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FOIA Number: 2016-0531-F
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This is not a textual record. This is used as an
administrative marker by the William J. Clinton
Presidential Library Staff.
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Clinton Presidential Records
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Minimum Wage - General
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S
22
4
9
1
memor
- gream
January 18, 1995
To:
NEC Members
From:
Gene Sperling
Subject:
Minimum Wage
Attached is a draft of a minimum wage memo that would go to the President. It was
drafted with the assistance of Alan Krueger at Labor. Please call me or provide written
comments. If possible, it would be optimal to get comments by the close of business
Thursday. At that point, the memo will be given to Leon Panetta for approval before going
to the President. Please give consideration to the issue of when this decision should be
publicly announced, as that remains somewhat unresolved.
Copy 3
On the minimum wage, there are three decisions that must be made: 1) whether to
support a minimum wage increase; 2) if so, how much to increase it; and, 3) when to
announce any decision. After several meetings and significant consultation with the Hill, the
NEC has come to a single recommendation on the first two issues, while timing still
represents a fairly open issue that must be resolved.
I. BRIEF BACKGROUND: The Federal minimum wage is currently $4.25 an hour. The
minimum wage had been frozen at a nominal level of $3.35 per hour from 1981 to 1990. In
1990, Congress voted to raise the minimum wage by 90 cents -- in two 45 cents stages --
from $3.35 to $3.80 in 1990, and from $3.80 to $4.25 in 1991. The real value of the
minimum wage is now above its value from 1988 to 1990, but is below its value for every
other year going back to 1955.
The minimum wage has two important purposes. First, the minimum wage raises the
bargaining power for low-wage workers who are not represented by a union and have low
skills. The minimum wage may also have a "ripple" effect, whereby wages of workers
earning somewhat more than the minimum wage are increased to maintain internal wage
standards. As a result, the minimum wage helps many poor and moderate-income families.
The second purpose of the minimum wage is that it induces firms to train their workers and
take a high-value added/low turnover strategy -- it blocks the so called "low road" strategy
of high turnover, high vacancies, continual recruitment, and low training.
II. EMPLOYMENT AND DISTRIBUTIONAL EFFECTS: The potential effect of a
minimum wage increase on employment has been the principal argument raised in opposition
to such an increase. While the potential employment effects of a minimum wage increase
surely need to be considered, the weight of the empirical evidence suggests that the effect of
a moderate raise from its current level is likely to be negligible. This conclusion is based on
a variety of recent studies employing different methodologies; the studies examined the
effects of raises in the federal minimum wage both across the nation and in particular states,
as well as the effects of raising state minimum wages above the federal level.
For example, studies of the federal minimum wage examined the effects of a 90 cent
increase in two increments over a two-year period. One of the state studies examined the
effects of New Jersey recently raising its state minimum wage by 80 cents, from $4.25 an
hour to $5.05 an hour; another examined the effects of California increasing its minimum
wage 90 cents from $3.35 an hour in 1987 to $4.25 an hour in 1988 (which would equal
$5.20 in 1993 dollars). All of these studies found that the minimum wage increases did not
reduce employment opportunities. (These studies were conducted by David Card, Alan
Krueger, Larry Katz.)
An important point to note about the minimum wage is that while there may be some
who are teens or just providing a supplement to a family living comfortably, most are people
who are either sole earners for their families or are providing vital support to help maintain a
middle income existence. Indeed, 36% of minimum wage workers are the sole earner in their
family, while the average minimum wage worker provides nearly 50% of the income in their
household.
1
While increasing the minimum wage does help many people at the bottom of the
economic ladder it is also, as mentioned above, important for families where a second income
is keeping them barely in the middle class. For example, 43% of minimum wage earners are
in the bottom 20% of income, 45% are in the middle 60% -- and only 12% are in the top
20%. Only about one-third of minimum wage earners are teens while two-thirds are adults.
Some argue against the minimum wage because it is not as targeted as the EITC toward
working poor families. Others find it to be a positive point that the an increase in the
minimum wage would have such a positive effect on both working poor and middle income
households.
III. RECOMMENDATION
NEC Recommendation: The general recommendation from your economic advisors as well
as Leon Panetta, George Stephanopoulos and Pat Griffin was to call for a 75 cent increase
over two years -- 50 cents the first year and 25 cents the second year -- bringing the
minimum wage to a total of $5.00. The rationale for the two-stage increase to 75 cents is
based on both our best estimate of what is sound economically, as well as representing a
reasonable political starting point for a minimum wage proposal. From a political
perspective, the most important single issue is the degree of support we can gather from
Congressional Democrats for our proposal.
a) Economic Rationale: As mentioned above, the economic literature demonstrates that there
is good evidence that a minimum wage increase under 90 cents does not have negative
employment consequences. While a $1 increase may still be in the ball park, our feeling is
that we would be on stronger footing if our increase was within the levels where the recent
economic studies by Katz and Krueger showed no negative employment impact. Furthermore,
at $5.00, the national minimum wage would still be below the highest state minimum wage
levels -- New Jersey at $5.05 and Hawaii at $5.25.
There was also agreement among most of the economists on the NEC that 75 cents in
one year might be too steep and that we were on sounder ground dividing it between 50 cents
and 25 cent. Furthermore, a 50 cent increase immediately puts the minimum wage level back
up to where it was when the last minimum wage increase passed in 1991. The additional 25
cents increase puts the number up to an even $5.00. While some may have found a 75 cents
minimum wage increase to be small by historical standards, the minimum wage increase you
call for must be also be considered in the context of the dramatic increase you proposed and
signed for the EITC.
b) Political Rationale: As mentioned above, you must consider your recommendation both in
terms of the statement it makes and the degree your proposal increases the chance of passage.
A higher minimum wage increase is likely to be more satisfactory to those who most support
the minimum wage increase -- organized labor and some progressive Democrats. The AFL-
CIO calls for a $1.50 increase -- with three 50 cent increase plus indexing. Sabo and seven
Democratic co-sponsors called last year for an increase in the minimum wage to $6.50 while
denying employers a tax deduction for excessive compensation (more than 25 times the
lowest compensation paid any other employee). Kennedy also supports a minimum wage
increase close to the AFL-CIO recommendation. On the other hand, several Democrats in the
2
Senate have expressed some reservations about proposing a minimum wage increase, and
would feel better if we kept the increase to a lower level.
Advocates who argue for a higher number increase state that since the chance of
passage of the minimum wage with the present Congress is considered small by some, the
proposal should at least accomplish the political goal of being satisfactory to labor. An
argument for going for a lower number -- 50 cents -- is that it would be small enough to
lessen intense opposition from some business groups while responding to the concerns of
some Democrats who feels that an increase in the minimum wage goes against the "new
Democrat" message. Furthermore, Pat Griffin and others felt that a 50 cent proposal had the
best chance of passage.
We felt that a two stage 75 cent increase without indexing made the most sense from
a political perspective as well as an economic perspective. First, while a 75 cent increase
would be unlikely to satisfy organized labor and the most ardent supporters of the minimum
wage, it would meet your campaign promise of making up the lost value due to inflation
since the last minimum wage increase while adding 25 cents to spare, and it seems to be a
level that could hold most Democrats in Congress together. Finally, to the degree that a one-
time 50 cent increase represents the proposal with the best chance of passage, a 75 cent
proposal gives us some negotiating room.
IV. INDEXING: The proposal that was considered for indexing would tie the minimum
wage to the wages of the median worker or the 25th percentile worker. These standards are
preferable to indexing to the CPI because they would avoid contributing to an inflationary
cycle that could result if the CPI was used. The arguments for indexing are that it would
protect the value of the minimum wage without making Congress continually have to seek
new legislation. Politically, Republicans who oppose indexing would be put in the position of
having to support indexing the capital gains tax cut for well-off Americans while opposing
indexing for wages for workers at the lowest wage levels.
Nonetheless, the NEC and White House staff felt that a 75 cent increase was adequate
without indexing. The arguments against it were the low chance of passage, the risk that it
would be perceived as inflationary (even with our attempts to index to a measure other than
the CPI), and the concern that the perceived benefit to workers would not be large enough to
overcome the political downsides. Furthermore, even strong advocates of a stronger
minimum wage increase might not support an indexing proposal because they would fear that
indexing after only a 50 cent or 75 cent increase would lock them into too low of a level for
the future.
V. ARGUMENTS AGAINST NEC RECOMMENDATION: Despite the fact that the NEC
was virtually unanimous it its recommendation, we wanted to give you "cons" -- the
opposing arguments you are likely to hear for either not increasing the minimum wage or, on
the other hand, calling for a larger increase.
Hurts New Democrat Message: Some Congressional Democrats believe that this
works against the "new Democrat" message -- as an increase in the minimum wage is
perceived as a traditional Democratic/labor agenda item and is likely to be vigorously
3
opposed by small business. Arguing against this concern is the fact that while there
will be intense small business opposition, polls consistently show that 70% of
Americans support an increase in minimum wage. Other Democrats concerned about
the minimum wage have argued that if we do propose a minimum wage that we
package it together with other policies designed to increase wages for working
Americans.
Will Create Opposition without Creating Strong Support: A 75 cent increase is
likely to run the risk of stirring strong small business opposition without generating
strong support from organized labor which is likely to feel it is far too low. Arguing
against this is the degree that we can work with Democrats to work together to draw a
line on the side of working Americans against Congressman Armey and others who
strongly oppose this popular issue.
Unfunded Mandates: An increase in the minimum wage does affect some state and
local governments who do pay the minimum wage for some jobs and therefore could
claim that this is an unfunded mandate.
VI: TIMING: The main timing question is whether or not to announce your minimum wage
decision in the State of the Union.
Pro:
The State of the Union allows you to directly make your case over the heads of the
special interests to the general public on an issue where the general public is with us.
The State of the Union allows you to blend the minimum wage in with an overall
strategy to raise incomes for working people.
There has been considerable speculation about how we are going to decide this issue
-- waiting past the State of the Union continues that process -- going earlier may
distract from the build up to the State of the Union.
Con:
A minimum wage increase in the State of the Union might be treated as a major
news item that could distract from the basic messages in the State of the Union.
There is still time to announce it prior to the State of the Union (though it would
have to be almost immediately) or after it as a way of keeping our economic story
going or building up to rewarding work for the welfare working session.
The general -- though not firm -- recommendation was to go with the minimum
wage increase in the State of the Union.
4
01-31-95 11:08AM
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memmer worse
- quenn
Edward M. Kennedy
U.S. Senator for Massachusetts
315 Russell Senate Office Building
Washington, D.C. 20510
202/224-4543
202/224-2417 FAX
FAX TRANSMISSION
FOR IMMEDIATE DELIVERY
JAN 31, 11 AM -
DATE/TIME:
TO:
HAROLD ICKES
456-1121
RECEIVING FAX#:
SENATOR KENNEDY
FROM:
NUMBER OF PAGES
INCLUDING COVER:
COMMENTS:
01-31-95 11:08AM
TO 94561121
P002/010
THE MINIMUM WAGE
The starting point for the effort to increase the minimum wage should be an
Administration proposal that calls for a 50-cent increase in 1995 and a 50-
cent increase in 1996 to bring the wage up to $5.25.
This is just the beginning of the process. Inevitably we will have to
compromise if we want to get a bill passed. If we start at $5.00, we're
going to end up with an increase so low that we will not be able to
claim it in the 1996 elections as a meaningful victory for working
people.
It is important that we start with a proposal that will appeal to and
energize the Democratic party's base, especially labor. Labor has
been willing to move some distance from where they would like to be
for the sake of consensus on a number that a broader spectrum of
Democrats can support, but we will lose them with a proposal that
limits the second-year increase to $.25.
An increase to just $5.00 over two years would do little more, in real
terms, than restore the minimum wage to the level that Bush agreed
to in 1989. With the Republicans in control of Congress, it would be a
real accomplishment if we could pass a bill at or near that level, but to
show that we are really on the side of working families, the
Administration needs to send a clear message in the bill it proposes
that unlike the Republicans, we believe in and support the principle
that the minimum wage should be more than a poverty wage.
The Real Minimum Wage
1960-1995
P003/010
1994 Dollars
7
6.5
$6.29
6
$5.82
TO 94561121
5.5
5
4.5
4
3.5
1960
1965
1970
1975
1980
1985
1990
1995
01-31-95 11:08AM
NOTE: Minimum wage is in 1994 CPI-U-XI Dollars. The inflation rate for 1995 is assumed to he 1.2 percent.
Minimum Wage Work No Longer Lifts
Families Out of Poverty
Annual Earnings at the Minimum Wage as a Percentage of the Poverty Line: 1959-1995
P004/010
Percent of Poverty Line
120
110
100
TO 94561121
90
80
70
60
1960
1965
1970
1975
1980
1985
1990
1995
01-31-95 11:08AM
Note: Annual earnings for a family of three with one full-time, year-round minimum wage worker as a percentage of
the three-person poverty line. The three-person poverty line for 1994 and 1995 are from Congressional Budget
Office projections.
POVERTY LINES
1967 - 1994
P005/010
Annual Income-Thousands
14
$11 809
12
Poverty Line-Family of 3
10
$8,840
TO 94561121
8
X
Annual Earnings at Minimum Wage
6
4
2
0
1967
1970
1975
1980
1985
1990
1994
01-31-95 11:08AM
Note: 1994 poverty line is est.
MINIMUM WAGE AND CONSUMER PRICES
1967 - 1994
P006/010
INDEX 1967 = 100
500
400
CONSUMER PRICES (CPI-W)
TO 94561121
300
MINIMUM WAGE
200
100
0
1967
1970
1975
1980
1985
1990
1994
01-31-95 11:08AM
CPI ANNUAL AVERAGES. 1994 IS EST.
Who was Affected by the Last Minimum Wage Increase
Distribution by Family Earnings
P007/010
Percent
50
44.9
43.2
40
TO 94561121
30
20
11.9
10
0
Bottom 20%
Middle 60%
Top 20%
Less than $275 per week
From $276 0 $962 per week
More than $963 per week
01-31-95 11:08AM
Source: Card and Krueger (1995)
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RECENT STUDIES FINDING NO DECREASE IN EMPLOYMENT
FROM INCREASES IN THE MINIMUM WAGE
David Card and Alan Krueger, Princeton University (1994)
Studied effects on employment in the fast food industry in New Jersey resulting
from 1992 increase in the state minimum wage from $4.25 to $5.05. (This $.80
increase in 1982 followed a 1990 increase from $3.35 to $3.80 and a 1991
increase from $3.80 to $4.25.) Compared New Jersey to Eastern
Pennsylvania, which did not increase its minimum wage beyond $4.25.
Found no negative impact on employment; some evidence of positive impact on
employment.
Walter Wessels, North Carolina State (1994)
Studied effects on restaurant employment across states resulting from 1990
and 1991 increases in the federal minimum wage from $3.35 to $4.25.
Found positive impact on employment.
Lawrence Katz, Harvard University, and Alan Krueger, Princeton
University (1992)
Studied effects on employment in the fast food industry in Texas of 1990 and
1991 increases in federal minimum wage from $3.35 to $4.25.
Found no significant impact on employment.
David Card, Princeton University (1992)
Studied effects on teenage employment across 50 states resulting from 1991
increase in the federal minimum wage from $3.80 to $4.25.
Found no significant impact on teenage employment in low wage as well as
high wage states.
01-31-95 11:08AM
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Kevin Lang, Boston University (1995)
Studied effects of 1990 and 1991 increases in the federal minimum wage
across states on restaurant employment.
Found no significant employment effects
David Card, Princeton University (1992)
Studied changes in retail trade and teenage employment in California resulting
from 1988 increase in the state minimum wage from $3.35 to $4.25. Compared
California to other comparison states which had similar employment trends prior
to 1988 but did not increase their state's minimum wage.
Found no significant impact on teenage employment or overall employment in
retail trade.
01-31-95 11:08AM
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PUBLIC SUPPORT FOR INCREASING THE MINIMUM WAGE
Public opinion polls continually show considerable support for a minimum wage hike.
A Time/CNN poll conducted January 25-26 found that 78% favor increasing the
minimum wage and 20% oppose it.
An NBC poll conducted January 25 found that 78% favor increasing the
minimum wage; 18% oppose it.
Another recent Wall Street Journal/NBC New poll found that increasing the
minimum wage is favored by a margin of 75% to 20%. A breakout of support
showed that support among women at 78%, support among blacks at 77%, and
support among young adults ages 18 to 34 at 85%. These are the groups most
affected by an increase in the minimum wage.
Other polls have found that a majority of Republicans as well as Democrats
favor a minimum wage increase.
A majority of the public supports a minimum wage hike even if they are first told
that a minimum wage rise will cost some people their jobs.
08/31/95
10:00
202 456 6797
CHIEF OF STAFF
002
new
great
THE WHITE HOUSE
WASHINGTON
August 31, 1995
MEMORANDUM FOR ERSKINE BOWLES
HAROLD ICKES
BRUCE LINDSEY
FROM:
JENNIFER O'CONNOR
7mg
SUBJECT:
Proposed Minimum Wage Executive Order
Secretary Reich forwarded the attached proposed Executive Order (E.O.) which would require
federal contractors to pay the President's proposed new minimum wage of $5.15 per hour. In
his transmittal memorandum, he outlined the advantages and disadvantages of his proposal.
The advantage is that it would demonstrate the President's commitment to increasing working
families' wages. The disadvantages Reich discusses are twofold: 1) the policy rationale for
such an E. O. is that it would increase overall economic efficiency; yet this finding is weak
and not supported by the Department of Labor's economists; 2) the legal justification is also
that the E.O. would increase economic efficiency; since the economists do not support such a
finding, the E.O. is particularly vulnerable to a court challenge.
Also attached are memoranda from the following White House offices based on a quick
review of the proposed E.O.: OMB, NEC, DPC, CEA, Vice President's Office, White House
Counsel, Office of Legal Counsel at Department of Justice (OLC). None of these offices
reported any positive reaction to the proposal. The criticisms they point out include: 1) it will
not increase economic efficiency as claimed and because of this Administration economists
will not support it; 2) it will make contractors stop doing business with the government which
will drive up the government's, especially the Defense Department's, costs; 3) it will reduce
employment among federal contractors; 4) there is no legal justification for the E.O. since it
will not increase economic efficiency; 5) it will disproportionately hurt small and minority
owned businesses; 6) it could add $2 billion to our budget; 7) it is inconsistent with the
National Performance Review goals of reinventing federal procurement; 8) it is inconsistent
with a reported conversation the President had with the Vice President shortly before vacation
in which he promised not to do anything further to undermine procurement reform.
The OLC memorandum includes suggestions for how to change the draft E.O. such that it
would be legally defensible and supportable. It's suggested changes require the President to
be comfortable claiming that the E.O. would increase overall economic efficiency (even if his
economists don't agree).
2
08/31/95
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CHIEF OF STAFF
4.
003
MEMORANDUM
DATE:
AUGUST 29, 1995
SUBJECT:
MINIMUM WAGE EXECUTIVE ORDERS
Summary
As requested, we have prepared a draft executive order that would prohibit
government agencies from doing business with federal contractors that pay below $5.15 per
hour.
Attached to this memorandum are: (1) the draft executive order relating to federal
contractors and the minimum wage; (2) the press packet released by the White House on
February 3, 1995 accompanying your legislative proposal to increase the minimum wage;
(3) an excerpt on the minimum wage from your May 19, 1995 speech for the 75th
Anniversary celebration of the Labor Department's Women's Bureau; and (4) a legislative
background brief describing how members of Congress voted when the minimum wage was
last increased in 1989.
Message
*
The nation's leading economic problems are stagnant wages and declining real
incomes for working families.
*
The federal government should not contribute to the wage and income problems
facing working families.
#
The President has presented Congress with a legislative proposal to increase the
minimum wage 90 cents from its current $4.25 per hour. This initiative would assure that
people who work hard and play by the rules receive a living wage of $5.15 per hour.
Congress has refused to act.
+
If Congress won't act, President Clinton will. The President will use his executive
authority to guarantee a living wage --- $5.15 per hour --- for everyone working in firms that
do business with the federal government.
* At a minimum, the federal government should not do business with corporations
that pay workers less than a living wage.
1
3
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Discussion
I.
Increasing the Minimum Wage for Employees of Federal Contractors
A. How the Executive Order Would Work
This draft executive order would establish that "[i]t is the policy of the executive
branch in procuring goods and services that
federal agencies shall contract with
companies that pay their employees no less than $5.15 an hour." This policy would be
enforced in two ways. First, every government contract entered into after the effective date
of the executive order (the date you sign it) would include a clause in which the contractor
agrees to pay a minimum wage of $5.15 per hour. Second, any contractor that pays below
$5.15 could have all of its government contracts terminated. The executive order does not
provide for any exceptions.
The Secretary of Labor would enforce and administer the order. If the Secretary
finds that a contractor is not paying a minimum wage of $5.15, he would transmit a finding
to the heads of contracting agencies or departments who, in turn, must terminate all contracts
with the contractor unless the contractor pays all of its employees at least $5.15 per hour
within a time specified by the Secretary.
Like the "striker replacement" executive order, this draft order is premised on the
authority delegated to the President by Congress in the Federal Property and Administrative
Services Act of 1949 "to provide for the Government an economical and efficient system for
procurement and supply." Some economic theories suggest that increasing the wages of
low-wage workers will result in an increase in those workers' productivity and, in turn, to
increases in efficiency that will offset the cost to federal contractors of the higher wages.
Thus, the federal government would, according to these theories, procure its goods and
services from more efficient, more economical federal contractors.
B. Possible Variations in this Executive Order
(1) Use CEO Pay as a Trigger: The executive order could be made to apply only to
federal contractors that pay their chief executive officer (or other top executive) more than
100 times the lowest wage paid to their employees. This approach would dramatize the
growing wage disparity in our economy. On the other hand, it undermines the central moral
argument which supports raising the minimum wage: every worker is entitled to a living
wage, regardless of who employs them or how much others in their organization earn.
Further, using a CEO pay trigger may weaken the nexus to economical and efficient
procurement, the legal prerequisite for presidential action of this type.
(2) Use Profits as a Trigger: The executive order could also be made to apply only to
federal contractors that earn above average profits. This approach would juxtapose the huge
economic returns being yielded by capital (e.g., the soaring stock market) with the decline in
2
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005
middle and working class family incomes. On the other hand, it suffers from both of the
infirmities outlined above (i.e., undermining the moral argument and attenuating the
procurement nexus), plus it would require an administrative apparatus to decipher each
contractors' profits.
C. Arguments For and Against the Executive Order
(1) Pro: This draft executive order will demonstrate your commitment to increasing
working families' wages (particularly for the lowest wage workers) and distinguish you from
a congressional majority that refuses to even consider your legislative proposal to increase the
minimum wage. The minimum wage has fallen 27% in real terms since 1979 and, without
adjustment, will fall to its lowest real value in forty years in 1996. It is arguable that the
growing disparity in family incomes and wealth is the most pressing issue for middle and
working class families. This executive order would make your moral position clear --- you
will not allow the federal government to do business with any company that contributes to
declining real wages for low-wage workers.
(2) Con: This executive order is premised entirely on economic theory, much of
which will be difficult to explain in simple terms to the public, that is outside the mainstream
of scholarly economic thought; accordingly, it is unclear whether reliable third parties will
validate the arguments set forth in the preamble. Further, it is unclear whether theory alone
is adequate to support an executive order. Even accepting the theories as true, it is also
unclear whether the nexus between a minimum wage increase and efficient and economical
procurement is sufficiently close to pass judicial scrutiny.
Preliminary research has not disclosed any executive order, outside the context of
President Roosevelt's extraordinary powers during World War II, that directly sets wages for
employees of federal contractors; that is, this executive order could be unprecedented. The
closest analogy may be President Carter's Executive Order No. 12092 which required federal
contractors to certify that they were in compliance with voluntary wage and price guidelines
established by the President's Council on Wage and Price Stability. Finally, this executive
order could lend support to attacks that President Clinton and the Democrats want big
government. A slippery slope argument is easily made: "If Bill Clinton can require federal
contractors to pay a higher minimum wage, is he going to require a pay increase for all
workers? Will he require all federal contractors to follow his health plan? To finance
abortions through their health plans?"
(3) Likely Constituency Responses: The labor movement and other advocates for low-
wage workers will likely support the executive order. Federal contractor groups and
representatives of the business community (e.g., the Chamber of Commerce, the National
Association of Manufacturers), as well as the Republican congressional majority, will oppose
the executive order. Since a substantially larger group of federal contractors will be affected,
it is reasonable to expect a much more vigorous negative response from the business
community than the striker replacement executive order evoked. Litigation and congressional
3
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CHIEF OF STAFF
006
action (e.g., efforts to overturn the executive order, appropriations riders blocking
enforcement of the order) will likely result.
D. The EO's Costs Are Difficult to Estimate
A very rough estimate of the costs of the executive order suggests that it will cost
federal contractors not more than $2.1 billion per year. Please note, however, that the data
needed to make a precise estimate of the cost of the minimum wage executive order are not
available. Estimates of worker wages and the number of workers involved do, however,
permit this crude projection.
The assumptions employed to reach the above estimate likely bias the estimate
upward. First, many federal contractors (e.g., construction, service) are required to pay a
prevailing wage above the minimum wage by the Davis-Bacon Act and the Service Contract
Act. Second, federal contractors' firms tend to be larger and, as a result, may have a
smaller percentage of minimum wage workers than firms in the economy as a whole.
Accordingly, the total number of workers affected by the executive order is probably smaller
than that assumed in the calculations to reach the above estimate. Certain structural changes
to the executive order (e.g., adding a threshold, narrowing the definition of "federal
contractor") would further reduce the number of workers covered and the commensurate
costs.
On the other hand, this estimate does not take into account any "ripple" effect that
minimum wage increase might have on the wages of workers that currently earn $5.15 or
slightly more. The ripple effect would tend to increase the costs of the executive order to
federal contractors.
II.
Two Approaches to Announcing the Executive Order
Should you decide to proceed, you should consider two approaches to announcing the
executive order.
You could announce the executive orders in a speech --- such as your forthcoming
address to the Alameda Central Labor Council's Labor Day Picnic --- or radio address and
then sign the order soon before, the same day, or soon thereafter. This approach gives the
White House control over timing and press arrangements. It also provides an opportunity to
brief potential supporters without tipping off opponents. On the other hand, it could inspire
congressional retaliation in the appropriations/reconciliation/debt ceiling process.
Or, you could announce in a speech or radio address that you are giving Congress a
90-day (or until Christmas or New Year's Eve) deadline before which it must enact your
proposed 90-cent increase in the statutory minimum wage. If it does not act by the time the
deadline is reached, you would issue the executive order. This approach puts the onus
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squarely on Congress' shoulders. It also allows you to wield all of your available authority
to keep the minimum wage from falling to its lowest real value in 40 years (which it will in
1996 if there is no adjustment). On the other hand, this approach allows opponents time to
organize and, possibly, to seek judicial intervention. It also offers words when bold action
might send a stronger and clearer message.
Attachments
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DRAFT 4
August 25, 1995
ENSURING THE ECONOMICAL AND EFFICIENT ADMINISTRATION AND
COMPLETION OF FEDERAL GOVERNMENT CONTRACTS
PREAMBLE
Some economic theories suggest that requiring federal
contractors to pay a higher minimum wage will lead to increases
in efficiency that will offset the cost to federal contractors of
the higher wage. The minimum wage has fallen 27% in real terms
since 1979 and, without adjustment, will fall to its lowest real
value in forty years at the end of 1996. Meanwhile, labor
productivity has increased 17% since 1979.
These theories suggest that the productivity of low-wage
workers is depressed when the minimum wage falls significantly in
real terms. These conditions can lead to greater levels of
"shirking" (i.e., reduced efforts by workers), higher turnover,
lower morale, and longer periods in which needed jobs remain
unfilled. Raising the minimum wage may lead to efficiency gains
among federal contractors that employ low-wage workers by
reducing shirking, lowering turnover, increasing morale, and
reducing the periods of time during which needed jobs remain
unfilled. In sum, productivity is lower when workers are paid an
obsolete minimum wage and, as a result, the federal government
receives lower quality, less reliable, and less timely goods for
each taxpayer dollar. By paying a higher wage to low-wage
workers, federal contractors will increase worker productivity.
The federal government will procure its goods and services from
more efficient, more economical federal contractors.
The market may not address this problem on its own. The
problems of turnover, shirking, low morale, and extended job-slot
vacancies likely result from a minimum wage which is too low to
attract new workers and retain incumbent workers. However,
employers cannot lure a new worker into a particular job with a
higher wage without giving everyone else in that job a pay
increase. Thus, in the absence of a requirement that they pay a
higher wage, employers choose lower levels of employment and
output rather than increasing the wages paid to all of their low-
wage workers.
NOW, THEREFORE, to ensure the economical and efficient
administration and completion of Federal Government contracts,
and by the authority invested in me as President by the
Constitution and the laws of the United States of America,
including 40 U.S.C. 471 and 486(a) and 3 U.S.C. 301, it is hereby
ordered as follows:
Section 1: It is the policy of the executive branch in procuring
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goods and services that, to ensure the economical and efficient
administration and completion of Federal Government contracts,
Federal agencies shall contract only with companies that pay
their employees no less than $5.15 per hour of work. All
Government contracting agencies shall include in every Government
contract hereafter entered into the following provision:
"During the course of the contract the contractor agrees
that all employees of the contractor will be paid no less
than $5.15 an hour."
Sec. 2. (a) The Secretary of Labor ("Secretary") may investigate
any Federal contractor to determine whether the contractor is
paying any of its employees less than $5.15 per hour of work.
(b) The Secretary shall receive and may investigate
complaints that the contractor is paying any employee less than
$5.15 per hour of work.
(c) The Secretary may hold such hearings, public or
private, as he or she deems advisable, to determine whether any
contractor is paying any employee less than $5.15 per hour of
work.
Sec. 3. (a) When the Secretary determines that a contractor has
paid any employee less than $5.15 per hour of work, the Secretary
may make a finding that it is appropriate to terminate the
contract for convenience. The Secretary shall transmit the
finding to the head of any department or agency that contracts
with the contractor. All Government contracts with the
contractor shall be immediately terminated unless the contractor
commences within a time specified by the Secretary to pay all of
its employees no less than $5.15 per hour of work.
(b) Each contracting agency shall cooperate with he
Secretary and provide such information and assistance as the
Secretary may require in the performance of the Secretary's
functions under this order.
Sec. 4. (a) The Secretary shall be responsible for the
administration and enforcement of this order. The Secretary may
adopt such rules and regulations and issue such orders as may be
deemed necessary and appropriate to achieve the purposes of this
order.
(b) The Secretary may delegate any function or duty of the
Secretary under this order to any officer in the Department of
Labor or to any other officer in the executive branch of the
Government, with the consent of the head of the department or
agency in which that officer serves.
Sec. 5. This order is not intended, and should not be construed,
to create any right or benefit, substantive or procedural,
enforceable at law by a party against the United States, its
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agencies, its officers, or its employees. The order is not
intended, however, to preclude judicial review of final agency
decisions in accordance with the Administrative Procedure Act, 5
U.S.C. 701 et seq.
Sec. 6. This order is effective immediately.
THE WHITE HOUSE
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EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, D.C. 20500
THE CHAIRMAN
August 30, 1995
95
AUG
30
P8
:
20
MEMORANDUM FOR THE PRESIDENT
FROM:
JOSEPH STIGLITZ
MARTIN BAILY
for
Subject:
Proposed Executive Order Regarding Minimum Wage
Although we strongly support the Administration's proposal to
raise the minimum wage, we have serious reservations about the
proposed Executive Order on minimum wages for federal contractors.
There is, to our knowledge, no substantive body of literature
to support the proposition stated in the preamble that
requiring federal contractors to pay a higher minimum wage
will lead to increases in efficiency sufficient to offset the
cost to federal contractors of the higher wage. Most of the
economic literature has either focused on low wage sectors,
like restaurants, or discussed effects of an across the board
increase in the minimum wage.
More generally, the effects of an increase in wages mandated
in one sector of the economy (here the federal contracting
sector) may be far different from those of an across the board
increase in wages.
Most economists would argue that if federal contractors' costs
would have been lowered by paying higher wages, they would
have already done SO. Imposing additional constraints on
contractors would normally be expected to increase total
costs. (The preamble does not contain any refutation of this
argument.)
The magnitude of the increased costs may be significantly
greater than the direct costs associated with increasing wages
of workers at or near the minimum wage. The executive order
will make it less attractive for firms to bid on government
contracts (since it will raise costs on all production, not
just on production for the government), and with fewer firms
bidding, costs to the government will rise. More generally,
the executive order is likely (if actively enforced) to
interfere seriously with our efforts to reform government
procurement policy, to make government procurement more
efficient and less costly.
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- 2 -
O
There is some chance that the increased minimum wage will
reduce employment among federal contractors--even under
conditions in which an across the board increase in the
minimum wage would not. Federal contractors could simply
substitute high-quality high wage workers. Such policies
could exert downward pressure on wages in other sectors of the
economy.
There are a further set of technical issues not addressed by
the executive order. Will contractors be responsible for insuring
that subcontractors pay the $5.15 minimum wage? If not, this is an
easy way for contractors to avoid the force of the executive order.
But if contractors are responsible for enforcing minimum wages on
subcontractors, it may impose significant economic costs. Each
contractor will have to review the wage policies of all of its
subcontractors (and its subcontractors of their subcontractors).
For some, the share of federal business may be sufficiently small
that they will be unwilling to revise their wage policy,
necessitating entering into new contractual arrangements,
presumably at greater costs. And what about products purchased on
the market: does the contractor have to make sure that each
product is produced by a manufacturer who pays the $5.15 wage?
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AUG-30-95 18.26 FROM:OMB DIRECTOR
ID:
PAGE
2/3
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
THE DEPUTY DIRECTOR
August 30, 1995
MEMORANDUM FOR HAROLD ICKES
FROM:
Jack Lew
a
SUBJECT: Minimum Wage Executive Order
This afternoon I received a copy of the draft executive order that would require all
federal contractors to pay the proposed new minimum wage of $5.15 per hour. The following
comments reflect our quick review. I have pulled together comments from Steve Kelman, Ken
Apfel's shop and Bob Damus, our general counsel. Without addressing the merits of a
statutory minimum wage increase, we think it would be a mistake to implement a minimum
wage increase applicable to federal procurement only.
(1)
Required finding is problemaric
As a legal matter, any procurement-related Executive Order would need to be justified
l
on the rationale that it promotes "economy and efficiency" in procurement. While it might be
possible to identify a theoretical study that shows that improved morale increases efficiency,
the common sense case would be difficult to make. There is a risk that the result would
expose us to significant ridicule, i.c., that we think you promote economy and efficiency by
spending more money and paying higher prices than others.
(2)
Differential minimum wage would disrupt Federal procurement
Creating a differential minimum wage, which is higher for federal contractors than for
all other employers, would cause many existing government contractors who also sell in the
commercial marketplace to withdraw from government business. It is unlikely that many of
these employers would be willing to disturb their existing wage structure (where a minimum
wage increase would produce ripple effects on other wages within the company) in order to do
business with the government. If fewer companies are willing to do business with the
government, we will experience higher prices due to less competition. This contradicts the
Administration's reinventing government efforts to attract more contractors to business with us
and increase comperition.
This will be particularly an issue for small businesses and minority contractors, with
which the Administration is making efforts to expand opportunities.
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AUG-30-85 18.27 FROM.OMB DIRECTOR
ID.
PAGE
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(3)
Budgetary impact
It is not possible this afternoon to produce a precise budget estimate, but the direct
wage effect alone could cost over $2 billion, not counting the ripple effect as wages near
minimum climb as well. As noted above, in addition to the direct effect, there would be the
added cost of reduced competition if there is a higher minimum wage for firms that do
business with the federal government, as many firms opt to drop federal contracts to avoid the
wage increase in their non-federal business. This indirect cost increase would not be present if
there is a statutory increase in the minimum wage.
The cost of reduced competition will be most severely felt at the Department of
Defense, which has already been experiencing significant problems in terms of contractors
who are unwilling to do business with the federal government.
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THE WHITE HOUSE
WASHINGTON
August 30, 1995
MEMORANDUM FOR ERSKINE BOWLES
HAROLD ICKES
CC:
CAROL RASCO
FROM:
Paul Weinstein
SUBJECT: Proposed Executive Order On Increasing
Minimum Wage For Government Contractors
The DPC has read over the proposed Executive Order from the
Department of Labor requiring any Federal contractor to pay a
minimum wage of $5.15 per hour. While the goal of such a
proposal is laudable, we believe the Order has some serious
drawbacks from a policy perspective. First, we do not think that
there will be any significant economic efficiency gains from the
Executive Order. Second, as part of the Vice President's
reinventing government effort, the Administration has been trying
to reform the procurement system by reducing the number of socio-
economic requirements placed on Federal agencies when they
contract with the private sector. The issuing of this Executive
Order would be inconsistent with the National Performance
Review's procurement reform proposal. Finally, the Executive
Order would have a negative budgetary impact at a time when we
are struggling to identify funds to pay for Presidential
initiatives.
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016
THE WHITE HOUSE
WASHINGTON
August 30, 1995
95 AUG 30
MEMORANDUM TO THE PRESIDENT
FROM:
LAURA TYSON
BO CUTTER
SUBJECT:
PROPOSED EXECUTIVE ORDER REGARDING MINIMUM
WAGE
We oppose an Executive Order requiring federal contractors to pay a minimum wage higher
than the statutory minimum wage. (Gene Sperling is out of the country, but we believe he
would agree.)
As a matter of process, we should not make as complex a decision as this one with as
Little analysis as has been carried out to date.
The proposed Executive Order would further complicate federal procurement, raising
an additional barrier to working with the Federal Government, and would be
inconsistent with the overall direction of federal procurement policy. We have not
analyzed the long-run costs the Government would experience as firms shift away
from federal work.
The proposed Executive Order would raise federal procurement costs, and, therefore,
because budgets will not expand, may well result in lower employment derived from
federal procurement.
The proposed Executive Order raises a number of other detailed issues we have not
been able to analyze in this short a time period: How would the international
operations of affected firms be treated? Would firms cut back on benefits? Are we
legally able to terminate contracts?
Finally, the basic justification for such an Executive Order -- that it would increase
overall economic efficiency --is not supportable for a measure applying only to part
of the economy. Larry Katz, who is, as you know, a leading proponent of this
argument when applied to the whole economy, would probably publicly criticize it in
this case.
We think our current minimum wage position is right and a political winner. We do
not need to jeopardize our position with one action we have not thought through. If
you wish, we can initiate a process immediately to develop a more thorough analysis
and provide you with a better basis for a decision.
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017
EXECUTIVE OFFICE OF THE PRESIDENT
30-Aug-1995 04:54pm
TO:
OCONNOR_J
FROM:
Lee Ann Brackett
SUBJECT: minimum wage -- procurement eo
Jennifer,
Please tell Harold in ;the strongest possible terms that the VP would be
very much opposed to the proposed executive order requiring federal
contractors to pay a minimum wage higher than the statutory minimum wage.
This proposal would run counter to all of the President's efforts in the
area of procurement reform. The effect would be to cause many existing
government contractors to withdraw from government business since these
companies do not now produce products off separate product lines. Having
fewer companies willing to do business with the government means both
higher prices for the government and contradicts the Administration's
efforts to lower the cost of goods and services through procurement
reform.
In addition, the VP believes that he has a commitment from the President
made at their last lunch before vacation that in the search for executive
actions, we would not entertain any further actions that undermine
procurement reform. If this does not die I will insist that the VP weigh
in.
Elaine Kamarck
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OFFICE OF THE VICE PRESIDENT
WASHINGTON
August 30, 1995
MEMORANDUM FOR HAROLD ICKES
ERSKINE BOWLES
FROM:
ELAINE KAMARCK
KUMIKI GIBSON
SUBJECT:
MINIMUM WAGE EXECUTIVE ORDER
We have reviewed the proposed Executive Order on "ensuring
the economical and efficient administration and completion of
Federal government contracts." We oppose the issuance of this
Executive Order for several reasons.
First, please be advised that before leaving for their
vacations, the President and the Vice President agreed that the
President would not issue any new directives regarding
procurement reform -- an effort being pursued as part of the
National Performance Review. Second, we have serious concerns as
to whether this order will in fact "increase efficiency," as it
purports to do. Third, we question whether this order is
defensible legally. Finally, we believe that this order may be
viewed as purely political.
Please contact either one of us if you have any questions
regarding our position.
Thank you.
PRINTED ON RECYCLED PAPER
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019
THE WHITE HOUSE
WASHINGTON
DETERMINED TO BE AN
ADMINISTRATIVE MARKING
PRIVILEGED AND CONFIDENTIAL
INITIALS: JAM DATE: 12/1/17
2016-0531-F
August 30, 1995
MEMORANDUM FOR ABNER J. MIKVA
FROM:
CHRIS CERF cpe
RE:
Minimum Wage E.O. Talking Points
*
The proposed Executive Order would require federal
contractors to pay employees $5.15 per hour.
*
The D.C. Circuit has held that the President can "legislate"
in this fashion only if he has the express or inherent
authority to do SO.
* The E.O. relies solely on the Federal Property and
Administrative Services Act as the basis for presidential
authority. Under D.C. Circuit law, the President may
properly rely on the Act if there is a "nexus" between his
actions and "the pursuit of economy and efficiency in the
management of federal property."
*
It is unclear to what degree a court would "look behind" a
presidential finding that such nexus exists. Judge
Kessler's opinion in the Striker Replacement cases implies
that courts would give deference to such a finding, and
there is some support for this in the D.C. Circuit.
*
The Minimum Wage E.O. asserts that "some economic theories
suggest that requiring federal contractors to pay a higher
minimum wage will lead to increases in efficiency that will
offset the cost to federal contractors of the higher wage."
In other words, pay people more and they will be more
productive and the savings associated with that productivity
will be at least equal to the increased costs stemming from
the higher wages.
*
The Chief Economist of D.O.L. has informed me that there is
no empirical evidence to support this theory. Moreover,
although the theory has some support in the literature, it
does not go so far as to suggest that there would be a full
offset. In his view, "it is unlikely, but possible" that
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the savings from the efficiency gains would fully offset the
increased costs." He does think, however, that there would
be some offset.
*
The Office of Legal Counsel thinks that it is reasonable to
assume (but not certain) that courts would more or less
defer to a concrete presidential finding. They believe,
however, that the E.O., as currently drafted, does not
contain such a finding.
*
To pass muster, the E.O. would need to delete all reference
to "economic theories" (see above) and state outright that
requiring contractors to pay a higher minimum wage would
lead to increases in efficiency that would offset the
increased costs associated with the wage.
*
The key question is whether the President would be
comfortable making such a finding. If not, the best guess
is that the order would not survive judicial review.
*
Even if we can make such a finding, there are substantial
litigation risks. The outcome will depend on how "tight" a
nexus the D.C. Circuit requires and whether it simply
accepts the President's finding or allows the plaintiffs to
challenge its factual basis.
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OLC
002
Memorandum
Subject
Date
Minimum Wage Executive Order
August 30, 1995
To
From
Robert Damus
Teresa Wynn Roseborough
the
General Counsel
OMB
Deputy Assistant Attorney
General
Office of Legal Counsel
We have reviewed the draft executive order entitled
"Ensuring the Economical and Efficient Administration and
Completion of Federal Government Contracts" and the accompanying
draft documents. We believe that the determination that
economy and efficiency in procurement will be promoted by the
specific provisions of the order is legally available, if the
assertions made in the order can be substantiated. That is, if
the President determines, in good faith, that increasing the
minimum wage of persons employed by federal contractors would
promote economy and efficiency in federal procurement, we believe
the issuance of the order would be authorized by the Federal
Property and Administrative Services Act of 1949, 40 U.S.C. § 471
et seq. See Chamber of Commerce V. Reich, 886 F. Supp. 66
(D.D.C. 1995).
The supporting documents, however, do not suggest economy
and efficiency in government procurement would be promoted by
proposed provisions that would link the application of the order
to CEO pay or company profits. Accordingly, we suggest that such
provisions be eliminated from consideration. Below are our
documents: suggestions for strengthening the draft order and supporting
A. The Executive Order.
We believe that the preamble articulates an economy and
efficiency argument that may be sufficient to support the
issuance of this order with the following alterations:
(1) The first and third paragraphs should be deleted
because they weaken the economy and efficiency argument and seem
to be contradictory and confusing. However, it may be possible
1
This memorandum provides our initial comments and
observations. complete. OLC review for form and legality is not yet
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to fit the penultimate sentence of the first paragraph into the
second paragraph.
(2) The President's authority to issue the proposed order
is contingent upon his determination that it will promote economy
and efficiency. Therefore, in the third sentence of the second
paragraph, we believe the word "may" should be replaced with a
less equivocal formulation, such as "I find that this order would
If the President cannot make such a finding, the basis
for issuing the order would be doubtful. (While it is not
necessary for the President to be absolutely certain that the
proposed order will promote economy and efficiency, we believe
that language that suggests a higher degree of certainty than
"may" is necessary. In that regard, we suggest that, where
possible, the language of this paragraph should be strengthened
to reflect that the President holds a good faith belief that the
proposed order will promote economy and efficiency in government
procurement. See, e.g., Executive Order 12954, "Ensuring the
Economical and Efficient Administration and Completion of Federal
Government Contracts.")
(3) Finally, we suggest that the penultimate sentence of
the second paragraph be amended to read as follows: "By paying a
higher wage to low-wage workers, federal contractors will
increase worker productivity, improve the stability of their
workforce, attract better qualified employees, and produce higher
quality goods. Procuring goods from such contractors will
promote economy and efficiency in federal procurement by (fill in
the blank)." (addition in bold) The last sentence of the second
paragraph should be deleted.
The Striker Replacement Order provides that the Secretary's
exercise of discretion under the order must be consistent with
the policy stated in section 1 of the order. We believe that the
Secretary's exercise of discretion under section 3(a) of the
proposed order should be similarly limited. We therefore suggest
the insertion of the following sentence at the end of section
3(a): "All discretion under this section shall be exercised
consistent with the policy enunciated in section 1 of this
order."
B. The Discussion Memorandum for the President.
We believe that the Memorandum does a very good job
presenting the pros and cons of issuing this proposed order.
Therefore, we limit our comments to three points.
First, the Memorandum fails to reveal the view of the
Secretary of Labor as to whether the proposed order will promote
economy and efficiency in procurement and does not include his
recommendation as to whether the President should issue the
proposed order. We believe that the President's determination
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that economy and efficiency in government procurement will be
promoted by the proposed order would be substantially bolstered
if it were supported by the recommendation of the Secretary.
Second, we believe that when discussing the different
options for announcing the order it should be made clear that
congressional retaliation in the appropriations/reconciliation/
debt ceiling process is a possibility regardless of the approach
the President decides to take. While the memorandum only lists
this possibility as a factor to be considered in the "sign
immediately" approach, we believe that it is also a possibility
if the President decides to announce his intention to act if
Congress fails to enact legislation within a certain time period.
In fact, utilization of the latter approach may provoke Congress
to block the operation of the order through a prospective
appropriation's rider.
Finally, we believe the discussion of the litigation risks
associated with the order should be expanded. In addition to
recognizing that the proposed order will almost certainly be
challenged, we note that the issuance of the proposed order may
have an adverse impact on the Chamber of Commerce litigation,
which is presently pending before the Court of Appeals in the
District of Columbia. The court may be more reluctant to accept
assertions of Presidential authority in Chamber of Commerce
knowing that this potentially would lead to broader assertions of
authority. If the court were to view the proposed order as an
indication that the President intends to legislate other than
through bicameralism and presentment, this too could color the
result of the litigation in Chamber of Commerce.
cc: Jennifer O' Connor
Chris Cerf
23