Tuesday Podcast: “Labor Relations, Collective Choice and ‘Card Check”’

Congress introduced the “Employee Free Choice Act” last week, which would end the secret ballot system currently in place for workers who vote on whether to start a union.

The bill could have disastrous effects on companies and would throw another wrench in U.S. labor relations, says University of Chicago law Professor and Cato Adjunct Scholar Richard A. Epstein in Tuesday’s Cato Daily Podcast:

It would be a major transformation of the American labor force, all for the worse as far as I’m concerned. Because it would mean that the monopoly model of the labor statutes that were intro under the Wagner Act would now become gov policy to the extent that a card check could allow a union essentially to contain partial ownership rights over the management and prerogatives of the firm.

A worse piece of legislation I cannot imagine, with respect to this field.

Epstein offers a more detailed look at the card-check legislation in the Spring issue of Cato’s magazine Regulation, which will be released March 26.

Oh C’mon, NYT!

C@L readers know that I’m a fan of the NY Times’s news and business reporting. If you want depth and detail (especially today, when papers increasingly read like Tweets), the NYT’s news coverage is about as good as it gets.

The opinion page, sadly, is another matter.

Case in point, last Friday’s lead editorial chastising Japan and Europe for not adopting large fiscal stimulus plans. The lede:

The world economy has plunged into what is likely to be the most brutal recession since the 1930s, yet policy makers in Europe and Japan seem to believe there are more important things for them to do than to try to dig the world, including themselves, out.

That’s actually OK — the editorial board is free to believe (and espouse) that massive fiscal stimulus is the best policy for dealing with the current recession. But to use an old saying, they’re entitled to their own opinion, but not their own facts. Ignoring that admonition, the ed led off its final graf with this howler:

In a recent speech, Christina Romer, another of President Obama’s economic advisers, pointed out some lessons [sic] from the Great Depression: fiscal stimulus works.

If you follow the economic history literature, this is a stunner; some of Romer’s most important academic work demonstrates the opposite, namely that fiscal stimulus did little to get the United States out of the Depression [$] and subsequent U.S. recessions [$]. Has she rejected her own findings?

I tracked down the speech transcript and found out that, nope, she hasn’t; in fact, she was explicit that “fiscal policy was not the key engine of recovery in the Depression.”

Romer did go on to say that she strongly supports the Obama stimulus plan, believing it will be effective and worthwhile. But this belief is rooted in one school of economic thought (or ideology, to borrow from NYT columnist Paul Krugman), not history. Whatever the merits of Romer’s belief, the NYT’s line about the Depression proving that “fiscal stimulus works” is just plain horseradish.

In recent years, the NYT editorial board has repeatedly chastised non-progressives, claiming they put ideology over objective fact. Will the ed board scold itself?

The Subway Business Administration

Yesterday, President Obama announced a government initiative to help small businesses, largely through the Small Business Administration (SBA). But more on that in a bit…

A February 24th Wall Street Journal article discussed the fact that defaults of SBA-backed loans to franchisees at 500 franchises went up 52% in fiscal year 2008. Loan losses went up 167%. Sure, the economy isn’t doing too hot right now. What grabs my attention is the fact that taxpayers are backing loans to business operations like Subway, Domino’s Pizza, and Planet Beach tanning salons. Is capitalism in this country so incapable, recession or not, that the government needs to ensure an adequate supply of credit to sandwich shops? Tanning salons? A recent headline on MSNBC.com reads, “In many cities, tanning salons exceed Starbucks.”

The Journal reported that in the last eight years 42% of SBA-backed loans to Cornwell Quality Tools Co. franchisees went into default. Yet, Cornwell’s CEO says that it opened 127 new franchisees last year and indicated that “relatively few used SBA lending to enter the business,” according to the article. Proponents of the SBA argue that the agency is needed to help businesses that are unable to obtain credit or financing through traditional channels. What this story shows is there’s obviously a very good reason why these businesses couldn’t obtain private financing. It also shows that, in the case of Cornwell, there’s no “need” to have taxpayers backing loans to its franchisees when so many are opening up without such help.

Is it even true that small businesses are generally so unable to obtain credit that the government must fill the void? According to a recent study by the Government Accountability Office (GAO), “Between October 2006 and March 2008, SBA determined that 31 of the 97 lenders reviewed had failed to consistently document that borrowers met the credit elsewhere requirement or personal resources test.” In other words, a third of the borrows didn’t prove they couldn’t obtain money elsewhere. Moreover, the GAO says, “we found that lenders evaluate a borrower’s ability to obtain credit elsewhere on reasonable terms against their own conventional lending policies.” That litmus test hardly provides proof that deserving small businesses are being left out in the cold. The reality is that the SBA-backs loans to small businesses that could have obtained credit through private means – or shouldn’t have been loaned money in the first place.

Cato adjunct scholar, Dr. Veronique de Rugy, has found that “no more than 1 percent of [all] small business loans each year are SBA loans. The private sector finances most loans without government guarantee and, hence, the SBA is largely irrelevant in the capital market.” Moreover, because SBA financed loans have below market rates, small businesses who aren’t subsidized by the government are placed at a competitive disadvantage. Table 3 of de Rugy’s study for Regulation magazine (download article here and go to pdf page 7), lays bare the SBA’s irrelevance, and the competitive disadvantage the vast majority of small businesses face because of the agency’s subsidies.

The table shows the top 25 industries receiving SBA 7(a) loans for fy2002. At the top of the list are full-service restaurants, with limited-service eating places in second, and automotive repair and maintenance in third. The SBA loan ratio (SBA loans divided by total number of small business establishments in the industry) for the top three, are 1.5%, 1.2%, and 0.6%. The ratio for the top 25 industries was 0.3%; the ratio for all industries was 0.2%. I’m not a math whiz, but less than 1% isn’t very much.

Let’s circle back to the President’s announcement…

First, the President said the U.S. Treasury “will begin making direct purchases of securities backed by [Small Business Administration] loans to get the credit market moving again, and it will stand ready to purchase new securities to ensure that community banks and credit unions feel confident in extending new loans to local businesses.” That idea sounds kind of familiar to me. Oh, right.

Second, the President said “These purchases, combined with higher loan guarantees and reduced fees, will help provide lenders with the confidence that they need to extend credit, knowing they both have a backstop against their risk and a source of liquidity.” According to the Wall Street Journal, “Mr. Obama’s plan, aimed at helping troubled small businesses, will increase that guarantee to as much as 90% of a loan. The plan also will temporarily eliminate many of the loan fees that help pay for the program and cover potential defaults.”

It’s this second part that should be particularly galling to regular taxpayers and the vast majority of small businesses dealing with subsidized competitors. The President mentions some temporary tax breaks, but as Raymond Keating, chief economist at the Small Business and Entrepreneurship Council, told the Journal, “the Obama administration would accomplish much more in terms of boosting confidence and getting the economy moving by, at the very least, moving away from imposing higher personal income, capital gains, dividend and estate taxes on investors and business owners.” Additionally, a small business owner writing in Slate, in a piece entitled “Why Small Business Hates the Taxman,” says that what rankles a lot of small businesses is “the sheer hassle of compliance with the tax laws and the complete loss of control you feel when dealing with the government.”

Instead, the administration’s idea of helping small businesses is perpetuating the same moral hazzards that has the government already bailing out reckless private interests to the tune of trillions of dollars in current and future taxpayer dollars. This is change we can believe in? Unbelievable.

Who’s Blogging about Cato

Here’s a list of bloggers who wrote about Cato this week:

  • Freedom Politics linked to Andrew J. Coulson’s blog post that notes the lack of media coverage of injustice in education.

If you’re blogging about Cato, contact Chris Moody at cmoody [at] cato.org (subject: blogging%20about%20Cato) .

More on that Massachusetts ‘Model’

Amid reports that the Obama administration, congress, and some conservative groups still consider Massachusetts to be a model for health care reform, the New York Times reveals that despite assessing insurers and hospitals, raising the penalty on noncompliant businesses, increasing premiums and co-payments for consumers, and raising the state tobacco tax, the program’s financing remains unsustainable.

Massachusetts has significantly reduced the number of people in the state who lack health insurance. However, it has not achieved, nor does it expect to reach, universal coverage. (The best estimates suggest that more than 200,000 state residents remain uninsured). And, significantly, roughly 60 percent of newly insured state residents are receiving subsidized coverage, suggesting that the increase in insurance coverage has more to do with increased subsidies (the state now provides subsidies for those earning up to 300 percent of the poverty level or $66,150 for a family of four) than with the mandate.

The cost of those subsidies in the face of predictably rising health care costs has led to program costs far higher than originally predicted. Spending for the Commonwealth Care subsidized program has doubled, from $630 million in 2007 to an estimated $1.3 billion for 2009.

Now the state is turning to a variety of gimmicks to try to hold down costs, including possibly cutting payments to physicians and hospitals by 3-5 percent. However, the Times quotes health reform experts who have studied the Massachusetts system as warning “the state and federal governments may need to place actual limits on health spending, which could lead to rationing of care.”

The more one looks at the Massachusetts “model,” the stronger the argument for keeping the government out of health care.

Ed. Dept. Advisor Wary of Politicizing the Curriculum

Mike Smith, a senior education advisor to Ed. Secretary Duncan, expressed concern yesterday about the possible ill effects of federal government standards. In a Library of Congress presentation, Smith told the crowd that if common national standards are funded by the federal government, “you can’t keep ideology or politics out of the ball game.”

This is a pearl of empirically validated wisdom. The problem is that it has been empirically validated at the state and district levels as well as the national level, as Neal McCluskey demonstrated in “Why We Fight: How Public Schools Cause Social Conflict.” And the U.S. is not alone in finding that official government schools cause social conflict over what is taught.

What can we do about it? How about real educational freedom that gives choice to both parents and taxpayers, eliminating the source of the problem?

Monday Podcast: ‘Challenging Domestic Military Detentions’

410px-ali_saleh_kahlah_al_marriAli Saleh Kahlah al-Marri, the exchange student from Qatar who was detained by the FBI with alleged ties to al-Qaeda, sat for years in a military brig in South Carolina as the only domestically detained enemy combatant.

The Bush Administration used al-Marri to test a legal theory aimed at keeping suspected terrorists in military prisons indefinitely.

President Obama has reversed that ruling, and has moved al-Marri into civilian courts. The Supreme Court is no longer hearing al-Marri’s appeal.

In Monday’s Cato Daily Podcast, Legal Policy Analyst David Rittgers says that there’s nothing that will stop future administrations from again reversing the policy.

This is creating this legal cul-de-sac where we can have military detention domestically…and the reason that they picked Al-Marri is, just as you would pick a sympathetic plaintiff to sue to overturn a law, if you want to keep a law…you would look for an unsympathetic defendant, and Al-Marri is as unsympathetic as you can get.

…He is the test case to keep this policy open.

The Cato Institute co-authored an amicus brief (PDF) at the Supreme Court supporting al-Marri’s challenge to the military detention.