Topic: Regulatory Studies

Senseless in Seattle: The Minimum-Wage Follies

Meet the Marxist behind Seattle’s wage hike,” read the headline of the lead item at CNN Money late this morning. It seems that one Kshama Sawant, an immigrant from India who earned a Ph.D. in economics from North Carolina State University before taking a teaching position at Seattle Central Community College, is credited by the local press with being the political force behind the city council’s recent vote to raise the minimum wage there to $15 an hour, phased in for large businesses by 2017 and all businesses by 2021.

A self-described Marxist, Ms. Sawant went from Occupy Wall Street to occupying Seattle City Council, the story says, adding that she was “radicalized politically by the gaping inequality she observed upon arriving in the world’s richest country.” Thus, she ran for city council last year “under the banner of Socialist Alternative, an organization that calls for ‘international struggle’ against global capitalism.”

Say this for Ms. Sawant: Whatever she learned about economics in the course of getting her degree, at least she’s not hiding her views. But what can we say about the Seattle City Council, which passed her proposal unanimously? Perhaps there’s something in the coffee out there. Or perhaps they really believe, as Ms. Sawant does, that this measure will “transfer $3 billion from businesses to low-wage workers over the next decade.”

Well it turns out that you don’t need a Ph.D. in economics to understand that economies are not static. That elementary insight from Econ 101 was captured, in fact, in an earlier lead item at CNN Money, “Seattle $15 wage plan is unfair to me.” Quoting several small business owners on what’s in store for them—and their employees—here we find Subway franchise owner Matthew Hollek lamenting that, although he has only eight employees, he’ll have to start paying them 60 percent more by 2017—while the sandwich shop next door will be immune from the law for another four years. The reason? The law counts him as a large employer because he’s part of a national chain. It looks like these “gaping inequalities” are more difficult to close than Ms. Sawant seems to have realized.

Indeed, not only are economies dynamic and is Seattle not an island, but if the benefits of a minimum wage were as good as its advocates believe, then why stop at $15? Why not $20, or $30, or more? You never hear an answer to that because there is none. For a sampling from Cato of a more serious approach to the subject, see here, here, and here.

Resources for a Potential Ruling Today in Halbig v. Sebelius

The D.C. Circuit is due to rule any day now, quite possibly today, on Halbig v. Sebelius. For those who haven’t been watching the vigil I keep over at DarwinsFool.comNewsweek calls Halbigthe case that could topple ObamaCare.”

First a little background. The Patient Protection and Affordable Care Act offers refundable “premium-assistance tax credits” to qualified taxpayers who purchase health insurance “through an Exchange established by the State.” The PPACA contains no language authorizing tax credits through the 34 Exchanges established by the federal government in states that declined to establish one themselves, nor does it authorize the Internal Revenue Service to treat those federally established Exchanges as if they had been “established by the State.” Offering benefits only in compliant states was proposed by numerous Republicans and Democrats in 2009, for obvious reasons: Congress cannot force states to implement federal programs, but it can create incentives for states to act, such as by offering health-insurance subsidies to residents of compliant states.

Halbig is one of four cases challenging the IRS’s decision to rewrite the statute and offer tax credits in the 34 states with federal Exchanges. The plaintiffs are individuals and employers who are injured by the IRS’s overreach because, due to the PPACA’s many inter-locking pieces, issuing those illegal tax credits subjects them to illegal penalties.

Since a ruling may come today (or some Tuesday or Friday hence, as is the D.C. Circuit’s habit), here are some materials for those who want to hit the ground running.

Update: The D.C. Circuit has handed down rulings for today, and Halbig is not among them. Click here to check on the court’s most recent rulings.

Should Taxi Medallion Owners Be Compensated?

The Sunday Washington Post published a very interesting long article on the effects of Uber and other similar ride-sharing services on the value of the medallions required for operation of conventional taxis in Chicago and other cities.

The medallions have value because the supply of rights to operate taxis, restricted by city regulation, is low relative to demand. The Post article presents data on the number of taxis per 100,000 residents. Washington D. C. licenses cabs, but does not restrict the number of cabs operating through a medallion requirement, and has almost 900 taxis per 100,000 residents. In contrast, Chicago and New York, which have medallion restrictions, only have approximately 230 to 250 taxis per 100,000 residents.[1] The supply restrictions in Chicago and New York lead to excess profits, which reveal themselves in the bids for medallions in the secondary market. The present value of the profits from owning the “rights to cruise for passengers” relative to the profits of other investments is the market value of the medallions, which until recently ranged from $500,000 to a million dollars depending on the city and the severity of the medallion restrictions.

Uber, which supplies luxury town-car service, and especially UberX, which supplies service similar to cabs, in effect, have increased the supply of taxis to eliminate some, if not all, of the difference between the number of vehicles per capita in Washington D.C. and those cities with medallion supply restrictions. This increased supply reduces the market value of the medallions. The article asks whether reductions in the value of the medallions are a “taking” by the government that deserves compensation like any normal taking of “property” by government action.

I (along with Richard Sansing, a Professor at Dartmouth Business School) wrote an article in the Journal of Policy Analysis and Management (volume 13, issue 3, Summer 1994 pp. 565- 570) that analyzed the question of whether governments should compensate those citizens who lose wealth because public policies change. (Here is a version published in Regulation in Winter 1997)

We analyzed data on lease versus purchase of tax medallions in New York City. If there were no risk, the purchase price of a medallion would reflect the present value of leasing in perpetuity. Unlike other assets the medallion’s only value is the entry restrictions created by government. At the time we conducted our analysis the present value of leasing in perpetuity at 5 percent interest was $240,000 whereas the sale price of medallions was only $100,000. That is the purchase price of a medallion at that time amortized the cash flows over a period of 20 years as if they would go to zero in year 21. Unlike other investments the only reason that cash flows might go to zero was the possibility of deregulation or reduction in enforcement of the entry restrictions. If policy change created any reduction in cash flows in years one through 19 investors made less than normal profits. Investors made “excess” profits if any reduction in cash flow occurred after year 20. Thus the medallion market was like a fairly priced lottery ticket that took into account the possibility of deregulation, even though at the time we did this calculation no change in taxi regulation had ever taken place since it was instituted in the late 1930s. We concluded that no compensation was required to preserve equity or fairness because the price for medallions reflected the risk investors faced from policy change.

We then analyzed the efficiency consequences of a no-compensation regime. The lack of compensation for policy change increases the riskiness (variance) of returns on assets even though it does not change the average return. Investors handle risk by diversification: owning assets whose returns do not all increase or decrease at the same time. As long as the risk of policy change in taxi medallions does not occur at the same time as the risk to assets in all other markets, the risk of taxi medallion policy change can be managed through asset diversification. Thus in the case of taxi medallion deregulation due to changes such as the advent of Uber and Lyft, compensation is not required for efficiency either.


[1] Chicago has 6904 medallions according to the Post article and 2,718,782 population in 2013 for 254 cabs per 100k people. NYC has 13,605 medallions http://en.wikipedia.org/wiki/Taxicabs_of_New_York_City  In December 2011, Governor Cuomo signed law allowing 18,000 new outer borough medallions. 6, 000 of the outer borough medallions have been issued. Thus New York City has 19,605 medallions and 8,405,837 people in 2013 according to the census, which equals 233 cabs per 100k people.

TaskRabbit to Become “Uber For Everything” Thanks to Makeover

TaskRabbit, a site that connects people looking to outsource tasks such as household repairs and keg deliveries, recently announced that its business model will be changing from one that resembles an eBay-style auction house to one that more closely resembles companies like Uber. The new TaskRabbit will be launched “before the end of July.”

As Casey Newton noted at The Verge last week in an article titled “TaskRabbit is blowing up its business model and becoming the Uber for everything,” when the new system goes live next month users will find a landing page that steers them to the platform’s four most popular types of service: handyman, house cleaning, moving, and personal assistants. (You can still request other services, though it takes a few more clicks.) After you submit some details about the job, TaskRabbit will present three contractors, along with their hourly rates, who represent a range of prices and experience levels. After you select one, you can schedule a time for the job and communicate with the “Tasker” in real time using a custom messaging platform built by the company.

It seems that news of TaskRabbit’s makeover has increased interest in the company. TaskRabbit PR chief Johnny Brackett tweeted on Wednesday, the day after TaskRabbit announced the planned changes, that TaskRabbit had “15X more user signups yesterday than an average day.”

While Uber’s rideshare service, UberX, makes it simple for users to do one familiar thing (catching a ride), TaskRabbit allows for its users to easily find help carrying out a range of common tasks such as assembling furniture, replacing light switches, and so-called “virtual” tasks such as vacation planning and proofreading.

It remains to be seen if TaskRabbit’s redesign will yield the sort of growth enjoyed by other “sharing economy” companies. If Brackett’s tweet is accurate, there is at the very least some new interest in TaskRabbit, the “Uber for everything.” Investors have shown that they believe in the potential of the “sharing economy” despite numerous domestic and international regulatory battles, having provided Uber and Airbnb with huge valuations earlier this year.

If the new version of TaskRabbit takes off, it will likely have to contend with its own share of regulatory obstacles. In particular, many of the jobs that it helps people to get done could be subject to state and local occupational licensing rules. Established service providers may try to use these laws to squelch unlicensed competition from TaskRabbit, just as taxi services have sought to stop Uber.

It will be interesting to see how TaskRabbit does with its Uber-like system. I was quite eager to use TaskRabbit myself, but after signing up as a TaskRabbit (a term that will be changed to “Tasker” once the new site is launched) in Washington, D.C. I received a message that said in part:

There is high application volume in your city right now so we’ve temporarily put a hold on all new applications. The number of tasks on our site is growing rapidly, so it shouldn’t be long before we start accepting new applications.

So, it doesn’t look like I’ll be helping strangers out with IKEA furniture assembly via TaskRabbit any time soon, but that seems to be because of the popularity of the “Uber for everything,” which shouldn’t come as a surprise.

Wal-Mart Swings Back against NYT Columnist

Don’t you wish more companies would do this when attacked? After New York Times columnist Tim Egan took a swipe at Wal-Mart over its wage policies, Wal-Mart swiped right back this weekend in a way that’s effective as well as funny. 

One further point the company could have added: the company’s low prices significantly improve standards of living for low-wage and low-income shoppers across the nation. Here’s one economist’s comment from a few years back: 

Wal-Mart’s low prices help to increase real wages for the 120 million Americans employed in other sectors of the economy. And the company itself does not appear to pay lower wages or benefits than similar companies, or to cause substantially lower wages in the retail sector…

[T]o the degree the anti-Wal-Mart campaign slows or halts the spread of Wal-Mart to new areas, it will lead to higher prices that disproportionately harm lower-income families…

By acting in the interests of its shareholders, Wal-Mart has innovated and expanded competition, resulting in huge benefits for the American middle class and even proportionately larger benefits for moderate-income Americans.

Although the link is via a post by colleague Michael Cannon, it wasn’t any of us at Cato who wrote that: it was Jason Furman, adviser to Democratic candidates and President Obama’s current chairman of the Council of Economic Advisers. More Furman on Wal-Mart here.

Connecticut’s Sweet Job-Protection Deal for Elected Officials

It is a truism that laws tend to be arranged for the benefit of the political class. Still, I was surprised how blatantly this truism plays out in the case of a Connecticut law by the name of Conn. Gen. Stat. 31-51l, which I learned of through a post earlier this year by Daniel Schwartz at his Connecticut Employment Law Blog. He writes: 

Here’s the scenario: Suppose you are a salesperson for a mid-size employer in the state and you decide to run for a full-time local or state office.  You then win (congrats).  And maybe you win a second term.  But then - after eight years in office - you decide to leave office.

Can you get your job back with your prior employer? Well, under state law, the answer is remarkably (with a caveat or two) yes.

And better still: you can get credit for your time in office.

The provision covers private Connecticut employers with 25 or more persons on their payroll, and has a couple of exceptions, as when an employer manages to plead hardship or changed circumstances. Still, imagine being able to demand that your job at United Technologies, Yale-New Haven Hospital, or ESPN be held open for eight years

Upon reapplication to the employer, the employer must then reinstate that employee to his or her original position or a similar position with equivalent pay and accumulated seniority, retirement, fringe benefits and other service credits.

Because Connecticut’s own legislature is part-time rather than full-time, the lawmakers who maintain this statute on the books can’t take advantage of it themselves (unless they happen to run for another public office, which is hardly unheard of). But members of the political class tend to hang out with each other, and can readily identify with each other’s situations. 

More, it sometimes seems, than with the situation of those they govern. 

Brazil Welcomes Airbnb Amid World Cup

The largest sporting event on Earth is taking place this summer in Brazil. Yet, despite having known since 2007 that Brazil would be hosting the 2014 FIFA World Cup Brazilian authorities failed to adequately prepare for the event, which is estimated to cost more than $11 billion. Not only has the construction of the stadiums and the relevant infrastructure been far from ideal, Brazil also has a hotel room shortage.

In light of the shortage of hotel rooms Brazilian authorities have welcomed Airbnb, the San Francisco-based company that connects those looking for a place to stay with property owners willing to provide short-term accommodation. Patrick Hoge of the San Francisco Business Times explains:

While Airbnb has been controversial in many cities around the world, Brazilian officials, facing shortages of hotel rooms, have been more welcoming to the San Francisco company, seeing it as a resource for housing the massive influx of tourists expected.

Hoge also reported that, according to Airbnb Brazil general director Christian Gessner, the number of Airbnb listings in Brazil increased from around 3,000 to more than 35,000 in the two year period ahead of the start of the World Cup.

Considering their state of preparation for the World Cup it is not hard to see why Brazilian officials have welcomed a company that makes it easier for private individuals to do what they have been doing for thousands of years: letting strangers stay in their property for a short time in exchange for money.