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VOL. 27, NO. 4 | FALL 2014


Obamacare and Affordability

Not as Connected as You Think
Sports Gambling
Wont Ruin the Game T he U.S. Supreme Court will
soon resolve a dispute with
potential major consequences
for the future of American health
care in the case King v. Burwell,
which CEI coordinated and
funded. The justices inter-
pretation of a few short pas-

6 sages in the 1,000-plus page

Affordable Care Act (ACA) the
Obamacare lawwill deter-
JOHN BERLAU mine whether federal agencies
Obamas Peanut-Brained are bound by the laws Congress
Attack on MetLife writes and whether unelected
bureaucrats can hand out subsi-
dies to millions of ineligible consumers. consumers, led to reduced affordabil-
One of the Obama administrations ity for the supposed poster children for
central arguments in defending the nation- Obamacarethe young and healthy unin-
wide subsidies will be that the ACA had a sured. Based on my professional underwrit-
single overriding purposeto increase the ing experience prior to the ACA, under-30
healthy consumers could obtain good
affordability of health insurance. For that
reason, it claims the ACA should not be individual coverage for $100 per month
interpreted to deny subsidies to people in or less in most states. The ACAs community
nonparticipating states, even if thats what rating requirement has more than doubled
IAIN MURRAY that amount. Subsidies have not offset that
the plain language of the act saysand,
Minimum Wage, in fact, what most of the judges who have price increase, except for young people
Maximum Damage looked at that language agree that it hovering around the minimum wage. The
appears to say. administration claimed to have broad
However, neither the ACA nor the power to delay nearly every other aspect
ALSO IN THIS ISSUE administrations implementation of it sup- of the ACA, but it did nothing to delay this.
ports the notion that affordability trumps Second, the administrations postpone-
other aspects of the law, even when the ment of the employer mandate gutted one
CFPBs Loan Report Attacks Lenders of the central affordability planks of the
Rather than Empower Students, administration could have chosen to pro-
mote affordability instead. ACA, namely incentives for employers
by Carrie Sheffield. . . . . . . . . . . . . . . . . . . 8
First, the ACAs requirement of com- without coverage to adopt it and assist their
Remembering Gordon Tullock, workers with health care costs.
by Fred L. Smith, Jr.. . . . . . . . . . . . . . . . . . . 9 munity rating, which made carriers over-
charge young and healthy Americans Third, President Obamas promise of If
The Good, the Bad, and the Ugly. . . . . . 14 you like your plan you can keep it raised
and undercharge older and less healthy
Media Mentions. . . . . . . . . . . . . . . . . . . . 15 (continued on page 3)
End Notes . . . . . . . . . . . . . . . . . . . . . . . . . 16
In Memoriam: Leonard Liggio
by Lawson Bader

A t the end of the film Amazing Grace, Lord Charles

Fox honors William Wilberforces tireless crusade
to abolish the transatlantic slave trade. When people
interactions with every hero and villain the libertarian
movement has had to offer.
Leonards knowledge about economic historyactu-
speak of great men, they think of men like Napoleon ally history in generalwas amazing. One time Henri

men of violence, begins Fox. Rarely do they think of Lepage sought to do a series of interviews with Leonard
peaceful men . on the classical liberal movements attitude toward war
A peaceful, and indeed great man died October 14. in the interval between the two world wars. Fred offered
Leonard Liggios passing was not mentioned in Politico, his weekend home in southern Maryland as a peaceful
National Journal, Roll Call, or The Washington Post. And environment for that project. Over that weekend, Henri
thats OK. For Leonards accomplishments were far too asked Leonard questions while Fred and his wife Fran
important to be summed up in headlines. (neither of whom Id characterize as wallflowers!) sat in
Clashes of large egos and personal antagonisms amazement as their roles were relegated to ensuring the
seem to dominate Washingtons policy making process. two were well fed.
Leonard would not have fit that bill. He understood that Leonard knew just about everything about classical
ideas matter and are passionately worth defending, but liberalismand just about everyone who helped build
he also recognized that civility matters as well. the movement. There are many more yet to come who
Leonard was long the Don of the free market intel- will be worth knowing. But they, alas, will only read him,
lectual community. And Im proud to say that he played and of him. To know Leonard was to absorb the richness
an important role at the Competitive Enterprise Institute, of his ideas and breadth of his insights.
which I now lead. It was also a pleasure. Todays libertarians are often
Years ago, realizing that CEI needed to move out of typecast as a cantankerous lot. Leonard was certainly
its infancy stage and create a board of directors, founder not. He was friends with all. Such is the power of legacy
Fred Smith approached Leonard, who quickly agreed to as generations move on.
serve on that inaugural team. He continued to carry out I close by echoing Freds words about Leonard:
that board role for several decades, moving to emeri- All creative lives are fascinating lengthy volumes
tus status only last year. Leonard was whimsical in his with many chapters. I, like most, had the opportunity
conversation, grounded in his idealistic commitment, and of perusing only a few selective chapters. But those
often bemused by CEIs temerity in translating classical that Ive read have been fascinating. And when I talk
ideas into actual reform. And he was always supportive. to others and ask about Who to ask, they always
In 1996, I joined the Center for Market Processes respond, Ask Leonard. He was a friend and col-
now the Mercatus Centerat George Mason University. league, his contributions were many, and his knowl-
Our office was located in a nondescript building a mile edge and wisdom cannot be replaced. His challenge
from campus that was shared by several organizations. to us at CEI, and to all who cherish liberty, is to do
We also shared Leonard, whose office was below mine. our best to keep its flame burning brightly.
I used to joke with him that if I stomped my feet hard
enough, pieces of dust and debris might rain down on Leonard, euge serve bone et fidelis.
his head. Good times.
To me, those years seem like a long time ago, but
for Leonard they were but a blip in a career spanning A version of this column originally appeared in Human
many decades and continents, and including personal Events.

Publisher The CEI Planet is produced by the Competitive Enterprise

Lawson Bader Institute, a pro-market public interest group dedicated to
Editor free enterprise and limited government.
Marc Scribner
CEI is a non-partisan, non-profit organization incorporated in the
Editorial Director District of Columbia and is classified by the IRS as a 501 (c)(3)
Ph (202) 331-1010
Ivan G. Osorio charity. CEI relies upon contributions from foundations, corporations
Fax (202) 331-0640 Contributing Editor and individuals for its support. Articles may be reprinted provided
Keara Vickers they are attributed to CEI.
ISSN#: 1086-3036


Obamacare, continued
people preferred. To make matters after-tax. As a result, employers that
Neither the ACA nor worse, the administration threw carriers previously made individual market
that did want to continue those plans coverage more affordable had to
the administrations into the political briar patch, labeling stop, and those that would have done
implementation of it those plans as lousy coverage. so could not. This may be the least
Fourth, the administrations own understandable blow to affordability
supports the notion that backtracking undercut the ACAs as Obamacares guiding principle.
affordability trumps risk-pool model. As the political fallout
from people losing their lousy plans
This decision reversed a decades-long
practice of small employers contribut-
other aspects of the grew, the administration allowed states ing to the cost of insurance purchased
to grandfather in these lower-cost by their employeesa practice which
law, even when the plans and exempt them from most ACA the IRS had already ruled would be
administration could provisions, including the supposedly not be taxed. Nothing in the ACA even
sacrosanct community rating rules remotely suggested that this longstand-
have chosen to promote perhaps forever. Since then, carriers ing practice would become a problem.
affordability instead. have stated publicly that these grand-
fathered plans have diverted people
So heres hoping when the Supreme
Court justices listen to the representa-
away from the exchange pool, thus tives of the administration wax poetic
driving costs higher than projected. So, about affordability as the ACAs central
costs for an even broader cross-section everyone buying insurance through overarching goal, theyll look at the
of consumers (though by amounts yet to the exchanges will have to pay more millions of Americans for whom health
be fully noticed). Regulators and every- because of the presidents careless insurance today is, for no good reason,
one in the industry knew the president rhetoric. This is yet another strike against less affordable and less available.
couldnt possibly make good on that affordability as the guiding principle of
promise. Because carriers were being the ACAs implementation.
forced to market new ACA-compliant Finally, in 2013 the administra- Tom Haynes is a member of the CEI
plans, they were not interested in tion declared that employers could no Board of the Directors. A version of this ar-
undercutting those new plans with the longer contribute to cover their employ- ticle originally appeared on
lower-cost, non-ACA-compliant ones ees insurance costs, either pre-tax or


Sports Gambling Wont Ruin the Game
As Varga notes, state-sanctioned betting within their borders.
BY MICHELLE MINTON sports gambling is illegal in most states Original supporters of PASPA
under the Professional and Amateur hoped that limiting sports betting

O n October 17, New Jersey

Governor Chris Christie signed
into law a bill legalizing sports gam-
Sports Protection Act (PASPA). When
it passed in 1992, PASPA prohibited
states from sanctioning sports gam-
would prevent minors from gambling
and help reduce crime along with
preventing match fixing. But Varga
bling in his state. But just as casinos bling unless they had laws regulating argued otherwise. Betting should stay
and race tracks began preparing to the activity within a year of the bills illegal not because it poses a danger-
take bets, the four major sports leagues enactment (it excluded gambling on ous moral hazard to individuals but
and the NCAA filed a motion to stop jai alai and pari-mutuel horse and dog because it leads to a marked increase
the law from taking effect, claiming it racing). in match-fixing, he wrote. To support
violates a federal ban on sports gam- This could all change if New Jersey this conclusion, he pointed to European
bling. Now its up to a federal judge to has its way. Proponents of legalized countries where sports betting is legal
decide. sports betting hope the case will reach that have had high-profile cases of
Its a legal matter, but earlier in the U.S. Supreme Court, and that match-fixinglike Greek soccer, where
October Mark Varga argued in The the Court will agree with the position match-fixing is institutionalized. But
New Republic that central issue is the detailed in a letter to Congress by the correlation isnt causation. There are
integrity of the game: that legalizing Department of Justice in 1992that also countries like Britain and Australia
sports gambling in America would PASPA is an unconstitutional violation where sports betting is also legal and
lead to scandals like match fixing. of states rights (the current DOJ sup- widespread and match-fixing is rare.
Theres no evidence to support his ports the constitutionality of the law). Sports betting is a $1 trillion
argument. In fact, legalizing gambling That would lead the Court to overturn industry globally, Varga noted. Why
would make the game even cleaner it, leaving it up to states to decide should the U.S. be left on the sidelines
and more transparent. whether they want to legalize sports while the rest of the world profits?


be much easier for the leagues to a zero-tolerance policy for athletes
Vargas argument spot those connections and discipline
offenders. Additionally, bribery of
gambling; the MLB and NFL prohibit
gambling by players, coaches, and
rests on the notion that an athlete is already a federal crime referees; and the NBA prohibits betting
and that will not change if states were on NBA games. Match-fixing carries
if refs, coaches, and allowed to legalize sports betting. serious consequences such as lifetime
players can legally Varga raised the specter of orga-
nized crime, but the international
bans and civil lawsuitsas happened
to Tim Donaghy, the NBA referee
gamble on sports they examples he cited have little bearing who in 2007 was accused of betting
for the U.S. The very same orga- on and fixing matches. And lets not
will be motivated to nized crime syndicates that engage forget Pete Rose, baseballs all-time
throw or call games in match-fixing in other nations, such
as the Triads in China, operate within
hits leader, who was banned from the
game and remains ineligible for the
for financial gain. the U.S., yet match-fixing is rare here. Hall of Fame.
Perhaps there are more differences This is what is working for American
between U.S. sports and the rest of the sports: the leagues self-interested moti-
But America isnt on the sidelines. world beyond the legal status of sports vation to weed out anything that will
Americans spend about $380 bil- gambling? lessen fans interest and players and
lion on illegal sports gambling every For an answer, we can look to officials desire not to risk destroying
year, according to some estimates. the black sox scandal, the White their lucrative careers. The teams and
That means in 2012 Americans spent Sox team that conspired to throw the leagues, for the most part, are private
more on illegal sports betting than on 1919 World Series. Varga warned of businesses interested in preserving the
prescription drugs and nearly five times a repeat of this episode if we legalize perceived fairness of the game so that
that years lottery sales. Why hasnt this sports betting. But this story serves a they can keep making money. Thats
led to match-fixing in U.S. sports (as good example of why match-fixing why its their responsibility. And that is
far as we know)? is an anomaly in U.S. sportsand where the regulation of sports integrity
Vargas argument rests on the will remain so even with legalized should stay.
notion that if refs, coaches, and players sports betting. All eight players
can legally gamble on sports they will involved in the scandal were banned
be motivated to throw or call games from Major League Baseball for life. Michelle Minton (michelle.minton@cei.
for financial gain. But illegal betting Today, American sports leagues take org) is a Fellow at CEI. A version of this
poses the same risk. If gambling were gambling by players and match- article originally appeared in The New
done through legal channels, it would fixing very seriously. The NCAA has Republic.

Realclear Radio offers listeners a

fresh perspective on political and
social issues of the day through
informative interviews and dis-
cussions. Brought to you by the
Competitive Enterprise Institute
and RealClearPolitics, and hosted
by CEI Fellow Bill Frezza.
Learn more at


Obamas Peanut-Brained Attack on MetLife

O ne day while sitting on the roof of

his doghouse, Snoopy supposedly
penned a letter to our nations tax col-
lectors that read, Dear IRS: Please take
me off your mailing list! (The storys
provenance is a matter of debate, but
its become a part of Peanuts lore.)
Now, however, an arbitrary action by
an unaccountable government entity
may prompt MetLifes longtime spokes-
dog to revise his apocryphal letter:
Dear FSOC: Please take MetLife off
your too-big-to fail list.
The Financial Stability Oversight
Council (FSOC), a secretive, unac-
countable task force of financial
bureaucrats from various agencies, was
created by the Dodd-Frank financial company, in fact, recently informed its Given the fact that the FSOC did
reform bill that was rammed through a shareholders that it may sue the Obama not publicly acknowledge its action
Democrat-controlled Congress in 2010. administration to escape the systemi- or give any reason for itnews of the
In October, FSOC designated MetLife cally important designation that some SIFI designation came from MetLife
as a systemically important financial competitors covet. itselfits reasonable to conclude that
institution (SIFI). This means the federal Unlike AIG and the big banks, the conservatively managed MetLife is
government considers MetLife to be MetLife has never taken a dime in in the second category. For MetLife cus-
too big to fail, making it subject to the taxpayer bailouts. It is asking not for a tomers, this will mean higher premiums
same Dodd-Frank bailout regime set up handout, but for the federal government and fewer services.
for big Wall Street banks like Goldman to keep its hands off of the success- And thats not the worst part. Under
Sachs and JPMorgan Chase. ful business model it has used to serve the Federal Reserves interpretation of
As CEI argues in a legal challenge customers for over a century. Dodd-Franks Collins amendment, spon-
to the Dodd-Frank Act (including the To use another Peanuts analogy, sored by Senator Susan Collins (R-Me.),
FSOCs role of identifying risk), the SIFI the FSOC designating MetLife a SIFI is insurance companies with a small thrift
designation confers on a firm a strong like a bully taking Charlie Browns lunch operationor even those, like MetLife,
competitive advantage, as investors and money to subsidize Pigpen rolling in the without any banking component but
creditors know the government wont let dirt, because under Dodd-Frank, when deemed systemically important by
it fail. Thats why big banks and MetLife one SIFI fails, all the other SIFIs pay its the FSOCwill face the same capital
competitor American International bailout costs. As my CEI colleague Iain standards as banks.
Group (AIG), which have already Murray explains: This practice strikes even an arch-
received billions in taxpayer bailouts, liberal lawmaker like Senator Sherrod
have eagerly embraced their SIFI status. [T]here are two classes of SIFIs1)
the high-rolling institutions that may Brown (D-Ohio) as absurd. I want
But MetLife, to its credit, has publicly strong capital standards, but they have
stated that it is not too big to fail and be tempted to take unreasonable
risks with the money people have to make sense, Brown said recently.
does not want the special privileges that Applying bank standards to insurers
come with SIFI status. MetLife chair- entrusted to them, and 2) the large
stable firms that actually have the could make the financial system riskier,
man and CEO Steven A. Kandarian not safer.
declared in 2013, I do not believe money (again, entrusted to them by
clients) that can be expropriated by Imposing bank-capital standards
that MetLife is a systemically important on insurers would raise costs for life-
financial institution. The insurance government to pay for the mistakes
of the first class. insurance consumers by $5 billion to


the Feds hands. The Collins amend-
Unlike AIG and the big ment does restrict what is possible for
the Federal Reserve in designing an
banks, MetLife has never appropriate set of rules, Yellen said at
taken a dime in taxpayer a Senate hearing.
bailouts. It is asking not For her part, Collins, one of three
Senate Republicans to vote for Dodd-
for a handout, but for the Frank, says her provision has been
federal government to misinterpreted. Since I am the author
of the Collins amendment, since I am
keep its hands off of the Senator Collins, I think I know what I
successful business model it meant, she stated at a Senate hearing
has used to serve customers in March. Yet there has been complete
silence on this from Obama and his
for over a century. Treasury Department.
Fortunately, a piece of legislation is
hovering around the Capitol that, like
$8 billion, according to the economic
consulting firm Oliver Wyman. These
Snoopy the flying ace, could partially
save the day. The Insurance Capital
costs could hit policyholders through
both higher premiums and reduced
Standards Clarification Act of 2014
(S. 2270), which the Senate passed SOCI ET Y
benefits. And some policies simply unanimously on June 3, would revise
could become unavailable as insurers Dodd-Frank by clarifying that it was
exit certain product lines, the Oliver not Congress intent to apply bank- Help the Competitive
Wyman study found. capital rules to insurers.
Among the product lines that could Now all the House has to do in the
Enterprise Institute
disappear or become prohibitively lame-duck session is pass an identical carry on its work for
expensive are variable annuities, an companion measure, the bipartisan generations by joining the
increasingly popular retirement option. H.R. 4510, and send it to President
MetLife CEO Kandarian remarked Obamas desk. Forcing Obamas
R.M. Freedman society.
last year, It is hard for me to see how hand here will make it politically easier
life insurers living under [bank-centric to repeal the law, or at the very least In 2013, CEI established the R.M. Freedman
rules] could remain in the variable- grant relief from other harmful parts Society in honor of Robert M. Freedman,
annuity business. of it. a business owner from West Bloomfield,
And, perversely, such bank-like But the main reason to pass this Michigan, who placed CEI in his estate
standards would probably heighten bill is to prevent the not-so-good grief and, in 2009, sadly passed on and gave
risks for insurers, according to risk- among the insured that will occur if CEI its first legacy gift. We named the
management professionals. In a June the FSOC is left unchecked. We have society in appreciation of his generosity.
5 letter to Congress, the American already seen what happened when
Many of CEIs extended family choose to
Academy of Actuaries warned that the football was pulled away in the
include CEI in their estate plans through:
forcing insurers to follow bank-capital health insurance market thanks to
rules assigns risks to insurers that are Obamacare. Bequests,
not necessarily significant to them Charitable Remainder Trusts,
and understates risks that may be
Charitable Lead Trusts, or as a
more significant to insurers than to enti-
ties such as banks. John Berlau ( is a Life insurance beneficiary.
Federal Reserve Chair Janet Yellen Senior Fellow at CEI. A version of this
doesnt seem to disagree with these article originally appeared in National If you make the decision to include CEI in
assessments, but says the language of Review. your estate plans, please reach out and let
Dodd-Franks Collins amendment ties us know.

While these sorts of decisions should be

undertaken with the help of an estate
planner, Lauren Avey and Al Canata of
CEI can be a resource to you. You can
reach them anytime at 202-331-1010.


CFPBs Loan Report Attacks Lenders
Rather than Empower Students
want to see a repeat of what happened in
BY CARRIE SHEFFIELD mortgages happen here. The comparison
is appropriate, but probably not in the Defaults are most
T he Consumer Financial Protection
Bureaus (CFPB) recent annual student
way Chopra intended.
The report identifies an increase in the common among
loan ombudsman report aims to help number of complaints filed with the CFPB
related to companies offering private stu-
students attending
people falling behind with private lenders.
However, its reactive approach would dent loanssome 5,300 in the past year, community colleges
simply stifle flames rather than prevent a 38 percent increase from the previous
their initial burst by proposing shortsighted year. and for-profit colleges,
policies that could lead vulnerable stu- The CFPB points out that in 2005 the
bankruptcy code was amended to exempt
according to a recent
dents to take on more debt.
CFPB Student Loan Ombudsman Rohit all loans made for a qualified education Moodys Investors
Chopra announced the reports release expense from discharge in bankruptcy
with a dire warning: This is something without undue hardship to the debtor. Service report.
were taking very seriously, and we do not The agency essentially blames lenders


fitting: Government policies to promote [T]he monthly payment burden faced
homeownership (such as the Community by student loan borrowers has stayed
In 2014, just 16 Reinvestment Act) forced lenders to about the same or even lessened over
states require high extend housing loans to less qualified
borrowers. The ensuing lending binge
the past two decades. The median
borrower has consistently spent 3 to
school students get triggered a domino effect with global
repercussions. Lender greed may have
4 percent of their monthly income on
student loan payments since 1992,
tested in economic played a role, but the underlying prob- and the mean payment-to-income
lems were insufficient consumer educa- ratio has fallen significantly, from 15
principles, while tion, lack of preemptive risk mitigation, to 7 percent. The average repayment
and government-driven loosening of term for student loans increased over
a mere six states lending standards. Encouraging more this period, allowing borrowers to
mandate personal risky lending for student debt would have
similar results.
shoulder increased debt loads without
larger monthly payments.
finance testing. Counterintuitively, as American
Enterprise Institute scholar Andrew Kelly
As the Brookings study also notes,
some students take on private student
points out, students with lower debt bur- loans before they have tapped out
for the rise in complaints, saying the dens are the ones most likely to default. their eligibility for federal debt, a huge
expected present value of payments in a Students with the highest burdens are the mistake since private loans tend to have
modified payment plan, less any one- best equipped to pay them back since higher interest rates and fewer borrower
time costs with modifying the loan, may they typically have the greatest post- protections.
be less than the expected present value collegiate earnings. Defaults are most Shortsightedly, the CFPB report fails to
of a borrower self-curing or through common among students attending com- call for empowering policies and educa-
recovery by third-party debt collectors munity colleges and for-profit colleges, tion that would ensure students conduct
and litigation. according to a recent Moodys Investors a robust analysis of the expected present
While not explicitly calling for a com- Service report. value of their education vis-a-vis the cost
plete rollback of the 2005 changes, the These students are clearly the ones and risk. Chopras Band-Aid prescriptions
CFPB report recommends changes that most in need of financial counseling. And fall under what Harvard professor Ronald
would allow more borrowers to discharge its no wonder that so many of them are Heifetz calls cheap, technical fixes for
their debt. This is the wrong approach to woefully unprepared to grasp the risks adaptive challenges.
dealing with consumer credit problems they are undertaking. In 2014, just 16 Rather than taking lenders to the
and could lead to the unintended con- states require high school students get woodshed and expanding a culture of
sequence of more unprepared students tested in economic principles, while a reckless lending, the CFPB should proac-
taking on even more debt. mere six states mandate personal finance tively push for better consumer education
It would also undo the modest reform testing, according to the Council for prior to loan creation. This would put
thats been achieved. The 2005 policy Economic Education. Laxer repayment student borrowers on a long-term path of
change was meant to offer lenders policies, such as Chopra calls for, would sustainable financial choices.
greater protection in exchange for offer- merely subsidizing unsustainable con-
ing loans to less creditworthy borrow- sumer behavior.
ersand thats what evidence suggests Contra Chopras warning, overall Carrie Sheffield (
happened. student loan defaults are on the decline. is the Warren T. Brookes Journalism Fellow
Seen this way, Chopras analogy A June 2014 Brookings Institution study at CEI. A version of this article originally
with the subprime mortgage crisis is finds: appeared on

CEI is going to the Supreme Court!

Your gift now will make it possible for CEI to take our case to
the Supreme Court to score a victory for the rule of law and
against Obamacare. Please go to
or contact Lauren Avey at 202-331-2772 to give today!


Minimum Wage, Maximum Damage
dollar on top of that a year later. SeaTac, The overwhelming majority of empiri-
BY IAIN MURRAY Washington, the area around Seattle- cal studies into the effects of the minimum
Tacoma International Airport, has already wage find that it erodes employment. In

F ew policies are more popular than

raising the federal minimum wage. It
seems to make economic and moral sense
raised its minimum to $15 an hour with
unhappy consequences.
Most economists agree that the
2007, David Neumark of the University
of California-Irvine and William Wascher
of the Federal Reserve surveyed over 100
on an intuitive level. In a 2013 Gallup minimum wage cannot achieve its aim. minimum wage studies published since the
poll, 76 percent of respondents approved Harvard economist Greg Mankiws Ten early 1990s. They discovered that over
of the idea. President Obama reflected things economists believe is a list of two-thirds of them found negative effects
this sentiment in his October 11 weekly statements that members of the economics on employment, while only about an
radio address, saying, We believe that profession finds uncontroversial. Here is eighth found positive effects. Worse, those
in America, nobody who works full time one of the statements: A minimum wage studies that focused on the low-skilled
should ever have to raise a family in increases unemployment among young people including young workers found
poverty. America deserves a raise right and unskilled workers. This proposition is particularly bad damage done.
now. supported by 79 percent of economists. Wascher and Irvine also looked at
Yet most economists oppose the con- James M. Buchanan, Nobel Prize the quality of the studies. They found 33
cept of a minimum wage at all, and the winner for economics in 1986, put it thus: studies that were robust to most criticisms,
data back them up. In fact, the minimum Just as no physicist would claim that of which 28 found negative employment
wage harms those it is intended to help. water runs uphill, no self-respecting effects. (Notably, much of the evidence
The federal minimum is now $7.25 economist would claim that increases for positive employment effects in the
an hour, but it is higher in some states in the minimum wage increase larger sample came from the United
and municipalities. There is a movement, employment. Such a claim, if seri- Kingdom rather than the United States,
headed by the president, to raise this to ously advanced, becomes equivalent and that those studies may have failed to
$10.10 an hour, with the ostensible goal to a denial that there is even minimal account for complicating factors during
of reducing poverty and inequality. Some scientific content in economics, and the 1980s, when the UK had sector-spe-
states and cities are on board. California that, in consequence, economists can cific minimum wages. But the more recent
will raise its minimum to $10 on January do nothing but write as advocates for evidence from the UKs introduction of a
1, 2016, and San Diego will raise it to ideological interests. national minimum wage in 1997 mirrors
$10.50 on the same date, with another the American evidence.)


The federal minimum wage was jobs are destroyed by a minimum
raised in 2007, and again in a couple wage increase have neither hard
of steps until 2009. There has been
recent research into the effects of that
work nor reward.
So why is the minimum wage
Just as no physicist
increase. One study, by Aspen Gorry of so popular? The answer is that only would claim that
the University of California-Santa Cruz, some of its economic effects are
focuses on the effect on youth unemploy- seen, while others are not seen, as water runs uphill,
ment. He found that minimum wages the great French economist Frdric
affect unemployment, especially youth Bastiat noted. As he explained, any no self-respecting
unemployment, because they interact new economic policy gives birth
with a workers ability to gain job experi- not only to an effect, but to a series economist would claim
ence. While the minimum wage increase
pushed the general unemployment rate
of effects. Of these effects, the first
only is immediate, and it manifests that increases in the
by 0.8 of a percentage point higher
over the study period (compounding the
itself simultaneously with its causeit
is seen. The others unfold in succes-
minimum wage increase
misery of the economic downturn), the
unemployment rate for 15- to 24-year-
sionthey are not seen. In the case
of the minimum wage, what is seen
olds surged by almost 3 percentage
is the increase in many workers pay
packets. What is not seen is workers James Buchanan
Gorry also looked at youth unem- losing their jobs.
ployment in France, where the minimum The public may not attribute
wage is about $12 per hour, consider- those job losses to a minimum wage out of poverty often fail to account for
ably more than in America, and where increase, blaming instead other factors these changes.
the youth unemployment rate has such as increasing automation, a compa- One unintended consequence is that
hovered around 24 percent, double the nys contraction, or an employers greed. taxes on wage earners go up. A higher
U.S. rate. Gorry finds that the different Yet the underlying reason is the same in minimum wage can make employers less
minimum wage levels account for nearly all these cases: A corporation invests in inclined to offer non-wage benefits such
the entire difference between Frances a machine because it is less expensive as generous leave policies or insurance,
and Americas youth jobless rates. That than paying workers the higher minimum as well as on-the-job perks such as free
means France could find jobs for about wage, the company contracts because it meals and parking. Non-cash perks
half its unemployed young people by cannot afford to keep the same number like parking and food are not taxed. But
reducing its minimum wage to American of workers with the same wage budget, when they are converted to wages, they
levels. and the employer sees the new wage become subject to income and sales
Such a preponderance of evidence cutting into his bottom line and therefore taxes. So not only do workers have to
is reflected in official studies. When the chooses to do other things rather than pay for perks that used to be free, they
Congressional Budget Office earlier this pay a marginally effective worker more get taxed for them, too.
year reviewed the probable effects of a than he thinks he is worth. SeaTac provides an informative
minimum wage increase to $10.10 an Job losses are just the beginning of example. There, Northwest Asian Weekly
hour, it took into account the findings of the unseen effects. There are other work- reporter Assunta Ng asked hotel work-
over 60 studies on the issue. The CBO ers, particularly inexperienced young ers who had received the wage increase
report suggested that the increase would ones, who will not be hired in the first whether they were happy with it:
help lift 900,000 families above the place because the cost of their wages
Are you happy with the $15 wage?
poverty line, as the president touted, but is too high. As Gorry found, jobs that
I asked the full-time cleaning lady.
at the cost of half a million other people never come into being prevent potential
losing their jobs. workers from gaining experience. Young It sounds good, but its not good,
The minimum wage transfers resources would-be workers are denied the chance the woman said.
not from the rich to the poor, but among to gain basic job skills. Instead, they set Why? I asked.
the poor. Some of Americas least well- off down the road to long-term unem-
I lost my 401(k), health insurance,
off workers would get a raise, but many ployment. This is what is happening in
paid holiday, and vacation, she
more others would see theirs hours cut, France.
responded. No more free food.
or lose their jobs entirely. Obama, in Those who lose their jobs or never get
his radio address, concluded, America them are not the only ones to suffer. Even The hotel used to feed her. Now, she
should forever be a place where your those workers who keep their jobs and has to bring her own food. Also, no
hard work is rewarded. But those whose are paid a higher wage and are lifted overtime, she said. She used to work


extra hours and received overtime That may sound small, but consider National Longitudinal Survey of Youth
pay. where the effects fall hardest. Workers data from 1997 to 2010 finds that, in
What else? I asked. earning minimum wage are more likely states that increased their minimum wages
to patronize fast food restaurants than during that time, crimes increase among
I have to pay for parking, she said. anyone else, and food takes up a much minimum wage-bound workers and most
Another interviewee, a waitress, bigger share of their budgets. A signifi- strongly among teenagers, and that these
claimed that she had seen a decrease in cant part of the minimum wage increase increases occur among both monetary
her tips. When the minimum wage was is, literally, eaten up by higher food and non-monetary crimes.
$7, her tips increased that to more than prices. The effect is all the more significant Increased crime takes a toll on per-
$15 an hour, but the differential was now for restaurant workers who may no longer petrators as well as victims because they
less. She now has to bring her own food have access to complimentary shift meals. acquire criminal records, which blight
and pay for parking, both of which used Obama claims that a minimum wage their chances of getting a job in the future.
to be provided by her employer. increase means those who get it have Breaking out of poverty is difficult for
Annual or holiday bonuses can also more money to spend at local businesses, many people, and the evidence is that
suffer. An interesting natural experi- which grows the economy for everyone. a minimum wage adds to the difficulty.
ment in the Westfield Valley Fair mall in But as Bastiat makes clear, that only Workers are fired, hours are cut, jobs are
California illustrates this well. Half the provides the short run seen effect. In not created, non-wage perks, includ-
mall is in San Jose, while the other half the medium and long run, price increases ing insurance, free parking, free meals,
is in Santa Clara. When San Jose raised cancel out the minimum wage hikes stim- and vacation days evaporate, annual
its minimum wage to $10 in 2012, Santa ulative effect, and the gains are reversed. bonuses shrink, prices rise, (squeezing
Claras remained at $8. The mall has two Aaronson and French, in another study, minimum wage earners themselves), big
competing pretzel shops, one in each find the long-term effect on the economy businesses gain an artificial competitive
jurisdiction. When San Jose instituted its of a minimum wage increase to be virtu- advantage over their smaller competitors,
raise, the pretzel shop there was unable ally nil, as the unseen effects take over. and crime rates rise. It is a bleak litany.
to raise its prices because of the competi- Most of the winners from a minimum Raising the minimum wage remains
tion across the mall, and the owner was wage increase are large businesses that popular because only the visible effects
reluctant to cut staff as that would have can afford to take on extra payroll. The are usually considered. Fortunately, the
affected customer service. Instead, she mom-and-pop store down the road might public may be willing to consider the
took the hit in the form of lower profits. not be able to follow suit. If, as sometimes unseen effects when they are pointed out.
The lower profits hurt workers, too. happens, it is forced to close, customers Following the March release of the CBO
The store owners policy was to share 15 are driven to the big retailer. Big com- study, Bloomberg News conducted a poll
percent of profits in the form in an annual panies often lobby for minimum wage in which it asked people if they supported
bonus. Reduced profits led to smaller increases. Walmart publicly favored the a minimum wage increase to $10.10
bonuses. This is not the sort of outcome 2009 federal increase to $7.25 per hour. an hour. With that simple proposition,
that an aggregation of statistics picks up. A combination of increased payroll 69 percent were in favor and 28 per-
Consumers dont escape the effects and reduced hours or fewer employees cent opposed. Bloomberg then asked,
of increased minimum wages, either. hits small competitors. Costco, which pays A recent report by the Congressional
Prices often increase when businesses all of its employees well above minimum Budget Office says that raising the
face a shortfall in profits. Businesses that wage, would not be directly affected by minimum wage to $10.10 over the next
use large numbers of minimum wage most proposed minimum wage increases, three years would increase the incomes
workers, such as the fast food industry, but its smaller competitors would. This of 16.5 million Americans while eliminat-
tend to raise their prices the most. A means higher prices and fewer employ- ing 500,000 jobs. Does that trade-off
2008 study by Daniel Aaronson and Eric ees to serve customers, which drives more seem acceptable or unacceptable to
French of the Chicago Fed and James customers to Costco and other large you? When put that way, 34 percent
MacDonald of the U.S. Department of retailers. were in favor and 57 percent found it
Agriculture found that fast food restau- There is evidence that high minimum unacceptable.
rants pass through 100 percent of the wage laws also increase crime because It is time for politicians to learn what
wage increase to their customers in higher they relagate some people to chronic the public is so quick to perceive.
prices. Another study by Sara Lemos of unemployment. Some turn to economic
the Institute for the Study of Labor found crime, drug dealing, or fencing stolen
that a 10 percent increase in the minimum goods to make ends meet, while others Iain Murray ( is Vice
wage led to a 4 percent increase in food turn to crimes of idleness, such as van- President for Strategy at CEI. A version
prices and an overall increase in prices of dalism and assault. A study by Andrew of this article originally appeared in The
just over half a percentage point. Beauchamp and Stacey Chan based on Washington Examiner.


Remembering Gordon Tullock
Tullock and Buchanan
G ordon Tullock, who passed away
November 3, co-founded the public
saw public choice as
choice school of economics, the applica- a theory of politics
tion of economics to politics, along with
James Buchanan. While Buchanan alone without romance.
was awarded the Nobel Prize, Tullocks
contribution to the field of economics
is massive, filling a 10-volume series
published by Liberty Fund. Tullock and achieved very high rates of return, but
Buchanan saw public choice as a theory estimates of actual lobbying expenditures
of politics without romance. were modest. This discrepancy became
Bureaucrats and politicians, they known as the Tullock paradox.
noted, are neither angels nor Einsteins. Tullock outlined a few plausible rea-
Rather, they are influenced by their sons for the paradox. These include the
own self-interest, while their knowledge direct costs of lobbying, the risk that others
remains painfully limited. Given that may be seeking offsetting privileges, the
self-interest and bounded rationality, Gordon Tullock likely embarrassment of media exposs,
their adopting policies that consistently the likelihood that such costs must be
advance the public interest is unlikely. studied the costs of using the market. incurred every political cycle, the lottery
The extent to which they do depends on Coase recognized that private parties nature of lobbying in a winner-takes-all
the institutions that channel, coordinate, would have every incentive to reduce political system, and the low probability
and discipline their action. Public choice such transaction costsof gaining trust, of success. But these economic factors
scholars, thus, have championed constitu- gaining information about the product and still seem inadequate to explain fully the
tional restraints, because they understand the parties interested in that exchange, observed low level of rent-seeking.
the realities of human nature. And that and devising secure ways of making the Public choice has crafted a very highly
in turn leads them to the conclusion that exchange. developed Theory of Sin. Yet, the Tullock
markets generally outperform political In the political sphere, Tullock argued, Paradox remains. While homo eco-
arrangements. the problems analyzed by Coase were nomicus provides insights on many impor-
Tullock saw economic motivations exacerbated by the challenges of reach- tant questions, homo sapiens presents a
as the dominant force guiding political ing political agreement. Much of his work much more interesting reality.
actors. For example, seeking to explain focused on the costs of rent-seeking My colleague Ryan Young and I are
why poverty aid programs were so costly private benefit gained through political now in the process of exploring the Tullock
and why so little of the funds seemed to privilege. He saw lobbying, trading of Paradox, specifically whether non-eco-
reach the poor, he noted that gaining favors, and logrolling schemes as costs of nomic factors may inhibit rent-seeking.
the needed political support for poverty using the political process. He noted that Perhaps many in the business world seek
programs would require providing ben- proponents of bigger government often to earn success, not have it given to them?
efits to the more influential middle class. ignored the costs of gaining political sup- Could Public Choice help craft a Theory of
As a result, programs initially intended to port for their favored programs. Therefore, Virtue alongside its Theory of Sin?
help the poor tend to expand to provide while in the private market self-interest How Gordon Tullock would answer
benefits to much of the population, using often efficiently advances public welfare, that is unclear, but our effort would cer-
tax revenues from one segment of the in the political world self-interest is more tainly have amused him. I wish we could
population and transferring it to another. likely to reward special interests. have asked himwell miss him.
The results is one so well described by Tullock wrote extensively on the appar-
Frdric Bastiatpeople picking others ent pervasive nature of rent-seeking. Yet,
pockets through the ballot box. he also noted that public choice econo- Fred L. Smith, Jr. ( is the
Tullocks focus on economics led him mists would have expected far more rent- Founder of CEI and Director of CEIs Center
to study the costs of using the political pro- seeking than was observed. Both theory for Advancing Capitalism.
cess, much as economist Ronald Coase and experience suggested that lobbying



CEI Sues White House Federal Regulators EPA Still Flouting

for Polar Vortex Move to Mandate Federal Record
Documents Talking Cars Keeping Laws

On October 29, CEI sued the In August, the National Highway In October, the Environmental
White House Office of Science and Traffic Safety Administration (NHTSA) Protection Agency (EPA) filed its latest
Technology Policy (OSTP) seeking opened a rulemaking aimed at effort to dismiss a lawsuit brought by
documents related to that agencys requiring that all new vehicles come CEI over the agencys destruction of
controversial January 2014 video, The with vehicle-to-vehicle (V2V) com- federal records without explanation.
Polar Vortex Explained in 2 Minutes, munications technology. V2V would This case is part of an ongoing CEI
which has been widely criticized by theoretically enable vehicles to send effort to investigate the EPAs attempts
scientists on both sides of the climate and receive road hazard warnings to skirt federal record keeping laws
change debate. Despite OSTP Director that would allow drivers to take eva- by using text messages to circumvent
John Holdrens claim that a grow- sive maneuvers before a collision. In the legislative process in order to
ing body of evidence supports the October, CEI Fellow Marc Scribner pursue the administrations climate
connection between extreme cold and filed comments urging the agency to agenda. Through our open-records
global warming, a number of published reject a mandate, arguing that such a requests, CEI discovered that EPA
peer-reviewed studies dispute the claim. mandate premature and ill-advised, administrator Gina McCarthy not
CEI petitioned OSTP to correct its claim and that requiring V2V would pose only lost thousands of text messages
under the federal Information Quality risks to superior autonomous vehicles. used to conduct official govern-
Act. The agency denied the petition, As Scribner noted, the Federal ment business, but that she admitted
claiming that Dr. Holdrens statement Communications Commission is still to knowingly deleting all of them,
was a personal opinion that was attempting to resolve critical issues said CEI Senior Fellow Christopher
exempt from the law. CEI then filed a related to V2V spectrum usage and Horner. Now were trying to put a
Freedom of Information Act request NHTSA ignored cellular-based V2V stop to the EPAs illegal cyber bonfire
for documents related to the videos technology that could bring benefits and force the agency to notify the
production, but the agency refused to to consumers more rapidly than the archivist so we can attempt to recover
disclose most of those records because planned government mandate. A some of the destroyed records.
they were supposedly part of the agen- mandate is not expected to take
cys deliberative process. Our latest effect until the end of the decade,
lawsuit indicates yet again that, despite just as autonomous vehicles may be
this administrations claims of transpar- coming to market for consumers.
ency, its real interest is invisibility, said
CEI General Counsel Sam Kazman.


Director of Technology Studies thousands of text messages we have insurance pur-
Wayne Crews discusses the pen discovered she destroyed, just as chased through a
and phone era of regulation with the IRS finally agreed to notify (the federal exchange.
The Washington Examiner: National Archives) about the emails The need
The Costberg is large, but in the lost from (former IRS official) Lois for a quick and
pen and phone era of doing things Lerners destroyed hard drive, he said. final resolution
off the books, the impact of regula- The IRS insincere efforts at follow- of this question is
tion becomes far more ominous given ing through on Federal Records Act undeniable, said
the regulatory dark matter we cant obligations drew the courts irethe Sam Kazman,
see that doesnt get counted, and for same court now hearing the EPA case. general counsel
which no one is accountable. Congress Taxpayers should rightly expect EPA to of the Competitive
must address this next year, warned have learned the proper lesson from the Enterprise Institute, a conservative advo-
the author of the report, Clyde Wayne IRSs experience and hope for better. cacy group that is coordinating lawsuits
Crews, a CEI vice president. OCTOBER 9, against the tax credits. This subsidies-for-
Complying with Energy Department Fox News everyone rule affects nearly every person
rules and regulations alone had an eco- across the country, he said.
nomic punch of $10 billion, he said in interviews Associate NOVEMBER 8,
the report provided to Secrets. The eco- Director of Technology Studies The Wall Street Journal
nomic hurt is $8 billion from USDA rules. Ryan Radia on congressional
And a category called federal worker Republicans technology policy Fellow Marc Scribner argues
mobility restrictions cost $12 billion. plans for the 114th Congress: against a proposed connected
Crews has made a working proj- Most Republicans in Congress have vehicle mandate in an interview
ect of his Costberg report which he sided with net neutrality critics. So if with CQ Roll Call:
regularly updates. In it, he compares [Federal Communications Commission Ive asked people, can anyone name
the cost of regulations estimated by Chairman Tom] Wheeler establishes a networked technology where there
federal agencies to a much broader list strong net neutrality protections, he are essentially zero benefits for the first
of estimates from multiple federal and could face a backlash from Congress. purchasers. I couldnt think of any. And
independent sources. And even then, he But any direct attempt to overturn those that is the case for [vehicle-to-vehicle
said, it doesnt include hard-to-calculate regulations would likely to be stopped by communications], at least as its envi-
costs associated with antitrust interven- President Obamas veto pen. sioned by [the National Highway Traffic
tion, regulation of electricity networks or Still, Ryan Radia of the Competitive Safety Administration] right now.
the cost of constrained access to natural Enterprise Institute says theres a lot that Thats a big challenge. The [car
resources. Republicans can do to pressure Wheeler and light truck] fleet turnover is slowing
SEPTEMBER 26, to take a more hands-off approach to the down. In a weaker economy, people
The Washington Examiner issue. Congressional committees can grill are holding on to their cars for longer.
Wheeler and other FCC commissioners We dont know when were going to
Senior Fellow Christopher Horner about their approach to the issue. And start seeing people purchasing cars as
takes on the EPA text message they also have the power of the purse: rapidly as they have in the past.
scandal with Fox News: they can cut the FCCs funding, limit- But maybe this is where we start
Christopher Horner, a senior fellow ing the agencys ability to enforce the utilizing existing LTE cellular networks or
for the institute, told in regulations and giving him an incentive to something like that where you get some
a statement it is clear the EPA has not change course. of these [advance collision warning]
learned from the IRS mistakes. The tax NOVEMBER 6, benefits out of your Smart phone.
agency came under fire earlier this year NOVEMBER 10,
after it announced it could not locate CQ Roll Call
an untold number of emails sought in The Wall Street Journal quotes
congressional probes into the agencys General Counsel Sam Kazman
targeting of conservative groups. on the Supreme Courts review of
Here we see EPA agreeing to the CEIs Obamacare exchange case:
court to do an IRS, which is to say: The Supreme Court agreed to review
notify the National Archivist of the whether consumers can receive subsi-
loss of every one of Gina McCarthys dies through the Affordable Care Act for


Nonprofit Org.
U.S. Postage
Permit 425
Southern MD

Veteran Fined for Keeping Therapeutic Ducks Anchorage Mayor Vetoes Moose-Proof Fencing
U.S. Army veteran Darin Welker of West Lafayette, Ohio, Ordinance
was recently found guilty of keeping 14 ducks on his prop- The mayor of Anchorage, Alaska, vetoed an ordinance
erty. Welker, a veteran of Operation Iraqi Freedom, was approved by the citys assembly that would have banned
ordered to pay a $50 fine for keeping the illegal farm ani- new spiked fences and required homeowners to modify
mals that he claimed helped him cope with post-traumatic existing fences less than seven feet tall. The ordinance was
stress disorder and depression. His wife, Shirley Welker, told intended to protect moose, which occasionally impale them-
the court that ducks were registered with a national service selves on palisade fences as they feed on foliage. Mayor
animal registry and that no neighbors had complained to Dan Sullivan argued that the number of moose injured or
them. West Lafayette recently amended a law to permit killed by fences is very, very low, that the measure con-
therapy pets, but only two per household. The new ordi- stituted an unnecessary and costly government intrusion by
nance tries to balance the needs of the community as well as requiring homeowners to replace existing fences, and that
the need of somebody who may legitimately be in need of a far more moose could be saved if residents simply practiced
therapy animal, said Village Solicitor Bill Owens. So they safer driving habits, without burdening property owners with
decided that two was enough. new requirements.

Federal Employees Still Watching Porn at Work Swedish Police Ordered to Repay Man for Stolen
In May, the Environmental Protection Agencys inspector Liquor
general disclosed that a senior agency employee was caught In 2007, a Swedish man had his wine, beer, and spirits
spending up to six hours of his workday on pornographic stock seized by police, who accused him of illegally import-
websites. In September, the employee was still employed and ing the bottles from Germany. After finally being acquitted
collecting pay. Rep. Mark Meadows (R-N.C.) introduced a years later, the man went to pick up his confiscated alcohol.
bill just before the election recess to make a uniform federal He noticed that some bottles were missing and out of date.
law prohibiting government employees from looking at porn But most peculiarly, he found that 10 bottles of gin and
at work. The bill would require the Office of Management and vodka had been emptied and refilled with water. Although
Budget (OMB) to issue guidelines to prohibit employees from the police refuse to charge any specific officer with the theft,
watching porn on government computers. An OMB spokes- the department has conceded that its officers were negligent
woman told The Washington Post that she was unaware of and will pay the man 16,000 kronor, or about $2,000, for
a current porn-specific policy, while another clarified that his troubles.
watching porn falls under general rules against misusing
government property.