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.

Thursday, May 13, 2010

On the Appropriate Scope of Judicial Review: Some Comments on Robert Lowry Clinton's "The Marbury Myth"






Dartmouth College Charter; Preserved Against Legislative Attack by Judicial Review


A friend and former student sent me the following article, from National Review, arguing that Marbury v. Madison, which articulated the principle of judicial review in 1803, does not stand for the proposition that the Supreme Court is the sole or supreme expositor of the Constitution's meaning. Indeed, the article goes a little further and seems to argue that neither Marbury nor any other decision in the first half of the 19th Century authorizes courts to strike down laws that do not purport to govern or direct courts themselves.


Here are some of the article's main points, followed by some commentary by your humble blogger. To summarize, I agree with some of Professor Clinton's points and disagree with others. For instance, I agree that neither Marbury nor the Constitution properly read supports "judicial supremacy" over the other branches when it comes to constitutional interpretation. At the same time, I respectfully suggest that Professor Clinton defines the appropriate role of courts too narrowly and also improperly equates any judicial role more expansive than he advocates with "judicial supremacy." Under my view (and the view of Lincoln, Madison, Antonin Scalia, Frank Easterbrook, Edwin Meese (no relation) as well as John McGinnis, Neal Devins, and many other leading scholars) each Department of Government is free to interpret the Constitution as it sees fit, without referring to views of other branches, so long as that Department is operating within the sphere of authority that the Constitution assigns to it. Under this approach, each branch is "supreme" within its own sphere, but no branch can control the constitutional interpretation of the other branches operating within their respective spheres. This approach, known as "Departmentalism" to some, finds support in the text and structure of the Constitution, the words of James Madison and the words and actions of Abraham Lincoln, among others. There are several examples of judicial review perfectly consistent with Departmentalism, that Clinton would apparently, and incorrectly in my view, equate with "Judicial Supremacy."



To reiterate, I will first summarize Clinton's argument, complete with some lengthy quotes from his article. I will then offer my own commentary on it. Note that, in summarizing Clinton's argument, I will sometimes elaborate on his points to clarify them, particularly by mentioning actual cases to which Clinton alludes or mentions by date but not by name.


A


1) While lionized today, Marbury was not, Clinton argues, deemed an important decision during the 19th century and was rarely cited for the proposition that Courts could strike down Acts of Congress or state legislatures. Indeed, the article says, the Supreme Court did not cite Marbury for this proposition until the late 19th Century, first in 1887 vis a vis a state law [Mugler v. Kansas, where the Court cited Marbury but then affirmed the Kansas statute under review] and then in 1895 [in Pollock v. Farmer's Loan and Trust Co., which struck down the income tax].



2) Marbury did not hold that the Supreme Court is the supreme or sole expositor of Constitutional meaning. Instead, Clinton says, the decision was much narrower than that. In particular, the decision simply declined to exercise jurisdiction over a case because the statute purporting to confer that jurisdiction exceeded the authority that Article III of the Constitution grants to Congress to create and define the appellate jurisdiction of the Supreme Court. To put things another way, Marbury was a sort of defensive decision, i.e., defended the Court from unlawful incursions by other branches and a decision that in one sense denied the Court power, because the Court declined to exercise adjudicatory power that Congress had attempted to give it. Marbury did not, Clinton says, purport to reach beyond the Court and interfere with Congress's substantive legislative choices, for instance. Nor, he says, did its rationale support such a judicial role. As Clinton puts it:

"In the final pages of his Marbury opinion, Chief Justice Marshall argued that a legislative act in conflict with the Constitution is void, and then carefully restricted the Court’s power to invalidate such acts to instances in which the Court is forced to ignore either the Constitution or the statute in order to decide a particular case. The only time this situation can arise is when the constitutional and statutory provisions involved are addressed to the Court itself, as in Marbury. In other words, under Marbury’s reasoning, the Court is not entitled to “reach out” and invalidate a legislative act simply because the Court doesn’t like it, or even because the Court believes that some other agency of government has done something unconstitutional. Thus, Marbury-style judicial review is very limited in scope. It is restricted to cases in which Congress has unconstitutionally meddled with the Court’s functions."

This is a strong claim (and by "strong," I do not mean "correct"), namely, that Marbury simply (and only) authorizes courts to invalidate Congressional statutes that purport to force Courts qua Courts to act in an unconstitutional manner.


3) During the last quarter of the 19th Century, elite lawyers for business interests bent on limiting the regulatory authority of states repeatedly invoked Marbury as justification for aggressive judicial review of state legislation that interfered with economic liberties. (Such liberties, it should be noted, included the right to contract, the right to set prices, and the right to pursue the occupation of one's choice.) At the time this campaign began, Clinton claims, courts had never exercised such power. As he puts it:

"This group of lawyers, in league with the captains of industry, opposed government regulation of economic activity. Since the state legislatures and Congress were passing regulations designed to mitigate the worst effects of the Industrial Revolution, the lawyers and their clients sought to employ the federal courts in an effort to counter the regulations. The problem was that the courts had never exercised such power, and the constitutional basis for it was doubtful at best. So the only way to get the job done was to find a precedent for judicial supremacy. But Marbury was too tame and Dred Scott was too notorious. The only thing left was to reinvent Marbury, reinterpreting its language to make it seem like an exercise in judicial supremacy." (emphasis added)

 

Courts ultimately agreed that the Constitution protects certain economic liberties from unjustified invasion by individual states and the national government. I should note that exemplars of such protection include Lochner v. New York (1905), which invalidated a state maximum hour law, and Allgeyer v. Louisiana (1897), which invalidated Louisiana's effort to regulate insurance contracts entered by its citizens in another state. I should also note that the Court exercised the same authority vis a vis Congress. For instance, in 1908, in Adair v. United States, the Court struck down Congress's ban on so-called "yellow dog" agreements, that is, contracts whereby employees agreed, as a condition of employment, not to join unions. Moreover, in Adkins v. Children's Hospital (1923), the Court struck down a minimum wage that Congress had imposed on employers and employees in the District of Columbia.

According to Clinton, these lawyers, and the courts that agreed with them, adhered to the philosophy of "Social Darwinism," which held that law and public policy should encourage economic survival of the fittest. Regulatory intervention in the marketplace, he says, was inconsistent with this vision, because it protected the weak from the depredations of the strong and thus stultified the process of social evolution. Here again, it is worth quoting a portion of his essay:

"These legal and economic elites were also believers in an ideology called Social Darwinism. They saw economic life in much the same way that Charles Darwin and his followers saw biological life — as an intense struggle for survival in which only the “fittest” deserve to survive and reproduce. Since economic regulation was usually in the interest of protecting those who could not protect themselves in this struggle, Social Darwinists believed that such laws were counterproductive in retarding economic progress, restricting the freedom of the “more fit,” and advancing the interests of those “less fit” people who constituted a “drag” on society. The Social Darwinists were ultimately successful in pressing their views on the courts, and these views held sway in the American legal community and the courts for about half a century."

To reiterate, Clinton argues that the Lochner era's protection for economic liberty exemplified the Supreme Court's assertion of judicial supremacy and reflected an approach to judicial review that was inconsistent with Marbury, or at least not not supported by Marbury.

4) Of course, in 1937, the Supreme Court reversed course and repudiated the Lochner era's protection for economic liberty. Still, Clinton argues that the Court, under the leadership of Earl Warren from 1954 until mid-1969, continued to embrace judicial supremacy, but simply reoriented its efforts toward the protection of a different set of substantive values. (Students of this era will of course recall the Warren Court's revolution in Constitutional Criminal procedure, which foisted upon the states various new rules governing the sort of evidence admissible at criminal trials, for instance.) Moreover, in 1958, Clinton says, the Court invoked Marbury for the proposition that judicial interpretations of the Constitution are themselves, like the Constitution, the Supreme Law of the Land and thus by their own force binding on other actors who must treat the Supreme Court's interpretation of the Constitution as equivalent to the Constitution itself. [Here Clinton is referring to the Court's decision in Cooper v. Aaron, which reiterated that Brown v. Board of Education required that admission decisions at state-run high schools be made irrespective of race and ordered the Governor of the State of Arkansas to refrain from interfering with a local school board's efforts to comply with the Brown decision, to which the school board had been a party.] Moreover, in the 1992 Casey decision, Clinton points out, the Court, when reaffirming Roe v. Wade, asserted that Americans' belief in themselves as a people committed to the Rule of Law "is not readily separable from their understanding of the Court invested with the authority to decide their constitutional cases and speak before all others for their constitutional ideals.” Clinton might have added the same opinion's statement that the Court should adhere to Roe in part to reward those citizens who thought Roe was wrong, "when viewed outside of constitutional terms" but "who nevertheless struggled to accept it, because they respect the rule of law." Like the statement from Casey that Clinton quotes, this statement seems to rest on the assumption that the Court's resolution of a constitutional question thereby binds individual citizens whose disagreement with that decision must thereby be "outside constitutional terms" and whose failure to adhere to the principle announced in such a decision in their public lives would thereby contravene the rule of law.

5) Finally, it should be noted that Clinton claims that decisions such as Roe, and various unnamed Warren Court excesses, would not have been possible without what he calls "judicial supremacy." As explained earlier, he also characterizes various decisions from the Lochner era as premised upon such supremacy.



B



1) I don't take issue with Clinton's assertion that Marbury was rarely cited until late in the 19th Century. See Davison Douglas, The Rhetorical Uses of Marbury v. Madison: The Emergence of a "Great Case," 38 Wake Forest L. Rev. 375 (2003). Still, the paucity of citations of Marbury during the 19th century should not obscure the deeply-rooted status of judicial review. As John Yoo and Sai Prakash have shown, numerous participants in the Constitutional Convention assumed that the Constitution they were creating would empower federal courts to strike down unconstitutional state and federal laws. See Saikrishna Prakash & John Yoo, The Origins of Judicial Review, 70 U. CHI. L. REV. 887. Indeed, Anti-Federalist opponents of the Constitution cited the prospect of judicial review as a reason to reject the constitution. (Some of the papers of the Anti-Federalist Brutus provide an example of such criticism of judicial review.) In his famous Federalist 78, published in 1788, Alexander Hamilton offered a rousing defense of judicial review in response to such detractors, arguing that the existence of a written constitution implied that, when a court court decides a case or controversy before it, it must treat the Constitution as paramount and decline to give effect to ordinary statutes, for instance, that contradict that supreme law.

Indeed, even before the Constitutional Convention, several judges on the highest court in Virginia, including George Wythe, a signatory of the Declaration of Independence, expressly embraced the concept of judicial review, in what is known as the Case of the Prisoners, decided in 1782. Moreover, shortly after the Constitution was ratified, the Justices of the Supreme Court declined to enforce a Congressional statute purporting to require individual justices to receive petitions from veterans of the Revolutionary War for pensions, determine whether each petitioner was in fact entitled to a pension, and make a recommendation to the Secretary of War, who could reverse the court's determination. See Hayburn's Case (1792). Finally, in Calder v. Bull (1798), the Supreme Court entertained a challenge to a Connecticut statute overturning the judgment of a state court. While the Justices rejected the challenge, each assumed that the Court possessed the authority to void unconstitutional state enactments.

Finally, the First Congress apparently believed that the Supreme Court had the authority to determine whether, for instance, state legislative enactments were consistent with the Constitution. To be precise, the First Congress enacted the Judiciary Act of 1789, very shortly after the Constitution was ratified. Among numerous other things, that Act conferred upon the Supreme Court the authority to hear appeals in cases:

"where is drawn in question the validity of a statute of, or an authority exercised under any State, on the ground of their being repugnant to the constitution, treaties or laws of the United States, and the decision is in favour of such their validity."


In other words, the First Congress --- acting 14 years before Marbury --- conferred upon the Supreme Court the authority to review decisions by state courts that had sustained state statutes against constitutional challenge. This, of course, is exactly the sort of review that the Supreme Court conducted during the Lochner era. Indeed, in Lochner itself, the Court reversed a judgment of the New York Court of Appeals that had narrowly sustained the state's maximum hour legislation against constitutional attack. If this sort of review was an example of inappropriate "judicial supremacy," then it's the sort of judicial supremacy endorsed by the same Congress that, for instance, proposed the Bill of Rights.

2) In sum, just as the Christian Church pre-dated the various books of the New Testament, in some cases by several decades, so too did the institution of judicial review predate Marbury v. Madison. Moreover, the logic supporting the institution of judicial review, expressed for instance in Federalist 78, was not limited to instances in which Congress sought to compel the courts to act in a manner that exceed their authority. Moreover, the First Congress contemplated that the Supreme Court would exercise judicial review in a manner that Professor Clinton would apparently regard as exemplifying judicial supremacy.

3) Professor Clinton also seems to understate the extent of judicial review early in the 19th century. For instance, during a ten year period, from 1810 to 1819, the Marshall Court struck down statutes in four different states on the grounds that such legislation offended the Contracts Clause found in Article I, Section 10 of the Constitution. None of the statutes purported to require Federal or even state courts to exercise jurisdiction in contravention of Article III or any other provision of the Constitution. In the famous Dartmouth College case, for instance, the Court struck down a New Hampshire statute that sought coercively to transform Dartmouth from a private to a public college, on the grounds that the statute offended the Contracts Clause because it altered the College's original royal charter, pictured above. In so doing, the Court conducted the same sort of review that courts would conduct during the Lochner era. To be sure, the opinion by John Marshall did not cite Marbury as authority for the sort of judicial review that the Court conducted. However, this omission seems beside the point. If anything, the omission could suggest that judicial review was so "taken for granted" by this time that there was no reason to justify the exercise of such review.

If, as Clinton asserts, "judicial supremacy" entails a court declaring a statute invalid "because the Court believes that some other agency of government has done something unconstitutional," then the Marshall Court, which decided Marbury in 1803, embarked on such a Supremacy campaign just seven years later, a campaign consistent with the Judiciary Act of 1789.

4) At the same time, I believe that Professor Clinton is absolutely correct when he asserts that Marbury does not support the sort of judicial supremacy suggested by the dicta of Cooper v. Aaron or the language in Casey quoted above. (I refer to the language in Copper as dicta because the actual question before the Court, as the Justices recognized, was whether the Governor of Arkansas could obstruct a local school board's compliance with the Court's prior mandate, issued pursuant to a case properly within the Court's jurisdiction. I also hasten to add that I believe Cooper and Brown to have been decided correctly on the merits.) That is to say, neither Marbury, its logic, nor its antecedents supports the notion that judges are the only actors authorized to interpret the Constitution or that other actors, e.g., the President, must treat Supreme Court precedent as definitive expositions of the Constitution when operating within their own sphere of authority. Indeed, at the Pennsylvania ratifying convention James Wilson, later a Supreme Court Justice, argued that a President could decline to enforce a law he believed to be unconstitutional and that, in the same way, judges could decline to enforce unconstitutional laws that came before them. Moreover, the logical structure of Marshall's justification for judicial review (and, for that matter, Hamilton's argument as articulated in Federalist 78), simply authorizes courts, when deciding cases properly before them, to determine whether a statute or regulation is constitutional. This could entail declining to enforce a statute that the Executive is seeking to enforce. Or, it could involve reversing a judgment by a state court sustaining a statute against constitutional attack.

None other than James Madison would have agreed with this assertion. In 1834 he wrote:


"As the Legislative, Executive, and Judicial departments of the United States are co-ordinate, and each equally bound to support the Constitution, it follows that each must, in the exercise of its functions, be guided by the text of the Constitution according to its own interpretation of it; and, consequently, that in the event of irreconcilable interpretations, the prevalence of the one or the other department must depend on the nature of the case, as receiving its final decision from one or the other."

And, of course, in his first inaugural address, Lincoln expressly reiterated what he had argued in his debates with Stephen Douglas a few years earlier, namely, that, while the Dred Scott decision was binding on the individual parties to the case, its overarching principle --- that African-Americans were not citizens and were instead property of their putative "owners," --- was not binding on actors in the political branches of government. Finally, as President, Lincoln directed Federal agents to grant passports and patents to African-Americans, thereby treating them as citizens.


5. I also agree with Clinton's assertion that the Warren and Burger Courts abused the power of judicial review, striking down various state and federal laws or judicial practices that were perfectly constitutional. Examples include Roe, Miranda v. Arizona and Mapp v. Ohio, the latter of which reversed 170 years of Constitutional Law to hold that evidence obtained in violation of the 4th Amendment MUST be kept from a jury in a criminal case, even if it means releasing a mass murderer so he or she may kill again. Other examples include the Burger Court's transmogrification of the 8th Amendment from a ban on Cruel and Unusual modes of punishment to a sort of roving commission empowering judges to determine what factors a jury must consider when deciding whether to impose the death penalty via the most humane method possible upon a defendant duly convicted of murder. At the same time, I would not attribute these errors to judicial supremacy, however defined, as such, but instead to willful judging.

6. "Departmentalism" as I have sketched it depends upon the existence of limits upon the judicial power. If anyone can at any time call upon courts to answer a constitutional question, and if such answers are treated as binding resolutions of cases or controversies, then the political branches will have a very small independent role in interpreting the Constitution. I would agree with Professor Clinton if he is arguing that courts have in some cases exceeded the appropriate judicial role by relaxing traditional limits on the sort of cases and controversies that judges can hear and resolve, thereby enlarging the judicial sphere at the expense of the political branches.

7. One final note that is not about the nature of judicial review as such, but instead about Professor Clinton's account of the Lochner era, particularly his claims that Lochner era judges were motivated by Social Darwinism and struck down legislation that was generally designed to protect the weak from the strong. Both assertions are controversial to say the least.

a) Lochner era judges found protection for liberty of occupation, liberty of contract and rights of property in the Due Process Clause of the 14th Amendment, one of the three "Civil War Amendments" adopted in the late 1860s. During the Civil War, Abraham Lincoln argued that the North and South were locked in a struggle over two definitions of Liberty. According to one definition, liberty included the ability to work at one's chosen occupation and retain the fruits of one's labors. The other definition, he said, protected the ability of one (white) person to own and direct the labor of another (black) person and to retain the fruits of that person's labor. The North, of course, won the Civil War, and the first definition of liberty prevailed, or so many thought. Still, despite emancipation, southern States sought to deprive African-Americans of various liberties, including economic liberties such as liberty of occupation and liberty of contract, via the so-called "Black Codes." Congress sought to preempt these codes via the Civil Rights Act of 1866 which, among other things, ensured African-Americans the same rights of contract as white persons and also prevented states from imposing occupational licensing requirements on African-Americans that were not imposed on white persons. The Act, however, exceeded any apparent power of Congress, which then proposed the 14th Amendment. When ratified, this amendment authorized Congress to enforce the Amendment's provisions, including the Equal Protection Clause, Due Process Clause, and the Priviliges or Immunities Clause, against the states.

Given the historical origins of the 14th Amendment, it's no surprise that, in the early 1870s, four Justices on the Supreme Court --- dissenting in the Slaughterhouse Cases --- argued that the Privileges and Immunities Clause as well as the Due Process Clause protected liberty of occupation from arbitrary abridgment, that is, regulation that did not fall within the police power. Of course, the five Justices in the Slaughterhouse majority took a contrary view, holding that the Amendment was motivated by and aimed at state racial discrimination. The opposite position, taken by dissenters like Justices Field and Bradley, for instance, had nothing to do with Social Darwinism. Indeed, it was the majority opinion in Slaughterhouse that smacked of Social Darwinism, ratifying the outcome of a Darwinian struggle in the political process that granted one firm a monopoly over slaughtering to the exclusion of hundreds of other small firms.


b) Nor am I aware of any data suggesting that most laws voided during the Lochner era protected the weak against the strong. Lochner itself, for instance, voided a law that likely disadvantaged labor-intensive small bakeries against larger, capital-intensive establishments. Small labor-intensive businesses could use constitutionally protected yellow dog contracts to prevent unionization that would raise their costs disproportionately compared to larger firms. At the same time, the Lochner era Court upheld certain forms of legislation, such as state and federal antitrust laws, that prevented large firms from cartelizing and thereby destroying wealth and harming consumers. See generally Alan J. Meese, Will, Judgment and Economic Liberty: Mr. Justice Souter and the Mistranslation of the Due Process Clause, 41 William and Mary L. Rev. 3, 25-44 (1999). Regardless of what one thinks of Lochner and its progeny as a matter of constitutional law, it seems difficult to square most Lochner-era decisions with the philosophy of Social Darwinism.

Saturday, May 8, 2010

A Nordstrom Shoe Index?


The author of this humorous item from the Chicago Tribune claims to have developed a "Nordstrom Shoe Index" for predicting the state of the economy.





Tuesday, May 4, 2010

Are We More or Less Free Than Our Ancestors?

Patrick Henry


Give me (ever-increasing?) liberty or . . . . .



Over at Reason.com, David Boaz makes a provacative argument that Americans, as a whole, enjoy more liberty today than we did, say, 50, 100 or 150 years ago. Boaz's assertion is contrary to the complaints of libertarians who lament what they characterize as a continual expansion of government at the expense of individual liberty, an expansion they often measure by examining the share of GDP that government consumes.

Here is a link to the Boaz post:

http://reason.com/archives/2010/04/06/up-from-slavery

Among other things, Boaz points that many accounts of a purported "Golden Age" of 19th Century Liberty ignore the institution of slavery. In the same way, many accounts of a less intrusive state early in the 20th century ignore so-called Jim Crow laws, which were of course very intrusive on human liberty, to say the least. To the extent that legal and constitutional developments (and of course the Civil War) eliminated slavery and Jim Crow laws, human liberty has increased, Boaz rightly asserts.

Boaz also makes a broader claim, namely that, overall, Americans are more free now than we were, say, two generations ago. He quotes the following argument by Brink Lindsey, from his book The Age of Abundance (2007). According to Lindsey:


"Nevertheless, the fact is that American society today is considerably more libertarian than it was a generation or two ago. Compare conditions now to how they were at the outset of the 1960s. Official governmental discrimination against blacks no longer exists. Censorship has beaten a wholesale retreat. The rights of the accused enjoy much better protection. Abortion, birth control, interracial marriage, and gay sex are legal. Divorce laws have been liberalized and rape laws strengthened. Pervasive price and entry controls in the transportation, energy, communications, and financial sectors are gone. Top income tax rates have been slashed. The pretensions of macroeconomic fine-tuning have been abandoned. Barriers to international trade are much lower. Unionization of the private sector work force has collapsed. Of course there are obvious counterexamples, but on the whole it seems clear that cultural expression, personal lifestyle choices, entrepreneurship, and the play of market forces all now enjoy much wider freedom of maneuver."

On the whole, Boaz and Lindsey make some powerful points. Indeed, they have overlooked two additional expansions of private liberty over the last two generations: 1) the substantial contraction of antitrust regulation and 2) the recognition that so-called "commercial speech" enjoys some First Amendment protection, thereby mandating the substantial deregulation of advertising. In the remainder of this post I elaborate on these two omissions but then also suggest that some of the developments invoked by Boaz and Lindsey do not necessarily reflect expansions of liberty. Indeed, those who, like Lindsey and Boaz, claim that liberty has expanded compared to prior eras must develop a defensible definition of liberty; focusing on the mere absence of coercive governmental restraint will not suffice.


A

1) Antitrust: During the 1960s courts and antitrust enforcement agencies were hostile to most non-standard contracts, that is, agreements that did more than simply mediate the passage of title from a seller to a buyer. Tying contracts, exclusive dealing contracts, restraints on prices dealers could charge and restraints on to whom and where dealers could sell a manufacturer's product --- all were unlawful per se or nearly so. In FTC v. Brown Shoe, for instance, 384 U.S. 316 (1966), the Supreme Court affirmed the Federal Trade Commission's ban on an agreement between Brown Shoe and 1 percent of the nation's shoe stores requiring such stores to do business primarily (but not exclusively) with Brown. Courts also banned all tying contracts obtained by sellers with "economic power" over a tying product, holding that the mere possession of a trademark established the requisite economic power sufficient to condemn such an arrangement. Thus, a franchisor could not, for instance, require its franchisees to purchase spices, batter mixes or paper products from the franchisor. See Siegel v. Chicken Delight, 448 F.2d 43 (9th Cir. 1971). Courts and the enforcement agencies were equally hostile to mergers. In Brown Shoe Co. v. United States, for instance, the Department of Justice challenged, and the Supreme Court condemned, a merger that resulted in a firm with an eight percent share in a market with more than 3,000 other market participants and low barriers to entry. (About 150 new firms had entered the market in recent years.)

All of this started to change in the late 1970s, by which time transaction cost economics (TCE) had undermined price theory's workable competition model and offered beneficial explanations for non-standard contracts. In Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1978), the Supreme Court abandoned its hostility to non-price vertical restraints, holding that courts should analyze such agreements under a forgiving rule of reason test that validates nearly all such agreements. As the Sylvania Court recognized, such restraints, while reducing competition between dealers, can in fact overcome the market failure and resulting underproduction of promotional information that would result from unbridled competition between dealers. Subsequent decisions applied the Sylvania rationale beyond the vertical context, holding that, for instance, horizontal restraints ancillary to an otherwise legitimate joint venture can also overcome market failure, enhance the allocation of resources and improve the welfare of consumers. Justice Stevens, who recently retired, presaged this expansion of Sylvania's rationale in NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984), when he invoked Sylvania's logic in support of his statement that a horizontal restraint over one form of competition can in fact enhance overall competition in the marketplace and thus enhance consumer welfare. I tell the story about the origin of the inhospitality tradition and TCE's overthrow of that tradition in the following paper:

Price Theory, Competition and the Rule of Reason, 2003 Il. L. Rev. 77.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=909241

During the same period, the courts and enforcement agencies also radically revised merger doctrine, holding that proof that a merger will lead to high levels of concentration in a properly-defined relevant market is necessary (but not sufficient) to justify banning such a transaction. Moreover, even if a merger did, in fact, lead to high concentration in a relevant market, the transaction would still survive scrutiny if the threat of entry would counter-act any resulting anticompetitive output reduction produced by actual or tacit collusion. In 1982 the Department of Justice essentially codified this sea change in merger policy, issuing enforcement guidelines that, had they applied in the 1950s, 1960s and 1970s, would have validated countless transactions that enforcement agencies challenged, and courts voided, during these decades.


In short, the massive shift in antitrust policy, from a regime of extreme intervention to one of comparative laisseze faire, left countless transactions, contracts and other commercial practices there were once unlawful, even though they harmed no one, unmolested by the law, thereby expanding liberty significantly.


2) Commercial Speech. During the 1970s the Supreme Court found that commercial advertising is "speech" within the meaning of the First Amendment, thereby voiding much regulation of advertising. The seminal case was Virginia Pharmacy Bd. v. Virginia Citizens Consumer Council, 425 U.S. 748 (1976), where the Supreme Court struck down a Virginia statute that banned price advertising of pharmaceutical products. Since then the Supreme Court has repeatedly held that states may not ban truthful advertisements for lawful products. The result, of course, has been more advertising, i.e., more liberty for firms that wish to provide information to consumers. Moreover, the ability to advertise makes new entry more likely, thus enhancing the liberty of firms previously excluded from the market by advertising bans. Consumers, of course, end up paying lower prices and making better-informed decisions about which products to buy or not to buy.


B

At the same time, Lindsey and Boaz may overstate their case somewhat. That is to say, not every development Lindsey invokes necessarily entails an expansion of liberty. Some may have actually reduced liberty, properly understood.

Take the rights of criminal defendants. Certainly various developments in the law over the last several decades have made it more difficult to convict a criminal defendant. These developments, then, have enhanced the liberty of those accused of crime. Still, Lindsey (and Boaz, apparently) do not consider the possibility that some individuals who escape punishment because of these developments are guilty, more precisely, guilty of interferring with someone else's liberty or property. Rules that increase the risk of letting guilty criminals off the hook can actually REDUCE liberty in a couple of ways. First, such mistakes can undermine the deterrent effect of the criminal law. Less deterrence, of course, means more crime, and thus less liberty for those who become victims of crime. In these circumstances, the state can only restore deterrence by increasing the penalties on those who are properly convicted (further reducing their liberty). Second, wrongly exonerated individuals who thereby avoid prison or capital punishment may then commit new crimes, thus interferring with the liberty of completely innocent fellow citizens. Indeed, Lindsey himself singles out the strengthening of laws against rape as a development enhancing liberty, and I quite agree. However, one cannot "strengthen" laws if prcedural developments make it too difficult to convict and punish invidiuals who break the newly-strengthened laws. Thus, any argument that enhancing the rights of the accused actually increases liberty requires a showing that the accused whose rights are enhanced are actually innocent, something Lindsey and Boaz does not assert.

Abortion provides another possible example. Lindsey (and Boaz, apparently) are certainly correct that bans on abortion reduce the liberty of the women they impact and, one might add, the liberty of the doctors who wish to perform such procedures, often for money. At the same time, proponents of abortion would argue that there is a third party involved, namely, the fetus. If, as many argue, a fetus is an actual human being, then a ban on abortion may, despite its significant impact on the liberty of the child's mother and her physician, enhance overall liberty, except of course in those cases in which abortion is necessary to protect the life of the mother, by protecting the life of the fetus until its birth. Put another way, such laws could be deemed analogous to bans on child abuse, though of course an abortion ban places a greater burden on the the regulated party than a ban on child abuse.

The rights of the accused and abortion examples, then, serve as reminders that a society that wants to maximize liberty might have to do more than simply minimize state-enforced coercive restraint on individual freedom of action. While such an approach might maximize "liberty" in some sense, it's not the sort of "liberty" that anyone, in the end, wants to maximize. (No one, I assume, would anyone think that the state should stand idly by while one individual used private force to enslave or kill another.) Maximizing actual human liberty requires some coercive restraint, imposed by the state; this is why humans leave the state of nature and enter political society, delegating to the state the authority to impose coercive restraints when necessary to enhance liberty. Any effort to measure the quantum of liberty enjoyed today compared to that enjoyed 20, 50 or 100 years ago must acknowledge this fact and include some methodology for defining and measuring the sort of actual human liberty --- one might say actual human welfare --- that is the object of government to enhance.

How Much Incivility Can We Tolerate?


Paragon of Incivility?




Probably Not a Fascist


On May 1, President Obama, speaking at the University of Michigan’s Commencement, denounced those who, on the left and right, use extreme rhetoric to demonize their opponents. For instance, he criticized those who characterize his own policies as socialistic or “soviet style.” At the same time, he also criticized those who refer to those on the right as “fascists” or “right wing nut jobs.”


The very next day, in a column that did not mention the President’s address, George Will noted that “hysteria about domestic fascism . . . is a liberal tradition[,]” a hysteria fanned by none other than FDR himself. According to Will:



In his 1944 State of the Union address, FDR identified opponents of his domestic agenda as fascists. Declaring that his "one supreme objective" was "security," including "economic security, social security, moral security," he issued a dire warning: Woodrow Wilson's progressive policies had been frustrated by "rightist reaction" and "if history were to repeat itself and we were to return to the so-called 'normalcy' of the 1920s -- then it is certain that even though we shall have conquered our enemies on the battlefields abroad, we shall have yielded to the spirit of Fascism here at home.

FDR’s remarks, it should be noted, were not off the cuff or unreflective. They were, to reemphasize, prepared and delivered as part of the State of the Union address. Moreover, they were, to be frank, a bit goofy. To the extent that FDR’s economic agenda involved greater economic centralization --- and it usually did --- it’s hard to see how resistance to that agenda could be equated even remotely with Fascism. Indeed, in the early 1930s it was FDR, over the existence of some Republicans, who proposed and then enforced legislation, e.g., the National Industrial Recovery Act, the Agricultural Adjustment Act and the Bituminous Coal Act, each of which facilitated and immunized from antitrust attack state-sanctioned cartels, all in the name of stimulating the economy. Fortunately, the Supreme Court unanimously struck down the National Industrial Recovery Act and also struck down the Coal and Agricultural Acts as well, thereby voiding provisions that had to that point discouraged economic recovery by interfering with the natural functioning of the price system. Indeed, after the Court struck down the NIRA, it is said that Justice Brandeis asked a lawyer from the Department of Justice to convey to President Roosevelt that the Court would tolerate no more “centralization.” Still, in the late 1930s, FDR's allies in Congress re-regulated numerous industries, including trucking, air transportation and agriculture, all with a view toward limiting entry and increasing prices.

FDR’s resort to the sort of tactics that President Obama decried contains two possible lessons, lessons that may not be mutually exclusive.


First, the sort of incivility that President Obama identifies is deeply-rooted and will be difficult to eliminate.

Second, our Republic seems to tolerate this sort of unsupported and extreme rhetoric, perhaps on the theory that the voters can sort the wheat from chaff. It's hard to imagine, for instance, that many took seriously FDR's claim that resistance to his agenda would lead to or was motivated by Fascism. It's even possible that this sort of rhetoric boomeranged. Indeed, by 1946, Republicans were in charge of both Houses of Congress, after what the Chicago Tribune called "the greatest Republican Victory since Appomattax." (The Republicans picked up 55 seats in the House and 13 in the Senate.) One doubts that the American people believed they were elected Fascists when they gave the Republicans the landslide that made William Martin of Massachusetts, pictured above, Speaker of the House.
By the way, to read Will's column, go here:



Sunday, May 2, 2010

President Obama Mischaracterizes Citizens United and TR


In Complete Agreement on Corporate Speech

This blog previously reported that President Obama misstated the holding of the Citizens United decision, authored by Justice Kennedy pictured above, which protected the free speech rights of corporations and their shareholders, during his state of the Union address.
Here is a link to that post:
In his Saturday radio address, the President continued his campaign against the Citizens United decision, this time mischaracterizing the state of the law and the scope of previous statutes regulating corporate political activity. Among other things, he incorrectly suggested that President Teddy Roosevelt had supported legislation banning the sort of activity that the Citizens United decision held deserved constitutional protection.
Here is an excerpt from the President's radio address:

Recently, however, the Supreme Court issued a decision that overturned decades of law and precedent – dealing a huge blow to our efforts to rein in this undue influence. In short, this decision gives corporations and other special interests the power to spend unlimited amounts of money – literally millions of dollars – to affect elections throughout our country. This, in turn, will multiply their influence over decision-making in our government.

In the starkest terms, members will know – when pressured by lobbyists – that if they dare to oppose that lobbyist’s client, they could face an onslaught of negative advertisements in the run up to their next election. And corporations will be allowed to run these ads without ever having to tell voters exactly who is paying for them. At a time when the American people are already being overpowered in Washington by these forces, this will be a new and even more powerful weapon that the special interests will wield.

In fact, it’s exactly this kind of vast power that led a great Republican President – Teddy Roosevelt – to tackle this issue a century ago. He warned of the dangers of limitless corporate spending in our political system. He actually called it 'one of the principal sources of corruption in our political affairs.' And he proposed strict limits on corporate influence in elections. “Every special interest is entitled to justice,” he said. 'but not one is entitled to a vote in Congress, to a voice on the bench, or to representation in any public office.'"


An ordinary member of the public, listening to President Obama’s speech or reading it, would conclude that the Citizens United decision overturned longstanding precedent affirming the State's authority to ban independent speech by corporations. The reader would also likely conclude that President Roosevelt (pictured above) proposed and secured the enactment of such legislation when he was President a century ago. Neither conclusion, however, is correct.
The Supreme Court did not approve a ban on corporate political speech until March 27, 1990, in Michigan Chamber of Commerce v. Austin, in a 6-3 decision. (Before that the Court approved bans on contributions by courts and labor unions to political campaigns.) Citizens United overturned Austin, on Jan. 21, 2010. That is to say, the Austin precedent lasted more than 1 decade but less than 2 decades. Thus, the assertion that Citizens United "overturned decades of law and precedent" is simply incorrect. Indeed, before Austin, the most important precedent on corporate political speech was First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978), where the Court struck down a Massachusetts ban on corporate political speech in connection with referendum campaigns. Bellotti technically left open the question whether states or the national government could ban corporate speech in connection with elections, although the decision did reject, in reasoning equally applicable to candidate elections, the argument that states can ban corporate speech to protect shareholders from supporting causes with which they might disagree, a rationale that Justice Brennan tried to rehabilitate in his Austin concurrence. Still, as of 1990, there was no precedent sustaining a ban on corporate political speech in connection with candidate elections.
What, though, about the reform efforts of President Roosevelt. Here again, President Obama is off base. President Roosevelt supported legislation that prohibited corporate contributions to political campaigns, and Congress enacted that legislation in the form of the Tilden Act in 1906. The statute did not ban independent speech by corporations, however. (Indeed, given the Supreme Court's commerce clause jurisprudence during that era, it seems unlikely that Congress could have successfully banned such speech; the Court had repeatedly held that only states could generate corporate law and that Congress's authority was limited to regulating actual interstate commerce, and not companies that engaged in such commerce.) Moreover, Citizens United did not question the constitutionality of statutes like the Tilden Act. Thus, contrary to President Obama's claim, Citizens United was not in any way inconsistent with President Roosevelt's reforms. Indeed, the line the Citizens United opinion implicitly drew between corporate speech, on the one hand, and corporate contributions to candidates, on the other, was exactly the same distinction that the Tilden Act drew in 1906. Hence, on this question at least, the Supreme Court and T.R. are in complete accord.
As I have noted in previous posts, it's perfectly fine for a President to criticize decisions of the Supreme Court. He may even propose legislation inconsistent with such decisions, hoping the Court will change its mind. But a President who promises a post-partisan era characterized by a more civil political discourse should lead by example and refrain from repeatedly misstating If the President wants to ban core political speech by corporations and their shareholders, let him make the case for doing so on the merits, instead of appealing to tradition and case law that never existed.