The Next Greece
by Daniel J. Mitchell
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ShareThisAmerica is on a path to becoming a Greek-style welfare state. Thanks to the Bush-Obama spending binge, the burden of federal spending has climbed to about 25% of national economic output, up from only 18.2% of GDP when Bill Clinton left office.
But that's just the tip of the iceberg. Because of a combination of demographic forces and poorly designed entitlement programs, federal spending could consume as much as 50% of economic output by the time the Baby Boom generation is fully retired.
One symptom of all this excessive spending is that Washington is awash in red ink. The United States is now in its third consecutive year of trillion-dollar deficits and the politicians just had to increase the nation's US$14.3-trillion debt limit.
Daniel J. Mitchell is a senior fellow at the Cato Institute, a think-tank based in Washington.
More by Daniel J. MitchellBut it wasn't easy getting there. Just as happened with the "government shutdown" debate in March, Republicans and Democrats had fierce disagreements over the right approach. They bickered until the last minute and then finally agreed to more than US$900billion of supposed spending cuts and the creation of a "super-committee" charged with proposing another US$1.5-trillion of deficit reduction.
So which side won this fight? Republicans are bragging that they got spending cuts today, a promise of spending cuts in the future, and no tax increases. Democrats, meanwhile, are chortling that they took the debt issue off the table until after the 2012 elections, protected their favourite programs and created a super-committee that will seduce the GOP into a tax increase.
Ignore that bragging. The easy answer is that politicians of both parties were the victors and taxpayers are the ones left in the cold.
In other words, the budget deal was a victory for the political establishment.
Here's why Republicans are winners. They get to tell their Tea Party activists that they forced Obama to cut spending. It doesn't matter that federal spending will actually be higher every year and that the cuts were based on Washington math (a spending increase becomes a spending cut if outlays don't climb as fast as some artificial benchmark).
They also get to tell their anti-tax activists that they held the line. Perhaps most important, the super-committee must use the "current law" baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the super-committee therefore can't use repeal of the "Bush tax cuts for the rich" as a revenue raiser.
This means that most Republican incumbents are well-positioned to win re-election.
Here's why Democrats are winners. Thanks to the magic of government math, despite all the talk of budget cuts, discretionary spending will be more than US$100-billion higher in 2021 than it is this year. And since defence spending in Iraq and Afghanistan presumably is winding down, this means even more money will be available for domestic programs.
In addition to telling the pro-spending lobbies that the gravy train is still on the tracks, they also get to tell the classwarfare crowd that there's an improved likelihood of higher taxes for corporate jet owners and other "rich" people. Notwithstanding GOP assertions, nothing in the agreement precludes the supercommittee from meeting its US$1.5-trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table.
This means that most Democratic incumbents are well-positioned to win re-election.
It's worth pointing out that this doesn't mean all Republicans and all Democrats are happy about the deal. The hard-core conservatives are upset that the deal is mostly smoke and mirrors on the spending side and that there may be a tax-increase trap on the revenue side.
The hard-core liberals, by contrast, are angry that there are any spending cuts, even ones based on Washington math. Moreover, they want higher tax rates on upper-income taxpayers today, not a super-committee that may or may not follow through on soak-the-rich policies in the future.
One group of people, however, unambiguously got the short end of the stick in this budget deal. Ordinary Americans are caught in the middle. They're not poor enough to benefit from the federal government's plethora of income-redistribution programs. But they're not rich enough to have the clever lobbyists and insider connections needed to benefit from the highdollar handouts like ethanol subsidies and bank bailouts.
Instead, middle-class Americans play by the rules, pay ever-higher taxes, and struggle to make ends meet while the establishment of both parties engages in posturing as America slowly drifts toward a Greek-style fiscal meltdown.
Protecting Economic Liberty
Protecting Economic Liberty: The Essential Freedom
by Doug Bandow
This article appeared in Forbes on August 15, 2011.
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ShareThis"I'm from the government and I'm here to help you" has become a standard punch line. There is no greater joke when public officials limit competition in the name of protecting consumers. Such as Louisiana's now-defunct casket monopoly.
Professional licensing is routine across America. You want to be a lawyer or hairdresser? You want to be a doctor or manicurist? Get a license — from a government-backed panel dominated by your established competitors.
No one wants to be served by an incompetent, but in most cases, health and safety are not at issue. If a hair stylist gives you a bad haircut, you'll be embarrassed, nothing more.
Doug Bandow is a senior fellow at the Cato Institute. A former special assistant to Ronald Reagan, he is the author of Foreign Follies: America's New Global Empire (Xulon).
More by Doug BandowEven for services with greater impact the licensing process is designed to protect existing practitioners rather than consumers. Plenty of non-lawyers, such as paralegals and even legal secretaries, are capable of doing work now reserved for attorneys. However, state bar associations fiercely police the "unauthorized practice of law," which is not the same as the incompetent practice of law.
Doctors similarly create arbitrary barriers against other medical professionals caring for patients. The government should combat fraud and malpractice, not decide which provider can do which procedure.
But casket-making is a far easier case. Obviously, making a substandard coffin isn't going to hurt the corpse, let alone kill anyone. (Indeed, the state neither sets standards for casket construction nor even requires use of one for burial.) Yet Louisiana only allows licensed funeral directors to sell "funeral merchandise," including caskets.
It's not hard to see who benefits from this restriction. It certainly isn't the dead or the bereaved families of the dead. It's not the producers of "funeral merchandise." And it isn't the public.
In Louisiana the casket typically accounts for nearly a third of the cost of a funeral. It is known in the trade as a "high margin" item. In fact, some people buy coffins from Wal-mart or even online in order to save money.
The winners from the casket monopoly obviously are the funeral directors.
Everyone paying for a funeral is a victim of Louisiana's rule. Along with the Saint Joseph Abbey of Saint Benedict, established in 1889.
For years the Benedictine monks made simple caskets for their own members. Over the years they received numerous requests from others to buy similar coffins.
Monks typically support themselves through common trades. Saint Joseph Abbey harvested timber for income, but Hurricane Katrina badly damaged the abbey's pine forest. Starting in 2007, Saint Joseph's 36 monks followed the example of monasteries in Illinois, Indiana, Iowa, and Minnesota and started making handcrafted caskets. The coffins are both unique and less expensive than those offered by funeral homes. Moreover, the abbey stored caskets made in advance for free.
No customer complained. But a local competitor, the Mothe Funeral Homes, went to the Board of Embalmers and Funeral Directors. Leonard Dunn, the operator of Serenity Funeral Home, another nearby operation, explained: "They're cutting into our profit." So the state board, run by funeral directors, issued a "cease-and-desist" order even before the abbey sold its first casket. The board also employed an investigator to confirm that the monastery did, indeed, do what it claimed to do: sell caskets. The board threatened the monks with fines and imprisonment — up to six months in jail.
The abbey urged the state legislature to change the law, but individual funeral home directors joined with industry lobbyists to defend the coffin cartel. (Not every funeral director was on board. Darin Bordelon of LaVille Funeral Home complained that Saint Joseph's opponents were "making us all look greedy.")
The only way for the monks to avoid punishment was to abandon their religious routine, serve a year as apprentices in a licensed funeral home, and turn their monastery into a formal "funeral establishment" with embalming equipment. Just to make and sell caskets.
So the monks went to court. Taking their case was the Institute for Justice, a public interest legal organization dedicated to defending economic liberty. IJ filed suit contending that Louisiana's casket monopoly violated the 14th Amendment.
The monks had the facts on their side. An earlier Federal Trade Commission investigation found that state-protected monopolies do not protect consumers. The agency specifically criticized states which used licensing to restrict competition in the sale of caskets. Notably, Louisiana made no effort to prevent funeral directors from selling overpriced junk coffins. It just wanted to make sure that only funeral directors could sell overpriced junk coffins.
The case also demonstrated the importance of economic liberty. Those who promote individual liberty tend to favor freedom of speech and assembly. These liberties represent freedom of conscience and promote political liberty, and are critical to the development of the human person.
However, economic liberty is no less important. Freedom is indivisible. Freedom of expression and speech is the freedom to buy a printing press, create a website, and build a television studio. Without access to the practical economic tools of liberty it is difficult to exercise the political forms of liberty.
More broadly, economic development helps create an environment and ethos more conducive to the development of democracy. People who no longer have to worry about feeding their families are more likely to acquire the instruments of liberty. They also are more likely to use them.
But there is something even more basic. Economic freedom is about earning a living and supporting oneself and one's family. Few human duties are more important.
Moreover, earning an income enables one to seek life's transcendent values. For the monks, casket-making is a means to an important end. Blocking the means interferes with the end.
Finally, for many people work is a critical aspect of their development and happiness as human beings. Obviously, some individuals allow their job to become an idol, taking over their lives. But the opportunity to freely choose one's vocation is more than just a matter of dollars and cents.
The law doesn't always reflect good policy. But in this case justice triumphed. U.S. District Court Judge Stanwood Duval ruled for the monks, explaining: "The Court finds no rational relationship between the Act and 'public health and safety.' No evidence was presented to demonstrate that requiring the purchase of caskets from licensed funeral directors aids the public welfare."
No evidence was presented because none exists.
The judge added: "Simply put, there is nothing in the licensing procedures that bestows any benefit to the public in the context of the retail sales of caskets. The license has no bearing on the manufacturing and sale of coffins. It appears that the sole reason for these laws is the economic protection of the funeral industry which reason the Court has previously found not to be a valid government interest standing alone to provide a constitutionally valid reason for these provisions."
Unfortunately, the problem of "economic protection" is far broader than just Louisiana's protection of the funeral industry. However, Judge Duval's ruling is a good start. No government should misuse its power to sacrifice everyone's economic freedom for the enrichment of a few.
It doesn't happen often, but in this case someone came from the government and actually did help people. Judge Duval recognized that respecting people's liberty is the best form of assistance. We can only hope that he is not the last government official to do so.
Obama's New New Deal and High Unemployment
FDR's New Deal, Obama's New New Deal and High Unemployment
by Jim Powell
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ShareThisPresident Obama's New New Deal of massive government intervention was inspired by FDR's New Deal, and both have been plagued by chronic high unemployment.
In her recent New York Times column, Christina Romer noted that there was some remarkable economic expansion during the New Deal period (1933-1940), but I doubt anybody disputes that. The key question is why, despite expansion, did high unemployment persist. It averaged 17 percent.
I suggest that New Deal unemployment and related economic difficulties were unintended consequences of New Deal policies. In particular:
Jim Powell is a senior fellow at the Cato Institute in Washington DC.
More by Jim Powell1. Federal tax revenues more than tripled, from $1.6 billion in 1933 to $5.3 billion in 1940. Excise taxes, personal income taxes, inheritance taxes, corporate income taxes, holding company taxes and "excess profits" taxes all went up. FDR introduced an undistributed profits tax. Consumers had less money for spending, and private sector employers had less money for hiring.
2. New Deal programs, intended to benefit the middle class and the poor, were mainly paid for by the middle class and the poor. This was because the biggest source of federal revenue during the 1930s was the excise tax on beer, cigarettes, soda, chewing gum, radios and other cheap pleasures disproportionately enjoyed by middle class and poor people. Until 1936, the federal excise tax generated more revenue than the federal personal income tax and the federal corporate income tax combined. Not until 1942, amidst World War II, did the federal personal income tax become the biggest source of federal revenue.
3. FDR caused uncertainty that discouraged investors from taking the risks of funding growth and jobs. Frequent tax hikes (1933, 1934, 1935, 1936) made it harder for investors to estimate the net returns of possible investments. FDR added to the uncertainty by denouncing investors as "economic royalists," "economic dictators" and "privileged princes," which amounted to threatening investors. No surprise that private investment was at historically low levels during the New Deal era.
4. The New Deal channeled government spending away from the poorest people who lived in the South. Comparatively little New Deal spending went there. Most New Deal spending went to political "swing" states in the West and East, where incomes were more than 60% higher. The decision was probably made that allocating more federal dollars to the South wouldn't yield more Democratic votes, since the South was already overwhelmingly Democratic.
5. The New Deal made it more expensive for employers to hire people. By enforcing above-market wages (National Industrial Recovery Act, Fair Labor Standards Act), introducing excise taxes on payrolls (Social Security Act) and promoting compulsory unionism (National Labor Relations Act), the New Deal increased the costs of employing people about 25% from 1933 to 1940 — a major reason why double-digit private sector unemployment persisted throughout the New Deal era.
6. The New Deal paid farmers to destroy food when millions were hungry. FDR promoted higher food prices by paying farmers to plow under some 10 million acres of crops and destroy some 6 million farm animals. The food destruction program mainly enriched big farmers, since benefits were paid on a per acre basis. This policy related farm programs meant the approximately 100 million American consumers had to pay more for food.
7. The New Deal made everything more expensive during the Depression. Americans needed bargains, but FDR signed the National Industrial Recovery Act that authorized some 450 industrial cartel codes. They forced consumers to pay above-market prices for goods and services. Moreover, FDR banned discounting by signing the Anti-Chain Store Act (1936) and the Retail Price Maintenance Act (1937).
8. FDR disrupted companies employing millions. In 1938, he authorized an unprecedented barrage of antitrust lawsuits against about 150 employers and industries. FDR had big employers tied up in court, distracting them from the urgent task of creating growth and jobs. In some cases, employers were attacked for pursuing policies that had been mandated by the National Industrial Recovery Act.
"We have never made good on our promises," FDR's Treasury Secretary Henry Morgenthau despaired in May 1939, after acknowledging that the New Deal failed to banish chronic high unemployment.
Since Obama is a great admirer of FDR's New Deal, we shouldn't be surprised that the Bureau of Labor Statistics reported fewer people are employed now and more people are unemployed now than when Obama became president in January 2009.
We need very different policies, not more of the same.
Empower the Regulated
Empower the Regulated
by Richard W. Rahn
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ShareThisIt is widely recognized that excessive regulation is unnecessarily killing jobs. The question has been what to do about it. President Obama may inadvertently have helped lead to a solution in his debate last week with an Iowa farmer who was complaining about excessive costly regulation. In his reply to the farmer, Mr. Obama said: "[A] lot of times we are going to be applying common sense. If someone has an idea, if we don't think it's a good idea, if we don't think there is more benefit than cost to it, we are not going to do it." Nice statement, but it is untrue in all too many cases, whether the president knows it or not.
The president previously has endorsed the concept of cost-benefit analysis in regard to regulation and even has issued an executive order, as other presidents have done, to require executive departments to do cost-benefit analyses on regulations that would have a "major" (often defined as costing more than $100 million) impact. Officials often just ignore the requirement to do cost-benefit analyses with excuses such as that the regulation is not "major" (which they cannot know without doing the analysis) or that they don't have the time to do it, etc. etc. The president suggested to the farmer that he talk to the Department of Agriculture about his complaint, but reporters who tried to contact the department about the farmer's grievance got the same bureaucratic runaround and buck-passing that is characteristic of government — good luck, Mr. farmer.
Now the president is telling us he is trying to do everything possible to create jobs. Members of his administration have acknowledged that regulations that do not meet a cost-benefit test cost jobs — as everyone with a basic understanding of economics realizes. We also know from decades of experience and "public choice" theory that the regulatory agencies are unlikely to clean up their acts because they have vested interests in creating more regulations to administer — the economy be damned. Many of the cost-benefit studies that are done by these regulatory agencies are little more than jokes, with grossly incomplete and incompetent analyses. Cass Sunstein, who claims to be in favor of cost-benefit analysis, is Mr. Obama's regulatory czar. But action — or inaction — speaks louder than words. Some agencies, such as the Internal Revenue Service and Treasury, often just refuse to do serious cost-benefit analysis, yet their rulings often cost hundreds of billions of dollars and hundreds of thousands of jobs.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
More by Richard W. RahnNancy A. Nord, a member of the U.S. Consumer Product Safety Commission (CPSC), has lists of many businesses that have been needlessly destroyed by the failure of her commission to do proper cost-benefit analysis. She has written that "these are real people who have lost real jobs and who are being forced to pay more for products with no real safety benefit."
There is a solution. First, as a matter of law, Congress should pass a requirement that before any regulation (not just major ones) is promulgated by any government department (including the IRS) or independent agency, the department or agency must have done a competent, complete and independent cost-benefit study. In order to make the law self-enforcing so it is not just ignored, any party or collection of parties who were adversely affected by the regulation would be allowed to bring suit to have it overturned if they could show that the costs of the regulation exceed its benefit (i.e., the preponderance of evidence). If the plaintiffs win, they would be entitled to have both their legal costs and the costs of their cost-benefit study reimbursed by the agency that issued the faulty regulation. Currently, in some limited circumstances, affected parties may bring suit to overturn destructive regulations. The U.S. Court of Appeals for the D.C. Circuit just struck down the Security and Exchange Commission's "proxy access rule," with Judge Douglas H. Ginsburg's devastating critique of the incompetent cost-benefit analysis by the SEC.
Despite these limited successes, the goal is to re-establish balance by making it much easier for those injured by regulations that do not meet a reasonable cost-benefit test to obtain redress. Frivolous suits should not be much of a problem because the plaintiffs would have to go to the considerable expense of funding a competent cost-benefit study and showing before going to court that the government's study was either nonexistent or flawed. One of the founding fathers of the field of law and economics, Henry G. Manne, dean emeritus of the George Mason University Law School, said he expects that my proposed solution would result in significantly more litigation; even so, he said he thinks it probably is well worth doing. Eventually, the regulatory agencies will realize that excessive regulation is costly to them, and thus they will become more responsible.
Again, the president said he is for cost-benefit analyses for regulations, and he also has said we must create more jobs. Republicans in Congress are searching for their own ways to create jobs, so requiring cost-benefit analyses for regulations should have great popular appeal. If properly drafted and explained, the requirement would be difficult for the president and the Democrats in Congress to oppose. If they are smart, they even could take credit for signing it into law.
Obamacare Heads to the Supreme Court
Obamacare Heads to the Supreme Court
by Doug Bandow
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ShareThisWhen Congress was pushing through President Barack Obama's plan to nationalize health care decision-making, legislators gave little thought to the Constitution. After all, the denizens of Capitol Hill had grown accustomed to passing whatever laws they desired, with the expectation that, if necessary, compliant courts would fashion another magical legal doctrine or two to justify Congress' action. Naturally, all of the president's men and their allies dismissed the legal cases filed against Obamacare after it became law.
However, the advocates of government-controlled medicine are no longer laughing. The Eleventh Circuit Court of Appeals last week struckdown an essential part of the legislation. This evens the score, balancing an earlier decision by the Sixth Circuit to uphold the vast expansion of federal power. In the latest case, Judge Frank Hull, a Democratic appointee, voted with Chief Judge Joel Dubina to overturn the legislation.
The substantive sections of the majority opinion in State of Florida, et al., vs. U.S. Department of Health and Human Services run roughly 150 pages, making it the longest and most detailed decision yet. As such, noted my Cato Institute colleague Ilya Shapiro, the "ruling shows that the constitutional issues raised by the healthcare reform — and especially the individual mandate — are complex, serious, and non-ideological."
Doug Bandow is a Senior Fellow at the Cato Institute and the Senior Fellow in International Religious Persecution at the Institute on Religion and Public Policy. A former Special Assistant to President Ronald Reagan, he is author of Beyond Good Intentions: A Biblical View of Politics (Crossway).
More by Doug BandowThe decision obviously will affect Americans' health care. But the more basic issue is whether there remains any limit to the reach of the federal government. The Framers viewed the national government as having important but only limited and enumerated powers. That is, Washington was an island of government authority in an ocean of individual liberty.
Over the years the courts have gutted constitutional doctrines intended to limit state power and justified almost any government action unless barred by the Bill of Rights. Indeed, the Commerce Clause, which authorizes federal regulation of commerce "among the several states," has been interpreted to largely swallow up Article 1, Section 8, which enumerates Congress's authority. The ocean became one of government power, with but a few islands of personal freedom.
However, Obamacare went further than any previous federal intrusion. In the name of regulating commerce, the law ordered people who had not entered any market to purchase a private product. If upheld, the measure would establish the principle that Americans could be forced to buy American cars to bail out the auto industry, Lehman securities to save Wall Street, and homes to revive the housing market. Whether or not the insurance mandate is good policy — and there are lots of reasons to argue that it is not — it effectively dismantles any meaningful limits on the national government.
The five federal District Court decisions so far have broken three-to-two in upholding Obamacare. Although in the majority, the former have been less than persuasive. Indeed, District Court Judge Gladys Kessler stated in her opinion that the government could regulate "mental activity" — under a constitutional provision involving "commerce."
All of these rulings were appealed. The Sixth Circuit was first to deliver its opinion, with the judges split two-to-one in favor of the president's plan to treat passivity as if it was activity. Then last week the Eleventh Circuit said no.
Twenty-six states sued the federal government, challenging several aspects of the misnamed Patient Protection and Affordable Care Act. (The law actually supersedes patient choice and bends the medical cost curve upward.)
One claim was that the legislation's dramatic expansion of Medicaid, which would impose additional costs on the states, was "coercive." Explained Judges Dubina and Hull: "[T]he coercion test asks whether the federal scheme removes state choice and compels the state to act because the state, in fact, has no other option."
Unfortunately, the states all have chosen to accept federal Medicaid dollars. With their hands greedily extended, they have been unable to convince any judge in any case that they could do nothing about the extra costs to be imposed. The Eleventh Circuit majority noted: "[S]tates have plenty of notice — nearly four years from the date the bill was signed into law — to decide whether they will continue to participate in Medicaid by adopting the expansions or not."
States might want to stay in the program without paying more, but that is not the same as being unable to pay more. Thus, observed the judges, "Medicaid-participating states have a real choice — not just in theory but in fact — to participate in the Act's Medicaid expansion" and "Where an entity has a real choice, there can be no coercion."
States should take this lesson to heart before again lining up for a federal handout.
The more important challenge was to the individual mandate. Under any serious interpretation of the meaning of "commerce" carried out "among" the states, not buying insurance does not qualify. The activity would have to cross state boundaries and, more important, actually be a commercial activity.
Under extraordinary political pressure the New Deal Supreme Court systematically denuded the Constitution of limits on government, substituting political preference for legal principle. In Wickard v. Filburn, the justices allowed the federal government to restrict a farmer from planting food for his family's personal use, ruling that intra-state non-commercial activity was the same as inter-state commerce, since the former could affect the latter.
It was a profoundly dishonest opinion, ignoring the plain meaning of the phrase as well as clear intent of those who wrote and ratified the Constitution. Had the recently rebellious Americans understood that they would end up authorizing the federal government to regulate almost every human activity with this one phrase, they would have struck it from the text or refused to ratify the document.
Still, Wickard only covered almost everything. Explained Judges Dubina and Hull in Florida v. HHS: "Nonetheless, the Supreme Court has staunchly maintained that the commerce power contains outer limits which are necessary to preserve the federal-state balance in the Constitution."
Those limits may be hard to discern, but the high court eventually enunciated them in two cases. In 1995 the majority ruled in United States v. Lopez that the Commerce Clause did not allow Congress to ban possession of a gun in a school zone since there was no commerce. In United States v. Morrison, decided in 2000, the Court overturned a penalty against gender-related violence, since there was no "economic activity." In both cases the Supreme Court recognized that accepting the government's position yielded no obvious limit to government power. Said the majority in Lopez, "[W]e are hard pressed to posit any activity by an individual that Congress is without power to regulate." The justices stepped back from that jurisprudential abyss.
After a detailed review, the Eleventh Circuit noted that Congress' latest assertion of power is unprecedented: "Even in the face of a Great Depression, a World War, a Cold War, recessions, oil shocks, inflation, and unemployment, Congress never sought to require the purchase of wheat or war bonds, force a higher savings rate or greater consumption of American goods, or require every American to purchase a more fuel efficient vehicle."
Equally important, the power being claimed through Obamacare is extraordinary. The majority added:
In sum, the individual mandate is breathtaking in its expansive scope. It regulates those who have not entered the health care market at all. It regulates those who have entered the health care market, but have not entered the insurance market (and have no intention of doing so). It is overinclusive in when it regulates: it conflates those who presently consumer health care with those who will not consume health care for many years into the future. The government's position amounts to an argument that the mere fact of an individual's existence substantially affects interstate commerce, and therefore Congress may regulate them at every point of their life. This theory affords no limiting principles in which to confine Congress's enumerated power.
The Administration makes much of the alleged uniqueness of the market and the problem of cost-shifting from the uninsured. However, the majority noted that the proffered distinctions have no constitutional relevance. Moreover, "the primary persons regulated by the individual mandate are not cost-shifters, but healthy individuals who forego purchasing insurance." This merely reaffirms the extraordinary nature of the mandate, "forcing market entry by those outside the market."
Reinforcing the Eleventh Circuit's caution in approaching the mandate was the fact that "insurance qualifies as an area of traditional state regulation." So does health care, since "a state's role in safeguarding the health of its citizens is a quintessential component of its sovereign powers." Federalism became the clincher. Stated the majority: "When this federalism factor is added to the numerous indicia of constitutional infirmity delineated above, we must conclude that the individual mandate cannot be sustained as a valid exercise of Congress's power to regulate activities that substantially affect interstate commerce."
The administration made two other unsuccessful claims to salvage the mandate. The first was that the requirement was "a necessary and proper exercise" of the commerce power. Nice try, but no cigar, said Judges Dubina and Hull.
The majority concluded that the argument the mandate is "necessary" is undermined by PPACA's own terms, with "broad exemptions and exceptions to the individual mandate (and its penalty) that impair its scope and functionality." In short, "to the extent the uninsureds' ability to delay insurance purchases would leave a 'gaping hole' in Congress' efforts to reform the insurance market, Congress has seen fit to bore the hole itself.â€
But even assuming "necessity" is not enough, the judges explained: "It would be nonsensical to suggest that, in announcing its 'larger regulatory scheme' doctrine, the Supreme Court gave Congress carte blanche to enact unconstitutional regulations so long as such enactments were part of a broader, comprehensive regulatory scheme." A law must be "proper" — that is, within the federal government's constitutional power — as well as "necessary."
The government's second claim was that the mandate, backed by a tax penalty, actually is a tax. In this case the majority didn't even say nice try. Rather, noted the opinion, "all of the federal courts, which have otherwise reached sharply divergent conclusions on the constitutionality of the individual mandate, have spoken on this issue with clarion uniformity. Beginning with the district court in this case, all have found, without exception, that the individual mandate operates as a regulatory penalty, not a tax."
It could not be otherwise. Congress declared the penalty to be a penalty, counted on no revenue from the provision, limited IRS power to enforce the penalty, and cited the Commerce Clause as the law's constitutional basis. Moreover, the fact that the Obama administration claimed the mandate was essential to its regulatory scheme demonstrated that the penalty was, in fact, a penalty enacted to back the mandate. The majority opined: "The individual mandate as written cannot be supported by the tax power."
Although the appellate court gutted Obamacare by voiding the insurance mandate, the judges did not kill the legislation. They reversed the trial court on the issue of "severability" — that is, whether the mandate can be separated from the rest of the bill. The District Court said no, since the mandate was integral to the legislation.
The Eleventh Circuit came out differently, however. The courts favor severability when possible, even when legislators fail, as in this case, to include a clause supporting severability. Thus, ruled the majority, the rest of the law stands since "the lion's share of the Act has nothing to do with private insurance, much less the mandate that individuals buy insurance."
The dissent, too, is long — over 80 pages. Judge Stanley Marcus called for a "pragmatic" decision reflecting "the undeniable fact that Congress' commerce power has grown exponentially over the past two centuries." Yet even he admitted that "the individual mandate is a novel exercise of Congress' Commerce Clause power" and that "it is surely true that there is no Supreme Court decision squarely on point dictating the result that the individual mandate is within the commerce power of Congress."
More tellingly, Judge Marcus dismissed "the parade of horribles said to follow ineluctably from upholding the individual mandate," since the supposedly "powerful limits" from Lopez and Morrison would remain. However, if these "powerful limits" do not prevent Congress from treating market inaction as market participation, they are "powerful" only in the opinion writer's mind. Affirming the individual mandate would effectively write the Article 1, Section 8 enumeration out of the Constitution.
Judge Marcus's more basic point is that doing the latter would be no big deal since "upholding the individual mandate would be far from a cosmic expansion of the boundaries of the Commerce Clause." In short, since the federal government can do almost everything that it wants already, why not let it do everything? The idea that the Constitution was created to protect individual liberty is of no matter, since most politicians (and most judges, including this one, obviously) today are not interested in protecting individual liberty.
The legal battle over Obamacare may look like just another esoteric court fight. However, the outcome will determine whether people retain the freedom to decide on their own medical treatment. The case also will decide whether any substantive powers remain beyond the federal government. Only if the judges affirm that the Constitution means what it says will our liberties be secure.
Well Worth the Money
by David Boaz
Two weeks ago the House of Representatives announced that it would end its nearly 200-year-old page program. What with new technology and all, there just isn't much need any longer to employ teenagers to take phone messages and carry documents from one member of Congress to another. The program costs $5 million a year, which isn't much in a $3.8 trillion federal budget, but taxpayers should appreciate any elimination of an unnecessary program.
The Washington Post published remembrances from former pages. One outraged response was titled "Well worth the money."
Well, it would be, wouldn't it? For those who benefited from it, it is indeed well worth the money. But, as with all government programs, the beneficiaries weren't paying for it. Did the program do the taxpayers much good? Yes, in the days when members of Congress needed a way to get documents to one another, the page program may well have been an efficient use of resources. But times change; technology has eliminated a lot of jobs in the private sector, and there's no reason to think it shouldn't have the same impact in the public sector. Cynics point out that pages were mostly the children of people with good political connections. And then they make better connections: The writer who thought the program was "well worth the money" now runs a company that boasts of having made more than 500 million political robocalls over the past 30 years. So we all owe something to the page program!
David Boaz is the executive vice president of the Cato Institute. He is the author of Libertarianism: A Primer, the editor of The Libertarian Reader and other books, and the author of the entry on libertarianism in Encyclopaedia Britannica.
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But this is just a tiny example of a much bigger problem: every government program is "well worth the money" to its beneficiaries. And the beneficiaries are typically the ones who lobby to create, expand, and protect it. When a program is threatened with cuts, newspapers go out and ask the people "who will be most affected" by the possible cut. They interview farmers about whether farm programs should be cut, library patrons about library cutbacks, train riders about rail subsidy cuts. And guess what: all the beneficiaries oppose cuts to the programs that benefit them. You could write those stories without going out in the August heat to do the actual interviews.
Economists call this the problem of concentrated benefits and diffuse costs. The benefits of any government program — Medicare, teachers' pensions, a new highway, a tariff — are concentrated on a relatively small number of people. But the costs are diffused over millions of consumers or taxpayers. So the beneficiaries, who stand to gain a great deal from a new program or lose a great deal from the elimination of a program, have a strong incentive to monitor the news, write their legislator, make political contributions, attend town halls, and otherwise work to protect the program. But each taxpayer, who pays little for each program, has much less incentive to get involved in the political process or even to vote.
And so we get bailouts for the Chrysler Corporation in 1979 and for Wall Street in 2008, a protective tariff for Harley-Davidson in 1982, higher-than-necessary wages for public employees, sugar and ethanol subsidies that benefit Archer-Daniels-Midland, farm subsidies, and thousands more programs with beneficiaries who know exactly who they are. When the Pentagon decided to cancel a program to build new presidential helicopters — after the price ballooned from $6.8 billion to $13 billion — an 11-year-old girl in Owego, New York, where Lockheed Martin had planned to build the helicopters, wrote a letter to President Obama that became "a voice for her shaken community":
Lockheed is the main job source in Owego. If you shut down the program, my mom may lose her job and a lot of other people too... . Owego will be a ghost town. I've lived here my whole life and I love it here! Please really, really think it over.
This girl loves her family and her home town. And we can't expect her to understand what $13 billion means to the American taxpayers. To the girl and her mom, the new helicopter is "well worth the money." But after all the beneficiaries of all the programs lobby to keep them going, we end up with a $3.8 trillion budget and a $1.5 trillion federal deficit.
For an unusually candid view of what it means to direct federal dollars to particular areas, we might turn to an advertisement in the Durango, Colorado, Herald in 1987, which touted the Animas-La Plata dam and irrigation project and made explicit the usual hidden calculations of those trying to get their hands on federal dollars:
Why we should support the Animas-La Plata Project: Because someone else is paying the tab! We get the water. We get the reservoir. They get the bill.
In the private sector, the voluntary sector of the economy, we know that something is "well worth the money" if people are willing to spend their own money on it. In government, politicians work to separate the payment of taxes from the receipt of specific services. We're not asked "will you pay $100 right now for farm subsidies and $4000 for Medicaid and $1600 for the wars in Iraq and Afghanistan and $130 for a new presidential helicopter and ... ?"
If we did get such a question, we might well decide that lots of government programs were not "well worth the money" to the people who would be paying the money.
And by the way, I said above that taxpayers would appreciate the elimination of even a small spending program. But House leaders said that they "will work with Members of the House to carry on the tradition of engaging young people in the work of the Congress." So chances are, taxpayers won't actually see even that $5 million savings. That's life in the taxpaying business.
For Global Health, China Must Liberalize
For Global Health, China Must Liberalizeby James A. Dorn
Chinese officials have been highly critical of the U.S. debt buildup and the political wrangling in Washington that has failed to resolve the debt crisis.
But China could well turn that leery eye inward to find policies that are preventing financial markets from functioning in a healthy manner — and which may yet spread the next serious malady to global financial markets.
One problem is that China is the largest holder of U.S. Treasury securities, with more than $1 trillion invested. Without China's large appetite for U.S. debt, Congress would have been more constrained in its deficit spending, and U.S. growth would have been more robust.
The challenge for both China and the U.S. is to restore the balance between the state and the market — to maximize freedom and minimize coercion.
China now holds more than $3 trillion in official foreign exchange reserves, the result of large trade surpluses and inward foreign investment. However, China is a net exporter of capital via the purchase of Treasuries and other government securities. The large accumulation of dollars is the result of an exchange-rate policy designed to undervalue the yuan.
Which brings us to the second major problem: if the Chinese currency were allowed to freely float, there would be no massive buildup of official reserves. Traders, not communist party members, would determine the exchange rate. Adjustment would occur spontaneously via voluntary decisions, not via central plans.
A more flexible exchange rate and a fully convertible yuan would increase the range of choices open to people, expand the private sector, and increase popular pressure for political reform.
The legacy of central planning still haunts the banking sector. Lending, interest rates, and the major banks themselves are all controlled by the state. Even more ominous is that most of the lending is to state-owned enterprises. Investment decisions are therefore heavily politicized, and corruption is rampant.
Stimulus spending allowed China to escape the 2008-09 global financial crisis, but the rapid expansion of bank credit, as well as off-balance sheet lending, has led to excess money growth and an inflation rate of more than 6 percent. UBS data show that China's bank credit, including off-balance sheet loans, now stands at about 180 percent of GDP, up sharply from 2008.
If the economy slows, nonperforming loans could swell. The excess credit could turn into a debt crisis. That crisis could be compounded by a bursting of the Treasury bond bubble, once the Federal Reserve begins to increase interest rates, or once markets think the Fed will inflate and reduce the real debt burden.
China needs to tame domestic inflation and further liberalize its economy. Yet, there is strong political pressure to continue to peg the yuan at an artificially low rate and "sterilize" the newly minted yuan — that is, drain off excess yuan by selling central bank bills, increasing reserve requirements, and setting tighter lending quotas.
Price controls and capital controls are also being used to suppress inflation and to limit private choices. But as long as China is trapped in its export-led development model, with financial repression, the hoard of foreign exchange reserves will grow and most of those reserves will be lent to the U.S government, not to private enterprise.
The reality is that both China and the U.S. are growing the state sector at the expense of the private sector. Crony capitalism, not market liberalism, is now the norm.
James A. Dorn is vice president for academic affairs and a China analyst at the Cato Institute in Washington, D.C.
More by James A. Dorn
For China to become a global financial center and achieve financial harmony, there must be privatization of the banking system, capital freedom, flexible exchange rates, market-based interest rates, and a rule of law that assigns responsibility to private individuals, not the state.
The mispricing of credit/risk and monetary manipulation plague both China and the U.S. Beijing is right to criticize U.S. policymakers for creating fiscal and monetary uncertainty. But what Beijing wants is more, not less government control, while the solution to the problem of creating economic and social harmony is less government.
With a rule of law and limited government, voluntary exchanges in private free markets would increase individual sovereignty and wealth, while promoting the general welfare. That concept of spontaneous order is now foreign to most politicians. Politics and "legal plunder" have trumped what the great French liberal Frederic Bastiat called the "law of liberty."
The challenge for both China and the U.S. is to restore the balance between the state and the market — to maximize freedom and minimize coercion. Rebalancing can then be market-directed, economic relations normalized, and politics put in its proper place.
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