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April 30, 2017 6:47PM

No Regulation by Amicus Brief

Congress passed the Fair Labor Standards Act (FLSA) in 1938 to regulate certain employment practices between employers and employees. In order to put the law into effect, Congress delegated authority to the Department of Labor (DOL) to enforce the statute’s provisions. It’s a fundamental legal principle, however, that an executive-branch agency may only regulate those provisions that Congress has actually put into its authorizing statute. Where Congress has not address a certain practice, the agency has no authority to regulate and the practice is presumptively legal.

Fast forward almost 80 years. E.I. Du Pont De Nemours and Co. (better known as DuPont), following standard industry practice, paid their employees for otherwise noncompensable meal breaks, using that compensation as credit towards the time employees spent performing certain work duties (especially “donning and duffing” special clothing and gear) before and after their shifts. The employees sued DuPont in federal court, arguing that the FLSA forbids this type of crediting and that they must be paid overtime pay for the donning/duffing time.

The district court disagreed, finding that the statute was silent about the practice and so DuPont had done nothing illegal under the FLSA. On appeal, the U.S. Court of Appeals for the Third Circuit invited DOL to file an amicus brief regarding whether DuPont had violated the law—essentially allowing it to regulate. DOL admitted in its brief that the FLSA was silent on the issue, but argue that the statute implicitly forbade the practice. The Third Circuit then adopted that view by granting DOL Skidmore deference (by which judges defer to agency interpretations according to their persuasiveness), and reversed the district court’s ruling.

Cato has now filed an amicus brief supporting DuPont’s petition for Supreme Court review. We argue that Third Circuit ignored the basic administrative-law and constitutional axiom that agencies can only exercise the powers delegated to them. Indeed, under Supreme Court separation-of-powers precedent, Congress must give executive agencies at least some “intelligible principle” to follow. The Third Circuit, however, would give any agency a virtually unlimited power to write any regulations it thinks a statute should cover, without any congressional authority.

Moreover, when the court accorded Skidmore deference to the DOL amicus brief, it violated DuPont’s due process rights for two reasons. First, this was the first time in the FLSA’s long history that DOL had ever interpreted the statute to forbid the practice at issue—and two other circuit courts had already ruled that the practice was legal—so DuPont was denied fair notice. Second, by inviting a nonparty government agency into the litigation and deferring to its view, the court decided the case with bias towards one of the parties before it.

The Supreme Court should take DuPont v. Smiley and explain that the Constitution’s separation of powers does not allow such judicial enabling of executive mischief. Administrative agencies simply cannot take it upon themselves to rewrite duly enacted legislation and then thrust their statutory revisions on private litigants for the first time in litigation.

April 28, 2017 1:10PM

Trump, Hillbillies, and Geographic Mobility

Following Trump’s electoral success in rustbelt states, the spotlight has been on white, rural, post-industrial poverty. J.D. Vance, author of the now-famous memoir Hillbilly Elegy, discussed some possible explanations for rural poverty yesterday in a podcast. In the interview, he suggests that geographic (im)mobility is partly to blame for the erosion of areas like Appalachia: the poor simply aren’t migrating to jobs. 

Vance is right that Americans have limited interest in relocating, and are relocating less than before. According to calculations[1] using University of Chicago data, the proportion of individuals unwilling to relocate for work is high: 42% of Americans say they will not move within the United States for work, and 68% of Americans will not move outside the country for work. A full quarter (25%) of Americans would not consider traveling further for a job, even if the decision resulted in unemployment. Meanwhile, Census data suggests that relocation—whether inter-state, inter-county, or intra-county—is down (Figure 1). 2016 had the lowest relocation rate in seventy years (Figure 2).

Figure 1. Type of Move, 1948–2016

mobility 1

Figure 2: Number of Movers and Mover Rate, 1948–2016

edited 2 mobility

 

Why are people relocating less than ever? One explanation Vance misses is that government policy gets in the way. For example, research provides evidence that land use regulations put pressure on housing prices in high-opportunity areas, which in turn eliminates the fiscal rewards of relocation for the poor and unskilled. Tragically, this means low-income Americans are trapped in job deserts with little in the way of opportunities, amenities, or hope.

You can listen to more of Vance’s interview regarding the causes of white, rural, post-industrial poverty, here.




[1] Author’s own.
April 28, 2017 11:45AM

Trump’s First 100 Days and the Deepening Militarization of U.S. Foreign Policy

Donald Trump’s first 100 days in office have set U.S. foreign policy on a dangerous course. Trump’s actions and rhetoric have raised the profile of America’s military power while weakening other sources of U.S. influence. Such an approach is in line with the “peace through strength” formula Trump espouses. However, the deepening militarization of U.S. foreign policy carries a host of risks and costs that may cause more headaches than victories.

The growing role of the military in U.S. foreign policy is not a new phenomenon. Barack Obama’s presidency was hardly peaceful. This was especially true in the Middle East, where the “light footprint” approach reduced the on-the-ground U.S. military presence but made extensive use of air power to conduct foreign policy by precision strike. However, Obama also spearheaded multilateral initiatives that relied on other sources of American power and influence, such as the Iran nuclear deal and the Trans Pacific Partnership (TPP). Not all of these initiatives were successful, but they demonstrate a foreign policy approach that places value on non-military tools.

Thus far into his presidency, Trump does not seem to share Obama’s appreciation for the value of non-military tools for dealing with foreign policy problems. One of Trump’s first executive orders withdrew the United States from the TPP, a key component of American economic engagement in East Asia. The TPP and a growing American military presence were the two key pillars of the Obama administration’s “pivot to Asia,” with the TPP emblematic of the softer side of U.S. policy. Granted, the TPP was not yet in force when Trump withdrew from it, which mitigates the diplomatic downside of withdrawal. But the loss of economic and diplomatic influence associated with withdrawing from the TPP leaves military power as the primary means for the administration to implement U.S. policy in East Asia. 

Greater reliance on U.S. military power in East Asia is already evident in the Trump administration’s policy toward North Korea. The administration wants to apply “maximum pressure” to Pyongyang in order force them to negotiate on Washington’s terms. As former defense official Van Jackson points out, this theory of victory depends heavily on U.S. military signaling and is more aggressive than previous administrations. Jackson argues, “the Trump administration appears to be a much more permissive—even enabling—environment for such coercive beliefs” due to “the prominence of the Pentagon in President Trump’s national security policy to date.”

Staring down North Korea through displays of military might and rhetoric hinting at military action fits with “peace through strength,” but probably won’t stop North Korea from testing new missiles or accepting the maximal conditions the United States has placed on negotiations.

Relying heavily on U.S. military power in matters of foreign policy is by no means exclusive to East Asia. Trump’s cruise missile strike against Assadspecial forces raid in Yemen, and loosening of the rules of engagement for counterterrorism missions point to a growing role for the U.S. military in Middle East policy. Recently, Trump said that Iran was “not living up to the spirit” of the nuclear deal, despite the fact that the State Department confirmed that Iran is complying with the deal. What the administration will do with the Iran deal remains uncertain, but the deepening militarization of U.S. foreign policy in the Middle East combined with a general hatred of the deal by President Trump point to growing tensions.

Fortunately there are things that Trump can do to rein in the militarization of U.S. foreign policy, if he is so inclined. Filling vacancies at State and Defense with civilian experts would provide additional, non-military voices in the policymaking process. These appointees may not be able to match the influence of the retired and active generals in Trump’s administration, but the current absence of civilian appointees ensures that the generals will heavily influence Trump’s foreign policy.

Congress could also fight back against the militarization of U.S. foreign policy through its control of the budget. Trump’s planned cuts to agencies like USAID and the State Department would devastate two non-military tools of U.S. influence. After the proposed cuts were announced, several prominent Republican senators spoke out in opposition. Congress could also demand that Trump obtain new authorizations for the use of military force if he wants to get the United States more directly involved in Yemen or Somalia.

The deepening militarization of U.S. foreign policy is Trump’s most worrisome “achievement” of his first 100 days. Valuing military power so highly over diplomatic and economic tools limits policy options and can make military conflict more likely, as peaceful avenues for resolution are shut down. Hopefully Trump will recognize that there are other tools at his disposal for conducting U.S. foreign policy, and the warlike first 100 days prove to be a fluke—and not the trend. 

April 27, 2017 4:54PM

Kate Steinle and San Francisco’s “Sanctuary City” Policy

The White House denounced a federal judge this week that enjoined the president’s executive order denying certain federal grants to sanctuary cities, and it raised the case of Kate Steinle to illustrate why sanctuary cities are such a problem. Almost two years ago, Steinle, a 32-year-old medical device sales rep from California, was shot and killed on a San Francisco pier. City police have charged an unauthorized immigrant named Juan Francisco Lopez-Sanchez who has confessed to killing her. Her death led Donald Trump to denounce sanctuary cities such as San Francisco and call for tougher border security and deportations. But in reality, the facts of this tragedy do not support these policies:

  • Lopez-Sanchez did not end up in San Francisco due to lax border security, and the case actually shows the opposite. In recent years, Border Patrol caught him each time he attempted to cross.
  • Lopez-Sanchez only ended up in the city because the Justice Department ignored an Immigration and Customs Enforcement (ICE) request to take custody. The department has since changed its policies.
  • ICE sent a request to the city to detain Lopez-Sanchez knowing that the city would only hold a person subject to a federal warrant. Yet ICE chose not to seek a warrant. Yet it has refused to change its policies.
  • San Francisco's Sheriff's Department could not legally hold Lopez-Sanchez who had no history of violence. Investigators have since shown that he was not trying to kill Steinle.
  • Lopez-Sanchez’s mental illness is the relevant cause of the tragedy, not his immigration status. Yet even after a federal judge instructed that he receive care, none was apparently provided.
  • This case is a tragic anomaly. Undocumented immigrants generally are half as likely as other people in the United States to commit these types of serious crimes.

Case highlights improving border security

Lopez-Sanchez is a Mexican national who had resided illegally in the United States on and off since at least 1991. In the early 1990s, he compiled various drug convictions in Arizona, Washington, and Oregon. Immediately following his conviction for imitation drugs in Oregon in June 1994, the federal government took custody and deported him to Mexico. A month later, he returned to Arizona and was arrested for violating his probation there. After the state released him, San Francisco arrested him for a $20 marijuana purchase charge, but he failed to appear in court, and seven months later, Washington convicted him of another felony drug charge. In April 1997, the federal government took custody and deported him again.

This period reflects the relative lack of border security in the 1990s. But after his first two deportations, he appears never again to have successfully snuck into the United States. After his deportation in 1997, Border Patrol agents apprehended and deported him in January 1998. They caught him again in February 1998 at which point he was imprisoned for felony illegal reentry until his fourth deportation in March 2003. In July 2003, Border Patrol apprehended him again, and he was imprisoned for felony reentry a second time until his fifth deportation in June 2009. Less than three months later, Border Patrol caught him a fourth time, and he was imprisoned until March 2015.

Thus, from 1997 to 2015, Lopez-Sanchez probably never crossed the U.S.-Mexico border without being caught. The case is hardly an example of the lack of border security. Indeed, he highlights the myth of border insecurity.

Case led to changes in federal prisoner policies

In March 2015, the Federal Bureau of Prisons (BOP) under the Department of Justice (DOJ) had custody of Lopez-Sanchez. DOJ told San Francisco that Lopez-Sanchez was due to be released, and San Francisco Sheriff’s Central Warrant Bureau sent a request to pick him up from the prison for prosecution of his 20-year-old marijuana charge. Lopez-Sanchez was arrested for his $20 marijuana buy in 1995. In 2006, the San Francisco Board of Supervisors made marijuana the “lowest enforcement priority” and called for the state to legalize it. By 2015, the sheriff’s department should have known that the city district attorney would decline to prosecute the 20-year-old marijuana charge.

DOJ could have referred Lopez-Sanchez to Immigration and Customs Enforcement (ICE) for deportation, but inexplicably, DOJ decided to honor the San Francisco request instead of a request from ICE that DOJ detain him for deportation. This is even stranger because DOJ never contacted San Francisco before Lopez-Sanchez’s three other deportations. On March 26, 2015, the transfer occurred, and DOJ sent an automated notice to ICE, which immediately sent a request to the city to detain him until they could pick him up, and the following day, the San Francisco Superior Court predictably dismissed the charges against him. San Francisco never should have sent the request, nor should DOJ have transferred him.

The DOJ decision was the only reason that Lopez-Sanchez came to San Francisco in 2015, not a lack of border security or insufficient interior enforcement. Attorney General Loretta Lynch announced in February 2016 that DOJ would no longer release individuals who may be deportable to localities without going through ICE first. In a letter, DOJ told the House Appropriations Committee, “Now, BOP offers ICE, instead of the states and municipalities, the first opportunity to take into custody and remove an individual.” This is appropriate because ICE is best able to assess the immigration implications of a transfer. Committee Chairman John Culberson responded by declaring, “Had that policy been in effect last summer Kate Steinle would still be alive.”

San Francisco’s policy was legal

In 2015, San Francisco’s Administrative Code prohibited “use of any city funds or resources to assist in the enforcement of federal immigration law or to gather or disseminate information regarding the immigration status of individuals" unless "such assistance is required by the federal or state statute, regulation, or court decision.” (Section 12H.2) That section has since been amended to change “immigration status” to “release status.” In a March 2015 memo, the Sheriff’s department interpreted the law to ban officers from providing “access to inmates in jail” or “release dates or times” to ICE unless the ICE request is supported by a court-issued warrant or a signed court order.

One big myth in this case is that San Francisco did not detain Lopez-Sanchez after it dismissed the marijuana charge. In fact, the city continued to hold him for nearly three weeks based, the Sheriff’s department claimed, on a confusion over whether his federal prison term was complete. It claimed that “federal transportation orders reflected two conflicting release dates.” This confusion is baffling because DOJ had literally just released him to San Francisco custody. In any case, during this time, it contacted DOJ to confirm that he had completed his federal prison time and was not the subject of any active warrants. Finally, on April 15, the Sheriff’s department released him without informing ICE.

Steinle’s family filed a wrongful death lawsuit against San Francisco for its decision not to inform ICE of Lopez-Sanchez’s release. A district court judge dismissed the claims against the city because it found, in part, that they did “not plausibly allege that Steinle‘s death resulted from a violation” of law. The only possibly relevant federal statute bans any policy that would prevent city employees from transmitting information regarding the immigration status of the individuals, not their release dates. “Given that ICE issued a detainer request for Lopez-Sanchez well before his release, there is no question that ICE was aware of Lopez-Sanchez‘s immigration status,” the court concluded. Thus, San Francisco could not have been in violation of the law.

Case highlights flawed ICE detainer policy

San Francisco has pointed to two court decisions on detainers that, if courts in San Francisco followed the same logic, could make the city liable for damages if it honored ICE detainers. First, a federal district court decision in Oregon found that ICE detainers cannot be the basis of further detention of a noncitizen and that the county violated the detainee’s Fourth Amendment rights by detaining her without probable cause. Second, in allowing a suit by a wrongfully detained U.S. citizen to proceed, the Court of Appeals for the Third Circuit has also found that “immigration detainers do not and cannot compel a state or local law enforcement agency to detain suspected aliens subject to removal.” The First Circuit issued a similar ruling on a preliminary manner a similar case.

In light of the fact that this area of law is so fraught—as a recent Congressional Research Service review found—San Francisco explicitly stated that it would honor any judicial warrant. In this case, ICE would have had no difficulty providing a judge with probable cause that Lopez-Sanchez was in the United States illegally if it had sought a warrant. Moreover, ICE already knew San Francisco’s policy—it had refused 98 percent of all ICE detainer requests the year before and the sheriff had met with ICE officials to tell them that it would not honor their detainers—yet the agency still chose not to seek a warrant in this case. The city held Lopez-Sanchez for three weeks after the initial detainer, so the agency cannot claim that it had insufficient time to seek a warrant.

ICE has simply chosen not to seek warrants because it believes it should not have to, even if they know that the person will be released. That was a mistake. Throughout the 19 days that Lopez-Sanchez was detained, as the judge in the Steinle lawsuit put it, “ICE took no further action to detain or deport Lopez-Sanchez other than issuing the detainer request.” Unlike DOJ, ICE has still not altered its policies in response to the Steinle death.

Killer’s mental health is more relevant than his criminal history or immigration status

When San Francisco released Lopez-Sanchez, he had no history of violence. His earlier convictions were nonviolent drug offenses, and his only offenses in almost two decades were immigration violations. While Lopez-Sanchez is a clearly unstable person, he was not a serious criminal. His first conviction was for huffing toxic chemicals. He then attempted to sell heroin and was caught in less than a month. Then he was convicted for selling fake drugs. After each of his last three deportations, he was almost immediately caught at the border. Neither the city nor the federal government had any reasonable basis for concluding that Lopez-Sanchez posed a threat to anyone other than himself.

The White House’s statement claims that Lopez-Sanchez “gunned down innocent Kate Steinle.” But the public facts indicate that the shooting was an accident. Lopez-Sanchez claims to have found the gun, which was stolen, and to have taken sleeping pills and been shooting at sea lions. Witnesses observed him “acting bizarrely” before the shooting, and investigators determined that the gun was “clearly aimed at the ground,” and the bullet ricocheted off the pavement and travelled at least 90 feet before hitting Steinle.

Lopez-Sanchez’s mental health is much more relevant than his criminal history or his immigration status. Indeed, a federal judge who sentenced him recommended that the government send him to “a federal medical facility as soon as possible.” That apparently never happened.

Undocumented immigrants do not increase crime

The key question is whether states and localities should—even if they don’t have to legally—aid the federal government in removing people who are not violent criminals. The president believes that the Steinle case proves that a general crackdown on unauthorized immigrants is warranted. But the reality is that, as a recent Cato Institute report found, unauthorized immigrants are much less likely than other people in the United States to commit these types of serious crimes. We know this because they are three times less likely to be incarcerated in state or federal prisons as native-born Americans, excluding those who are jailed solely for immigration offenses.

This conclusion fits with a lot of other research finding that increases in immigration are correlated with lower crime rates. Moreover, research has shown that when crackdowns on immigrants occur—even when it is targeted at those with contact with law enforcement—it has no positive effect on crime rates. For example, multiple researchers found that when Secure Communities—a program that automatically contacted ICE after an FBI background check by local police—was rolled out, the areas where it was implemented first saw no greater reduction in crime than areas where it was not implemented. This means that the deportees were no more crime-prone than the population at large—probably because the actual criminals were already being deported.

As I have written before, a crackdown on undocumented immigrants could actually increase crime because immigrants help reduce crime in various ways, including through intervening to stop crimes as they are happening or acting as witnesses against criminals. Given the complicated relationship between police and their communities, the research supports allowing localities the opportunity to decide how to handle immigration status and release information about immigrants they encounter.

April 27, 2017 3:42PM

Why ‘Net Neutrality’ Is a Problem

Yesterday, Federal Communications Commission Chairman Ajit Pai announced his intention to reverse Obama administration "net neutrality" rules governing the internet that were put in place in 2015. Some commentators are criticizing the announcement as a give-away to large telecom companies and an attack on consumers. But the Obama rules create some serious problems for consumers—problems that Pai says he wants to correct.

Under the Obama rules, internet service providers (ISPs) are subject to "rate-of-return" regulations, which the federal government previously applied to AT&T's long-distance telephone service back when it was a monopoly more than 50 years ago. Ostensibly, rate-of-return regulation gives government officials the power to review and approve or reject ISP rates. In reality it basically guarantees ISPs government-enforced market protection and profitability, in exchange for regulators ensuring that ISPs won't be too profitable.

As explained in this 2014 post, rate-of-return regulation involves more than just telecom. It is an attempt to settle fights between "producers" and "shippers"—whether those are farms, mines, and factories on one side and railroads and shipping lines on the other, or Netflix and Hulu on one side and ISPs on the other. In all those cases, the producers and shippers need each other to satisfy consumers, but they fight each other to capture the larger share of consumers' payments. If shippers charge more, then farmers, factories, and Netflix must charge less in order to maintain the same level of sales.

The political resolution of the producer–shipper fights was the Interstate Commerce Act of 1887 and its rate-of-return regulations, which were initially written with railroads in mind. Similar efforts were later extended to trucking, air transportation, energy, and telecom. It took about 100 years for policymakers to accept that those efforts hurt consumers much more than it helped them, forcing on consumers too many bad providers with high prices and poor quality.

Since 2007 Regulation has published seven articles on traditional telephone regulation and why such regulation would be inappropriate for the internet:

  • Bruce Owen explicitly makes the link between the concerns of traditional transportation common carrier regulation and the contemporary notion of "internet neutrality."
  • Hal Singer and Christopher Yoo argue that the one-size-fits-all architecture that policymakers envision of the internet has been a myth for some time. Network providers employ an array of business arrangements and prices to manage congestion and maintain quality of service, but that diversity will be weakened by net neutrality rules.
  • In another article, Yoo notes that traditional rate-of-return telecom regulation assumes a monopoly service. The expansion of wireless high-speed internet has allowed multiple competitive providers to offer service to a large majority of American consumers while restraining capital costs.
  • Gerald Faulhaber explains that service quality will suffer to the extent that internet access providers can't charge more for streams that impose greater costs on the system.
  • Dennis Weisman points out that internet regulation will likely protect competitors from competition rather than serve consumer interests, just like the old telephone regulatory scheme did.
  • And Larry Downes argues that the movement to re-regulate telecom is propelled by some firms' quest for rents under new regulation, and by the FCC wanting to regain its former political power and the benefits that come with it.

Hopefully, Pai's efforts will mean that bad regulations on internet service will be thwarted before they have been allowed to take hold. However, the news isn't entirely good. As this June 2016 post explains, an appeals court approved the Obama rate-of-return regulations despite previous court rejections of other attempts to regulate the internet under different provisions of the Telecommunications Act. The 2016 decision may complicate Pai's attempt to reverse course.

April 27, 2017 2:01PM

New Paper Shows Workers Commute Away From Minimum Wage Rises

The beauty of the United States where policy is concerned is that state variations allow for lots of decent analysis. Nowhere is this more clear than on the minimum wage, where a fascinating new empirical paper by Terra McKinnish from the University of Colorado Boulder adds further light as to whether Econ 101 holds in regards to raising statutory pay rates.

Remember, there are (to simplify) two main theoretical stories of the labor market. In an ordinary competitive model, imposing a minimum wage above the equilibrium wage rate leads to an increase in the quantity of labor supplied (more people want to work at the higher wage) and a reduction in the quantity demanded (employers want fewer worker hours at the higher price). The difference between the two is the increase in “unemployment” – i.e. the difference between the worker hours people are willing to work and the demand for worker hours at that wage rate. Raising the minimum wage in a competitive labor market is said to have “disemployment effects.”

In the past decade though, some academics have posited a different theory of the labor market, implying that all or many employers have “monopsony power” - monopoly power but in the purchase of labor. Profit maximization would lead firms to pay less than the value of the marginal product of labor and employ less labor-hours than would be the case in a competitive market. The implication is that when there is a strong element of monopsony in the labor market, the imposition of a higher minimum wage can lead to both an increase in pay per hour and an increase in hours of employment. Workers would gain unequivocally from the minimum wage, while previously exploitative employers would lose.

Let’s put aside for a second that in reality the labor market is complex, dynamic, and there could be elements of both. Empirically, the question is which provides a better explanation of the real labor market we see.

Here’s where McKinnish’s new study comes in. She seeks to exploit the variation in minimum wage rates between states and the compressing effect of the 2009 federal minimum wage increase to analyze whether a relative increase in a minimum wage within a state led to more commuting into that state to work for under 30s or more commuting out of the state to work.

Suppose I’m residing and working in a state whose minimum wage is unchanged and a neighboring state increases its minimum wage relative to the one I am in. A result of more commuting from my state to the neighboring state would be consistent with the monopsony story that a higher minimum wage could support more employment or at least the idea that the disemployment effects of higher minimum wages were small. On the other hand, if the higher minimum wage in the neighboring state resulted in more commuting out of the state then this would signify the disemployment effects of Econ101, and thus the competitive labor market story.

McKinnish employs difference-in-differences techniques to try to find the answer, using commuting records of people earning both low and modest hourly rates to control for other factors which could influence commuting, such as the health of the economy.

Upon doing all this, three key findings arise from her work:

  1. Prior to the 2009 federal minimum wage increase, there is no evidence that low-wage workers commuted at higher rates (relative to moderate-wage workers) to neighboring states with a higher minimum wage.
  2. After the federal minimum wage increase, low-wage workers modestly increased out-of-state commuting out of states most affected by the federal minimum wage increase.
  3. Moderate-wage workers reduced the rate at which they commuted out of states most affected by the federal increase following the rise in the rate (consistent with the idea that increasing minimum wages leads to employers replacing low productivity workers with higher productivity ones).

The implications of this finding are 3-fold. First, it directly refutes the narrative presented by some in the media that people commute towards states with higher minimum wages. Second, it suggests that the real labor market looks much more like the competitive model than the monopsony one. Third, it suggests that studies which seek to examine the effects of minimum wage increases using data based on the residential location of the worker will tend to understate the disemployment effects of the wage rise.

In all, this study is further evidence to support the Econ 101 view of minimum wages. See here and here for more.

April 27, 2017 1:07PM

No, Higher Deficits Don’t Raise Long‐​Term Interest Rates

According to former Reagan adviser Martin Feldstein, “Higher projected budget deficits could raise long-term interest rates, potentially triggering. . . a serious economic downturn.”

Has that ever happened?

From 1977 to 1981 10-year bond yields nearly doubled, rising from about 7.4% to 13.9%, but budget deficits were relatively small, around 2.5% of GDP.  Budget deficits were doubled from 1984 to 1993 (about 5% of GDP), yet bond yields were nearly cut in half, falling from 12.4% to 5.9%. Bond yields were no lower from 1997 to 2000 when the budget moved into surplus. But yields fell dramatically in 2008-2012, a period of record budget deficits.

One possible objection is that larger budget deficits were caused by recessions, which is why bond yields did not rise with larger deficits or fall with surpluses.  The graph addresses this concern by using CBO estimates [.xls] of cyclically-adjusted budgets (“with automatic stabilizers,” in CBO vocabulary). 

Deficits and Bond Yields

Still, there is clearly no correlation between bond yields and any measure of yearly budget deficits and surpluses. And that is also true in other times and places – Japan’s chronic large deficits and debt being an obvious example.

Another possible objection centers on Feldstein’s use of the phrase “projected budget deficits,” as though the CBO’s notoriously inaccurate long-run projections could somehow have an entirely different effect from actual deficits. I criticized the analysis and evidence behind that conjecture in a Treasury Department presentation which was condensed and simplified in a Cato Institute paper. I found the underlying analysis illogical and contradictory and the evidence worthless.

There is no need to make up stories about alleged effects of deficits on bond yields in order to make a strong case for minimizing frivolous government borrowing (e.g., to pay for transfer payments or government employee compensation).

Chronic deficits add to accumulated debt, and that debt will have to be serviced with future taxes even if it is rolled-over indefinitely. That is reason enough for Congress to keep growth of federal spending below the growth of the private economy – a task which requires frugality in spending but also a tax and regulatory climate which minimizes impediments to investment, entrepreneurship, education and work.