Thursday, December 30, 2010

China's Carrier-Killer Missile Now Operational

In April, 2009, this Blog called attention to China's efforts to develop a conventional ballistic missle capable of striking surface vessels, particularly aircraft carriers, 2,000 kilometers from the Chinese mainland. In particular, reports at the time suggested that China was working to modify its DF-21 mobile intermediate range ballistic missile, pictured previously on this blog here, so it could strike moving targets, particularly aircraft carriers. The blog opined:

"If the report is accurate, America's ability to project power near China, e.g., defend Taiwan, could be greatly diminished, absent effective counter-measures that could thwart such a missile."

Now, the Washington Times is reporting that the DF-21 is operational, though not yet thoroughly tested. The Times quotes an American Admiral stating that China has deployed the missile, which apparently has not been tested on sea-based targets. Given the missile's range, the Chinese could, for instance, threaten American vessels coming to the aid of Taiwan or South Korea. (Note in this connection that the F-18 Superhornet, the main offensive weapon deployed from carriers, has a combat radius of between 400 and 450 miles. Hence, even carriers deployed west of Taiwan would be vulnerable to DF-21 attack.) (However, the F-35 will have a combat radius closer to 600 miles, without refueling.)

As reported in this blog's initial post on the subject, this version of the DF-21 would rely upon satellites, over the horizon radar, and unmanned aerial vehicles to track its targets -- which themselves travel over 30 miles per hour --- and guide the missile to its destination. This particular version of the DF-21 carries a conventional warhead, so near misses will be misses.

There are, it should be noted, various counter-measures the U.S. could take to blunt the relevance of the DF-21. For instance, the RIM-161 Standard Missile 3, deployed on Aegis-class cruisers, has an anti-ballistic missile capability and can presumably shoot down the DF-21. Indeed, as previously discussed on this blog, the United States deployed such interceptors to defend Hawaii against a threatened North Korea missile "test" during 2009. Moreover, the same missile can destroy low-orbit satellites; in 2008 a Standard 3 launched from the USS Lake Erie destroyed a malfunctioning American satellite at an altitude of 130 miles. Presumably the same missile could destroy satellites employed to help guide the DF-21 to its intended target.

Monday, December 27, 2010

If Nuclear Power Works for the Chinese Navy . . . . .

Writing in the Japan Times, Michael Richardson reports that China is anxious about securing additional sources of imported oil and natural gas. According to Richardson China, once a net exporter of oil during the early 1990s, now imports just over one half the oil it uses, having recently surpassed Japan to become the world's second largest importer of oil. At the same time, China is encouraging "electricity generators, heavy industry and home-heating and cooking" to switch from reliance on coal to reliance on natural gas instead. (According to a different source, China is currently the world's largest user of coal.) In short, in 2030, China will import 80 percent of its oil consumption; natural gas, which currently accounts for 3 percent of China's energy production, will account for 10 percent of that production.

According to Richardson, China may take aggressive steps (what he calls "strong arm tactics") backed by a strengthened military, to assure itself of adequate supplies of oil and natural gas --- both by keeping sea lanes open and locating and exploiting supplies of oil and gas in waters also claimed by other nations. (At the same time, as Richardson notes, China is also moving to exploit offshore sources of oil and gas in undisputed Chinese waters.) Richardson also notes that China could choose a more cooperative approach to meeting its vast and rapidly increasing needs for oil and natural gas.

There is, of course, another way for China to deal with it growing dependence on imported oil and gas. That is, the country could follow the lead of the United States and other nations that have moved more aggressively to encourage carbon free energy production. As previously reported on this Blog, China is the world's largest emitter of greenhouse cases, having passed the United States several years ago, largely due to its coal-intensive energy strategy. Indeed, according to one source, the combined emissions of three Chinese electricity companies exceed those of Britain, and another source predicts that China will nearly triple its coal-fired electricity generating capacity and use 135 percent more coal than the United States by 2030. At the same time, China's GDP is currently less than one half that of the United States, with the result that China employs more than twice as much carbon per unit of output than the United States, for instance.

What could China do? Of course wind power and solar power are options. However, China might also take a hint from its own Navy, which boasts ten nuclear-powered submarines, one of which is pictured above. While China is rapidly modernizing its own navy, and, according to some reports, planning to deploy a nuclear-powered aircraft carrier by 2020, the nation truly lags behind several other nations when it comes to non-military nuclear power. Indeed, according to one source, China ranks 9th in the world in nuclear power generation, behind Ukraine, Canada and South Korea, to name a few. Indeed, while China produces more output than France, for instance, France generates six times more electricity with nuclear power than does China. (The United States generates more than 12 times more electricty with nuclear power than does China.) According to the U.S. Energy Information Agency, China's coal-fired power plants had just under 496 gigawatts of generating capacity in 2007. That's less than the combined nuclear generating capacity of France (418 gigawatts) and Canada (84 gigawatts) in 2008.

If China is truly serious about moving to a clean energy economy, it should get with the (nuclear) program.

Sunday, December 26, 2010

Has George Will Tripped on Federalism?


Today George Will praises the proposed Public Employee Pension Transparency Act, the title of a bill introduced by Congressman Devin Nunes (R-California). As Will describes it, the bill would perform two main functions. First, the Act would enhance the transparency of state and local pension systems, by requiring states to disclose the full extent of their pension liabilities as well as the nature of the financial assumptions used to calculate those liabilities. Second, the Act would, Will says "stipulate that state and local governments are entirely responsible for their pension obligations and the federal government will provide no bailouts."

As Will points out, states and localities together labor under nearly $4 Trillion in unfunded pension liabilities. Given these facts, encouraging fiscal responsibility by spendthrift states is a laudable objective. At the same time, there are two possible objections to the bill as Will has described it.

First, Congress cannot, as a matter of Constitutional Law, bind future Congresses not to bail out insolvent states, even states whose insolvency is the result of reckless spending. So, for instance, the new incoming Congress could not enact a tax cut and at the same time provide that "no future Congress shall repeal this reduction in tax rates." Allowing one Congress to bind future Congress's would entrench the decisions of today's representatives, and the people they represent, depriving citizens of their ability to alter the course of national policy by electing different representatives in the future.

Hence, while it might make sense as a matter of policy in this particular instance for Congress to bind itself in this manner, future Congresses would properly feel perfectly free to ignore such an effort and thereby address any request for a bailout "on the merits" of such a request. I hasten to add that, like George Will, your humble blogger cannot imagine an instance in which the national government should bail out a state that has become insolvent due to its own fiscal profligacy.

Second, some might wonder why the National Government should be attempting to induce states to disclose additional information to their own citizens about pension liabilities. In particular, devotees of federalism can justly ask why Will, a prominent conservative, would advocate such national interference with states' inner political workings. As this blog has previously noted, in a federal system, states compete with each other for citizens and capital; states that adopt inefficient rules will lose capital and citizens to other states. Moreover, presumably a state's own citizens have a greater interest in that state's solvency than citizens in other states. Given these assumptions, there is no apparent reason why a national government would be in a better position to determine the appropriate level of public pension transparency than state governments subject to these competitive and democratic constraints. It should also be noted that individuals, including large institutional investors, have significant incentives to ascertain the actual liabilities of states and localities that issue debt before purchasing such debt, with the result that states that decline to provide such information my find themselves paying higher rates of interest, other things being equal, than those that do.

Will and, for that matter, Congressman Nunes, have anticipated such an objection. For, as Will points out, the Act would not require ANY state to adopt the sort of disclosure he describes. Instead, the Act would "merely" encourage states to do so by withdrawing the tax exemption for interest on debt issued by those states that decline to comply. In other words, states that declined to comply with the Act's disclosure provisions would be placed at a competitive disadvantage in the capital market compared to those states that did, in fact comply.

To be sure, subsidizing the issuance of state debt via exempting its interest from taxation is questionable practice. Moreover, withdrawl of a tax exemption is not equivalent to the outright coercive imposition of such rules. Moreover, Congressman Nunes should be praised for showing some sensitivity to federalism concerns. At the same time, use of the tax system to induce states to pass legislation they otherwise would not enact still, in the view of this blogger, requires some showing of a national interest that justifies such attention to the disclosure practices of individual states. While there may be such an interest, Will has not provided one, leaving the case for such legislation as of yet unproved.

Wednesday, December 22, 2010

The Senate Stands for Federalism

The Daily Press of Hampton Roads has penned a superb editorial praising the Senate for rejecting a bill that would have required states, localities and municipalities to allow the unionization of their public safety employees, even if such unionization was otherwise contrary to state law. As the Daily Press points out, states that allow such unionization are laboring under the financial yoke of the resulting collective bargaining agreements, struggling to locate the funds necessary to pay the often-inflated salaries and benefits, including pensions, that unions negotiate on behalf of their members, backed up by the threat of a strike or work slowdown.

As the Daily Press puts it:

"From California to Massachusetts, localities are raising taxes, borrowing money, cutting services and eyeing bankruptcy to pay for the police and fire union contracts that have driven up costs, in some cases to the point where the average firefighter costs $170,000 a year in pay and benefits."

Of course, proponents of unionization would invoke various purported benefits of allowing workers to "bargain collectively" (that is, form cartels). Moreover, your humble blogger has previously rebutted some of these arguments. However, as the Daily Press points out, and as this blogger has previously pointed out, there is no apparent rationale for allowing the National Government to impose the benefits of mandatory collective bargaining against the will of individual states. That is to say, if allowing the unionization of public safety employees advances the public interest, then states --- who are uniquely interested in the public safety of their own citizens --- will presumably allow for such unionization themselves. As James Wilson put it, in statement previously quoted by this blog:

"Whatever object of government is confined in its operations and effects, within the bounds of a particular state, should be considered as belonging to the government of that state; whatever object of government extends, in its operation or effects, beyond the bounds of a particular state, should be considered as belonging to the government of the United States."

The decision whether to allow unionization of local public safety workers plainly falls into Wilson's first category --- an "object of government confined in its operations and effects, within the bounds of a particular state" and should thus be left to that state.

Indeed, the Daily Press put this point in Constitutional terms.

"The Constitution reserves to the states all powers not specifically assigned to the federal government. Among those would seem to be the power to manage relations with their own workers. Virginia decided it doesn't want to deal with unions in the government sector, and that works well here."

The Daily Press is plainly referring to the 10th Amendment to the U.S. Constitution, which provides:

"The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

Because the Constitution does not authorize Congress to determine the working conditions of state and local employees, the argument goes, the 10th Amendment reserves such issues to individual states.

To be sure, there are some Supreme Court decisions suggesting that Congress has the authority, employing the power to regulate interstate commerce, to regulate the terms and conditions of the employment of state and local employees. See Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985). However, Garcia rested upon the assumption --- controversial to be sure --- that the political process would protect states from undue intrusions on their sovereignty, there, the wages and other working conditions of transit workers. It would therefore seem that members of Congress would have a special responsibility in this context to give voice to the sort of federalism values that animate the 10th Amendment and the more general limitation on Congressional powers.

Of course, the Garcia doctrine only comes into play when Congress might otherwise possess the authority to regulate the activity in question. Since 1937, the Supreme Court has rarely struck down a federal statute because it exceeds the scope of the commerce power. In part, this track record reflects judicial deference to Congressional determinations that particular activities in fact have a substantial impact on interstate commerce thereby justifying regulation. Here again, the prospect of such deference demands legislative sensitivity to the sort of federalism concerns that led the founders to place limits on the power of the national government, what John Marshall called "the genius of the whole system."

Kudos to Senator Mark Warner for displaying such sensitivity to federalism concerns in this case and protecting the sovereignty of Virginia against such unjustified intrusion into the state's authority.

More fundamentally, decisions by the Supreme Court are not the final word on the meaning of the Constitution, as Andrew Jackson, Abraham Lincoln, James Madison, and Ronald Reagan understood. That is, individual citizens and political actors, when acting within the sphere of their authority, are free to take a different view of the Constitution than that taken by the Supreme Court. So, for instance, in his first inaugural address, President Lincoln announced his opposition to the infamous Dred Scott decision. Moreover, both Andrew Jackson and Ronald Reagan vetoed legislation on constitutional grounds despite Supreme Court precedents holding that such legislation was valid. Public officials take an oath to the Constitution and not to the Supreme Court. Perhaps some Senators believed that the proposed bill exceeded the scope of their authority, properly construed.

Monday, December 20, 2010

Erroneous and Tautological Arguments for The Coercive Health Insurance Mandate

Ezra Klein of the Washington Post has penned an editorial defending a national coercive requirement that individuals purchase over-priced health insurance, by touting the supposed virtues of the recently-adopted Massachusetts plan, which also contains such a mandate. Close inspection reveals that one of Klein's assertions about the Massachusetts plan is erroneous, and two others are mere tautologies.

1. Klein argues that the Massachusetts individual mandate has reduced health insurance premiums "for everybody" in Massachusetts. Here's the full quote:

"The bigger reason [for Massachusett's supposed success] is that the individual mandate - plus the combining of individual and small firms in the same insurance market - brought healthier, younger people into the mix, which brought average premiums down for everybody." (emphases added).

This is false. As Klein himself argues, one point of the Massachusetts law was to force young, healthy individuals who declined to buy insurance to purchase insurance required by the state. Thus, before the law was passed, thousands of citizens in the Bay State were paying health insurance premiums of zero. Now, having been forced to buy a product they don't want, these citizens must pay premiums that are much higher than zero. So, the law did not reduce premiums for "everybody."

2. If pressed, Klein might reply that the individual mandate helped reduce health insurance premiums for individuals that were purchasing health insurance BEFORE passage of the Massachusetts Act. Here is the pertinent quote consistent with that view:

"Like the federal law, the Massachusetts law left most people's health arrangements alone. The exception: people who don't get their coverage through a large employer or a public program. That accounts for most of the uninsured. It's also where the individual mandate is primarily in play and where the "exchanges" - the purchasing markets that put individuals and small businesses in a single pool and force insurers to compete for their business and treat them fairly - really matter.  In Massachusetts, that market has worked better than expected. According to data from America's Health Insurance Plans, the largest health insurer trade group, premiums for that market have fallen by 40 percent since the reforms were put in place. Nationally, those premiums have risen by 14 percent."

This assertion may well be correct, but if so it's beside the point. Indeed, it's a meaningless tautology. By design, the Massachusets plan, like the National Health Care Reform Act, requires a modified form of "community rating," preventing insurance companies from charging individuals with higher risk profiles more than they might charge those who pose lower risks. As a result, low-risk individuals who declined to purchase insurance before such reform must now purchase insurance at rates higher than justified by their risk profile, while high risk individuals receive a state-mandated discount from the premiums they had to pay before the law. (This is why some have argued that the National Health Care Reform Act is a "Bad Deal for Young Adults.") It should be no surprise whatsoever, then, that, after passage of the Massachusetts law, individuals who previously paid cost-justified high premiums because they posed a high risk, now pay lower premiums, because Massachusetts coercively requires other citizens to subsidize their health care.

In the same way, of course, taxing left handers to subsidize the health insurance premiums of right handers will, believe it or not, reduce the premiums paid by right handers!

In other words, Klein has made no argument for Massachusetts-style individual mandate. He has, instead, simply reported the natural consequence of such a mandate when combined with the sort of price controls inherent in community rating.

3. Klein also praises the Massachusetts Act because, he says, it has lowered the proportion of Bay State citizens who are uninsured. Here again, this is not really an argument. Instead, it is a description of the natural consequences of a coercive requirement that citizens take a certain action. After all, Massachusetts requires all citizens who don't have health insurance via their employers or a public program like Medicare or Medicaid to .... purchase health insurance. If they don't, they suffer a penalty. Apparently most citizens of the Bay State follow the law for one reason or the other.

Monday, December 13, 2010

The Constitution Vindicated (so far).

"Adhere to the Constitution."

"Eat your Wheaties (and buy over-priced health insurance)."

Judge Henry Hudson of the Eastern District of Virginia has struck down a portion of the recent Health Care Reform Act that would have required individuals to purchase over-priced health insurance. His opinion is here.

In so doing, Judge Hudson rejected the administration's claim that Congress may coercively compel all individuals to purchase health insurance because: (1) such individuals will, at some unspecified time in the future, need medical care, with the result that failure to purchase such insurance now will have an impact of some sort on the health care market and (2) failure by some individuals to purchase health insurance will undermine Congress's effort to pool risks, by allowing some individuals to avoid participating in the risk pool and subsidzing individuals who pose higher risks, by paying premiums higher than those that are actuarially justified. (Apparently the first argument by the United States assumes that individuals who decline to purchase health insurance now will not have such insurance when they need medical care in the future or will not be able to pay for such care at that time "out of pocket."). It should also be noted that, actuarial considerations to one side, the insurance Congress hopes to force individuals to purchase will be over-priced, because Congress failed to take numerous steps that would have lowered the cost of medical care and also lowered the price of insurance. Such steps would have included preempting state certificate of need laws, allowing additional immigration of physicians, and repealing the McCarran-Ferguson Act, thereby reinstating the Federal ban on collusion between health insurance providers and eliminating otherwise unconstitutional state-created barriers to entry by out-of-state health insurance providers. Put another way, by failing to enact other, perfectly vaild federal legislation, Congress has itself helped to create the very economic conditions that supposedly justify additional (and unconstitutional) legislation.

According to Judge Hudson:

"This broad definition of the economic activity subject to congressional regulation lacks logical limitation and is unsupported by commerce clause jurisprudence." (See page 23).


"Of course, the same reasoning [by the United States] could apply to transportation, housing or nutritional decisions." (See page 23).


"Neither the Supreme Court nor any federal circuit court of appeals has extended commerce clause powers to compell an individual to involuntarily enter the stream of commerce by purchasing a commodity in the private market." (See page 24).

In other words, if courts accept the rationale for federal intervention offered by the government here, Congress would also have to power to compel individuals to purchase and eat more nutritional foods, to take vitamins, to purchase a treadmill and use it three times a week, and to get more sleep, all because an individual's failure to engage in such activities would have an impact on their future health care expenditures and thus, for this reason alone, be appropriate objects of Congressional regulation. As Judge Hudson rightly noted, no American appellate court has ever sustained national legislation on such a theory. Doing so would even further erode the boundaries that constrain what the founders and ratifiers meant to be a national government of limited powers.

As Judge Hudson himself put it:

"The unchecked expansion of Congressional Power to the limits [necessary to sustain the coverage mandate] would invite unbridled exercise of federal police powers.” (See page 37).

Judge Hudson also rejected the government's claim that the fine imposed for non-compliance with the mandate to purchase insurance was merely a revenue-raising tax, and not a penalty. If the fine is a tax, then it would be constitutional so long as it furthers the general welfare. According to Judge Hudson, "the notion that the generation of revenue was a significant legislative objective was a transparent afterthought." (See page 32). Moreover, he concluded that "the use of the term 'tax' appears to be a tactic to achieve enlarged regulatory license." (See page 33). Finally, after a careful review of the statute, he concluded that numerous features of the Act itself confirm that, unlike the actual taxes explicitly imposed by the law, the penalty imposed for non-compliance is not a tax. (See pages 33-36). In other words, Congress and the President now realize that the coercive mandate exceeded Congress's power under the Commerce Clause and have thus sought to recharacterize what had been conceived of as a penalty, inducing purchase of insurance, as a tax.

Of course, the United States will appeal Judge Hudson's ruling to the Fourth Circuit Court of Appeals and then, if necessary, to the U.S. Supreme Court. Hopefully the appellate judges who hear the case will keep in mind the following excerpt from the majority opinion of Chief Justice Charles Evans Hughes (pictured above), joined by, inter alia, Justice Brandeis, in Schechter Poultry v. United States, 295 U.S. 495 (1935).

"It is not the province of the Court to consider the economic advantages or disadvantage of such a centralized system. It is sufficient to say that the Federal Constitution does not provide for it. Our growth and development have called for wide use of the commerce power of the federal government in its control over the expanded activities of interstate commerce, and in protecting that commerce from burdens, interferences, and conspiracies to restrain and monopolize it. But the authority of the federal government may not be pushed to such an extreme as to destroy the distinction, which the commerce clause itself establishes, between commerce "among the several States" and the internal concerns of a State."

Wednesday, November 24, 2010

President Lincoln's 1863 Thanksgiving Proclamation

Washington, D.C. October 3, 1863
By the President of the United States of America.
A Proclamation.

The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consciousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom.

No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People.

I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.

In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.

Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the Unites States the Eighty-eighth.

By the President: Abraham Lincoln

Wednesday, November 17, 2010

Federalism at Work Protecting Economic Liberty

A recent study by Americans for Tax Reform finds that states with high taxes and pro-union labor laws are losing citizens and thus losing influence in Congress (and, it should be noted, the Electoral College.)

In particular the study finds that eight states are projected to gain at least one Congressional seat as a result of the 2010 Census, with the gains distributed as follows. Note that the states highlighted in red cast their electoral votes for George W. Bush in 2004, while those highlighted in blue cast their for John Kerry.

1) Texas (4 seats);

2) Florida (2 seats);

3) Georgia (1 seat);

4) Nevada (1 seat);

5) South Carolina (1 seat);

6) Utah (1 seat);

7) Washington (1 seat);

The same study finds the losses distributed thusly:

1) New York (2 seats);

2) Ohio (2 seats);

3) Illinois (1 seat);

4) Louisiana (1 seat);

5) Massachusetts (1 seat);

6) Michigan (1 seat);

7) Missouri (1 seat);

8) New Jersey (1 seat);

9) Pennsylvania (1 seat);

The results have obvious ramifications for the 2012 Presidential Election. In particular, the results show a net gain of six electoral votes for states that cast their votes for George W. Bush in 2004 over John Kerry. Recall that, in 2004, President Bush received 286 electoral votes --- 16 more than the 270 needed to prevail. If the same states vote for the Republican candidate in 2012, that candidate will receive 292 electoral votes. As a result, such a candidate could lose, say, Ohio (18 electoral votes in 2012), and still prevail. That is to say, the electoral map is shifting in favor of the Republicans.

The study also finds that, among the states gaining seats, the average top tax rate on personal income is 2.8 percent, while the average top rate in states losing seats is just over 6 percent. Moreover, 7/8s of the states that gained seats have passed so-called "right to work laws." Such laws, authorized by the Taft-Hartley Act of 1947 (passed over President Truman's veto) prevent Unions and employers from negotiating collective bargaining agreements that require employees to join or financially support a union as a condition of employment with the employer in question. States that decline to adopt so-called "right to work laws" are known as "closed shop states."

For proponents of economic liberty, the message of the study is clear, namely, states with low taxes on high income earners and a favorable climate for business create economic opportunities and thus attract in-migration, while states with high taxes on the well-to-do and unfavorable business climates stultify economic growth and induce out-migration. These proponents would also view such migrations as part and parcel of a well-functioning system of federalism whereby states compete with one another for productive citizens and capital. Such competition, they would argue, deters states from adopting unduly onerous regulations and taxes at the behest of special interests, thereby providing a bulwark against economic oppression.

Proponents of high taxes and closed shops might interpret this data in a different way, however. These analysts might see these data as reflecting a "race to the bottom," that is, destructive competition between the states for high income individuals and businesses hostile to unions. Under this view, states compete with each other by lowering taxes and relaxing protection for workers, thereby undermining the ability of each state to generate sufficient tax revenue to support essential functions as well as the ability to ensure fair wages and working conditions for labor. Adherents to this view would presumably decry the system of federalism that allows this competition to take place and, for instance, advocate repeal of that portion of the Taft-Hartley Act that authorizes states to pass right to work laws.

My own sense is that any "race to the bottom" characterization of these data is strained. I have no doubt that such races can occur. For instance, absent federal regulation, individual states may adopt lax anti-pollution regulation if pollution produced by industrial activity crosses state lines. (Imagine, for instance, a factory in one state that emits pollutants into a river that then flows through several other states.) In such cases, no individual state captures the full costs and benefits of the legislation it passes because of negative externalities flowing from the activity in question. In these settings, it is appropriate for the national government to step in and impose a uniform solution. When it comes to income tax rates and right to work laws, however, any supposed externalities are far less apparent. With respect to these policies, then, states seem to operate more or less as "single owners" of the costs and benefits of legislation they impose. For instance, if a state raises taxes and spends the proceeds on police protection or sanitation, the state's own citizens will benefit and property values will rise. (While other expenditures, e.g., on education, may produce some spillovers, as educated citizens might move elsewhere, the appropriate response to such spillovers would seem to be some national expenditures on education, funded via national taxation, instead of giving individual states the ability to tax and spend without consequence.) Moreover, if "closed shop" laws make industries and workers more productive, then states will adopt such laws as a means of attracting labor and capital. Finally, the size of population flows seems large enough to suggest that working class individuals, that is, individuals supposedly helped by laws allowing closed shops and high taxes on the wealthy, and not just those in the upper income brackets, are moving to low-tax, right to work states.

It should be noted that the "federalism" mentioned here is not of a constitutional dimension, at least according to the jurisprudence of the Supreme Court. Under current Supreme Court case law, Congress could, if it wished, eliminate right to work laws altogether, allowing unions and employers to negotiate "closed shop" arrangements in any state. Indeed, that was the state of the law between passage of the National Labor Relations Act in 1935 and its amendment via the Taft-Hartley Act. (Though it should be noted that, in 1935, the Supreme Court still enforced limitations on Congress's Commerce power, thereby limiting the scope of the NLRA to business of the sort that, if crippled by a strike, would place a direct burden on interstate commerce.) Moreover, Congress could, if it wished, provide citizens in high tax states with tax federal credits that compensate citizens in high tax states for the tax premium they pay compared to their fellow citizens who live in other states. (Indeed, under the current tax code, taxpayers can generally deduct any state taxes they pay from their gross income, and this rule functions as a federal subsidy of sorts for high tax states.) Still, Congress has chosen NOT to take these steps, thereby facilitating competition among the states for labor and capital, competition that deters oppresive taxation and fosters labor and other laws friendly to wealth and job creation. In so doing, Congress seems sensitive to the admonition of James Wilson, perhaps the most under-appreciated of the Founding Fathers, pictured at the top of this post. According to Wilson, describing the appropriate boundaries between state and federal power at the Pennsylvania Ratifying Convention:
"Whatever object of government is confined in its operations and effects, within the bounds of a particular state, should be considered as belonging to the government of that state; whatever object of government extends, in its operation or effects, beyond the bounds of a particular state, should be considered as belonging to the government of the United States."
Fortunately Senator Robert Taft, pictured after Wilson above, and other supporters of the Taft-Hartley Act, agreed with Wilson.

Sunday, October 24, 2010

Justice O'Connor's Prescient Support for Corporate Political Speech

More "Conservative" Than Chief Justice Rehnquist?

In a recent and informative analysis of the Supreme Court, David Savage of the Los Angeles Times concludes that the appointment of then-Judge Samuel Alito to replace Justice Sandra Day O'Connor shifted the Supreme Court "to the right." He also reports that opinion polling establishes that the public generally agrees with various decisions the Court has reached in recent years, including those that evidence a rightward tilt. That is the say (and I am extrapolating somewhat here), Savage concludes that Justice Alito is more likely to reach results congenial to constitutional conservatives --- and the American Public --- than was Justice O'Connor.

Savage provides several examples of decisions congenial to conservatives that the public approves. As he puts it:

"A strong majority [of the public] favored conservative rulings that prohibited “partial-birth” abortions, upheld a homeowner’s right to have a gun, and required voters to show photo identification."

Savage also notes that the public agreed with a couple decisions more congenial to those on the left, e.g., decisions allowing EPA regulation of carbon emissions (a decision, I will note, that did not involve application of the Constitution) as well as a decision striking down laws providing life in prison without parole for juveniles who commit heinous murders. Finally, Savage notes:

"There were two notable exceptions [that is, instances in which the public disagreed with the Court]. The public disagreed with the liberal decision two years ago that gave detainees at the U.S. prison in Guantanamo Bay, Cuba, a right to challenge their detention in a civilian court. Sixty-one percent of respondents said these noncitizen detainees should not be allowed to go to court. The public also disagreed with the conservative ruling earlier this year that gave corporations a right to spend freely to endorse or oppose candidates for election. By 58 percent to 40 percent, they disagreed with the notion that 'corporations ought to be able to spend their profits on TV advertisements urging voters to vote for or against candidates.'"

The decision protecting corporate speech, of course, was Citizens United v. Federal Election Commission, a decision advocated and then approved by this blog.

Savage points out that most of these decisions (including Citizens United and District of Columbia v. Heller, which found that the Second Amendment protects the individual right to bear arms) were decided 5-4, and asserts that Justice Alito's presence on the Court, replacing Justice O'connor, tipped the balance in favor of the more "conservative" result.

While it may be that Justice Alito has tilted the Court "to the right" on certain issues, e.g., the authority of states and Congress to regulate "partial birth abortion" (a practice that Senator Moynihan called "only minutes away from infanticide" and that then-Senator Biden voted to ban) his appointment did not tilt the Court on the question of free speech rights for corporations. Citizens United overruled Michigan Chamber of Commerce v. Austin, which sustained, by a vote of 6-3, Michigan's ban on speech by corporations for or against a candidate during an election. Justice Kennedy, the author of the majority opinion in Citizens United, issued a lengthy dissent in Michigan Chamber of Commerce, arguing that Michigan's ban on high value political speech violated the First Amendment. In so doing, he rejected the rationale for speech suppression articulated by the majority, namely, that corporations receive "special benefits" from the state, with the result that their speech does not reflect "actual public support" for the views expressed. He also rejected the argument that bans on corporate political speech protect shareholders from seeing "their" money (retained corporate earnings) used to support candidates with whom shareholders might disagree, an argument made by Justice Brennan in a concurrence. (It should be noted here that Michigan allowed shareholders and others affiliated with corporations to make contributions to so-called "segregated funds," and Justice Brennan argued that the ability to "speak" via these funds sufficed to protect shareholders' free speech rights. As I have argued elsewhere, this argument by Justice Brennan ignores the basic economic truth that relegating shareholders to individual contributions to segregated funds will result in significantly less speech than shareholders actually desire and for which shareholders would be willing to pay. Such speech is what economists call a collective good --- the party producing the good cannot exclude others from consuming it --- with the result that contributions by one shareholder to support production of the good benefit other shareholders as well. (Put more technically, from the perspective of individual shareholders, production of such speech is characterized by "non-excludability.") As a result, each shareholder will have an incentive to "free ride" on the contributions that other shareholders might make to support such speech. If each shareholder free rides in this way, no shareholder will contribute to support such speech, with the result that relegating corporations to reliance on such segregated funds will result in a severe burden on political speech that shareholders would otherwise support.)

Here is one of many "money quotes" from Justice Kennedy's opinion:

"Far more than the interest of the Chamber is at stake. We confront here society's interest in free and informed discussion on political issues, a discourse vital to the capacity for self-government. "In the realm of protected speech, the legislature is constitutionally disqualified from dictating the subjects about which persons may speak and the speakers who may address a public issue." First National Bank of Boston v. Bellotti, 435 U.S. 765, 784 -785 (1978). There is little doubt that by silencing advocacy groups that operate in the corporate form and forbidding them to speak on electoral politics, Michigan's law suffers from both of these constitutional defects."

Importantly, Justice Kennedy did not speak alone. Instead, both Justice O'Connor and Justice Scalia joined his opinion in its entirety. That is to say, more than a decade before President Bush nominated then-Judge Alito to replace Justice O'Connor, Justice O'Connor had herself gone on record as opposing the sort of speech suppression schemes exemplified by the statute the Court sustained in Michigan Chamber of Commerce. Justice Kennedy's majority opinion in Citizens United was simply a reaffirmation of the views that he had expressed for himself, Justice O'Connor and Justice Scalia in his dissent in Michigan Chamber of Commerce.

As Savage reports, Justice Alito joined the Citizens United opinion, thereby reaching the same result that Justice O'connor would have reached, as evidenced by her dissenting vote in Michigan Chamber of Commerce. To be sure, Justice O'Connor may have felt compelled to follow Michigan Chamber of Commerce based on considerations of stare decisis, but there is no reason to believe she would have been more committed to stare decisis on this question than Justices Kennedy and Alito, for instance.

What, then, accounts for the Court's shift, from a 6-3 vote to sustain such suppression in 1990, to a 5-4 vote to condemn it last term? Two changes in personnel resulted in the shift. First, Justice Thomas, who joined Citizens United, replaced Justice Thurgood Marshall, who authored the majority opinion in Michigan Chamber of Commerce. Second, Chief Justice Roberts replaced Chief Justice Rehnquist, who had joined the majority opinion in Michigan Chamber of Commerce. The result was therefore a 5-4 majority in favor of protecting the free speech rights of corporations and the shareholders that employ the corporate form to express their views.

Some may be surprised that Chief Justice Rehnquist, often described as an "arch conservative," supported Court's decision in Michigan Chamber of Commerce. Don't conservatives always support the rights of big business, including corporations? Apparently not. While then-Chief Justice Rehnquist did not explain his vote in Michigan Chamber of Commerce, it's not hard to figure out why he joined the majority. After all, then Justice Rehnquist had dissented in First National Bank of Boston v. Belloti, where the Court struck down the effort by Massachusetts to suppress the speech of corporations during referenda campaigns. In that dissent, he argued that corporations are mere creatures of the state. As a result, he said, when states create corporations, providing them with limited liability and perpetual life, states need not empower such firms to employ the profits derived from these economic advantages in the political marketplace. Michigan Chamber of Commerce employed a similar rationale in sustaining Michigan's effort to suppress corporate political speech. Chief Justice Roberts, who replaced Chief Justice Rehnquist (for whom he had clerked), apparently rejected this line of reasoning when he joined Justice Kennedy's majority opinion in Citizens United. The divergence in views between these two "conservative" Chief Justices is further evidence that the fit between a Justice's (supposed) politics and his or her jurisprudence is not as tight as many apparently believe.

Saturday, October 23, 2010

"So You Want to go to Law School?"

Here's a hillarious spoof on Law School and the legal profession in general. The item had about 50,000 views a few days ago and is now over 500,000.

Monday, October 18, 2010

Should Big Brother Ration Speech??

Speech Rations are DOWN!

In a characteristically superb Op-Ed, "The Democratic Version of Big Brother," George Will takes on Progressive efforts, now led by President Obama, to micro-manage political speech. Will reminds us of various Progressive-imposed "annoyances," including the 55 MPH speed limit, national ban on the incandescent light bulb (replaced, I might add, by one brimming with poisonous mercury (sorry Thomas Edison!), and suppression of showerheads that produce more water per minute than Washington bureaucrats can tolerate.

Will analogizes these Progressive initiatives to so-called "campaign finance reform," a 1970s project hereby the National Government "regulat[es] the quantity, timing and content of speech about government." During this election cycle, he says, political candidates for all offices in the United States, from local clerks to U.S. Senators, will spend a grand total of $4.2 billion on various forms of electioneering --- less than one half of the annual advertising budget of Procter and Gamble and more than Americans spend annually on yogurt. Apparently Will believes that it's actually healthy for Americans and organizations to which they belong to participate in the electoral process by, among other things,

"Those who are determined to reduce the quantity of political speech to what they consider the proper amount are the sort of people who know exactly how much water should come through our shower heads (no more than 2.5 gallons per minute, as stipulated by a 1992 law). Is it, however, really worrisome that Americans spend on political advocacy -- on determining who should make and administer the laws -- much less than they spend on potato chips ($7.1 billion a year)?"

Finally, Will calls out President Obama for his misleading attacks on the Chamber of Commerce, an organization, I might add, made up of over three million businesses, nearly all of them with 100 employees or fewer. As Will points out, the President of the United States has claimed, without adducing any evidence, that the U.S. Chamber of Commerce is spending money raised from foreign contributors, a charge the Chamber has vehemently denied. While baseless attacks are "par for the course" in our political culture, it's unfortunate to hear such attacks from a President who promised to change the tone in Washington and bring people together. Perhaps his advisors misinformed him about the source of the case paying for the Chamber's high value political speech.

Let me add two points to Will's cogent analysis.

First, it is ironic to say the least that Progressives, including President Obama, would complain about "too much money in politics." Then-Senator Obama promised to work with John McCain to ensure that both would take public financing during the general presidential election and thereby limit the additional amount he could raise from contributors. He then broke that promise, when it became clear that he could raise more money than his opponent, making no real effort to work out an agreement with Senator McCain. As a result, President Obama raised a total of $745 million to support his 2008 run for President, more than twice as much as John McCain and more than all the candidates for President in 2004 combined. Most Progressives seemed perfectly happy to see President Obama raise as much money as possible when necessary to outspend his opponents, even breaking his own promises to do so, but then cry "foul" when their opponents might beat them at their own game.

Second, the misleading attack on the Chamber of Commerce is analogous to the larger effort by Progressives to discredit and villify free speech by corporations and the shareholders who own them. As previously reported on this blog, President Obama misstated the holding of Citizens United and also mischaracterized the history of the caselaw leading up to that decision. Among other things, he claimed, incorrectly, that the Citizens United Court had held that foreign corporations have a right to speak in connection with American elections, even though this issue was not before the Court.

Friday, September 17, 2010

The next chancellor of the D.C. Schools?

A friend has called my attention to a recent Op-Ed in the Washington Post by Courtland Milroy, praising Warren Buffet and D.C. Schools Chancellor Michele Rhee for offering a Leninist solution to the problem of urban education. (Before the reader takes umbrage with my use of the word "Leninist," he or she should note that Millroy himself concedes that Rhee is "sounding like Fidel Castro.")

Here's a summary of the Rhee/Buffet proposal, apparently endorsed, at least in principle, by Millroy:

"I believe we can solve the problems of urban education in our lifetimes and actualize education's power to reverse generational poverty," Rhee wrote. "But I am learning that it is a radical concept to even suggest this. Warren Buffett [the billionaire investor] framed the problem for me once in a way that clarified how basic our most stubborn obstacles are. He said it would be easy to solve today's problems in urban education. 'Make private schools illegal,' he said, 'and assign every child to a public school by random lottery.' " (emphasis added)

It is perplexing to say the least that three otherwise very intelligent and public-spirited people would advocate such a solution, even in partial jest. For one thing the scheme, throwing people in jail for opening a private school --- would entail a frightening invasion of one our most basic civil liberties --- the right of families to choose religious schools for their children. See Pierce v. Society of Sisters, 268 U.S. 510 (1925). The plan would also lead to an exodus from Washington D.C. of families able to move elsewhere, unless Buffet/Rhee/Millroy would also ban such out-migration, thereby further eroding the city's precarious tax base and undermining funding for education.

More fundamentally, such a plan contravenes one of the basic postulates of a free society, namely, that decentralized competition, and not coercively-imposed state-monopoly, produces the highest quality product at the lowest possible cost. To be sure, there is a strong argument for state subsidies of education, because individual families cannot capture the full benefits of investments they make in the children's education. Plus, certain imperfections in the capital market can prevent families of modest means from borrowing the funds necessary to fund, say, a high quality K-12 education. However, even a compelling argument for state subsidy does not justify coercive state control over the means of producing education. All of us would support state subsidies that help the poor purchase necessities like food and clothing. Does that mean, however, that the State must also own the nation's farms and grocery stores, installing a Chancellor of Nutrition to oversee the "Foodstuffs Sector?" Most would chuckle at such an Orwellian proposal.

Indeed, imagine if, instead of education, we were discussing the production of software. Would Buffet, Rhee or Millroy argue that the State should outlaw private software companies, take over Microsoft, and install the firm as a national software monopoly? Would we rely on an elected or appointed "National Software Board" to oversee the development, production, distribution and marketing of software? Of course not. Indeed, most applauded when the national government filed suit against Microsoft, which had obtained a monopoly by providing a product that consumers preferred and then maintained its monopoly position by employing practices that, while questionable, did not employ the sort of state coercion that Rhee, Buffet and Millroy seem to applaud.

Simply put, the problem with our educational system is not too much freedom --- the problem is a deficit of freedom. Our university system --- a highly competitive mix of public and private colleges and universities --- is the envy of the world, drawing hundreds of thousands of foreign students. (A recent study by the Times of London found that 18 of the world's top 25 universities are American. The top five are private universities.) Does anyone think we could improve the system by banning private colleges and universities and assigning students by lot to the remaining public universities? (Recall in this connection that our best private universities train many of the faculty who then teach and perform research at our public universities.) If not, then why adopt such a strategy for K-12 education?

While Millroy, Rhee and Buffet press for greater centralization, states like Minnesota and Wisconsin have moved in the other direction, promoting public school choice and facilitating the formation of charter schools, the latter of which advertise in an effort to compete with more standard "public schools." Under this approach, state money follows the student; schools that fail see their enrollments fall as students choose other schools, be they traditional "public" or charter schools. Plus, contrary to the Rhee/Buffet/Millroy plan, Minnesota and Wisconsin actually allow private schools to operate in the state! Moreover, between 2004 and 2009, public high school graduation rates in Minnesota's largest city, Minneapolis, rose from 54.5 percent to 76.3 percent. Not surprisingly, there is no movement in Minnesota to ban private schools or charter schools. Unlike Rhee, Buffet and Millroy, Minnesotans apparently understand what the Supreme Court said more than 80 years ago:

"The fundamental theory of liberty on which all governments of this union repose excludes any general power of the state to stadardize its children by forcing them to accept instruction from public teachers only. The child is not the mere creature of the state; those who nurture him and direct his destiny have the right, coupled with the high duty, to recognize and prepare him for additional obligations."

Pierce v. Society of Sisters, 268 U.S. 510 (1925).

Enough said!

Sunday, August 29, 2010

John F. Kennedy, Radical Supply-Sider?

In an August 2, 2010 Op-Ed "Soak the Rich Catch-22" published in the Wall Street Jounal, Arthur Laffer argues that a tax increase on the wealthy will reduce the tax revenue received from such individuals and, other things being equal, increase the federal budget deficit. The Op-ed follows a May WSJ column by Laffer on tax policy in various states, entitled "Soak the Rich, Lose the Rich." Laffer argues that the wealthy, which he defines as individuals in the top 1 percent of the income distribution, can more readily take those steps necessary to alter their activities and income so as to avoid the incidence of income taxes.

As Laffer puts it:

"The highest tax bracket income earners, when compared with people in lower tax brackets, are far more capable of changing their taxable income by hiring lawyers, accountants, deferred income specialists and the like. They can change the location, timing, composition and volume of income to avoid taxation."

Laffer also warns that those who call for higher taxes at this moment in history are repeating the mistakes of Herbert Hoover and Franklin Roosevelt, each of whom signed large income taxes into law in the early 1930s, increases that Laffer claims first precipitated and then deepened and legthened the Great Depression.

To support his claim that raising taxes on the rich will result in lower revenues, Laffer points to data showing that, after REDUCTIONS in tax rates on the rich, tax receipts from the rich rose. For instance, between 1978 and 2007 (the last year from which Laffer has data), taxes paid by the rich rose from 1.7 percent of GDP to 3.3 percent of GDP. (It should be noted that GDP rose significantly during this period. Thus, the size of the pie increased, and so did the portion of the pie that the "rich" paid in taxes.) During the same period, Laffer notes, the share of taxes paid by those individuals in th lower 95 percent of the income distribution fell, from 5.4 percent of GDP to 3.2 percent of GDP.

It should be noted that there may be alternative explanations for these data. For instance, it may be that, from 1978 until 2007, the wealthiest's pre-tax share of overall GDP rose, thus explaining the increase in tax receipts from the wealthy as a share of GDP. Note, however, that this increase in pre-tax share of GDP would reflect in increase in the productivity of the wealthy relative to other earners, an increase that Laffer might explain by the reduction in tax rates that led the wealthy to work, save and invest more than they had under prior tax rates. Others may attribute this increase in productivity to other factors or claim that productivity had nothing to do with the wealthy claiming a larger share of GDP.

Here, though, is what really caught this blogger's eye.
Laffer begins his editorial with a quote from the January, 1963 Economic Report of the President, published by John F. Kennedy.

"Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle --- workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today's economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit --- why reducing taxes is the best way open to us to increase revenues." Like the Arthur Laffers of today, President Kennedy argued that, over the longer run, cutting taxes will actually result in increased government revenues.

Now of course, President Kennedy likely did not pen the words that appeared in his economic report. That task probably fell to Walter Heller, also pictured above, who chaired President Kennedy's Council of Economic Advisors at the time. Heller was a highly respected macroeconomist from the University of Minnesota, hardly a hotbed of laissez faire. Note, however, that Heller was echoing what President Kennedy himself had said just a month earlier, in his famous speech to the Economic Club of New York. There the President made the case for an "across the board, top to bottom" reduction in income tax rates as well as corporate tax rates, as a means of stimulating the economy. At the time, the unemployment rate was 5.5 percent.

In so doing, President Kennedy sounded a lot like Professor Laffer.

"In short it is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now. The experience of a number of European countries and Japan have borne this out. This country's own experience with tax reduction in 1954 has borne this out. And the reason is that only full employment can balance the budget, and tax reduction can pave the way to that employment. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring about a budget surplus."

It should be noted that there are a couple of possible distinctions between Professor Laffer's position, on the one hand, and that taken by President Kennedy, on the other. That is, Laffer emphasizes the ability of individuals to shift income from one place to another --- both spatially and temporally --- an ability that prevents tax increases from raising revenue. President Kennedy's emphasis was more Keynesian, that is, he claimed that tax cuts would enhance private consumption and investment, thereby enhancing aggregate demand and increasing real output, given that the economy was operating below full employment. Of course, the conventional Keynesian story includes an INCREASE in the full employment budget deficit, an increase that stimulates consumption and investment. Kennedy does not fully explain n how, given his Keynesian logic, deficits will, as he claims, turn into surpluses, except to say that such tax cuts will lead to increased prosperity and thus to a balanced budget. However, he does claim that wealthy Americans who receive a tax break will "hereby be encouraged to undetake additional efforts and enabled to invest more capital." This is pure supply-side reasoning, as such "additional efforts" and investing of "more capital" manifest themselves as shifts in the aggregate supply curve that thereby increase real output (and reduce prices). In so doing, he seems to distance himself from the traditional Keynesian approach, which assumes away such supply-side effects to focus only on the demand side. Perhaps he also had in mind the possibility that relaxed monetary policy would provide a separate source of stimulus and thereby boost GDP sufficiently to lead to a balanced budget.

One final note. True Keynesians believe that, when it comes to stimulating the economy, increased spending will, if anything, be more potent than tax cuts. After all, individuals who receive a tax cut, particularly those who are well off, may choose to save the additional income the government allows them to retain instead of spending it. The Keynesian model assumes that such savings will be completely unproductive, even if the additional savings drive down interest rates, because the economic downturn will reduce the return from private investments. (Moreover, consumers may spend the proceeds of a tax cut on imports, thus stimulating the economies of other countries.) Outright spending, by contrast, will stimulate the economy "by definition," as the government purchases goods or services directly from its citizens. Nonetheless, Keenedy's speech to the New York Economic Club rejected additional spending as a remedy for recession, arguing that "such a course would soon demoralize both our government and the economy." "If the government is to retain the confidence of the people," he continued "it must not spend more than can be justified on grounds of national need or spent with maximum efficiency." In short, President Kennedy rejected a big government spending approach to stimulating the economy.

In sum, while President Kennedy may not have been a pure, "true believing" supply sider, he did incorporate certain aspects of supply side thinking in his macroeconomic policy, as part of an overall synthesis of Keynesian and supply-side principles.

Wednesday, August 4, 2010

Missourians Reject an Individual Health Insurance Mandate Despite Corporate Speech!

Yesterday Missouri's citizens voted to reject the National Government's effort to require the state's citizens to purchase health insurance against their will. So-called Proposition C amends Missouri law to protect each citizen's right to pay health care providers directly for services rendered as well as the right to decline to purchase health insurance. Presumably Missouri voters had in mind their state model, inscribed on the state seal pictured above, i.e., "salus populi suprema lex esto" ("Let the welfare of the people be the supreme law.") The measure passed with 71 percent of the vote.

Of course, valid federal law preempts state law, including Proposition C, under the Federal Constitution's Supremacy Clause. But many argue that a coercive federal requirement to purchase health insurance exceeds the scope of Congress's limited and enumerated powers and is thus invalid. (For a summary of this argument, see the following Op-Ed in the Wall Street Journal by Randy Barnett, of Georgetown Law School.) Presumably many Missourians who voted for Proposition C did so because they believe Congress exceeded the powers the Constitution confers upon it, though some may simply agree with former Vermont Governor Howard Dean that the individual mandate is poor public policy.

Ordinarily, the "proper party" for challenging such a mandate would be an individual citizen facing a fine for not complying with the new law. (Note in this connection that the individual mandate does not even take effect until 2014.) That is to say, ordinarily a state cannot itself challenge a federal law, even one that burdens its citizens, simply because the law exceeds the scope of Congress's power. See Frothingham v. Mellon, 262 U.S. 447 (1923). However, by enshrining the right not to purchase health insurance in state law, Missouri, like several other states, has ensured that any effort to enforce the individual mandate will also preempt Missouri law. The prospect of such preemption thereby increases the chance that Missouri would itself have standing to challenge the individual mandate as a sovereign entity. Indeed, earlier this week, Judge Hudson of the Eastern District of Virginia ruled that Virginia has standing to challenge such an individual mandate, relying in part upon Virginia's Patient Protection and Affordable Care Act, which, like Proposition C, protects Virginia's from an individual mandate.

It should be noted that the Missouri Hospital Association, exercising their first amendment rights, apparently spent over $400,000 speaking in opposition to Proposition C, according to one organization that tracks these sorts of things. This is not surprising, for two different reasons. First, some citizens who choose not to purchase insurance may nonetheless require medical attention that hospitals receiving federal subsidies must provide under federal law. If the citizen cannot pay for that care, then hospitals will be left holding the bag. An individual mandate would thereby reduce the anticipated costs that hospitals must incur. Second, the premiums mandated by federal law, particularly those imposed on the young, may significantly exceed the prices justified by the expected cost of providing health care for those required to purchase insurance. If so, then the individual mandate will, other things being equal, increase overall spending on health care and thereby increase the profits earned by hospitals.

Strangely, progressive opponents of corporate political speech have not condemned the Missouri Hospital Associations efforts to drown out the speech of individual Missourians who oppose the national mandate, some of whom relied upon billboards strapped to pickup trucks to convey their support for Proposition C.

Saturday, July 31, 2010

Keynes v. Hayek on the Macroeconomy

Here's a hilarious rap video summarizing the competing macroeconomic perspectives of John Maynard Keynes and Friedrich A. Hayek, each pictured above. Note the appearance as bartenders of actors portraying Ben Bernanke and Tim Geitner near the end of the video.


This blogger's favorite line of the video is sung by Hayek, shown at the top of this post holding his Nobel Medal:

"So sorry there buddy if that sounds like invective. Prepare to get schooled in my Austrian perspective."


U.S. Crushing China in Clean Energy Race

A commentary in Bloomberg Businessweek claims that the United States is somehow "sitting out the race for clean energy." The author points to various Chinese investments in solar power and other forms of clean energy and claims that the U.S. will lose a clean energy race to China unless we impose a large tax on carbon emissions and require utilities to produce 15 percent of their energy from renewable sources. The article seems unconvincing for several unrelated reasons.

First, the portrayal of China as some sort of clean energy leader is laughable. China is the world's largest emitter of carbon according to this 2006 article in the New York Times, and at the same time produces less than one half the output produced by the United States. In other words, China employs more than twice as much carbon per unit of output than does the United States. Thus, compared to China anyway, the United States has lapped China and is winning the clean energy race "going away."

Second, there is no indication that China will catch up to the United States. Indeed, some have estimated that, even under optimistic assumptions, China's carbon emissions will nearly double over the next two decades. By contrast, U.S. Greenhouse emissions actually fell from 2008 to 2009, according to the EPA. If, in fact, Chinese emissions almost double between now and 2030, this increase in emissions will by itself far offset any plausible decrease in American emissions during the same period.

Third, the U.S. lead over China likely reflects our far more stringent environmental regulations under existing law. Any argument for even more stringent regulation on American industry would have to explain why the USA, and not China, should have to bear an even a greater share of the burden of reducing carbon emissions.

Fourth, the author is certainly correct that a tax on carbon and requirement that utilities employ renewable sources of electricity will cause the additional development and marketing of methods of generating renewable sources of electricity. (Though of course foreign firms might outpace U.S. firms as they do in some other fields.) But this is unsurprising and no argument for such requirements. If the American government required automotive companies to paint all cars pink, then of course we'd witness a boom in the pink paint industry as firms came up with new and better ways to make pink paint. The prospect of such a boom, however, would not be an argument for such a pink paint mandate. Put another way, the fact that industries will respond in a predictable way to regulation is not an argument for such regulation.

Fifth, additional regulation of carbon emissions may be good public policy, but not because such regulations would help us win a race we are already winning or encourage firms to develop technology that helps firms comply with that regulation.

Saturday, May 29, 2010

Should We Mimic Brazil's Tax System and Tax Rates?

In some off-the-cuff remarks at the Brookings Institution, Secretary of State Hillary Clinton has asserted that the "rich" are not paying their fair share of taxes in light of the nation's high unemployment rate or, as she put it: "in any nation that faces the kind of employment issues [American currently faces]." She then cited Brazil as a purported counter-example, that is, a country that has imposed high taxes on the rich, spurred economic growth and reduced poverty. As she put it: "Brazil has the highest tax to GDP rate in the Western Hemisphere and guess what --- they're growing like crazy. And the rich [in Brazil] are getting richer, but they're pulling people out of poverty. There is a certain formula there that used to work for us until we abandoned it, to our regret in my opinion."

Before the United States imposes even higher taxes on "the rich," it might want to consider the following:

1. Brazil apparently imposes LOWER taxes on "the rich" than the United States. According to several sources, the top individual tax rate in Brazil is 27.5 percent. By contrast, the top rate in the United States is 35 percent. That 35 percent rate does not include state income taxes. In Virginia, for instance, the top income tax rate is 6 percent. In some US states the top rate is even higher than that. In some others it is lower. Click here for a link to one such source reporting that Brazil's top tax rate is 27.5 percent:

Following Secretary Clinton's logic, perhaps we should be cutting income taxes on "the rich," not increasing them.

2. How is it, one might ask, that Brazil nonetheless maintains such a high tax to GDP ratio? The short answer is "payroll taxes." In Brazil employers pay payroll taxes of just over 37 percent of wages, and employees pay between 7.65 percent and 11 percent, depending upon their income. (Note, however, that the employee payment is capped, thereby reducing the amount of such taxes that the rich would otherwise pay.) I doubt Secretary Clinton would advocate the imposition of such payroll taxes here. Taxing payrolls is a great way to kill job creation during a weak recovery, assuming we are in a recovery.

3. Income inquality in Brazil is more pronounced than it is in the United States, despite (or perhaps because of) Brazil's high tax burden. The conventional method for measuring income inequality is called the "Gini coefficient." A Gini coefficient of 1.0 represents a society in which one individual receives all of society's income, while a Gini coefficient of zero represents a society in which each individual receives exactly the same income. According to the CIA, Brazil's coefficient is 56.7, while the USA's is 45. Apparently Brazil's high tax burden has not produced the sort of income equality for which progressives yearn. (Though perhaps the nation's inequality would be even MORE pronounced without such a high tax burden?)

4. It's not entirely clear that Brazil IS growing like gangbusters. According to one source, Brazil's GDP grew less than 2 percent annually in the 2007-2009 time frame and grew just 2 percent in the first quarter of this year --- less than the United States. Hat tip to the American Thinker for this citation on Brazil's growth.

In any event, whatever its growth rate, Brazil's per capita GDP is less than one fourth that of the United States. It stands to reason that nations with relatively low per capita GDPs can grow more quickly than those with higher per capita GDPs, simply because such nations employ production processes that are less capital-intensive (both in terms of human and physical capital) than wealthier countries, with the result that the incremental return on invested capital is higher than it would be in wealthier nations. Brazil's purported growth may simply reflect this economic truism.
5. The State Department, it should be noted, attributes a portion of Brazil's recent growth to an aggressive privatization campaign, including the privatization of highways. According to the Department:

"Government-initiated privatization after 1996 triggered a flood of investors in the telecom, energy, and transportation sectors. Privatization in the transportation sector has been particularly active over the last 20 years. Many antiquated and burdensome state management structures that operated in the sector have been dismantled, though some of them still exist. The Brazilian railroad industry has been privatized through concession contracts ranging from 30 to 60 years, and the ports sector is experiencing similar, albeit less expansive, privatization. In response to the dramatic deterioration in the national highway system, the federal government has granted concessions for existing highways to private companies, which in turn promise to restore, maintain, and expand these highways in exchange for toll revenues generated. New opportunities are expected to arise with the opening of the Brazilian civil airports to private management and investment through a federal concession model, but the initiative faces obstacles due to questions surrounding sovereignty and opposition from airport unions. The United States and Brazil signed an Air Services Liberalization Agreement in 2008 that significantly expanded air services between the two countries."

Perhaps the Obama administration will take these conclusions to heart and advocate privatization of various state-owned enterprises, such as schools and the automobile industry!

6. Secretary Clinton did not explain why she selected Brazil as her analogy. There are other countries that have grown faster in recent years. Ireland is a case in point. Between 1994 and 2004, the "Celtic Tiger" grew by an average of 8 percent annually, compared to growth rates in the U.S. of less than 4 percent. (Growth in the E.U. was even lower than that in the U.S. during this period. Here is a chart summarizing Irish growth rates during this and previous periods.

Many, including Irish officials, attribute Ireland's rapid growth in part to its very low corporate tax rate of 12.5. (By contrast, the corporate tax rates in the United States and Brazil exceed 30 percent.) Perhaps in the future Secretary Clinton will make some off-the-cuff remarks calling for a drastic reduction in the U.S. corporate tax rate.

7. Finally, it should be noted that inter-country comparisons of ratios between taxes and GDP receipts are hazardous for several reasons, two of which I'd like to highlight here. First, high taxes can induce some firms and individuals to conduct economic activities "off the books," and such activities may not be captured when countries measure their GDPs. If so, then the tax to GDP ratio in some admittedly high tax countries may be lower than it initially appears. Second, the optimal tax to GDP ratio may vary depending on a nation's state of economic development. For instance, the per capita cost of certain governmental services may rise more slowly than a nation's per capita GDP. It should not, for instance, cost the USA four times more per person than Brazil to teach elementary school students to read and write or to provide safe streets and sanitation. Other things being equal, then, we might expect the tax to GDP ratio to fall as a country's per capita income rises. If so, then the tax to GDP ratio of a relatively low income nation, such as Brazil, even one that is growing quickly, may not be a useful benchmark for a high income nation such as the United States.