Topic: Regulatory Studies

‘Loser-Pays’ in Texas: a ‘Triumph of Packaging’

The latest round of litigation reform in Texas drew big national attention because of its “loser pays” label. But in reality, as I told Reuters reporter Moira Herbst in her new story, by the time the bill reached enactment the label wasn’t really deserved.

Texas courts will apply the loser-pays principle to only a small fraction of unsuccessful actions. The package also includes new rules shifting costs in some cases where litigants turn down a settlement offer and then do less well at trial; that’s welcome, but doesn’t venture much beyond what other states have tried with success in their legal systems. As before, Alaska (which has had its rule since territorial days) is the only state to enjoy the benefits of a comprehensive loser-pays principle.

For more background on loser-pays, see my Maryland Law Review article with co-author David Bernstein, or this more popular Reason piece. For more on the recent Texas enactment, see links at Overlawyered here, here, here, etc.

Orszag and the People

Former OMB Director Peter Orszag has written a provocative New Republic essay calling for less democracy. Most people, myself included, would be inclined to dismiss his effort as an obviously self-serving call for rule by progressive experts. I believe that temptation should be put aside. After all, in 1789 and afterwards, the American people have not created a democracy but rather a republic. So we should address Orszag’s arguments on their merits while asking whether he is proposing a “Republican remedy for the diseases most incident to Republican Government.”

A bit of historical context offers a way into Orszag’s argument. Progressives did favor expert influence over government, but they also plumped for direct democracy; the referendum and the initiative were progressive reforms. They believed direct rule of the people would bypass corrupt and “reactionary” state legislatures who refused to enact progressive legislation. Orszag does not propose reforms introducing direct rule; he is thus left with the expert aspect of the progressive legacy. Why not more democracy?

The people are dysfunctional. Orszag reasons that legislative gridlock does harm to the nation and will do more in the future, that gridlock is rooted in polarization of the masses and not just of elites, and that polarization arises from people living and interacting only with people who share their views. Representatives in DC reflect these divisions. The problem, according to Orszag, is not in our agents but in ourselves. In response, we should sever the link between policymaking and the problematic people.

You need not equate the voice of the people with the voice of God to find Orszag’s analysis unconvincing. Is it really so surprising that the people are so polarized? For decades, we have lived under a redistributive government. Your gain is my loss and vice-versa. The politics of redistribution also foster a rhetoric of blame and contempt. You are the cause of my problems and vice-versa. In the zero sum struggles around the redistributive state, people begin to see each other as friend and enemy. Big Government leads to Big Polarization.

Orszag offers three general ways around the people and their representatives: automatic policies, backstop rules (like the sequester governing the supercommittee), and institutions more independent of the dysfunctional people. I focus on the last of these.

Is the independent judgment of experts what we need? Policies are means to ends, and the latter are tied to values. For example, Cato experts often argue for a policy of deregulation to limit government and thereby increase individual liberty. Experts have special knowledge about means not ends, about the effects of policies and not about the worth of values.

However, Orszag might say, Americans agree about ends/values. Everyone wants more, not less, economic growth. Politicians (and their constituents) bicker over the policies needed to bring growth; in contrast, experts agree about the effects of policies. If we turn over policy to experts, we will get policies that achieve the ends everyone wants. Is this true?  Consider for a moment the expert debates about the stimulus, the most recent policy designed to renew growth. Would you say those debates reflect expert agreement or a polarization not unlike what Orszag ascribes to the public?

Orszag’s case for more independent institutions cites policies that involve ends as much as means, values as much as facts. Tax policy might be given to a board of independent experts similar to the Federal Reserve. But making tax policy requires making tradeoffs between liberty and equality (among other values). Why would a board of experts have special knowledge about the proper tradeoff between those two cardinal values? In fact, mainstream economics assumes such values and their proper relationship cannot be known. Hence, economists begin with exogenous preferences which are not a matter of knowledge but rather, of will. The most important decisions about tax policy are simply not within the competence of experts.

You might think that Orszag takes as his slogan “taxation without representation” but that would be unfair. He does allow that the legislature could overrule his various independent institutions and their judgments about ends and means. But the experts would set the agenda, and political scientists have found that those who set the agenda usually win the policy battle. So actually Orszag is proposing “taxation (usually) without representation.” The original Tea Party Patriots of 1773 might wonder: has it really come to this?

Orszag does have a point. Americans do deeply disagree about public ends and means and thus about the size and scope of government. Why must all those disagreements be resolved in Washington? Must we always be at one another’s throats? Actually, no. The same political tradition that promised “no taxation without representation” also endorsed a division of power between national and subnational governments. Federalism offers an chance for people who deeply disagree about values to live at some distance politically from one another. We are too centralized and too much a nation for the people that we have become.

But we can and should deal with this challenge by drawing on, not repudiating, American political culture.

Update: I did a podcast on this topic with Cato’s Caleb Brown.

English Fluency? Correct Pronunciation? Why Would Teachers Need Those?

As Pat Kossan reports in the Arizona Republic, the state of Arizona has averted a threatened civil-rights lawsuit from Washington by agreeing to stop monitoring teachers’ English fluency and pronunciation in the classroom. “In November, federal officials told Arizona that its fluency monitoring may violate the Civil Rights Act of 1964 by discriminating against teachers who are Hispanic and others who are not native English speakers.”

Does this strike you as perhaps a bit crazy? If so, it’s craziness with quite a pedigree. It was way back in the first Bush administration that the Equal Employment Opportunity Commission (EEOC) began filing lawsuits against employers for “discriminating” against employees with difficult-to-understand or heavily accented speech, the theory being that this served as an improper proxy for discrimination based on national origin. The scope for allowable exceptions was exceedingly narrow, too narrow to cover most teaching positions, as I wrote quite a while back when the issue had just come over the horizon in a Massachusetts case. Indeed, the National Education Association (I pointed out) had been prevailed on to pass a resolution “decrying disparate treatment on the basis of ‘pronunciation’ – quite a switch from the old days when teachers used to be demons for correctness on that topic.”

Don’t assume you can escape by choosing one of your local private schools. Their employment of teachers falls under the EEOC’s jurisdiction too.

Zoning Laws Are Strangling Silicon Valley

Many of the best jobs for computer programmers are concentrated in the San Francisco Bay Area, where dozens of innovative software companies—Google, Facebook, Apple, Intel, Cisco, Adobe—are located. This concentration of innovative, rapidly-growing firms shows up in income statistics. For example, the average wage in the San Jose metropolitan area, around $80,000, is among the nation’s highest.

Yet strangely, the Bay Area as a whole has been growing slowly. Between 1990 and 2000, the population of the Bay Area grew by 12.6 percent, slower than the 13.2 percent growth rate of the nation as a whole. Between 2000 and 2010, the Bay Area grew by just 5.4 percent, barely half the 9.7 percent growth rate of the nation as a whole. Compare that to the Phoenix metropolitan area. Despite dramatically lower wages (the average is less than $50,000) it attracted enough people to grow by a whopping 45 percent in the 1990s, and by 29 percent in the last decade.

A major factor is a severe shortage of housing in the Bay Area. Lots of people would like to live there, but the supply of homes hasn’t kept up. As a result, the median home in the Bay Area cost about $600,000 in 2009. This means that even though Silicon Valley firms offer some of the nation’s highest wages, many families can still increase their standard of living by moving to cities like Phoenix, where the median home costs about a third as much.

This pattern has been with us for long enough that most of us just take it for granted. Everyone knows that large cities are outrageously expensive, and that families often have to move to less glamorous cities to find homes they can afford. But in his new book The Gated City, Ryan Avent argues that this complacency is misguided. Living in the heart of a large city will never be as cheap, per square foot, as living in an outer-ring suburb. But the enormous discrepancy in housing costs between Silicon Valley and the Sun Belt is mostly a result of government regulations, not the inevitably higher costs of urban life.

In the 19th Century, the most innovative cities tended to also be the fastest growing. New York, Chicago, and Detroit all grew by an order of magnitude in the late 19th and early 20th centuries as key American industries grew in them. Skyscrapers sprang up in these cities’ downtowns. In New York and Chicago especially, developers built dense, walkable neighborhoods to accommodate the surging demand for housing. And this, in turn, helped keep supply in balance with demand and avoided large price increases.

This isn’t happening in Silicon Valley. If Wikipedia is to be believed, the tallest skyscraper in San Jose, the self-styled capital of Silicon Valley, is a pathetic 22 stories tall. Silicon Valley continues to be dominated by low-density, suburban patterns of development, even as housing prices have skyrocketed.

Why is this happening? In a nutshell, it’s because high-density development is illegal. The city of San Jose has 350 pages of regulations that place an effective ceiling on building density. The regulations include minimum lot sizes, minimum building setbacks, maximum building heights, minimum parking requirements, and so on. Of course, developers can apply for exceptions to these rules, but when they do so, city officials are besieged by what Avent calls NIMBY’s (“Not In My Back Yard”), local activists who strenuously oppose having more people live or work in their neighborhoods.

Avent argues that this isn’t just an aesthetic or lifestyle dispute between those who like the suburban lifestyle and those who prefer to live in cities. By strangling the growth of America’s densest and most productive cities, restrictive zoning laws actually make the nation poorer. When an engineer leaves his $80,000 job in Mountain View for a $60,000 job in Scottsdale, he may wind up with a larger house and more disposable income. But the economy as a whole becomes less productive. In a free market, developers would be allowed to supply more housing in Mountain View so that engineer could enjoy a higher salary and an affordable home. And the phenomenon isn’t limited to the Bay Area. Large, coastal cities like New York and Boston also have high wages but anemic population growth. Meanwhile, people flock to cities like Atlanta, Las Vegas, and Charlotte with lower wages but cheaper housing. Deregulation would not only allow more people to enjoy life in America’s most dynamic cities, but it would have a real impact on the nation’s economic growth.

The Gated City is a Kindle Single. It’s just $2, and short enough that you’ll be able to finish it in an afternoon.

Electric Power in Montgomery County: Spot the Fallacy

Some politicians in Montgomery County, Md. want the county government to take over the provision of electric power from the private Potomac Electric Power Co. (Pepco). One councilman quoted in the D.C. Examiner seems to think the killer argument is that money laid out by the county government has no opportunity cost:

“Pepco pays out … $200 million in dividends,” said Councilman Marc Elrich, D-at large. “If I’m not paying shareholders dividends, I have $200 million I can invest in infrastructure.”

Surely Councilman Elrich’s insight is too profound to confine to the utility business alone. It suggests that the government – enjoying, it seems, the power to lay out taxpayer dollars with Greece-like insouciance about boring old concepts like “return on investment” – could do better than dividend-paying corporations at almost any business. Why not have it take over the running of fast-food restaurants and dry cleaners too?

As it happens, Pepco has been the target of consumer anger in recent years in considerable part because windstorms in its service area have resulted in prolonged and costly outages. And in the suburbanized Northeast, at least, one of the single most important predictors of severe windstorm outages is the extent to which utilities trim back trees near power lines: well-off counties like Montgomery that prize a leafier, more natural tree canopy pay the price in occasional electric interruption, a phenomenon likewise seen in places like Greenwich, Ct.

So who’s led the opposition in the past when Pepco has tried to accelerate cutting? You guessed it:

Councilman Marc Elrich (D-at large) says he is considering legislation to stop widespread tree-cutting by Pepco.

There is perhaps no single right way of resolving the trade-offs here, but demagoguing the issue up one side of the street and down the other is almost certainly the wrong way.

Unions Can’t Force Non-Members to Pay for Political Advocacy

As recent events in Wisconsin have demonstrated, public-sector unions are powerful political constituencies that can shape government to their ends. The Service Employees International Union, for example, the defendant in Knox v. SEIU Local 1000, has been ranked by OpenSecrets.org as the fifth biggest “heavy hitter” in federal politics in terms of campaign spending.

In 2005, the SEIU initiated a mid-year campaign against two California ballot measures, one that would cap state spending and another that would restrict the use of union dues for political purposes. In states such as California that do not have “right to work” laws, unions are allowed to take dues from non-union workers to finance collective-bargaining activities that, arguably, benefit all employees.  Since 1977, however, unions have not been allowed to take dues from non-union members to pay for pure political advocacy without adequate protections for possible dissenters.

To distinguish political money from collective-bargaining money, the Supreme Court requires that a “Hudson notice” be given to all non-union workers. This notice gives non-members the opportunity to challenge political expenditures. But when the SEIU began garnishing 25-33% more wages to fight the California ballot initiatives, it issued no new Hudson notice, effectively forcing 28,000 non-member employees to finance its political speech.

As Judge J. Clifford Wallace wrote in dissent from the Ninth Circuit’s ruling in favor of the SEIU, “it is undeniably unusual for a government agency to give a private entity the power, in essence, to tax government employees.”  Now before the Supreme Court, Cato joined the Pacific Legal Foundation, the Center for Constitutional Jurisprudence, and the Mountain States Legal Foundation, on a brief supporting the non-union workers and arguing that the Court should focus not on the extent of the burden Hudson places on unions (as the Ninth Circuit did) but on the paramount reasons why the notice requirements exist in the first place: to ensure that an individual’s right to speak or remain quiet receives the protection it deserves.

As Judge Wallace put it, “the union has no legitimate interest … in collecting agency fees from nonmembers to fill its political war-chest.”

We also highlight the numerous unscrupulous tactics that unions have used over the years that violate the rights of dissenting workers – the same kind of rights that the Ninth Circuit treated with indifference. Finally, in light of the extreme political power that unions enjoy, the Court should find that the only way to adequately protect the rights of dissenting workers is to require that all non-union members must “opt-in” to any garnishment of wages for political purposes.

The Supreme Court will hear the Knox case in early 2012.  Here again is Cato’s brief.

Peter Schiff: For Jobs, Look to Microeconomics

Peter Schiff’s testimony to a House committee yesterday on the nation’s economic crisis provides a refreshing contrast to the Keynesian-dominated commentary that saturates the mainstream media.

Peter talks about how:

  • The president’s jobs plan would create perverse hiring and firing incentives
  • Infrastructure investment needs to earn a positive net return else it’s not worth doing.
  • The minimum wage increases unemployment for low-skill workers
  • Regulation and litigation reduce hiring
  • Extended unemployment benefits exacerbate unemployment.

It’s all Econ 101 microeconomics, but it’s often forgotten these days by economists and pundits who only see the world through the lens of “aggregate demand.”