Lame-Duck Menace: The Paycheck Fairness Act
At Compensation Cafe, Stephanie Thomas explores some of the “nonsensical implications” of a misnamed bill that’s a high Obama administration priority in the lame duck session:
Let’s assume that John and Jane have identical characteristics (education, work experience, etc.) except for gender. ABC Company makes offers of employment to John and Jane on the same day, for the same position, for the same starting salary: $45,000. Jane accepts the offer, but John negotiates the salary, and ends up with $50,000. Under the current equal pay laws, there’s no problem; John is earning more because he negotiated and Jane did not. Makes sense, right? Under the Paycheck Fairness Act, ABC Company would be guilty of gender discrimination.
Here’s another example. Assume that Sam and Sally have the same education, work experience, etc., and are both hired by WidgetCo on the same day. WidgetCo sets Sam and Sally’s starting salary at $2,500 more than they were making at their previous job. Sam was earning $37,500 at his previous job, and Sally was earning $36,000; their starting salaries at WidgetCo are $40,000 and $38,500. Seems reasonable, doesn’t it? Under the Paycheck Fairness Act, WidgetCo would be guilty of gender discrimination.
One final example. Assume that Brad and Bridget both work for Alpha Inc., have the same job title, same level of responsibility, etc., and they are both earning $100,000 per year. Brad asks for a 5% raise, but Bridget doesn’t ask for a raise. Brad gets the raise and ends up earning more than Bridget. Again, no problems here, right? Wrong – under the Paycheck Fairness Act, Alpha Inc. would be guilty of gender discrimination.
“Making matters worse, under the new law, damage awards would be uncapped, and class-action procedures loosened. Bring on the trial lawyers,” notes a Chicago Tribune editorial. For more on this very bad bill, check out the papers and presentations from a panel last week put on by our friends at the Hudson Institute. Earlier here and, at Overlawyered, here, here, etc.
The Court Tackles a Hard Case: Implications for ObamaCare?
The Supreme Court hears oral argument today in an important pre-emption case, Bruesewitz v. Wyeth, which asks whether the National Vaccine Injury Compensation Act of 1986 pre-empts state law “design defect” suits brought against vaccine manufacturers. I’ve discussed this complex case more fully in an op-ed at the Daily Caller, but in a nutshell, Congress passed the Act to address the risks inherent in vaccinations through a federal no-fault ”Vaccine Court” rather than through the vagaries of state tort law. It did so because the inability to make vaccines entirely safe, plus uncertainty surrounding causation, coupled with the penchant of state juries to discount those issues in favor of sympathetic plaintiffs, had rendered most manufacturers unwilling to produce needed vaccines at reasonable costs.
In drafting the statute, however, Congress left things unclear, to put it charitably. Thus, the Court will have to make sense of this language:
No vaccine manufacturer shall be liable in a civil action for damages arising from a vaccine-related injury or death associated with the administration of a vaccine… if the injury or death resulted from side effects that were unavoidable even though the vaccine was properly prepared and was accompanied by proper directions and warnings.
Although the Act allows victims to sue over manufacturing defects, conduct that would subject a manufacturer to punitive damages, and a manufacturer’s failure to exercise due care, nowhere does it define “unavoidable”—and there’s the nub of the matter. In the case before the Court, a three-judge Third Circuit panel decided unanimously for Wyeth, as did the district court. But in another case five months earlier, a nine-member Georgia Supreme Court, facing similar facts, decided unanimously for the plaintiff.
And behind it all is the question whether Congress should have pre-empted state law in the first place. It probably should have here, but that’s a close call. And the implications for ObamaCare are not absent in this case, which could be a portent of the complex and uncertain litigation that lies ahead if the scheme is not repealed. As I say at the outset of my post, hard cases make bad law, but bad law too makes hard cases, and this is one. Does anyone think that ObamaCare is anything but bad law? We’ll know once we figure out “what’s in it,” as the lady said.
Federal Employees and College Costs
For a long time now I’ve been writing about how student aid fuels explosive college costs, while Chris Edwards and Tad DeHaven have been highlighting the ever-cushier compensation of federal workers. Well, I’m pleased to have finally discovered a direct linkage between these topics: A new U.S. Office of Personnel Management report on student loan repayment programs for federal workers.
According to the report, in calendar year 2009 “36 Federal agencies provided 8,454 employees with a total of more than $61.8 million in student loan repayment benefits.”
Now, 8,454 employees is a small chunk of the entire, roughly 2-million-person federal workforce. Still, $61.8 million isn’t anything to sniff at, and loan forgiveness is one more perk that needs to be considered when thinking of federal worker compensation. And then there’s the trajectory of forgiveness: According to the report, spending on student-loan forgiveness by federal agencies in 2009 was “more than 19 times” bigger than it was in 2002. Were things to continue at that rate, in 2017 the cost would be almost $1.2 billion, and then you’d almost be talking real money!
The important point from a student-aid perspective is to emphasize something that must never be forgotten: While many analyses of student aid will only count grants – because they don’t ever have to be paid back — as “aid,” the reality is that that hugely under counts the true cost of federal aid to taxpayers. In addition to grants, taxpayers fund all federal student loans (and eat them when they aren’t repaid), help finance work-study, and pay for federal expenses that people taking federal education tax credits don’t pay for. So when you look just at federal grants, the bill for taxpayers in the 2008-09 school year was about $24.8 billion (see table 1). Add in loans, credits, and work-study, however, and the bill suddenly balloons to nearly $116.8 billion.
“But wait,” will say the only-grants-are-aid crowd, “isn’t a lot of that $116.8 billion loan money that will be paid back?” Yup — it’s just that at least $61.8 million of that repayment is coming, once again, from beleaguered federal taxpayers. And that, to be sure, is just the tip of the federal loan-forgiveness iceberg.
Government and GDP
The expansion in government and poor state of the economy got me thinking about how government growth is reflected in measured gross domestic product. So here is a wonky look at the treatment of government in the Bureau of Economic Analysis GDP data.
Data notes: By “government,” I mean total federal, state, and local. For 2009, I’m using the average of second and third quarter data. All data from BEA Tables here.
GDP measures total production. In 2009, government production was 20.7 percent of U.S. GDP. Government production is roughly the sum of government value-added (the stuff it produces itself) and government purchases. The first item, government value-added, was 12.4 percent of GDP and mainly consists of employee compensation. For example, the Pentagon produces output by adding together fighter pilots, which it hires, and fighter jets, which it buys.
A more commonly cited measure of government is total government spending. In 2009, that was 38 percent of GDP. The difference between this number (38 percent) and the production number (20.7 percent) is 17.3 percent, and represents the sum of government interest payments and transfer payments to individuals and businesses.
Figure 1 shows how the three measurements of government size have changed over time. Government production has remained fairly stable as a share of the economy, but total government spending has soared. The growing gap between these two lines mainly represents the massive growth in transfer (or subsidy) programs, such as Social Security.
Likely Supreme Court Tie Would Be a Loss to Property Owners
Today, the Supreme Court heard argument in Stop the Beach Renourishment v. Florida Department of Environmental Protection, which is a Fifth Amendment Takings Clause challenge involving beachfront property (that I previously discussed here).
Essentially, Florida’s ”beach renourishment” program created more beach but deprived property owners of the rights they previously had — exclusive access to the water, unobstructed view, full ownership of land up to the “mean high water mark,” etc. That is, the court turned beachfront property into “beachview” property. After the property owners successfully challenged this action, the Florida Supreme Court – “SCOFLA” for those who remember the Bush v. Gore imbroglio – reversed the lower court (and overturned 100 years of common property law), ruling that the state did not owe any compensation, or even a proper eminent domain hearing.
As Cato adjunct scholar and Pacific Legal Foundation senior staff attorney Timothy Sandefur noted in his excellent op-ed on the case in the National Law Journal, “[T]he U.S. Constitution also guarantees every American’s right to due process of law and to protection of private property. If state judges can arbitrarily rewrite a state’s property laws, those guarantees would be meaningless.”
I sat in on the arguments today and predict that the property owners will suffer a narrow 4-4 defeat. That is, Justice Stevens recused himself — he owns beachfront property in a different part of Florida that is subject to the same renourishment program — and the other eight justices are likely to split evenly. And a tie is a defeat in this case because it means the Court will summarily affirm the decision below without issuing an opinion or setting any precedent.
By my reckoning, Justice Scalia’s questioning lent support to the property owners’ position, as did Chief Justice Roberts’ (though he could rule in favor of the “judicial takings” doctrine in principle but perhaps rule for the government on a procedural technicality here). Justice Alito was fairly quiet but is probably in the same category as the Chief Justice. Justice Thomas was typically silent but can be counted on to support property rights. With Justices Ginsburg, Breyer, and Sotomayor expressing pro-government positions, that leaves Justice Kennedy, unsurprisingly, as the swing vote. Kennedy referred to the case as turning on a close question of state property law, which indicates his likely deference to SCOFLA.
For more analysis of the argument, see SCOTUSblog. Cato filed an amicus brief supporting the land owners here, and earlier this week I recorded a Cato Podcast to that effect. Cato also recently filed a brief urging the Court to hear another case of eminent domain abuse in Florida, 480.00 Acres of Land v. United States.
McCain: Interests of Defense Contractors May Conflict with US National Interest
USA Today reports that retired military officers join the boards of directors of, or become employees of, defense contractors and take home big bags of money doing so. Not surprising. At the same time, the paper reports, lots of them are being paid by the Pentagon to be “senior mentors” of their former colleagues. Not being government employees, but rather independent contractors, these folks aren’t subject to government ethics rules. To take one example, as chairman of BAE Systems, Gen. Anthony Zinni is clearing almost a million a year, in addition to his $129,000 per year government pension. In addition to all that, the Pentagon pays him about $2,000 per day to “mentor” people at DOD.
As the article points out, information is almost invaluable to the defense contractors in these contexts. The knowledge of what’s going on at DOD is extremely useful for planners at the defense companies, and so while the retired officers are protesting that being paid nearly $2,000 per day by DOD for their work as mentors is “way below the industry average,” it increases their value to, and presumably their compensation from, their military-industrial employers. As one coordinator of the mentors program told the retired officers, “you’re getting paid in two ways–monetarily and informationally.”
This isn’t too surprising a story, but the crowning irony comes as Sen. John McCain calls for an ethics rewrite and offers his view that “the important thing is that [the involved officers] avoid the appearance of conflict.” This is a puzzling remark coming from a man whose top foreign-policy adviser was collecting hundreds of thousands of dollars from the Georgian government to lobby McCain at the same time he was being paid by McCain to advise him on foreign policy.
McCain’s thoughts about conflict of interest in that instance? He was “so proud” of his lobbyist-cum-adviser. Presumably once McCain issued his ridiculous “today we are all Georgians” fatwa it became a patriotic duty to take money from foreign governments to represent their interests. But in the case of the proposed reforms–which would attempt to institute some semblance of transparency in these mentoring deals–one can only wish the senator from Arizona the best.
Wednesday Links
- How Washington’s plans may result in even higher executive pay.
“In 1993, Congress intervened in corporate compensation and messed things up. Now it’s the White House’s turn.”
- The case for allowing insider trading: “Want to keep companies honest, make the markets work more efficiently and encourage investors to diversify? Let insiders buy and sell.”
- Cato v. Heritage on the Patriot Act, Round III: “In hindsight, did Congress and the president react too hastily in 2001 by passing the Patriot Act just weeks after the 9/11 attacks?”
- Instead of fixing the Patriot Act, President Obama is protecting it.
- Twenty years later: Why the Berlin Wall fell.
- Podcast: “Financial Privacy and Freedom” featuring Prince Michael of Liechtenstein.
U.S. Cutting Pay for Bailed Out Company Executives
According to reports, executives from bailed out companies Citigroup, Bank of America, GM, Chrysler, GMAC, Chrysler Financial and AIG are going to see major pay cuts this year, which will be enforced by the president’s “pay czar,” Kenneth R. Feinberg. WaPo:
NEW YORK — The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.
The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.
The American people have every right to be upset about generous compensation packages for executives at financial firms that are being kept alive by subsidies and bailouts.
But their ire should be directed at the bailouts, because that is the policy that redistributes money from the average taxpayer and puts it in the pockets of incompetent executives. Unfortunately, rather than deal with the underlying problems of bailouts and intervention, some politicians want to impose controls on salaries. This might be a tolerable second-best (or probably fifth-best) outcome if the compensation limits only applied to companies mooching off the taxpayers, but some politicians want to use the financial crisis as an excuse to regulate compensation at firms that do not have their snouts in the public trough.
This would be a big mistake. So long as rich people make money using non-coercive means, politicians should butt out. It should not matter whether we are talking about Tiger Woods, Brad Pitt, or a corporate CEO. The market should determine compensation, not political deal making. Markets don’t produce perfect outcomes, to be sure, but political intervention invariably produces terrible outcomes.
I debate this further on CNBC:
C/P The Hill
What Is ‘Unreasonable’ Compensation? And Who Gets to Decide?
As could be expected, the effects of the financial crisis — and people’s reaction thereto — are starting to make their way to the least political branch of government, the judiciary. The Supreme Court this term will be hearing several cases that could have serious repercussions on our economic recovery, one of which led us to file an amicus brief. Here’s the situation:
The Investment Company Act of 1940 places on investment advisers a fiduciary duty with respect to the compensation they receive for the services they provide their clients. In the case of Jones v. Harris Associates, shareholders in various mutual funds contend that their adviser fees were excessive and violated the ICA. The Seventh Circuit, the federal appellate court based in Chicago, affirmed the judgment of the district court that the fees were not excessive but also expressly disapproved of the methodology for evaluating such claims used by the Second Circuit (based in New York). Judge Frank Easterbrook’s opinion explains that the ICA creates a fiduciary duty but does not act as a rate regulator, and that judicial price-setting does not accompany fiduciary duties. Judge Richard Posner, writing for five judges, dissented from the denial of an en banc rehearing. The Supreme Court agreed to review the case to settle the circuit split.
Our brief supports the investment adviser and makes three arguments:
- All persons have a fundamental human right to whatever compensation their contracting partners freely and honestly choose to pay them.
- Courts have no power to second-guess the reasonableness of any salary or compensation agreement honestly and freely signed by both contracting parties.
- The ICA’s fiduciary duty requires only fair dealing, not any particular outcome.
Thanks to Cato adjunct scholar Tim Sandefur for spearheading this effort, and to Cato legal associate Matthew Aichele for helping with much of the attendant busywork.
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