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Monday, January 9, 2023

Bureaucrats Don't Know Best

On January 5th, the FTC announced that it will implement and enforce a rule that will prohibit non-compete clauses in labor contracts, nation-wide, retroactively, and proactively. This single action demonstrates several problems with the current state of democracy, the regulatory state, media coverage, and economic punditry. In summary, this proposed rule suffers from a lack of evidence, a lack of democracy, and a lack of consistency.

This proposed rule suffers from a lack of evidence, a lack of democracy, and a lack of consistency.

Lack of Evidence

In their announcement, the FTC claims that proscribing non-competes could increase wages by "nearly" $300 billion per year and expand career opportunities for 30 million Americans. I've discussed before how the evidence that is provided for regulations can be extremely challenging to parse, even for well educated people. In this case, FTC buries their calculations on page 162 of their background document.

The bottom of their range is determined by taking 3.3% of all private income summed across all professions throughout the United States. 3.3% was the bottom of the range from one of the papers (3.3% - 12%). The FTC doesn't seem to make any effort to account for states that do not enforce or have outlawed non-competes and exclude them from the calculation. The top of the range comes from a study that estimates a 1% increase in wages from banning non-competes. The 1% is applied to every state (despite many not enforcing non-competes), and uses the state of non-competes as recorded in 2009, despite many states passing legislation that changed their enforcability in the intervening years.

This rule should be countermanded for the obviously incorrect estimates alone.

One of the primary defenses of non-compete clauses is that they lead employers to invest in their employees through training. When the employer can be more confident that the employee will continue to contribute, they are more willing to invest their resources because they won't worry that their training investments will benefit their competitors. The FTC does acknowledge this issue and even cites some evidence that it is a tangible, determinable cost. However, they do not attempt to put an annual dollar figure on this loss to employees and so they do not compare it with their calculated benefits.

While the FTC does point to different estimates for different industries, their discussion of these differences is less than comprehensive, and they do not account for the differences in their calculations. They discuss, at different times, the effects on low wage workers, high tech workers, CEOs, and physicians. For the most part, they discuss how research has found different estimates of the effects of non-competes for different groups. For physicians, research has shown that non-competes actually increase salaries; they dismiss that evidence. The evidence they cite for these different professions is so scattershot, it is difficult to draw any larger conclusions. Not surprisingly, this doesn't stop them from doing so.

The FTC acknowledges that their estimates represent some transfer from employers to employees and potentially, consumers to employees if employers are forced to raise their prices to cover the increased salaries of employees, but does not provide a clear, concrete estimate as to how much is actually benefitting the economy versus how much will just be transferred from one group to another.

Lack of Democracy

An edict from the FTC, specifically, 3 members of a 5 member panel who were not elected to their posts, is not how significant changes to labor laws should occur. Non-competes have been used for centuries, and the FTC has existed since 1914. Voters should be highly skeptical when a long-standing practice is suddenly deemed illegal despite no change in the practice or the law. Citizens should have a strong disinclination to any such changes particularly when these practices can be addressed through acts of legislatures, and indeed have been. Many states have acted to restrict the use of non-competes in the past ten years, showing that this is an area where the democratic process is functional. Other states have opted not to restrict them. Should those states and their voters be over-ruled by 3 unelected FTC agents? Essentially, three commissioners of the FTC are attempting to expand California's non-compete policy to the rest of the country without a vote of the national legislature, any of the other states' legislatures, or the approval of voters. This despite there being a bill introduced in the Senate to accomplish this that was not passed. Should the FTC enact laws that majorities in the legislature didn't support?

Essentially, three commissioners of the FTC are attempting to expand California's non-compete policy to the rest of the country without a vote of the national legislature, any of the other states' legislatures, or the consideration of their voters.

If this were left up to the states, states could approach non-competes in many ways. They could ban non-competes nearly totally like California; for low wage workers like Oregon; for high-tech workers like Hawai'i did; something in between; not at all; or try any number of different policies. Some countries require employers to pay their employees if they are laid off, for example. A national FTC mandate will prevent any such custom policies. It should come as no surprise, and even the FTC admits, different professions have different reactions to non-competes. That the FTC understands that, yet still prefers a top-down, national, uniform proscription shows that smart policy is not their goal.

The other drawback from a uniform, national policy, is that it will be impossible to gather further evidence on what an optimal policy would be. Optimal policy is almost never a single, nationwide ban but is more likely to be restrictions of varying degrees by income, occupation, state, and any other number of circumstances. By implementing a single policy, much like other regulations in other industries, the opportunity to find a set of policies that work for the most people and improve the economy will also be proscribed.

Lack of Consistency

Many economics pundits complained about President Biden's expensive student loan forgiveness plan because it was decreed by the president and not initiated by Congress. They were right to do so. Whether an action is strictly legal or not, the executive branch's tendency for unilateral policy making needs to be criticized consistently and fully by voters, media, and legislatures. When President Trump tried to shift money to build his border wall, while the legality was questionable, nearly everyone criticized his decision as against the spirit of the law.

When the FTC made their announcement, many on the left, and the same economists who had criticized Biden's student loan announcement, praised the FTC's action because they agreed with the policy. While the policy may be a good one or even more likely, some movement toward that policy would be beneficial, everyone should agree that such a substantial policy should not be conducted by a 5-member panel of un-elected appointees as a substitute for Congress or preferably, individual states.