Associated Press Rewrites Economic History

Orwell Would Be Proud

Today's Associated Press reports that the Obama campaign plans to give former President Bill Clinton a more prominent role in the upcoming Democratic Convention.  News outlets from Fox News to MSNBC and everywhere in between are republishing the story as "news." (See here, here and here for examples.)  In "reporting" this story, the AP, like the Ministry of Truth in George Orwell's 1984, attempts to rewrite economic history.   In particular, the story asserts that the move to highlight Clinton will:

"remind voters that a Democrat was in the White House the last time the American economy was thriving."

The statement that "a Democrat was in the White House the last time the American economy was thriving" is simply false. In 2005, the nation's unemployment rate was 5.2 percent in the first quarter, 5.1 percent in the second quarter, and 5.0 percent in second and third quarters.  (See this report from the Bureau of Labor Statistics.)   Moreover, as previously noted on this blog,  the unemployment rate was at or below 5.0 percent for all 24 months of 2006 and 2007.  Indeed, between late 2005 and early 2008, the nation's unemployment rate was at or below 5 percent for 30 straight months.   By contrast, during President Obama's Administration, the unemployment rate has exceeded 8 percent for 41 months, and job growth is stagnant compared to that experienced during the Reagan Administration, for instance.

Perhaps Republicans should feature George W. Bush at their convention, to remind the American people just how robust the economy was less than a decade ago.

No Lobster Cartel in Maine . . . .

Excess Capacity

Not Evidence of Collusive Output Reduction

Flotilla of Lobster Boats Plying Their Trade in Casco Bay

A recent article in the Portland Press Herald quotes a state official warning Maine's lobstermen not to engage in price fixing or collective tactics designed to restrict the supply of lobsters.   In particular, the Press Herald quoted Marine Resources Commissioner Patrick Keliher as follows:

"We have heard that fishermen are seeking to impose a de facto shutdown of the fishery and coercing others into complying by threatening to cut off their gear," Keliher said in his release. "Any such actions will be met with targeted and swift enforcement."

Mr. Keliher is of course correct that agreements between  to fix prices or reduce output are unlawful, both under Section 1 of the Sherman Act and Maine's parallel antitrust statute.   More precisely, an agreement between lobstermen to set prices or reduce output would be unreasonable per se and thus contrary to the "Rule of Reason" that the Supreme Court articulated in Standard Oil v. United States, 221 U.S. 1 (1911).

At the same time, as the Press Herald article notes, individual lobstermen remain entirely free to refrain from setting new traps and/or harvesting from traps already set.  Moreover, it seems highly unlikely than any conspiracy between lobstermen could in fact result in unreasonably low output or unreasonably high prices.  In particular, several factors suggest that any collective effort to increase prices or reduce output would be doomed to fail.  First, there are over 1,000 lobstermen in Maine; it would be difficult to say the least for such individuals to negotiate and police an anticompetitive agreement.  Second, even if most lobstermen in fact agreed to reduce output and increase prices, those who refused to participate in the agreement could undercut it, by increasing their own output and thereby counter-acting any output reduction by conspirators.  Such a response would be particularly effective if the market was characterized by excess capacity, e.g., unused but servicable equipment like the unused lobster traps, pictured above, located on an island in Casco Bay. Third, ostensible participants in a price or output agreement could cheat, surreptitiously setting more traps than called for by the agreement, for instance.  Fourth, even if all current partipants in the marketplace somehow agreed to reduce output and increase prices, any resulting unreasonable prices would attract new entry, thereby increasing output and driving prices back down.

Those suspcious that price fixing might be afoot might invoke reports of lobstermen simultaneously reducing the number of traps set or harvesting less often from such traps, as Businessweek reported earlier this week.  However, such data are equally consistent with an alternative hypothesis, namely, that market participants are rationally responding individually to low lobster prices.  (The Businessweek article reports that lobstermen are receiving between $2 and $2.50 per pound for theit catch; the Press Herald suggests that the price has been even lower.)  Simply put, as prices fall, the payoff from searching for lobsters falls as well, with the result that individual lobstermen might conclude that the cost of such search outweighs the potential benefits, at least in the short run.  Because similar lobster prices prevail throughout the Maine region, numerous lobstermen might individually decide to "stay home." Taken together these individual and perfectly legal decisions might (incorrectly) appear to be the result of collective action.  Absent additional evidence demonstrating actual collective action, however, the public should be confident that the lobstering trade is a well-functioning competitive market.

  

Should the "Rich" Pay Even More?

Understood the Social Contract

Wants to Breach It

Earlier this week the President defended his plan that would raise taxes on individuals who earn more than $250,000 per year.  Explaining why such individuals should pay more income taxes than they already do, the President opined as follows:

"There are a lot of wealthy, successful Americans who agree with me [that taxes should be higher] because they want to give something back. If you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something -- there are a whole bunch of hardworking people out there.

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business, you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”

As others have noted, the President's remarks basically repeat similar arguments made by Harvard Professor and Massachusetts Senate candidate Elizabeth Warren.  As Professor Warren colorfully put it:

"You [businesspersons] didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did."

The President's characterization of the relationship between business success and government contains some germs of truth.  After all, individuals leave the state of nature and enter civil society precisely because they believe they are better off with some government than with no government at all.  Moreover, by consenting to live in a civil society, individuals necessarily cede to the larger community a portion of their liberty and a portion of any property they might create or acquire.   In particular, no member of society can exercise his or her liberty or right of property in a way that interferes with similar rights held by others.  As James Madison noted over two centuries ago in Federalist 10, the primary function of government is to protect the liberty and property of each member of society from invasion by others.  Moreover, the same State that protects liberty and property can also execute public works projects that confer benefits on the larger community, projects that no individual or collection of individuals can complete on their own.  Finally, it is not enough that the State protect individuals from each other; the State must also protect itself from external threats by other states.

These various activities implied by the Madisonian social contract are not free; they require the expenditure of real resources. To protect property rights against theft or invasion the state must hire police, judges and prison guards. To enforce contracts the state must hire judges and sheriffs, the latter of whom enforce judicial judgments. To provide national defense or build roads, bridges and other infrastructure governments must levy taxes on individuals and business and enforce those levies with coercion if necessary. Without such coercion, the state would have to rely upon voluntary contributions to pay employees of the State and provide the resources necessary for various infrastructure projects.  It thus seems irrefutable that government and governmental expenditures are necessary conditions for the creation of wealth in the private sector and that government plays a role in the success of every business. (As Professor Warren would say, Ford Motor company cannot make and sell automobiles unless the State protects Ford’s property from trespass by others.  Though it should be noted that individual states, and not the national government, are primarily responsible for protecting factories from "marauding bands.")  

Still, the fact that free enterprise depends upon a well-functioning State that enforces property rights and builds infrastructure does not mean that business owners should feel duty-bound to "give something back" to the State or the larger community.  This assertion, made by the President and many of his supporters, is a non-sequitur.   For, as previously explained on this blog, a State that recognizes and enforces property rights is simply fulfilling its pre-existing obligation under the Madisonian social contract described above; if the State declined to protect property rights and bodily integrity from invasion by others, individuals would have no duty to obey the State's commands.    Moreover, the State does not perform the various functions described above for free, gratuitously showering its citizens with such protections and infrastructure.  Instead, the State levies taxes on individuals and businesses, employing a portion of the proceeds to pay for these various activities.  Indeed, in 2009, individuals in  the top 1 percent of the nation's income distribution paid over 36 percent of all Federal income taxes, that is, 36 times their pro-rata share of government expenses.  Such individuals also paid billions of dollars in state and local sales, property and income taxes.  All in all, then, the "rich" individuals that President Obama and Senator Warren wish to tax even more are already paying their share of governmental expenses several times over.  While such individuals might create more wealth within the free enterprise system than others, such economic success does not alter the terms of the social contract or the rationale for taxation derived therefrom. The state's performance of its pre-existing obligations under the social contract does not thereby justify whatever tax rates the majority might wish to impose.

To be sure, some individuals might sincerely believe that they have an obligation to "give something back."   If so, such individuals should feel perfectly free to increase their donations to charity, overpay their taxes, or both.  However, the fact that some individuals believe they are undertax does not thereby entitle the polity to impose higher taxes on other individuals who already pay far more than they receive in return.

On The (Conservative) Distinction Between Commerce and Non-Commerce

Several scholars who agree with the result in the Obamacare decision have nonetheless criticized the Court's holding that Congress lacks the authority to coerce individuals into purchasing health insurance against their will.  (See this excellent explanation by Thom Lambert at Truth on the Market of why the Commerce Clause ruling is a holding.)  In particular, scholars claim that five justices (Chief Justice Roberts, and Justices Scalia, Kennedy, Thomas and Alito) erred when they held that the Commerce Clause does not empower Congress to coerce such purchases.

Two examples of this reasoning, from a debate on Scotusblog, will suffice.

According to Dean Erwin Chemerinsky:

"Chief Justice Roberts still expressed the view that it would not be permissible under the commerce power. "Five justices took the position that there is a distinction between Congress regulating activity as opposed to inactivity. It is unclear how often this will matter, but the flaw in the argument is that everyone is engaged in economic activity when it comes to health care. Individuals either are purchasing health insurance or they are self-insuring. Congress was regulating the latter to ensure that health care is more likely available for all."

According to Professor Charles Fried at Harvard Law School:

"The fact is that not since 1937 has the Court turned down the use of the Commerce Clause as a basis for Congressional intervention in a major national economic concern — which of course neither the Gun-Free School Zones Act nor the Violence Against Women Act were. Activity/inactivity is a new basis for limitation and has no anchor in our jurisprudence. That is why Roberts’s opinion was not conservative but radical. I have my doubts about the political and economic virtues of the ACA, but am appalled at this radically reactionary new doctrine."

Both of these scholars confuse the issue by asserting that the Court's opinion rests upon a distinction between "activity" and "inactivity."  This assertion is incorrect.  Instead, the Court's opinion rests upon a distinction between actual "commerce" and the absence of commerce, only the former of which Congress is empowered to regulate under the Commerce Clause.  This is a distinction that is, in fact, "firmly anchored in our jurisprudence" and, of course, the text of the Constitution.  In Gibbons v. Ogden, 22 U.S. 1 (1824) Chief Justice John Marshall explained that the Commerce power entails the power to "to prescribe the rule by which commerce is to be governed."   As Chief Justice Roberts explained, and as previously explained on this blog, this defintion presumes the existence of commerce to be regulated.  Absent such commerce, the Commerce Clause is no more a source of authority to compell commerce than it would be a source of power to regulate the rules of hopscotch.

It is thus no surprise that neither scholar cites a single example in which Congress has employed the Commerce Clause to require individuals to enter a commercial transaction.

It will not do, as Professor Chemerinsky claims, to recharacterize failing to purchase health insurance as "self-insurance."   Of course it is, as this blog has previously explained.  Still, an individual who self-insures may never engage the health care system at all.  Or, he or she may only engage the health care system sporadically, over the years.  The choice to purchase health care, if needed, out of one's own pocket is not "commerce."  If it were, then Congress could recharacterize an individual's decision to walk to work instead of purchasing a car as "self-transportation" and rely upon this characterization to compell individuals to purchase automobiles or other modes of transportation against their will.  (Presumably proponents of such "regulation" would point out that individuals without cars sometimes engage the transportation system by, saying, taking a taxi or a bus.)  But, as Chief Justice Roberts explained, embrace of this principle would grant Congress an unprecedented and vast power to direct individual behavior, thereby undermining the liberty-protecting virtues of the enumeration of Congressional powers.    Or, to paraphrase Professor Fried, Professor Chemerinsky is proposing a "radical[] reactionary new doctrine."


It is of course true that failure to engage in commerce is "inactivity."  But so is failure to engage in piracy, for instance.  Still, if Congress attempted to declare all individuals who declined to purchase health insurance guilty of piracy, the Court would, one hopes, unanimously invalidate such an enactment.  Such a decision would not rest upon a new or "radical" distinction between "inactivity" and "activity," even though failure to engage in piracy is a form of inactivity.  Instead, the decision would rest upon a tried and true distinction between "piracy" and "non-piracy," only the former of which is within Congress's power to punish as "piracy."  In the same way, the Court's invalidation of the Federal attempt to compell  the purchase of health insurance rests upon a tried and true distinction between "commerce" and "non-commerce."  

As a result, the Court's failure to validate the coercive individual mandate was in no way "radical" or "reactionary," but instead quite conservative, in that it conserved the allocation of authority between the nation and individuals.

Will Progressives Follow the Chief's Lead and Embrace Citizens United?

A recent op-ed by Michael Kinsley of Bloomberg News argues that progressives should follow the example of Chief Justice John Roberts and embrace a constitutional result with which they disagree as a policy matter.  Kinsley surmises that the Chief Justice opposes Obamacare on policy grounds but notes that he nonetheless found the measure to be constitutional as an exercise of Congress's taxing power, albeit beyond the power of Congress under the Commerce and Necessary and Proper clauses.  (Go here for a brief explanation of the ruling.)

As Kinsley notes, speech costs money, and spending money on speech is distinguishable from campaign contributions, which candidates may or may not spend on speech.  Moreover, the law before the Court in Citizens United banned speech and not spending as such.  Hence, those who criticize Citizens United because the ruling equates "money" with "speech" are simply wrong.  (For a similar and more didactic argument, see this essay by Geoff Stone on the Huffington Post.)   Moreover, as Kinsley perceptively points out:

"As applied to an individual, such a law [a ban on political speech] would be obviously unconstitutional. Endorsement of a political candidate -- even if that candidate is yourself -- is about as central to the First Amendment as any category of speech can be."

Kinsley concedes that corporations are not natural persons, and that one could distinguish a ban on personal speech from a ban on corporate speech on this ground.  But, as he points out, this rationale for censorship would also empower Congress and the states to ban speech by newspapers and other media companies altogether, so long as such entities are organized as corporations, as they invariably are.  While the particular law at issue in Citizens United exempted media companies, such an exemption would be unnecessary if the now-fashionable progressive view that corporations are not entitled to protection under the First Amendment prevailed.  As a result, Kinsley calls on progressives to acknowledge that Citizens United is correct, even if they believe the decision has deleterious effects for democracy, in the same way that Chief Justice Roberts acknowledged the constitutionality of Obamacare.

Of course Chief Justice Roberts did not announce his policy views on Obamacare; hence, Kinsley's assertion about the Chief Justice's personal opinion on the matter is speculation.  Moreover, the joint dissent of Justices Scalia, Kennedy, Thomas and Alito made a powerful argument that the Obamacare penalty is not a bona fide exercise of the taxing power, with the result that their vote to invalidate the individual mandate is no less principled that Chief Justice Roberts' conclusion to the contrary. 

At the same time, Kinsley, who obviously disagrees with the result in Citizens United, has himself taken a principled stand.  Moreover, he is certainly correct that many "progressives" (including the President of the United States) strongly believe that Congress and the states should censor high value political speech by corporations, even corporations of very modest means that spend far less on speech than many individuals.  He's also correct that many of these same individuals (including again the President, who mischaracterized the decision in a State of the Union Address) continually decry the Citizens United decision, despite the fact that the Supreme Court has treated corporations as persons for more than 110 years and the Constitution forbids bans on high value speech.  At the same time, the case for corporate free speech rights is even stronger the Kinsley acknowledges.  For, as previously explained on this blog corporations are simply associations of individuals who voluntarily contribute their skills and capital to a joint enterprise.  (See here and here),   Thus, when the corporation speaks, it does so on behalf of the various participants in the corporate enterprise, thereby ensuring a more effective exercise of constituent members' free speech rights.  To be sure, some members of that enterprise may disagree with positions that a Board of Directors take on behalf of a corporation.  But that is true of any organization, whether the ACLU, Cato Institute, or Firefighters Union.  The possibility of disagreement within an organization does not empower the government to censor it.


Indeed, Kinsley might also have noted that, if the Constitution did not treat corporations as persons, states and the national government could simply confiscate corporate property without providing compensation or impose regulatory penalties without providing due process, a regulatory approach the Supreme Court rejected over a century ago in decisions premised upon the finding that corporations are persons within the meaning of the 14th Amendment.  See Chicago, Burlington & Quincy Railroad Co. v. City of Chicago, 166 U.S. 226 (1897) (14th Amendment forbids taking of corporate property without just compensation); Chicago, Milwaukee & St. Paul Railway Company v. Minnesota, 134 U.S. 418 (1890) (14th Amendment requires states to afford due process protections to corporations).  The result would be a kleptocracy, a state of affairs that progressives would themselves decry.

Only 80,000 Jobs in June/Reagan-Obama Jobs Gap Widens

A few minutes ago the Labor Department released another disappointing jobs report.   The economy added only 80,000 jobs in June.  This is the third month in a row that the economy has added fewer than 100,000 jobs.  Indeed, the latest figures show that the economy added 68,000 jobs in April and 77,000 jobs in May, for a total of 225,000 in the entire second quarter of 2012.     By contrast, in July, 1984, during the Reagan recovery, the economy added 379,000 jobs after adding  308,000 in May, 1984 and 363,000 in April, 1984, for a total of 1,050,000 in the second quater of that year.   (Go to this website and insert the appropriate month and year to locate this data).

Moreover, as previously explained on this blog, the gap between the 1984 numbers and the 2012 numbers actually understates the difference between the Reagan Recovery and the Obama Recovery when it comes to job creation. After all, in 1984, the American workforce was significantly smaller than it is now.  In particular, the civilian workforce in June, 1984 was 113,817,000, while the June, 2012 figure is 155,163,000. Thus, even if the economy had added 379,000 jobs in June, 2012 as it did in June 1984, such an increase would reflect a significantly smaller rate of employment growth than the June 1984 increase. A true "apples to apples" comparison of the 2012 and 1984 figures therefore requires one to adjust the 1984 figures upward, to determine how many jobs the economy would have to add today to achieve the same rate of job growth achieved during the Reagan recovery. We can obtain the relevant conversion factor by dividing the June, 2012 labor force by the June, 1984 labor force; the result is 1.3623.

If we apply this conversion factor to the June, 1984 employment increase, we obtain 516,312. Thus, the true jobs gap between the Reagan and Obama recoveries for June, 1984 is 436,312.    Moreover, applying the same methodology reveals that the jobs gap between the second quarter of 2012 and the second quarter of 1984 is 1,205,415 jobs for these quarters alone, a stunning gap that is just one example of the underperformance of the Obama recovery.