Archive for the ‘Regulation’ Category.

San Francisco & Austin: Cities So Woke and Progressive That Blacks Are Forced To Leave

I found this interesting from Randal O'Toole

Between 2015 and 2016, the total population of the San Francisco-Oakland urban area grew by 13,773 people, but the black population shrank by 5,839, suggesting that Bay Area land-use policies continue to push low-income people out of the region by making housing unaffordable. The Austin urban area, to its shame, saw a decline of 4,439 blacks despite a total population growth of 25,316.

 

One Onerous New Regulation Down, Zillions More to Go

A while back I wrote about the Obama Administration's near exponential expansion of EEO reporting

 It takes the current EEO-1 (the annual exercise where we strive for a post-racial society by racially categorizing all of our employees) and makes it something like 15-20 times longer.  In addition, rather than simply "count" an employee as being on staff in a certain race-gender category, we now have to report their income and hours worked.  Either I will have to hire staff just to do this stupid report, or I will again (like with Obamacare) have to pay a third party thousands of dollars a year to satisfy yet another government reporting requirement.  This is utter madness.

Get this -- the report has 3600 individual cells that must be filled in.  And this is in addition to the current EEO-1 form, which also still has to be filled out.  The draft rule assumes 6-7 hours per company per year for this reporting.  They must be joking.

Fortunately, the Trump Administration has at least temporarily suspended this requirement:

On Tuesday, the White House suspended a burdensome reporting requirement for employers that would have cost them $400 million while yielding information of questionable value. It did so in rejecting changes to the EEO-1 form made at the end of the Obama administration.

The White House Office of Management and Budget stated that the pay collection and reporting requirements “lack practical utility, are unnecessarily burdensome, and do not adequately address privacy and confidentiality issues.” It explained its reasoning in a letter to the Chair of the Equal Employment Opportunity Commission, Victoria Lipnic.

The Obama administration had claimed that rewriting the form to include 3,660 boxes for companies to check or fill out would help identify wage discrimination. But very little of the information it sought would have shed any light on potential wage discrimination.

Yep, I Was Right. Opioid Proposals Going Forward With No Discussion Of Their Effect on Legitimate Users

A few weeks ago I wrote:

If you want to convince me of the need for restrictions on any substances, such as narcotics, you have to convince me of three things:

  1. That incarcerating users is somehow better for them than their addiction
  2. That ethically abusers of the substance are more worthy of our attention and intervention than legitimate users who benefit from the substance and whose access will likely be restricted
  3. That the negative social costs of the substance's use are higher than the inevitable social costs of the criminal black market (including the freedom-reducing policing laws implemented in response) that will emerge when its use or purchase is banned

Think in particular about point #2 when reading this:

Arizona would limit all initial opioid prescriptions to five days for new patients under sweeping guidelines recommended Wednesday by Gov. Doug Ducey's administration.

The plan also would limit maximum doses for pain medication, implement steps to taper down pain medications and require pain prescriptions to be filed electronically, rather than on paper, to limit diversion of drugs.

Consider that many legitimate users will need more than the legal maximum dosage to control their pain, and thus the issue becomes whether we want to essentially torture innocent sick people by forcing them to remain in excruciating pain in exchange for (possibly) reducing the number of accidental deaths from abusers of these drugs (I say possibly because over the last 40 years the government war on drugs has had such a super stellar track record in reducing narcotic usage).

To me the answer to this tradeoff is obvious but I am willing to admit it is a tradeoff subject to debate.  But the article linked has no debate.  There is not a single mention of any downsides to the rules, or any potential harm to legitimate users.

Regulation and Innovation

We often talk about the direct costs of regulation, but in the long run perhaps the most worrying problem is a cost that is impossible to measure -- its effect on innovation.  From a labor regulation paper I am writing:

Labor regulations are written in consideration of existing, well established business models, and are not written for business models that might someday exist.  Often my employees ask me why labor law will not allow practices that would make a lot of sense in our business, both for employer and employee.  I tell them to imagine a worker in a Pittsburg factory, punching a timeclock from 9 to 5 Monday through Friday, working within sight of their supervisor, taking their breaks in the employee lunch room.  This is the labor model regulators and legislators had in mind when writing the bulk of labor law.  Any other labor model – seasonal work, part-time work, working out of the home, telecommuting, working away from a corporate office or one’s supervisor, the gig economy – become square pegs to be jammed in the round hole of labor law.

When someone does try to stick an innovative square peg in the round hole of existing regulation, there tend to be concerted efforts by regulators to kill the new model.  Just look at Uber and the efforts to force it out of its labor model and into a more traditional one.  Most of us see innovation as good and value-creating.  Regulators - by training, by their incentives, by the culture - see innovation as threatening.  They see innovations as viruses trying to bypass the immune systems they have spent years constructing.

Here is an example from pharmaceuticals that really struck me.  Alex Tabarrok is writing on promising anti-aging and cancer reduction drugs:

The assembled scientists and academics focused on one obstacle above all: the Food and Drug Administration. The agency does not recognize aging as a medical condition, meaning a drug cannot be approved to treat it. And even if the FDA were to acknowledge that aging is a condition worthy of targeting, there would still be the question of how to demonstrate that aging had, in fact, been slowed—a particularly difficult question considering that there are no universally agreed-on markers.

 

Net Neutrality , White Supremacy, and Baking Cakes

I was thinking about these two stories in the context of net neutrality (the theory if not the practice)

The folks who are cheering this on seem to be the same folks who support net neutrality (Venn Diagram, Professor Perry?)  Look, if I had an Internet business, I would not want to serve or subsidize these folks.  But then again, I have always opposed net neutrality rules.  I suppose that one could argue net neutrality is narrowly about ISP's, so this stuff is not relevant, but what if Cox Communications decided the same thing?  Do they not have the same rights of association that GoDaddy and GoFundMe have?  And if every registrar and web hosting company refuse to serve a certain person or viewpoint, does net neutrality at the ISP level even matter?  This is part of the hypocrisy of companies like Google, which demand Cox act as a common carrier for its YouTube traffic (because Google does not want to foot the full cost of the amount of bandwidth they use) but act as anything but a common carrier in its core search business.

And while we are on rights of association, am I legally required to bake a cake for James Fields?

Postscript:  I wonder if people on the Left, which dominate most of the calls for net neutrality, would be demanding net neutrality if they thought most ISP's were controlled by folks on the Left?  Google and Facebook are known to be controlled by the Left, and thus no one on the Left demands neutrality of them  -- in fact the Left likely would oppose calls for neutrality at Google and Facebook as their hope is that opposing voices to theirs will be disproportionately screened out by these companies.

The More We Talk About the Opioid "Crisis", The More Likely Stupid and Unproductive Legislation Will Be Passed

If you want to convince me of the need for restrictions on any substances, such as narcotics, you have to convince me of three things:

  1. That incarcerating users is somehow better for them than their addiction
  2. That ethically abusers of the substance are more worthy of our attention and intervention than legitimate users who benefit from the substance and whose access will likely be restricted
  3. That the negative social costs of the substance's use are higher than the inevitable social costs of the criminal black market (including the freedom-reducing policing laws implemented in response) that will emerge when its use or purchase is banned

Not only have I not been convinced on any of these dimensions on any of the substances we currently call illegal drugs, I have yet to see anyone seriously even attempt to address these trade-offs or acknowledge they exist.

Employing People in California Really is Harder

California is a uniquely difficult place for companies trying to actually employ people rather than robots.   Owning a business in that state, you could be forgiven that the legislation actually embarked on a program to explicitly punish companies for hiring people.  The state has spent the last ten or twenty years defining a myriad of micro offenses employees for which  may sue employers and make large recoveries -- everything from having to work through lunch to having the wrong chair and not getting to sit in that chair at the right times of day.

To illustrate this, I want to show you the insurance application I just received.  Most companies have something called employment practices liability insurance.  This insurance helps pay legal and some settlement expenses if and (nowadays) when a company is sued by an employee for things like discrimination or harassment or any of the variety of sue-your-boss offenses California has established.  In that multi-page application, after the opening section about name and address, the very first risk-related question asks this:

They specifically ask about your California employment, and no other state, in order to evaluate your risk.

The other insurance-related result of California's regulatory enviroment is that if one is in California, it is almost impossible to get an employee practices insurance deductible under $25,000.  This turns out to be just about exactly the amount of legal costs it takes to get a nuisance suit filed with no real grounding dismissed.  It essentially means that any disgruntled ex-employee, particularly one in a protected class, can point their finger at a company without any evidence whatsoever and cost that company about $25,000 in legal expenses.  Rising minimum wages is not the only reason MacDonald's is investing so much in robotics.

The Progressive Left Becomes State Rights Advocates. Who'd Have Thought?

Many libertarians like state's rights because it creates 50 different tax and regulator regimes, and libertarians assume that people and businesses will flow to the most free states.  However, California progressives have discovered they like state's rights as well, though they are in more of the antebellum South Carolina category of desiring state's rights in order to be less free than the Federal government allows.

After a bid to launch a California secession movement failed in April, a more moderate ballot measure has been approved, and its backers now have 180 days to attain nearly 600,000 signatures in order to put it up to vote in the 2018 election.

The Yes California movement advocated full-on secession from the rest of the country, and it gained steam after Donald Trump won the presidential election in 2016. However, as the Sacramento Bee noted, that attempt failed to gather the signatures needed and further floundered after it was accused of having ties to Russia.

But as the Los Angeles Times reported this week:

On Tuesday afternoon, Atty. Gen. Xavier Becerra’s office released an official title and summary for the initiative, now called the ‘California Autonomy From Federal Government’ initiative.

The new measure that seeks to set up an advisory commission to inform California’s governor on ways to increase independence from the federal government. It would reportedly cost $1.25 million per year to fund “an advisory commission to assist the governor on California’s independence plus ‘unknown, potentially major, fiscal effects if California voters approved changes to the state’s relationship with the United States at a future election after the approval of this measure,’” the Los Angeles Times reported.

With Becerra’s approval, its backers can now seek the nearly 600,000 signatures required to place the measure on the 2018 ballot.

As the outlet explained:

The initiative wouldn’t necessarily result in California exiting the country, but could allow the state to be a ‘fully functioning sovereign and autonomous nation’ within the U.S.’”

According to the Attorney General’s official document on the measure, it still appears to advocate secession as the ultimate goal — even if it doesn’t use the term outright.“Repeals provision in California Constitution stating California is an inseparable part of the United States,” the text explains, noting that the governor and California congress members would be expected “to negotiate continually greater autonomy from federal government, up to and including agreement establishing California as a fully independent country, provided voters agree to revise the California Constitution.”

Politicians Will Burn Down Anything That Is Good Just To Get Their Name In The News

Via Zero Hedge:

a group of 12 Democratic Congressman have signed a letter urging the Department of Justice and the Federal Trade Commission to conduct a more in-depth review of e-commerce giant Amazon.com Inc.'s plan to buy grocer Whole Foods Market Inc., according to Reuters.

Rumblings that Amazon is engaging in monopolistic business practices resurfaced last week when the top Democrat on the House antitrust subcommittee, David Civilline, voiced concerns about Amazon's $13.7 billion plan to buy Whole Foods Market and urged the House Judiciary Committee to hold a hearing to examine the deal's potential impact on consumers.

Making matters worse for the retailer, Reuters reported earlier this week that the FTC is investigating the company for allegedly misleading customers about its pricing discounts, citing a source close to the probe.

The letter is at least third troubling sign that lawmakers are turning against Amazon, even as President Donald Trump has promised to roll back regulations, presumably making it easier for megamergers like the AMZN-WFM tieup to proceed.

It is difficult even to communicate how much Amazon has improved my life.  I despise going to stores, and Amazon allows me the pick of the world's consumer products delivered to my home for free in 2 days.  I love it.  So of course, politicians now want to burn it down.

I say this because the anti-trust concerns over the Whole Foods merger have absolutely got to be a misdirection.  Whole Foods has a 1.7% share in groceries and Amazon a 0.8%.  Combined they would be the... 7th largest grocery retailer and barely 1/7 the size of market leader Wal-Mart, hardly an anti-trust issue.  So I can only guess that this anti-trust "concern" is merely a pretext for getting a little bit of press for attacking something that has been successful.

The actual letter is sort of hilarious, in it they say in part:

in the letter, the group of Democratic lawmakers – which includes rumored presidential hopeful Cory Booker, the junior senator from New Jersey – worried that the merger could negatively impact low-income communities. By putting other grocers out of business, the Amazon-backed WFM could worsen the problem of “food deserts,” areas where residents may have limited access to fresh groceries.  "While we do not oppose the merger at this time, we are concerned about what this merger could mean for African-American communities across the country already suffering from a lack of affordable healthy food choices from grocers," the letter said on Thursday.

Umm, the Amazon model is being freed from individual geographic locations so that everyone can be served regardless of where they live.  This strikes me as the opposite of "making food deserts worse."  It is possible that Amazon might not deliver everywhere at first, and is more likely to deliver to 90210 than to Compton in the first round of rollouts.  But either they do deliver to a poor neighborhood, and improve choices, or they don't, and thus have a null effect.  And it is really sort of hilarious worrying that new ownership of Whole Foods, of all groceries, is going to somehow devastate poor neighborhoods.

By the way, if I were an Amazon shareholder, I would be tempted to challenge Bezos on his ownership of the Washington Post.  In a free society, he is welcome to own such a business and have that paper take whatever editorial stands he wishes.  However, we do not live in a fully free society.  As shown in this story, politicians like to draw attention to themselves by using legislation and regulation to gut successful companies, particularly ones that tick them off personally.  In this case:

So far, it’s mostly Democrats who are urging the FTC to take “a closer look” at the deal. However, some suspect that Amazon founder Jeff Bezo’s ownership of the Washington Post – a media outlet that has published dozens of embarrassing stories insinuating that Trump and his compatriots colluded with Russia to help defeat Democrat Hillary Clinton – could hurt the company’s chances of successfully completing the merger, as its owner has earned the enmity of president Trump. Similar concerns have dogged CNN-owner Time Warner’s pending merger with telecoms giant AT&T.

 

A Net Neutrality Parable

I have been frustrated trying to explain to folks why net neutrality is anything but neutral, in fact tilting the playing to the advantage of large content providers.  I thought I would take a lesson from Don Boudreaux, who has spent a lot of time thinking about economics education.  He often works by analogy -- sometimes these analogies work for me and sometimes they don't, but they seem a good way to reach people perhaps when traditional arguments have not worked.

Let's consider two cities we will call Gotham and Metropolis.   One day a private road builder proposes the first major highway between the two cities.  The citizens cheer, but the government places one caveat on them -- the builders must be neutral to all traffic.  Every entity (individuals, corporations, public agencies) should each pay the same fixed amount each year for use of the road and everyone should get equal access to the road, no matter how much they use it.

Things start out pretty much as expected.  The company sets the access charge at $10 a year, and lots of entities pay to put their one or two vehicles on the road from time to time.  The road is a great time saver and the capacity of two lanes in each direction is more than enough for easy, fast travel.

This new road and the faster transportation it allows spawns a number of entrepreneurs who find new uses for the road.  In particular, two companies create new logistics services that cause at first dozens, then hundreds, and then thousands of their trucks to hit the road between the two cities.  Soon, more than half the vehicles on the road are from these two companies, and another 25% of the vehicles on the road are from perhaps a dozen smaller imitators.  But each of these companies, despite using orders of magnitude more of the road's capacity than any other individual, still pay the same flat $10 for access to all their vehicles.   These trucking companies continue to add new services -- such as high demand logistics (HD for short) -- that put more and more trucks on the highway. Traffic explodes.  It turns out that these trucking companies have ways to compress their loads into fewer trucks with little loss to their quality of service, but why bother?  They are not paying for the capacity they are using, so why conserve?

But the resulting congestion from these few companies' trucks is slowing everyone else down.  Congestion reigns.  Instead of blaming the trucking companies, everyone demands the road company add more capacity, which they do.  They spend huge amounts of money to accommodate the traffic from these few companies, but due to neutrality rules the costs get paid by everyone, and the annual fee goes up to $15, $20, then $25.  Finally, a few people begin to observe that their access fees have doubled and tripled all to support vehicles from just a few entities.  Proposals come forward:  Can't these trucks be limited to certain lanes to keep them out of the way of other traffic?  Can't they be limited at certain times of day?  Can't the road company charge them per vehicle, rather than a flat fee, so they pay their fair share of the expansion costs?  Can't the road company give them incentives to compress their loads into fewer trucks?  Can't the trucking companies make a contribution to the capital fund to expand the road?

But nothing happens, because of road neutrality.  The trucking companies repeatedly shout "road neutrality" and conduct a successful campaign to convince everyone else that road neutrality is really in their interest.  They try to scare individuals by saying that an end to road neutrality will cause certain drivers to be excluded just because the road company does not like them, when in fact no such proposal or issue has ever existed. Just to be sure, the trucking companies pack the regulatory boards with their cronies. 

I hope the analogy is, while not perfect, at least clear.  Google (via Youtube), Netflix, and Facebook account for over half the bandwidth used on the Internet.  They claim they are worried about ISP's filtering traffic based on political views, but no one has ever provided the smallest shred of evidence that this occurs (and it is incredibly hypocritical since Facebook and Google do exactly this within their platforms).  What they are really worried about is that someone might un-bundle your local Internet service, specifically splitting the high bandwidth using sites from the low.  An ISP might very rationally offer a much lower monthly rate to someone who accepted a plan that did not allow streaming video or which compressed streaming video to conserve bandwidth (oddly, while the Left supports net neutrality, they favor the opposite in cable TV, trying to force unbundling of sites that are cheap for cable companies to provide from those that are expensive (e.g. ESPN).  This is likely Google and Netflix's nightmare.

One way to think about this is a classic vertical supply chain fight.  Suppliers and their channel fight all the time to see who will reap the lion's share of the profits available from selling to the end consumer.  There is a certain amount to be made from selling an incremental streaming movie -- Netflix and your ISP both want a piece, Netflix for the content and the ISP for building the pipe.  In a free market, they would fight it out, and the accommodations between them would likely ebb and flow over time.  What net neutrality does is attempt to impose a resolution of this such that Google and Netflix get 100% of the revenue and the ISP is saddled with 100% of the cost to build the pipe.  Hardly "neutral".

Postscript:  Google is also worried than an ISP might hook up with, say, Netflix and offer Netflix for free to their low-bandwidth products sort of as a preferred provider.  Sort of exactly like what Google does with every one of its own services, given them preferred position in their search engine.  Hypocrites all.

Regulators Are Almost By Definition Anti-Consumer

Free markets are governed and regulated by consumers.  If suppliers offer something, and consumers like it and like how that particular supplier provides it more than other choices they have, the supplier will likely prosper.  If suppliers attempt to offer consumers something they don't want or need, or already have enough of from acceptable sources, the supplier will likely wither and disappear.  That is how free markets work.  Scratch a Bernie Sanders supporter and you will find someone who does not understand this basic fact of consumer sovereignty.

Regulators generally are operating from a theory that says there is some sort of failure in the market, that consumers are not able to make the right choices or are not offered the choices they really want and only the use of force by regulators can fix this failure.  In practice, regulators have no way of mandating a product or service that producers cannot economically or technically provide (see: exit from Obamacare exchanges) and so all they actually do is limit choice by pruning products or services or individual features the regulators don't think consumers should be offered.   They substitute the judgement of a handful of people for the judgement of thousands, or millions, and ignore that there is not some single Platonic ideal of a product out there, but thousands or millions of ideals based on the varied preferences of millions of people.

A reader sends me a fabulous example of this from the Socialist Republic of Cambridge, Mass.

Month after month, in public meeting after public meeting, a trendy pizza mini-chain based in Washington, D.C., hacked its way through a thicket of bureaucratic crimson tape in the hopes of opening up shop in a vacant Harvard Square storefront. But when the chain, called &pizza, arrived at the Cambridge Board of Zoning Appeal in April, the thicket turned into a jungle.

Harvard Square already has plenty of pizza, board chairman Constantine Alexander declared, and though a majority of the board signed off on &pizza’s plans, approval required a four-vote supermajority. Citing the existence of five supposedly similar pizza joints in the area, as well as concerns about traffic congestion, a potential “change in established neighborhood character,” and even the color of the restaurant’s proposed signage, Alexander and cochair Brendan Sullivan dissented.

“A pizza is a pizza is a pizza,” Alexander said at one point during the April hearing, sounding suspiciously like someone who doesn’t eat much pizza or give much thought to the eating habits of the 22,000 or so college students who live in the city.

A city ordinance dictates that any new fast-food place should be approved only if it “fulfills a need for such a service in the neighborhood or in the city.” But the notion that an unelected city board should be conducting market research using some sort of inscrutable eye test to decide precisely what kind of cuisine is appropriate for Harvard Square stretches that to the point of absurdity.

EU Fines Google in a Dose of Net Neutrality Schadenfreude

Via engadget:

The European Commission's long-running investigation into Google has finally come to an end, and it's not good news for the search giant. Commissioner Margrethe Vestager confirmed today that the company has been fined €2.42 billion ($2.72 billion) for unfairly directing users to its own products rather over those of its rivals. It's the biggest financial penalty the Commission has ever handed out, eclipsing the €1.06 billion ($1.4 billion) charge incurred by Intel back in 2014.

In a statement, Vestager said: "Google has come up with many innovative products and services that have made a difference to our lives. That's a good thing. But Google's strategy for its comparison shopping service wasn't just about attracting customers by making its product better than those of its rivals. Instead, Google abused its market dominance as a search engine by promoting its own comparison shopping service in its search results, and demoting those of competitors.

Via calls for "net neutrality"** in this country, Google has been arguing that ISPs must act as common carriers of its content and must ignore the fact that nearly half of all US ISP bandwidth investment is used without compensation to support the business model of just two content providers (Google and Netflix).  Google does not want ISP's to somehow favor other content providers over themselves, even though these others cost orders of magnitude less to serve than does Google's Youtube division.

Well, as I wrote before, the EU is bringing karmic justice to Google via this decision.

Hah!  I think this is a terrible decision that has nothing to do with economic sanity or even right and wrong -- it has to do with the EU's frequent historic use of anti-trust law as a way to bash foreign competition of its domestic providers, to the detriment of its consumers.  But it certainly is Karma for Google.  The EU is demanding that Google's search engine become a common carrier, showing content from shopping sites equally and without favor or preference.  The EU is demanding of Google exactly what Google is demanding of ISP's, and wouldn't you know it, I don't think they are going to like it.

** I put "net neutrality" in scare quotes because I think it is a term that means exactly the opposite of what it says.  Neutrality is what we had 2 years ago, with no regulation that favored either content providers or bandwidth providers in the typical negotiations and back-and-forth that occurs in every supply chain.  "Net neutrality" actually means tipping the scales and being non-neutral in favor of content providers over ISP's.

Karmic Justice: EU Does to Google What Google Did To Others With Net Neutrality

Google was (and is) a big supporter of Net Neutrality.  Content providers like Google (Google owns Youtube, among other large content sites) want to make sure that other content providers are not somehow given special treatment by the ISP's that provide the bandwidth for consumers to view these sites.  In particular, sites like Youtube and Netflix, which consume a HUGE percentage of the bandwidth at many ISP's, don't want to somehow pay any extra costs that might be imposed on content sites that use a lot of bandwidth.   I wrote this on net neutrality a few years ago:

Net Neutrality is one of those Orwellian words that mean exactly the opposite of what they sound like.  There is a battle that goes on in the marketplace in virtually every communication medium between content creators and content deliverers.  We can certainly see this in cable TV, as media companies and the cable companies that deliver their product occasionally have battles that break out in public.   But one could argue similar things go on even in, say, shipping, where magazine publishers push for special postal rates and Amazon negotiates special bulk UPS rates.

In fact, this fight for rents across a vertical supply chain exists in virtually every industry.  Consumers will pay so much for a finished product.  Any vertical supply chain is constantly battling over how much each step in the chain gets of the final consumer price.

What "net neutrality" actually means is that certain people, including apparently the President, want to tip the balance in this negotiation towards the content creators (no surprise given Hollywood's support for Democrats).  Netflix, for example, takes a huge amount of bandwidth that costs ISP's a lot of money to provide.  But Netflix doesn't want the ISP's to be be able to charge for this extra bandwidth Netflix uses - Netflix wants to get all the benefit of taking up the lion's share of ISP bandwidth investments without having to pay for it.  Net Neutrality is corporate welfare for content creators.

A typical ISP would see this relative usage of its bandwidth.  You can be assured everyone on this list is a huge net neutrality supporter.

Essentially, Google wanted to force ISP's to be common carriers, to be legally required to carry all traffic equally, even if certain traffic (like Google's Youtube) is about a million times more expensive to serve than other people's content.

But the point of this story is not about my issues with Net Neutrality.   The point of this story is Karma, or as we used to say it in the South, what "goes around, comes around."

The European Union’s antitrust watchdog in the coming weeks is set to hit Alphabet Inc.’s Google with a record fine for manipulating its search results to favor its own comparison-shopping service, according to people familiar with the matter.

The penalty against Google is expected to top the EU’s previous record fine levied on a company allegedly abusing its dominance: €1.06 billion (about $1.18 billion) against Intel Corp.in 2009.

The fine could reach as high as 10% of the company’s yearly revenue, which stood at $90.27 billion last year.

But more painful to Google than a sizable fine could be other consequences that come with the European Commission’s decision, including changes not only to the tech giant’s business practices with its shopping service but with other services as well. The EU’s decision could also embolden private litigants to seek compensation for damages at national courts.

The EU is likely to demand Google treat its own comparison shopping service equally with those of its competitors, such as Foundem.co.uk and Kelkoo.com Ltd., possibly requiring the search giant to make rival services more visible on its own platform than they are at present. Such companies rely on traffic to their site from search engines like Google’s.

Hah!  I think this is a terrible decision that has nothing to do with economic sanity or even right and wrong -- it has to do with the EU's frequent historic use of anti-trust law as a way to bash foreign competition of its domestic providers, to the detriment of its consumers.  But it certainly is Karma for Google.  The EU is demanding that Google's search engine become a common carrier, showing content from shopping sites equally and without favor or preference.  The EU is demanding of Google exactly what Google is demanding of ISP's, and wouldn't you know it, I don't think they are going to like it.

As Predicted Here 2 Years Ago, More Diesel Emissions Cheating Alleged

Back in November of 2015 I wrote:

I would be stunned if the Volkswagen emissions cheating is limited to Volkswagen.  Volkswagen is not unique -- Cat and I think Cummins were busted a while back for the same thing.  US automakers don't have a lot of exposure to diesels (except for pickup trucks) but my guess is that something similar was ubiquitous.

My thinking was that the Cat, Cummins, and VW cheating incidents all demonstrated that automakers had hit a wall on diesel emissions compliance -- the regulations had gone beyond what automakers could comply with and still provide consumers with an acceptable level of performance.

Since then Fiat-Chrysler has been accused of the same behavior, and now GM is accused as well, though only in  a civil suit.

A class-action lawsuit accuses General Motors of rigging emission-control systems on 2011–2016 Chevrolet Silverado HD and GMC Sierra HD pickups with GM’s Duramax turbo-diesel 6.6-liter V-8 engine. If the allegations are proved true, the environmental damage from these 705,000 trucks, which the lawsuit said emit two to five times the legal limit of nitrogen oxides (NOx) in typical driving conditions, could easily exceed that of Volkswagen’s emission-test-cheating TDI engines.

Of course, people can say any thing they want in a civil suit, so this needs to be proved, but I think it probably is true.

A while back a reader with some inside knowledge explained what was going on.

Immigration Law as a Precursor for Work Permits

I have made this same point before -- immigration restrictions on who can and can't work in the US is effectively a Federal work permit requirement, one that could easily be expanded over time:

E-Verify, if implemented nationwide, would be a system of work permits. If you started a new job, you would need the federal government to verify that you are legally allowed to have that job. How long would it be before the government started making judgements about who should be allowed to work? Convicted sexual predators, even those who were, say 19, and sleeping with a consensual 16-year-old, have to register for life and are told that they can't live in certain parts of a city. Is it entirely inconceivable that some would ultimately be told that they can't work?

I can imagine far worse than that in today's society.   One must complete a certain number of hours of training and pass a series of tests to get a driver's licence.  How long before someone suggestions mandatory diversity testing and a woke-ness test before being allowed to work?

Your Labor Regulation Fact of the Day

The minimum wage of a laborer who places and picks up orange cones around a Federal highway project in California is set at $43.97 an hour (and yes, the wage rules are that detailed).  This is set by the Davis-Bacon Act and the wage determination is here (wage determination CA29, LABORER TRAFFIC CONTROL/LANE CLOSURE, Traffic Control Person II, wage plus fringe).

Here is your essay question:  Given that this equates to nearly $88,000 a year, how many truly unskilled workers would you expect to be hired by Federal stimulus projects, vs. other workers with more skills who are taking jobs below their skills and experience)?

How Governments Break Markets: 1. Restrict Supply 2. Subsidize Demand 3. Declare Market Failure When Prices Soar

Restrict supply, subsidize demand, and then declare a market failure.  That is how the government has jacked prices through the ceiling in higher education, health care, and housing:

Oregon is responding to its housing affordability crisis by doing all the wrong things. The crisis is due to a shortage in supply which in turn is due to urban-growth boundaries.

So the legislature legalized inclusionary zoning ordinances and Portland passed one. Such ordinances require developers to provide a certain percent of the homes they build to low-income people at below-market rates. In response, developers are building fewer homes, exacerbating the supply problem. City officials “hope the slowdown is temporary,” but that hasn’t proven to be the case in other cities that passed inclusionary zoning ordinances.

Now the state legislature is considering a bill to provide $5 million to help first-time home buyers make down payments on homes. This will have the effect of increasing demand, which will only drive up prices even more.

Why Monopsony Power May Be Irrelevant to the Effects of A Minimum Wage Increase

Most of us who took Econ 101 would expect that an increase in the minimum wage would increase unemployment, at least among low-skilled and younger workers.  After all, demand curves slope downards so that an increase in price of labor should result in a decrease in demand for that labor.

Supporters of the minimum wage, however, argue that employers have monopsony power when hiring low-skill workers. What they mean by this is that due to a bargaining power imbalance, employers can hire workers for less than they would be willing to pay in a truly competitive market.  As the theory goes, this in turn creates an additional consumer surplus for employers, which manifests itself as higher profits.  A minimum wage increase would thus reduce this surplus but not effect employment because companies before the new minimum wage were paying less than they were willing to pay.  Thus minimum wage supporters argue that higher wages mandated by minimum wage laws will be paid out of these excess profits, and not result in higher prices or less employment.

My understanding (and I am not an economist) is that the evidence for monopsony power in hiring low-skill workers is weak or at best limited to niche circumstances.  However, I am going to argue that it does not matter. Even if companies are able to pay workers less than they might via such monopsony power, whatever gains they reap from workers ends up in consumer hands.  As a result, minimum wage increases still must result either in employment reductions or consumer price increases or more likely both.

Why Monopsony Power May Not Matter

Why? Well, we need to back up and do a bit of business theory.  Just as macroeconomics (all the way back to Adam Smith) spends a lot of time thinking about why some countries are rich and some are poor, business theory spends a lot of time trying to figure out why some firms are profitable and some are not.  One of the seminal works in this area was Michael Porter's Five Forces model, where he outlines five characteristics of markets and firms that tend to drive profitability.  We won't go into them all, but the most important for us (and likely for Porter) is the threat of new entrants -- how easy or hard is it for new firms to enter the marketplace and begin competing against an incumbent firm.  If new companies can enter into competition easily, a profitable firm will simply attract new competitors, and keep attracting them until the returns in that market are competed down.

So let's consider a company paying minimum wage to most of its employees.  At least at current minimum wage levels, minimum wage employees will likely be in low-skill positions, ones that require little beyond a high school education.  Almost by definition, firms that depend on low-skill workers to deliver their product or service have difficulty establishing barriers to competition. One can’t be doing anything particularly tricky or hard to copy relying on workers with limited skills. As soon as one firm demonstrates there is money to be made using low-skill workers in a certain way, it is far too easy to copy that model.  As a result, most businesses that hire low-skill workers will have had their margins competed down to the lowest tolerable level.  Firms that rely mainly on low-skill workers almost all have single digit profit margins (net income divided by revenues) -- for comparison, last year Microsoft had a pre-tax net income margin of over 23%.

As a result, the least likely response to increasing labor costs due to regulation is that such costs will be offset out of profits, because for most of these firms profits have already been competed down to the minimum necessary to cover capital investment and the minimum returns to keep owners invested in the business. The much more likely responses will be

  1. Raising prices to cover the increased costs. This approach may be viable competitively, as most competitors will be facing the same legislated cost pressures, but may not be acceptable to consumers
  2. Reducing employment. This may take the form of stealth price increases (e.g. reduction in service levels for the same price) or be due to a reduction in volumes caused by price increases. It may also be due to targeted technology investments, as increases in labor costs also increase the returns to capital equipment that substitutes for labor
  3. Exiting one or more businesses and laying everyone off. This may take the form of targeted exits from low-margin lines of business, or liquidation of the entire company if the business Is no longer viable with the higher labor costs.

An Example

When I discuss this with folks, they will say that the increase could still come out of profitability -- a 5% margin could be reduced to 3% say.  When I get comments like this, it makes me realize that people don't understand the basic economics of a service firm, so a concrete example should help. Imagine a service business that relies mainly on minimum wage employees in which wages and other labor related costs (payroll taxes, workers compensation, etc) constitute about 50% of the company’s revenues. Imagine another 45% of company revenues going towards covering fixed costs, leaving 5% of revenues as profit.  This is a very typical cost breakdown, and in fact is close to that of my own business.  The 5% profit margin is likely the minimum required to support capital spending and to keep the owners of the company interested in retaining their investment in this business.

Now, imagine that the required minimum wage rises from $10 to $15 (exactly the increase we are in the middle of in California).  This will, all things equal, increase our example company's total wage bill by 50%. With the higher minimum wage, the company will be paying not 50% but 75% of its revenues to wages. Fixed costs will still be 45% of revenues, so now profits have shifted from 5% of revenues to a loss of 20% of revenues. This is why I tell folks the math of absorbing the wage increase in profits is often not even close.  Even if the company were to choose to become a non-profit charity outfit and work for no profit, barely a fifth of this minimum wage increase in this case could be absorbed.  Something else has to give -- it is simply math.

The absolute best case scenario for the business is that it can raise its prices 25% without any loss in volume. With this price increase, it will return to the same, minimum acceptable profit it was making before the regulation changed (profit in this case in absolute dollars -- the actual profit margin will be lowered to 4%). But note that this is a huge price increase. It is likely that some customers will stop buying, or buy less, at the new higher prices. If we assume the company loses 1% of unit volume for every 2% price increase, we find that the company now will have to raise prices 36% to stay even both of the minimum wage increase and lost volume. Under this scenario, the company would lose 18% of its unit sales and is assumed to reduce employee hours by the same amount.  In the short term, just for the company to survive, this minimum wage increase leads to a substantial price increase and a layoff of nearly 20% of the workers.   Of course, in real life there are other choices.  For example, rather than raise prices this much, companies may execute stealth price increases by laying off workers and reducing service levels for the same price (e.g. cleaning the bathroom less frequently in a restaurant).  In the long-term, a 50% increase in wage rates will suddenly make a lot of labor-saving capital investments more viable, and companies will likely substitute capital for labor, reducing employment even further but keeping prices more stable for consumers.

As you can see, in our example we don’t need to know anything about bargaining power and the fairness of wages. Simple math tells us that the typical low-margin service business that employs low-skill workers is going to have to respond with a combination of price increases and job reductions.

How My Company Has Responded

Just to put a bit more flesh on this, I will give a real example from my own company.  My company operates public recreation facilities, mainly campgrounds, under bid contracts.  To understand our response to rising minimum wage, you need to understand some background:

  • In bidding these, we bid both the camping fee we will charge to customers as well as the rent we will pay to the government for the concession.  Given the weights the government uses in the bid process, keeping customer price low is more important than the rent we pay, so in most cases the prices we charge customers are well below the private market rate for similar campgrounds.
  • We have limited ability to further increase productivity, in part because our ability to invest in these campgrounds in limited.
  • Because we have many contracts across the country, our reputation is important and so we seldom will entertain reductions in service, such as cleaning frequency
  • Labor and labor-related costs are about 50% of revenues, and most employees are paid minimum wage.  Profit margins hover around 5% of revenues

One of the states we operate in is California.  We are in the midst of a minimum wage increase there from $8 an hour several years ago to $15 several years hence, or an increase of 87.5%.  Basically we have had two responses:

  • In places where we are under the market price, we have been able to raise prices without a lot of drop in volume.  But this means that our camping rates in some locations have risen from $18 to a future $26 a night, an enormous increase in just a few years.
  • In places where we did not think the market would bear such a rate increase, or where our contract did not allow such a rate increase, we closed our operation.  In fact, we have exited about half our business in California (while simultaneously growing it aggressively in states like Tennessee).  In all cases this has resulted in a loss of employment -- either the location was never reopened by anyone else, or else it was reopened by a competitor with different reputational concerns who staffed the location with far fewer employees.

Bureaucracy Creep

One of the irritating tasks I am required by law to perform for the government is fill in a bunch of detailed information about my business for the US Census Bureau.  This is one of a number of reports the government sends me each year to fill in.  The first thing I look at on these forms is whether they are required by law.  If they are not, they immediately go in the trash can.  In particular, I could spend 110% of my free time filling in Department of Labor surveys that seem to come for each state we operate in.  The only entertainment value I get associated with these many surveys is the calls I sometimes get from government workers asking me if I would please fill in the survey.  Generally I explain to them that 1.  My time is too valuable to waste on this stuff and 2.  There is no way in hell I am going to give them a bunch of data they will likely only use to justify new regulations that make my business life even harder.

The two reports that are required (this does not include of course the dozens of required tax forms, licensing forms, and corporate registration forms we fill out every year) are the annual Census report and the EEO-1 report.  I already discussed a while back the 15-20x increase in size and complexity of the EEO-1 report, where about 3600 new cells have been added that have to be filled in.  This year the Census Accommodations Industry Report had a huge increase in complexity -- last year's report had one cell for last years' total expenses (though the Census bureau's definition of total expenses was so arcane that it took an hour or so to calculate the number).  This year, instead of a single number for expenses there are 48 different cells to be filled in with detailed categories of expenses.  Here are just two of the many categories they demand:

d.  Purchased repairs and maintenance to machinery and equipment - Expensed repair and maintenance services to machinery, vehicles, equipment, and computer hardware. Exclude materials, parts, and supplies used for repairs and maintenance performed by this firm's employees

e.  Purchased repairs and maintenance to buildings, structures, and offices - Include repair and maintenance to integral parts of buildings (e.g., elevators, heating systems). Exclude materials, parts, and supplies used for repairs and maintenance performed by this firm's employees. Report janitorial and grounds maintenance services in line 4c

Perhaps I am a failure as a business person, but my company does not track expenses in this detail, or at least in these specific categories.   The exercise was not only absurdly time-consuming, it was impossible.  Depending on my mood, I might have just filled it all in with random guesses.   However, even though it is not supposed to be used this way, I couldn't shake the sense that someone someday might try to use it to compare against my tax returns (which are prepared quite carefully and accurately) and try to raise red flags.  So I left it all blank.  I will be interested to see how they respond.

Great Moments in Regulation

Here is what you are paying your government to spend time on:

The age-old question has finally been answered: No, Snuggies are not clothing.

Earlier this month, a federal court ruled that Snuggies, the As Seen on TV 'blanket with sleeves', should be classified as blankets, and live as a separate entity from robes or priestly vestments.

The ruling followed the Justice Department's argument that Snuggies are apparel and not blankets, so they should be 'subjected to higher duties than blankets', reports Bloomberg.

Judge Mark Barnett of the Court of International Trade said during the trial that the Customs and Border Protection was in the wrong to classify Snuggies as apparel. Barnett cited the Snuggies' use of marketing as a blanket, specifically referencing its packaging with the phrase, "The Blanket With Sleeves!".

The judge added that those who purchase Snuggies may likely be "in the types of situations one might use a blanket; for example, while seated or reclining on a couch or bed, or outside cheering a sports team."

In Barnett's opinion, the addition of sleeves 'was not enough' to have the Snuggie be considered a piece of clothing. He added the use of sleeves allowed the Snuggie "to remain in place and keep the user warm while allowing the user to engage in certain activities requiring the use of their hands."

More so, Judge Barnett rejected the idea a Snuggie may also be similar in fashion to priestly vestments or scholastic robes which also use wide sleeves and a loose fit around the body. In his ruling, the judge argued that robes open from the front, and priestly vestments and scholastic robes have no opening on either side, so the role of a Snuggie as a garment is invalid.

California: Easy to Love, Impossible to Do Business In

California is beautiful.  Many parts have great weather.  There are a lot of smart people there and some good schools.  Both my kids live there right now, though it is really expensive given the state and local governments' propensity to take many steps to limit the supply of housing.

But it is simply impossible to do business in.  Every single legislative session brings a series of new time-consuming and expensive regulatory requirements.  Despite California having some of the best recreation spots in the world, we have systematically reduced our business in California by 50%, and I have a moratorium in place on accepting new business (I won't even look at RFP's and proposals to avoid being tempted.)  I wrote about this process a number of times, including here.

This week, Hans Bader covers this ground and more in his article about businesses fleeing California to places like Texas.

It does not surprise me that service industries, particularly those that provide high-margin services to the wealthy, stay in California -- service businesses have to be close to their customers.  But it always blows me away when I see anyone manufacturing in California.  Why?  Move over the border into Nevada or Arizona or Mexico and costs go down a lot without any real increase in logistics costs.  California does not even want you there -- I am convinced they achieve most of their environmental goals merely by chasing folks over the border, exporting these issues rather than solving them.

Diesel Emissions Cheating, Regulation, and the Crony State

One of my favorite correspondents, also the proprietor of the Finem Respice blog, sent me a note today about my article the other day about cheating on diesel emissions regulations.   The note covers a lot of ground but is well worth reading to understand the crony-regulatory state.  They begin by quoting me (yes, as I repeat so often, I understand that "they" is not grammatically correct here but we don't have a gender-neutral third person pronoun and so I use "they" and "their" as substitutes, until the SJW's start making me use ze or whatever.)

"My thinking was that the Cat, Cummins, and VW cheating incidents all demonstrated that automakers had hit a wall on diesel emissions compliance -- the regulations had gone beyond what automakers could comply with and still provide consumers with an acceptable level of performance."

Exactly. More importantly, the regulators KNEW it. I was researching energy shorts and had a ton of discussions with former regulatory types in the U.S. I was stunned to discover that there was widespread acknowledgement on the regulatory side that many regulations were impossible to comply with and so "compliance trump cards" were built into the system.

For instance, in Illinois you get favorable treatment as a potential government contractor if you "comply" with all sorts of insane progressive policy strictures. "Woman or minority owned business" or "small business owner", as an example. Even a small advantage in the contracting process for (for example) the State of Illinois puts you over the edge. Competitors without (for instance) the Woman or Minority Owned Business certification would have to underbid a certified applicant by 10-15% (it's all a complex points system) to just break even. It got so bad so quickly that the regs were revised to permit a de minimis ownership (1%). Of course, several regulatory lawyers quickly made a business out of offering minority or women equity "owners" who would take 1% for a fee (just absorb how backwards it is to be paying a fee to have a 1% equity partner) with very restrictive shareholder agreements. Then it became obvious that you'd get points for the "women" and "minority" categories BOTH if you had a black woman as a proxy 1% "owner." There was one woman who was a 1% owner of 320 firms.

Some of my favorites include environmental building requirements tied to government contract approval. The LEED certification is such a joke. There are a ton of "real" categories, like motion detecting lights, solar / thermal filtering windows, CO2 neutral engineering. But if you can't get enough of that, you can also squeeze in with points for "environmental education". For instance, a display in the lobby discussing the three solar panels on the roof, or with a pretty diagram of the building's heat pump system. You can end up getting a platinum LEED certification and still have the highest energy consumption density in the city of Chicago, as it turns out.

U.S. automakers have been just as bad. There's been a fuel computer "test mode" for emissions testing in every GM car since... whenever. Also, often the makers have gotten away with "fleet standards" where the MPG / emissions criteria are spread across the "fleet." Guess how powerful / "efficient" the cars that get sent to Hertz or Avis are.

Like so many other things in the crony capitalist / crudely protectionist United States, (e.g. banking prosecutions) foreign firms will get crucified for industry-wide practices.

Gee, I wonder if state-ownership of GM has been a factor in sudden acceleration / emissions prosecutions?

BTW, I wrote about the silliness of LEED certification here, among other places, after my local Bank of America branch got LEED certified, scoring many of their points by putting EV-only spaces (without a charger) in the fron of the building.  In a different post, I made this comparison:

I am not religious but am fascinated by the comparisons at times between religion and environmentalism.  Here is the LEED process applied to religion:

  • 1 point:  Buy indulgence for $25
  • 1 point:  Say 10 Our Fathers
  • 1 point:  Light candle in church
  • 3 points:  Behave well all the time, act charitably, never lie, etc.

It takes 3 points to get to heaven.  Which path do you chose?

As Predicted By Coyote Over a Year Ago, Other Car Manufacturers Have An Emissions Cheating Problem

Back in November of 2015 I wrote:

I would be stunned if the Volkswagen emissions cheating is limited to Volkswagen.  Volkswagen is not unique -- Cat and I think Cummins were busted a while back for the same thing.  US automakers don't have a lot of exposure to diesels (except for pickup trucks) but my guess is that something similar was ubiquitous.

My thinking was that the Cat, Cummins, and VW cheating incidents all demonstrated that automakers had hit a wall on diesel emissions compliance -- the regulations had gone beyond what automakers could comply with and still provide consumers with an acceptable level of performance.

So we have this:

U.S. environmental regulators accused Fiat Chrysler Automobiles NV of using software that allowed illegal emissions in diesel-powered vehicles, the latest broadside in an unprecedented government crackdown on auto makers for alleged pollution transgressions.

The Environmental Protection Agency, days before the end of the Obama administration, delivered a violation notice to Fiat Chrysler accusing the auto maker of using illegal software that allowed 104,000 recent diesel-powered Jeep Grand Cherokee sport utilities and Ram pickup trucks to spew toxic emissions beyond legal limits. The affected vehicles have model years ranging between 2014 and 2016.

Regulatory compliance can be a royal pain in the *ss, but I comply with everything I know about and can figure out in my own business.  There just is no percentage in cheating.  Where regulation has made my business untenable, such as in certain parts of California, I have closed the affected parts of the business.

So if I see no good reason to cheat in my own business when the rents for doing so would flow directly into my own pocket, how in the hell do middle managers on a salary with little or no share in the marginal profitability gains of the company convince themselves to take these risks?

When You Come Here, Please Don't Vote for the Same Sh*t That Ruined the Place You Are Leaving

From the WSJ:

Americans are leaving the costliest metro areas for more affordable parts of the country at a faster rate than they are being replaced, according to an analysis of census data, reflecting the impact of housing costs on domestic migration patterns.

Those mostly likely to move from expensive to inexpensive metro areas were at the lower end of the income scale, under the age of 40 and without a bachelor’s degree, the analysis by home-tracker Trulia found.

Looking at census migration patterns across the U.S. from 2010 to 2014, Trulia analyzed movement between the 10 most expensive metro areas—including all of coastal California, New York City and Miami—and the next 90 priciest metro areas, based on the percentage of income needed to pay a monthly mortgage on a typical home.

I can't tell you now many people I know here in Arizona that tell horror stories about California and how they had to get out, and then, almost in the same breath, complain that the only problem with Arizona is that it does not have all the laws in place that made California unlivable in the first place.  The will say, for example, they left California for Arizona because homes here are so much more affordable, and then complain that Phoenix doesn't have tight enough zoning, or has no open space requirements, or has no affordability set-asides, or whatever.  I am amazed by how many otherwise smart people cannot make connections between policy choices and outcomes, preferring instead to judge regulatory decisions solely on their stated intentions, rather than their actual effects.

What Uber Drivers Seeking Minimum Wage Are Missing

Via Engadget:

Uber drivers have won an employment tribunal case in the UK, making them entitled to holiday pay, paid rest breaks and the National Minimum Wage. The ride-hailing company has long argued that its chauffeurs are self-employed contractors, not employees; the tribunal disagreed, however, setting a major precedent for the company and its relationship with workers. GMB, the union for professional drivers in the UK, initiated the two "test cases" in July. It's described the decision as a "monumental victory" that will impact "over 30,000 drivers" in England and Wales.

"Uber drivers and thousands of others caught in the bogus self-employment trap will now enjoy the same rights as employees," Maria Ludkin, GMB's legal director said. "This outcome will be good for passengers too. Properly rewarded drivers are the same side of the coin as drivers who are properly licensed and driving well maintained and insured vehicles."

This misses a couple of things

  1. This might well kill Uber, such that the only "victory" here is that drivers have one less employment option and choice of work style.  The latter is perhaps the most important -- why does every single job have to be punch-in-punch-out with standard benefits and holidays and work hours and work rules?  Why is there no room for a diversity of work experiences from which to choose?
  2. One of the things that many Uber drivers like about Uber is that there are no set work hours or productivity expectations.  Well, that goes out the window with these rules.  Today, if Uber pays drivers only based on what they work, they don't really care how hard they work or how many jobs they take or where they choose to cruise or even if they choose to cruise at unproductive hours, like 5AM.  Currently, if you want to drive back and forth on a country lane at 4:30AM waiting for a fare, you can go for it -- you are taking the risk.  But if the company is paying minimum wage per hour, everything changes.  Suddenly they must now demand minimum productivity expectations, which will include limits on working in unproductive locations or at unproductive hours.  The company will start to rank drivers and cut the lowest productivity / lowest activity ones.

I went into these issues in more depth here.