Category Archives: Uncategorized

Coronavirus and the Limits of “Flash Policy”

The coronavirus outbreak is serious, and it deserves a serious response. If you’re healthy, help people out. If you have elderly relatives or neighbors, reach out and see if they need anything. If you need help yourself, don’t be embarrassed to ask for it. If you need to cancel travel, work from home, or even self-quarantine, do so. It might be unpleasant, but it’s likely better than the alternative. And, of course, be diligent about washing your hands. But what about public policy? The real meat of Washington’s coronavirus response should focus on the long term, not the short term. Congress should refrain from passing what my colleague Wayne Crews calls “flash policy,” such as a crisis-inspired stimulus package, or bailouts, or rash monetary fixes.

There are a few immediate actions the federal government should take. My colleague Iain Murray suggests reducing tariffs, especially on medical supplies, faster approval for vaccines, and a few other things. Several of our other colleagues have additional ideas. But honestly, the list is short. The federal government is just not well-suited for fast, flexible crisis response. Most of the government-appropriate responses are at the state and local level, not the federal level.

Short-term flash policy is at best unnecessary. More likely, it is actively harmful. To show why, here is a graph of U.S. real GDP, 1929-present. The gray bars indicate where recessions are. If they weren’t there, they would be hard to see. The coronavirus may well give us another gray bar. Whatever Washington does now will have little to do with whether or not one appears, or how severe it will be, or how long it will last.

The graph’s 90-year span includes the Great Depression, World War II, oil price shocks, stagflation, and the 2008 financial crisis. Long term, the economy will be fine, even if the coronavirus has an impact on par with those events. We should be concerned not with a gray bar, but with helping the sick and containing the infection’s spread.

While there just isn’t much Washington can do in the short run, there are long-run policies Congress should enact. Easing regulatory burdens will enable faster, more flexible responses to future outbreaks—even in areas that might not seem to be outbreak-related. For example, my colleague Marc Scribner points out that drones and autonomous vehicles can help to prevent infections from spreading in the first place, and can make quarantines easier on the people who have to endure them. Lifting regulatory barriers against them won’t help with the coronavirus pandemic right now. But if there is another outbreak in five or ten years, it could help people then.

The point is that limiting damage from disease requires flexibility and adaptability. Intentionally or not, many regulations freeze things in place. They make adapting and improving more difficult. Easing those burdens will not calm the stock market today. Nor will it help anyone with coronavirus right now get better any faster. But less restrictive, more flexible regulatory institutions can improve everyone’s chances the next time an outbreak happens. And eventually, one will.

I don’t expect Congress or President Trump to take the long view right now. It’s an election year. Long-term regulatory reform would do little to calm volatile markets. People are scared right now, and not always thinking rationally. This is reflected in jittery markets, which are comprised of scared, sometimes irrational human beings. People won’t likely even listen to long-term policy proposals until the short term settles down a bit.

And that’s ok. Let’s take care of each other first. Let’s enact what policies are suited to the problem, such as reducing medical supply tariffs and expediting vaccine approval. Let’s avoid flash policies like stimulus or bailouts. Washington is inherently helpless against the coronavirus. Considering the harm that flash policies can cause, the coronavirus response is a time for limited government, not a new case for the opposite. Then we can talk about long-term institutional improvements such as regulatory flexibility and institutional safeguards against flash policies. Ultimately, sound institutions are what will allow for faster, more flexible responses to epidemics, and keep people safe.

The Minimum Wage Tax Increase

By far the most common criticism of minimum wages is that they cost jobs. This is incomplete—the data often show smaller job losses than one would expect after minimum wages go up. This is because workers earn more than wages—they also get non-wage pay such as insurance, free food and parking, and more. When regulations cause wage pay to go up, employers cut non-wage pay to pay for it. Job cuts happen, but they tend to be a last resort. I recently wrote a paper on these underappreciated tradeoffs.

The most underappreciated minimum wage tradeoff is a tax increase on the poor, which for some people would exceed $2,000. When untaxed non-wage pay is converted to taxable wages, workers pay higher taxes, without necessarily making more money. If a $15 minimum wage passes, it could cost some workers more than $2,000 in taxes, in addition to all the other non-wage pay cuts that come with a minimum wage increase.

I try to shine some light on this in an op-ed for Inside Sources:

To afford higher wages, employers cut back on other benefits, like health insurance, workplace leave flexibility, free meals, free parking or tuition reimbursement. That’s a real loss to workers, considering that non-wage pay is mostly tax-free.

By incentivizing employers to convert nonwage benefits to wages,  minimum wage advocates are, probably unknowingly, proposing a massive tax increase on the poor.

For some workers, this would mean a tax increase of up to $2,370 per year at a $15 per hour minimum wage. Depending on which state a worker lives in and other factors, shifting untaxed non-wage pay over to taxable wages could also expose some minimum wage earners to income tax liability, sales taxes and other taxes.

Read the whole thing here. My paper “Minimum Wages Have Tradeoffs” is here.

Book Review: Steven Strogatz – Infinite Powers: How Calculus Reveals the Secrets of the Universe

Review of Steven Strogatz – Infinite Powers: How Calculus Reveals the Secrets of the Universe

This book is really, really good. It should be required supplemental reading for math teachers, who should assign relevant portions to their students. Most math pedagogy consists of memorizing procedures. It’s mostly how, with only a little bit of what or why. There is rarely much of any unifying theme that ties the separate problem-solving procedures together in a way that makes sense. Strogatz provides all that, and in a compelling way, complete with examples ranging from medicine to astronomy.

Strogatz also explains terminology, which is another common weak spot in classrooms. Why are calculus’ two main concepts called derivative and integrals? I didn’t learn that in undergrad. Nor in a high-quality graduate economics program. Instead, I learned it from Strogatz’s popular-level book in my late 30s.

Another fun bit of etymology is that the word “calculus” is derived some the world for rock. It shares a root with calcium, chalk, calcite, and other similar words. This is because in ancient times, people did their counting by sliding stones along an abacus’ strings.

The concept of infinity is key. Calculating the area of a circle is hard because of the curves. Slicing it into quarters, like a pizza, makes it a little easier. The wedges are kind of triangle-like, but there is still plenty of curved surface on the outside. Cutting into 8, 16, and 32 slices makes the curve progressively less important. Tending the number of slices towards infinity sends that tricky curved area towards zero. Long before infinity, it reaches deep decimal territory, where the accuracy of the calculation is good enough to satisfy even the most exacting engineers. Infinite parts are simpler than a complex whole. This view of infinity is the key to understanding calculus.

Differentiating is taking a complex whole, like a circle, and converting into many different parts, which are easier to calculate accurately. Derivatives are parts derived from a larger whole. Integrals take these differentiated parts and integrate them back together. Calculus is essentially the math of moving from a whole to its parts and back, as needed to accomplish the task at hand.

This is simple stuff that is so obvious to veteran instructors that they never bother to teach it to rookie students. This kind of larger context and purpose should be taught on day one of any course, and regularly reinforced as new material is introduced.

In high school, I spent months memorizing procedures for calculating sines and cosines, but never really learned much about their significance, or knew that they had anything to do with calculus. Moreover, why does it matter that the same curved shape is shifted horizontally? More than twenty years later, I finally learned why. The sine wave is interesting because of its continually changing slope. And a sine wave’s derivative is… it’s cosine. And now I have a greater appreciation of everything from the changing length of daylight during the seasons to how sound waves interact with each other. The rate of change in daylight as the calendar moves from solstice to equinox is a sine wave. The rate of change is slowest at the solstice (about 40 seconds), and fastest at the equinox (more than two minutes). Figuring out the rate of this change at any given point can be figuring out the derivative. In the special sine wave case, this is simple—just figure out the cosine.

Again, this is basic stuff that high schoolers deserve to know. GPAs would likely be measurably higher, and understanding measurably greater, by teaching a little bit more of this big-picture context and a little less rote memorization.

Needless to say, I will be reading Strogatz’s other books in short order. Infinite Powers would pair well with David Salsburg‘s The Lady Tasting Tea, which accomplishes a similar task with statistics.

This Week in Ridiculous Regulations

During the four-day week, Lawrence Tesler passed away. The underappreciated inventor created the cut, copy, and paste functions on computers. The Hair Club for Men also lost a client. Meanwhile, agencies issued new final regulations ranging from “biological products” to land erosion taxes.

On to the data:

  • Last week, 53 new final regulations were published in the Federal Register, after 66 the previous week.
  • That’s the equivalent of a new regulation every three hours and 10 minutes.
  • Federal agencies have issued 414 final regulations in 2020. At that pace, there will be 2,958 new final regulations. Last year’s total was 2,964 regulations.
  • There were also 41 proposed regulations in the Federal Register last week, for a total of 306 on the year. At that pace, there will be 2,186 new proposed regulations in 2020. Last year’s total was 2,106 proposed regulations.
  • Last week, agencies published 358 notices, for a total of 2,951 in 2020. At that pace, there will be 21,079 new notices this year. Last year’s total was 21,804.
  • Last week, 1,551 new pages were added to the Federal Register, after 1,271 pages the previous week.
  • The 2020 Federal Register totals 10,268 pages. It is on pace for 73,343 pages. The 2019 total was 70,250 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. One such rule has been published this year. Four such rules were published in 2019.
  • The running cost tally for 2020’s economically significant regulations is currently zero. 2019’s total ranges from net savings of $350 million to $650 million, mostly from estimated savings on federal spending. The exact number depends on discount rates and other assumptions.
  • Agencies have published 13 final rules meeting the broader definition of “significant” so far this year. 2019’s total was 66 significant final rules.
  • So far in 2020, 81 new rules affect small businesses; four of them are classified as significant. 2019’s totals were 501 rules affecting small businesses, with 22 of them significant.

Highlights from last week’s new final regulations:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

This Week in Ridiculous Regulations

Spring Training began for all 30 Major League Baseball teams, bringing joy across the nation. Meanwhile, agencies issued new final regulations ranging from grains ounce equivalence to inactive fishing boats.

On to the data:

  • Last week, 66 new final regulations were published in the Federal Register, after 60 the previous week.
  • That’s the equivalent of a new regulation every two hours and 33 minutes.
  • Federal agencies have issued 361 final regulations in 2020. At that pace, there will be 2,912 new final regulations. Last year’s total was 2,964 regulations.
  • There were also 61 proposed regulations in the Federal Register last week, for a total of 265 on the year. At that pace, there will be 2,138 new proposed regulations in 2020. Last year’s total was 2,106 proposed regulations.
  • Last week, agencies published 410 notices, for a total of 2,593 in 2020. At that pace, there will be 20,912 new notices this year. Last year’s total was 21,804.
  • Last week, 1,271 new pages were added to the Federal Register, after 1,536 pages the previous week.
  • The 2020 Federal Register totals 8,715 pages. It is on pace for 70,283 pages. The 2019 total was 70,250 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. One such rule has been published this year. Four such rules were published in 2019.
  • The running cost tally for 2020’s economically significant regulations is currently zero. 2019’s total ranges from net savings of $350 million to $650 million, mostly from estimated savings on federal spending. The exact number depends on discount rates and other assumptions.
  • Agencies have published 11 final rules meeting the broader definition of “significant” so far this year. 2019’s total was 66 significant final rules.
  • So far in 2020, 71 new rules affect small businesses; four of them are classified as significant. 2019’s totals were 501 rules affecting small businesses, with 22 of them significant.

Highlights from last week’s new final regulations:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

The Spectrum Case against AB5

California’s Assembly Bill 5 (AB5) is intended to classify more independent contractors as formal employees. The goal is for workers to get higher wages and benefits. It is aimed mostly at rideshare and food delivery companies like Uber, Lyft, and GrubHub, but thousands of other workers are losing their jobs in other fields from journalism to entertainment to business consultants. These unintended consequences are almost exactly what Ryan Radia predicted in a CEI study published shortly before AB5 came into effect.

Part of AB5’s problem is that it comes from a fundamental misunderstanding of the labor market. It treats workers as either contractors or formal employees, but that is not an either/or question. The labor market is a wide-ranging spectrum, not a simple binary. There are all kinds of in-betweens, nuances, and complications.

AB5 uses what is called an ABC test to determine if a worker is an independent contractor or a formal employee. It consists of three questions:

  1. How closely is each worker supervised or directed? Do they check in with a boss every day? Or do they work mostly on their own and have wide discretion on how to do their job?
  2. Is their work part of the company’s core business? For an Uber driver, the answer is yes. For an accountant or a maintenance worker, maybe not.
  3. Is the hiring company the contractor’s sole or dominant customer? Is the job mostly in the contractor’s area of specialty or expertise?

The bill text is vaguely worded. In practice, nearly any freelancer qualifies as a formal employee under AB5. But a lot of job arrangements are somewhere in between.

Legislators have come up with two categories to describe a spectrum with countless categories. AB5 is a clunky piece of legislation, and thousands of workers are paying the price.

Take actors, for a classic California example. Acting is a classic gig-oriented job. But some actors have steady gigs. Filming a one-off movie or commercial is almost surely in the independent contractor category. But what if an actor has repeat dealings with the same studio? In the old days, many actors had exclusive contracts with a studio, and were likely employees under most reasonable definitions. But what if an actor has a non-exclusive contract but still appears in multiple films in the same movie franchise, like the Marvel Cinematic Universe? Where should that fall on the ABC test? It could go either way. Under AB5, politicians make the decision, not the employee.

What if an actor works on two or more unrelated films with different producers and directors, but that are produced by the same studio? Or multiple movies with the same production team, but released by different studios? Are those treated differently than the Marvel movie actor under the ABC test? Workers don’t get to make that choice under AB5.

What if an actor becomes a regular go-to person for an advertising agency and does regular commercials for them, but never signs a contract and does other acting work, too? At what point on this broad spectrum does the actor pass from one category to the other? It will take years of case-by-case political decisions, and likely many lawsuits to give clarity to AB5’s broad wording. Many workers just don’t have the time or money to be without work while these new problems wind through the court system.

And it’s more than Hollywood actors. The Los Angeles Times reports about how AB5 is affecting fine artists:

We received more than 120 responses from artists across California — jazz and classical musicians, directors of arts nonprofits, magicians, costume designers, actors, a burlesque dancer and freelance food stylist, among others.

The overwhelming majority said AB5 is hurting their careers. Many are unsure how to comply with the law. Others are cutting back on programming or canceling services because of the cost required to convert independent contractors to employees.

This is the same spectrum problem. Rather than trying to fit real-world people into tidy regulatory categories, policy should allow workers to choose their own work arrangements.

The old workplace ideal of the 1950s doesn’t apply in the 2020s. Back then, the ideal was to have a Monday-to-Friday job, first shift, always at the same office, with everyone on the same company insurance and pension plan. And where possible, the gig was often intended to be for life, or at least until retirement.

Today’s workers want more diverse choices than their parents and grandparents had. Some people like the traditional model; it’s still there for them. Other people like being able to work from home or from a café some days. Other people like the kinds of jobs available in big cities like New York, but don’t necessarily want to live there. According to GlobalWorkplaceAnalytics.com, the number of telecommuters increased 173 percent from 2005 to 2019.

Not everyone wants to work traditional hours. For people with young kids or other family responsibilities, or who are in school, that is often not possible. Other workers do want a 40-hour schedule, but prefer to work four 10-hour days instead of five eight-hour days to get an extra day at home with kids.

Many rideshare drivers are retirees who want to have something to do, but don’t want scheduled hours. Others are people who are between jobs and use ridesharing as a way to make ends meet while they look for their next 9-to-5 gig. AB5’s rigid categorization hurts these workers at various places along the contractor-employee spectrum.

Other workers want more flexibility with their benefits. Don’t like the company health insurance plan? Would you prefer a different retirement savings plan? Tough, say AB5 supporters. Some workers prefer higher wages with fewer benefits. Other workers prefer the opposite. It is much more difficult for employers to accommodate diverse preferences under AB5.

That’s the main reason why independent contracting is becoming more popular. The old model doesn’t fit everybody, so everybody shouldn’t be fit into it. Contractors can choose an insurance and retirement plan that fits their family’s needs and that they can take with them wherever their career takes them. Under the traditional model, if you lose your job, you lose your insurance at the worst possible time. Formal employees who frequently change jobs have to endure hours of unnecessary paperwork changing benefit plans. Independent contractors are spared those headaches.

Californians are learning the hard way that the labor market is a diverse spectrum, not a simplistic two-lump model of contractors and formal employees. Unfortunately, the rest of the country might soon  copy California’s mistake. New York is mulling its own version of AB5. The House of Representatives recently passed the PRO Act, which contains a federal version of AB5’s ABC test. After seeing California’s experiment, hopefully legislators will reconsider.

Antitrust Enforcement in 4-D

Antitrust regulators have long concerned themselves with horizontal and vertical competition, as well as the depth of market concentration. Now they are entering the fourth dimension: time.

The Wall Street Journal reports that “The Federal Trade Commission on Tuesday ordered Amazon.com Inc., Apple Inc., Facebook Inc., Microsoft Corp., and Google owner Alphabet Inc. to provide detailed information about their acquisitions of fledgling firms over the past 10 years.” These deals, which regulators approved at the time, might be undone after the fact.

This is likely illegal. Both federal and state governments are prohibited from making ex post facto laws punishing past actions that were legal when committed. This is a complicated legal question, however. Antitrust law usually comes in the form of judicial decisions, not congressional legislation. The Sherman Act, for example, is only two pages long. Its use of key terms is so vague that judges have been defining and redefining those terms at will for more than a century. In an antitrust case, it is not enough to have truth, justice, and the merits on your side. You must also have the judge.

If regulators follow through with their ex post facto threats and judges agree, they will create enormous uncertainty in the mergers and acquisitions market. Buyers risk prosecution if a deal works out better than expected. The potential chilling effect on competitive behavior is obvious.

Moreover, many of the technologies from years-old acquisitions are so thoroughly merged with the buyer’s operations that unwinding the deals is simply unfeasible. It would be like trying to turn a book back into a tree.

The whole scheme highlights fundamental problems with antitrust law. To see why, let’s step back and take a larger four-dimensional view.

Time

Companies have long risked prosecution for both present and future behavior. But to reach back into the past ex post facto is something new. For example, if a company’s present size is too big for regulators’ tastes, they might break it up. That in-the-moment concern motivated Standard Oil’s 1911 breakup despite its declining market share. It also ended the government’s protection of AT&T’s monopoly in 1984, when regulators decided to allow competition, although in a weird, top-down way. Those cases did not create new offenses out of years-ago actions that were legally permissible at the time.

Antitrust regulators are also concerned with the future. If a company is doing nothing wrong now but might do something bad in the future, some regulators believe they have cause to act now. This is called the incipiency doctrine. For example, if Sprint and T-Mobile merge, will the wireless market become too concentrated, leading to potential future bad behavior? Regulators asked the question. Courts said no, and my colleague Jessica Melugin agrees. Other mergers have been blocked because of possible future effects, as has happened twice with Staples and Office Depot.

Now the distant past is coming into play. Over the last decade, the bigger tech companies, such as Google, Facebook, and Amazon, have bought out as many as 400 startups that had developed promising new products, technologies, or business models. Many of the deals fell below the minimum dollar-value threshold for an antitrust investigation. Regulators approved all of the deals they did examine.

Most of these deals ended up being duds; the rule of thumb is a 90 percent failure rate. But after a decade or so, some of the acquisitions turned out to be important to the bigger companies’ success. Facebook’s 2012 acquisition of Instagram is one example. As Facebook’s primary user base gets older and grayer, Instagram is keeping the company relevant with younger people. Countless algorithms and other under-the-hood technologies that now power different parts of Google and Amazon’s operations were originally developed at acquired firms. Now regulators are mulling undoing these past deals, which were previously approved.

The Horizontal, Vertical, and Depth Dimensions

Regulators should instead use a simpler framework with fewer dimensions. To show why, it is worth asking basic questions about business organization. What if Google or Facebook had come up with the successful technologies in-house, rather than having bought them from elsewhere? Would that be an offense? If not, why should developing them via buyouts be treated differently? This is similar to the lesson from economist David Friedman’s Iowa Car Crop story. It is a distinction without a difference.

My theory is that these sorts of multi-dimensional concerns are rationalizations that distract from the main issue: size. In our extended (and imperfect, but useful) analogy, this is equivalent to the depth dimension. Arguments about ex post facto enforcement or different horizontal and vertical arrangements are, in the end, really about size, or the depth of market competition. What appears to be four-dimensional regulation actually concerns one dimension.

Distractions from the Real Issue: Size

Many members of the Neo-Brandeisian antitrust revival are open about believing, like Justice Louis Brandeis, that large size is an inherent antitrust offense. The arguments investigators are floating about different past, present, and future actions, or about different places along the horizontal and vertical dimensions, are only intended to apply to companies of a certain size or to markets with fewer than a certain number of competitors.

Even the number of competitors in a market is a problematic measure. (I earlier gave two reasons why here and here.) A third way to look at it is this: In a way, startup tech entrepreneurs eager to sell out are similar to independent contractors, similar to the way a company might outsource its payroll to an outside contractor or a family might outsource household repairs to a handyman. Sometimes doing something in-house is better. Sometimes it’s not. Every case is different. But doing something in-house means fewer, and larger, firms in the market. Outsourcing means more, and smaller, firms. One arrangement is not inherently more competitive than the other, yet antitrust regulators treat them differently. This is not a coherent position.

Circumstances also change over time. Maybe a company’s in-house R&D team loses a key person or is stuck in a rut. Sometimes a fresh perspective from an outsider might be helpful. Maybe a contractor is too far away from her customers to communicate with them effectively. Maybe a company is having trouble coordinating multiple outside contractors. In these cases, bringing the contractors in-house could make the companies more competitive, even as it reduces the number of firms in the market.

Competition Is a Spectrum and a Process, Not an On/Off Switch

Even within the outside contractor model, there are lots of places along this vertical dimension. Maybe one company contracts with a startup. Another licenses a startup’s technology and brings it in-house but doesn’t buy the company itself. Maybe the license is exclusive; maybe it isn’t. A third company hires the outside person with the bright idea but doesn’t buy her company. Maybe that person’s team and their equipment are necessary to make the most of that idea. If that’s the case, maybe a buyout is easier, and likely cheaper, than hiring away one or two key people. Maybe another company makes overtures to a horizontal competitor or certain of its employees.

Here we find there are angles between the purely horizontal and the purely vertical. Again, competition is not a binary switch, fully on or fully off. It is a spectrum with all kinds of in-betweens. Competition is a complicated, evolving process with nuances that don’t neatly fit into categories.

Every case is different. Nobody knows in advance which possible course of action is the right one—or if there even is a right one. Remember, as noted, mergers have about a 90 percent failure rate—and each and every one was entered into with confidence.

Here is another way to put it. A company with in-house counsel has essentially bought its own law firm. For antitrust purposes, how is that conceptually different from using an outside attorney? These are two different places on the spectrum of vertical integration, but they irrelevant to market competition.

There are similar concerns for the horizontal spectrum. Some cases require multiple attorneys. What if attorneys from competing firms collaborate on the same side of a case? What if some mix of in-house and outside attorneys work together? The result is the same. People or companies who need legal services buy them in the manner of their choosing. That is not a proper antitrust issue.

Same goes with the mishmash of mergers, acquisitions, and divestitures that have characterized the tech industry for decades. Regulators are only making incoherent multidimensional arguments now because the companies are bigger on the one dimension they really care about: size.

Conclusion

Whatever names we give to the ways big and small companies interact with each other, the end results are not that different. Someone sells something and someone else buys it. The sellers might get paid as employees, vendors, or contractors, or maybe they just take the money and move on to something else.

Why some of these arrangements are considered legitimate antitrust questions while others are not is an important question. Regulators have not given a compelling answer, nor are they likely to.

A final point worth remembering: The reason firms exist in the first place is not to enable or restrict competition. It is to reduce transaction costs. There is no magic number of firms that accomplishes that goal. And if there were, it would constantly move as tastes and technology change. It would certainly move faster than the speed of antitrust litigation. Competition is an ongoing discovery process.

Antitrust regulation fails along all four dimensions—the vertical, the horizontal, depth, and time. It should be entirely repealed. At the very least, the Justice Department should immediately stop its search for ex post facto offenses against Amazon, Apple, Facebook, Google, and Microsoft.

For more problems with antitrust regulation, see Wayne Crews’ and my paper, “The Case against Antitrust Law.”