over Apple Computer and tried to design breakthrough products. The government would surely screw it up, which is the situation today with ATC run by the Federal Aviation Administration (FAA).

The Washington Post reports:

A day after the Federal Aviation Administration celebrated the latest success in its $40 billion modernization of the air-traffic control system, the agency was hit Friday by the most scathing criticism to date for the pace of its efforts.

The FAA has frustrated Congress and been subject to frequent critical reports as it struggles to roll out the massive and complex system called NextGen, but the thorough condemnation in a study released Friday by the National Academies was unprecedented.

Mincing no words, the panel of 10 academic experts brought together by the academy’s National Research Council (NRC) said the FAA was not delivering the system that had been promised and should “reset expectations” about what it is delivering to the public and the airlines that use the system.

The “success” the WaPo initially refers to is a component of NextGen that was four years behind schedule and millions of dollars over-budget. That is success for government work I suppose.

The NRC’s findings come on the heels of other critical reports and years of FAA failings. The failings have become so routine—and the potential benefits of improved ATC so large— that even moderate politicians, corporate heads, and bureaucratic insiders now support major reforms:

“We will never get there on the current path,” Rep. Bill Shuster (R-Pa.), chairman of the House Transportation Committee, said two months ago at a roundtable discussion on Capitol Hill. “We’ve spent $6 billion on NextGen, but the airlines have seen few benefits.”

American Airlines chief executive Doug Parker added, “FAA’s modernization efforts have been plagued with delays.”

And David Grizzle, former head of the FAA’s air-traffic control division, said taking that division out of FAA hands “is the only means to create a stable” future for the development of NextGen.

The reform we need is ATC privatization. Following the leads of Canada and Britain, we should move the entire ATC system to a private and self-supporting nonprofit corporation. The corporation would cover its costs by generating revenues from customers—the airlines—which would make it more responsible for delivering results.

Here is an interesting finding from the NRC report:  “Airlines are not motivated to spend money on equipment and training for NextGen.” Apparently, the airlines do not trust the government to do its part, and so progress gets stalled because companies cannot be sure their investments will pay off. So an advantage of privatization would be to create a more trustworthy ATC partner for the users of the system.

ATC privatization should be an opportunity for Democrats and Republicans to forge a bipartisan legislative success. In Canada, the successful ATC privatization was enacted by a Liberal government and supported by the subsequent Conservative government. So let’s use the Canadian system as a model, and move ahead with ATC reform and modernization.

Raise the Wage Act Is More Rhetoric than Reality

When U.S Congressman Robert C. “Bobby” Scott (D-VA) and U.S. Senator Patty Murray (D-WA) introduced the Raise the Wage Act on April 30, they promised that their bill would “raise wages for nearly 38 million American workers.” Their bill would also phase out the subminimum tipped wage and index the minimum wage to median wage growth.

With rhetorical flourish, Sen. Murray said, “Raising the minimum wage to $12 by 2020 is a key component to helping more families make ends meet, expanding economic security, and growing our economy from the middle out, not the top down.”

The fact sheet that accompanied the bill claims that passing the Raise the Wage Act would reduce poverty and benefit low-wage workers, especially minorities. Indeed, it is taken as given that the Act “would give 37 percent of African American workers a raise”—by the mere stroke of a legislative pen. It is also assumed that “putting more money into the pockets of low-wage workers stimulates consumer demand and strengthens the economy for all Americans.”

The reality is that whenever wages are artificially pushed above competitive market levels jobs will be destroyed, unemployment will increase for lower-skilled workers, and those effects will be stronger in the long run than in the short run.  The least productive workers will be harmed the most as employers substitute new techniques that require fewer low-skilled workers.  There will be less full-time employment for those workers and their benefits will be cut over time.  That is the logic of the market price system.

Why Are Environmental Policy Conflicts So Intractable?

On Earth Day the op-ed pages remind me of “Groundhog Day.”  Environmentalists argue we need stricter environmental regulation.  Business interests argue such regulations reduce economic growth and cost the economy jobs.  Each also invokes “sound science” as an adjudicator of the conflict.  Environmentalists invoke “science” in the case of CO2 emissions and effects while business interests invoke “science” in the case of traditional pollution emissions.  Each year we wake up and the same movie plays out.

The scientific validity of people’s preferences plays no role in the market’s delivery of private goods.  Markets can and do supply organic lettuce regardless of whether it is really “better” for your health.  The scientific validity of people’s preferences is irrelevant.

Air- and water-quality environmental disputes are more challenging to analyze than the supply of organic lettuce for two reasons.  First, while property rights exist for lettuce, they often do not exist for air and water.   Thus, environmental politics involves continuous struggle over implicit property rights and the wealth effects that flow from such rights.  Second, both conventional air and water quality are “local” public goods (club goods) rather than private goods, thus individual differences in consumption, the primary method of reducing conflict associated with private goods, are not possible.  Instead, everyone’s varied preferences for environmental goods can only result in one jointly consumed outcome.

One possible impediment to the implementation of market-like solutions to air and water quality is that the initial ownership of property rights to air or water emissions not only has wealth but also efficiency effects.  That is those particular property rights (the right to a pristine environment) are so valuable relative to other assets that their initial allocation alters the willingness of people to pay for them and thus affects how much pollution exists.  In such cases the initial distribution is the whole ballgame because it determines the resulting air- and water- quality levels.

IRS Budget Cuts and Tax Filing

For taxpayers needing IRS help, this year’s filing season could be a nightmare. The Washington Post today reports on the long lines at IRS offices. The newspaper suggests that five years of Republican budget cuts are to blame, even though Democrats control the White House and, until recently, the Senate. But, whoever is at fault, the IRS commissioner is correct that his agency’s service is “abysmal.”

Let’s take a closer look at those alleged budget cuts. Using data from the OMB budget database, I split total IRS outlays into two activities: administration and handouts. Administration includes tax return processing, taxpayer help, enforcement, and other bureaucratic functions. Handouts are mainly refundable tax credits, particularly the earned income tax credit, child credit, and Obamacare exchange subsidies, which began in 2014.

The chart shows that the IRS budget for handouts has skyrocketed (red line). The IRS has become a huge welfare agency. Handouts quadrupled from $30 billion in 2000 to an estimated $121 billion in 2015. Handouts have spiked the past two years because of Obamacare exchange subsidies of $13 billion in 2014 and an estimated $29 billion in 2015. (Data for 2015 are the president’s estimates).

How about IRS administration costs? They have been relatively flat (blue line). They grew from $8.4 billion in 2000 to a peak of $12.3 billion in 2011, and then they dipped to an estimated $11.3 billion in 2015.