Thursday, October 30, 2008

Putting Some Taxes Into Perspective

So, Exxon Mobil announced its third quarter earnings today, which were a record $14.8 billion for the quarter. And with it comes accusations from politicians that big oil isn't paying its "fair share" of taxes. From all the political noise you would think that oil companies don't pay any taxes at all. Well this couldn't be farther from the truth. The untold story that gets lost in all this corporate bashing is that along with that $14.8 billion in earnings, Exxon Mobil also paid a record $11.3 billion in income taxes. For the past year, the company has paid $49.1 billion in income taxes.

To put this in perspective, the bottom 50 percent of income earners in the US will have paid an estimated total of $35.5 billion in 2008 (estimated from 2006 data, the most recent available), and this number does not include the rebate checks earlier this year. The effective tax rate for Exxon Mobil was 44.4 percent over this past year while the average rate for the lowest 50 percent of income earners was 3.0 percent in 2006. Keep in mind also that this is only Exxon Mobil's income tax; it does not include royalties, property taxes or their share of the sales tax. So this one company pays more in income taxes then half of the country's working population. So is Exxon Mobil really not paying its "fair share"?

Furthermore, and very importantly, corporate taxes are not really paid by corporations; they only collect them. Corporations are just legal entities for organization. The actual cost or incidence of the corporate tax is really paid for by people as it it gets carried over as a business expense. Workers pay them through lower wages, consumers pay them through higher prices, and investors pay them through lower returns. The corporate tax allows politicians to tax people without them knowing it.



As a point of concurrence, I would not argue that Exxon has not paid its "fair share." But I would also like to add that I think the amount of taxes it has paid (and everyone in the top 1% has paid) is entirely reasonable. EJB rightly points out that Exxon paid more in taxes than the bottom 50% of income owners. However, to be fair, it should be noted that the actual income difference between these two entities is enormous. To qualify for the dubious distinction of being in the bottom 50% of income owners, one must make less than $31,987 a year. The average tax rate for a person in this bracket (per EJB's website stats) was 3.01%...roughly $960. That left your average Joe Bottom-Fifty-Percent with about 31k a year (less state tax and all that jazz). Now, Exxon, this year, had a net income (after taxes) of $43,643,000,000 (about 45 billion). Its gross profit was around $200 billion, with total revenue equaling $404 billion.

Forty-five billion dollars. That's ONE company. I was unable to find any detailed information about the salaries of Exxon execs. However, in 2006, Exxon parted ways with its former CEO, Lee Raymond, and granted him a mind-boggling "retirement package" of $400 million dollars. In addition, he received two years of free home security, use of the corporate jet, a $1 million consulting deal and a car and driver. This is unconscionable. After hearing stories like this, I find it hard to believe that anyone could argue that a tax rate of 22.79% for the upper 1% is too much. Now I know that not everyone at Exxon (or in the 1%, for that matter) receives 9-figure "golden parachutes." But that's not the point...the point is to illustrate the copious amounts of wealth that is undeniably present in Exxon - and in many of the larger, more successful corporations. My point here is that it makes sense to tax the bottom 50% less because the $30k they are left with is far more important to them than the billions which are spread amongst Exxon's managers, directors and shareholders. It is an essential fairness and undoubtedly just.

Furthermore, as the abstract to this article states: Individual income taxes and payroll taxes now account for nearly 80 percent of federal revenue and corporate income tax revenue makes up about two-thirds of the rest. Thus, corporate income tax only accounts for two-thirds of 20% of the federal revenue - roughly 14%. If you consider that the top 1% paid about 40% of all income taxes paid to the United States, this means that approximately 54% of federal revenue is coming from the top 1% (assuming that the set of people within the top 1% and the set of people who pay substantial amounts of corporate tax are the same or nearly the same). I think I can live with the idea of the top 1% paying around 50% of the federal revenue - especially considering that the income cutoff for the bottom half is under $32,000.

I would also urge everyone to read the article that EJB cites. This one. I don't think it fully supports the conclusion that the actual cost of the corporate tax is covered by the people. Instead, after citing previous historical theories on where the burden of the corporate tax falls, the article states:
Modern economic opinion is divided on the incidence of the corporate income tax, but few economists today believe its burden falls entirely on the owners of capital.

Not exactly a ringing endorsement of the view that "
the actual cost or incidence of the corporate tax is really paid for by people as it it gets carried over as a business expense." If anything, the article suggests that this could be the case, or is, at most, a popular contemporary economic theory. But again, empirical proof it is not. Corporations, after all, are not simply "legal entities for organization," they are reified by most courts in what has been termed a "useful legal fiction." EJB, like many economists, views the corporation as a network of contracts and organizations - this explains the definition he uses in his post. But like I said, the legal world does not hold such a view. Personally, I agree with EJB's definition and hope that one day courts will drop the unnecessary, confusing and often problematic viewpoint of corporation as "legal person."

Finally, because I am not well-versed enough in economics or tax law (next year...can't wait...), I can only post a brief bit of the previously cited article to muster a defense of the corporate tax:

The arguments in favor of leaving the corporate income tax alone are politically compelling. For one thing, the tax has a proven ability to raise revenue, an important consideration for a nation that has run chronic budget deficits. For another, the old aphorism that “an old tax is a good tax” has some validity. Any major change in the tax code changes expectations and imposes new costs and complications during the transition period. But the most compelling rationale for the corporate income tax is the difficulty in assessing its incidence. Since no political constituency sees itself as the primary payer of the tax, none is willing to lobby aggressively for change. Indeed, the art of taxation, as seventeenth-century French administrator Jean-Baptiste Colbert reportedly said, “consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Judged solely by this standard, the corporate income tax has worked well.



A few things.
On Equating the Bottom 50% of Earners to Exxon Mobil
It is true that as JSK states that from a legal standpoint, corporations are defined as people. However, as he acknowledges for all practical purposes it is an association of contracts for the purpose of organizing labor and capital for the purpose of production. However, despite this practical acknowledgement, he continues to treat Exxon Mobil as an individual in his comparisons. He states, "However, to be fair, it should be noted that the actual income difference between these two entities [bottom 50 percent and Exxon Mobil] is enormous." He compared the income of the median individual, one piece of the group aggregate with the total income of the entire company. But just as the bottom 50 percent of earners is a collection of many individuals, Exxon Mobil is just a collection of over 100,000 employees and tens if not hundreds of millions of individual share holders. If he is going to use the entire income of the company, he has to compare it to the entire income of the bottom 50 percent, or has to compare the income per shareholder (data is not available). So the total before-tax income of Exxon Mobil over the past year was $110.6 billion (I'm not sure where JSK is getting his 200 billion number from). In comparison, the bottom 50 percent of earners in aggregate had wages of $1,016 billion. Clearly the company pays a much higher rate of taxes then individuals in this group.

Side Note: It is true that I used the bottom 50 percent of earners because this was what data was available, but understand what that is exactly. As JSK states, technically the cutoff for this group is about $32,000 per year. However, this includes part time workers and people who didn't work all year. The 50 percent cutoff for people who work full time all year around is about $41,000 and the median household income is about $51,000. Also note that this only includes wages, and not compensation through fringe benefits, which are increasingly becoming a larger portion of total compensation. Also this number does not include income from sources including interest, dividends, capital gains, rents or government transfer payments.

On CEO Pay and the Wealth of Exxon Mobil
Similarly in JSK's discussion about executives, he continues to use the framework of the company being like one person. He insinuates the absurdity of just one company earning 45 billion dollars. But once again, this is money that is divided amongst a huge amount of shareholders. Large companies tend to have more holders then small ones. Though this number is often good for press stories and political attacks, what is more important in analyzing the profitability of a company is not the raw amount of earnings but rather the rate of return on investment. The company's average market capitalization (the total value of its shares) averaged about $410 billion over the last year. Therefore the rate of return on devoting ones money to investment is 45 billion/ 410 billion or about 11 percent. In other words for every 100 dollars a shareholder gives up, he or she received 11 dollars this year in earnings. This is really not that absurd considering the stock market as a whole, for both large and small companies averages about ten percent growth per year. One has to look at proportions, not raw numbers. Just as in comparing the national incomes of differnt countries where we look at it in per-capita terms, one has to look at corporate profits in per-capita terms as well.

This similarly applies to corporate pay. Though JSK may find it personally disturbing that an individual makes millions of dollars per year, it is only because the CEOs of large companies have fiduciary responsibility over a larger amount of shareholder wealth relative to smaller firms. The cost of employing the CEO per dollar of investment is no more then a smaller company paying their execs less. This is why CEOs of large companies tend to make more then CEOs of small companies.

On Who Pays the Corporate Tax
It is true that empirically, it is difficult to measure exactly the incidence of corporate taxation. This isn't because it hasn't been done, but that is it very difficult to get estimates on the elasticities of supply or more plainly the relative responsiveness that labor and capital have to changes in prices. However, logically it has to be paid in some proportion from the three areas I earlier mentioned: labor, capital, and the consumer. Unlike what is often misunderstood to be, corporate profits are not what is available for executive pay; this is the earnings of the entity after expenses including executive compensation. So in theory this is the money to now be divided amongst share holders. But if this money is taxed, then the rate of return on investment is reduced and share holders now no longer invest as much in the company, which reduces demand for labor, and reduces the production of goods, which respectively lower wages and increase the price to the consumer. So all three are hit to some degree. It is increasingly becoming generally agreed upon however that a relatively small percent actually gets paid for by those who own capital, because capital is easily movable. Investment can go to other companies, even other countries or investors may just decide to save less and spend more. Whereas workers can not as easily move to other locations to find work and work income is generally more of a necessity then investment income for most individuals. So in the end the cost of the corporate tax more heavily gets absorbed by reduced wages. This is why most developed nations in the world have recently been slashing their corporate tax rates in order to attract more investment which in turn creates wage growth. The US now has the second highest corporate tax rate in the developed world and I am more then willing to bet that it is one of the reasons why manufacturing activities are moving oversees and done so not at the expense of investors, but workers.

On Who Owns Oil Companies
But for the sake of argument, lets assume that the bulk of the corporate tax does indeed fall on capital, or investors. Well who actually owns these shares? Obviously "rich" people own more stock then poorer people, but unlike the common conception and what JSK implies through his adding the corporate tax rate to the rich 1 percent income tax rate and stating its more fair to tax shareholders, stock ownership is a lot more spread out then most think. The emergence of 401ks, IRAs and online discount brokers, has allowed the middle class to broadly participate in the stock market. As of 2005, an estimated 50.3 percent of US households owned stocks either directly or through mutual funds. The median family income for this group was $65,000 (more then the country average but by no means not in the middle class). Also, about another 15 percent of households who don't own stocks, do so indirectly through participation in pension plans. Therefore, about 65 percent of American households own stocks either directly or indirectly. Also understand that this is a snapshot in time. Young people with few assets don't own as much stock and retired people often liquidate their shares for income, so the percent of households that will have owned stock at some point in their lifetimes is even higher. To the extent that the corporate tax does fall on capital, it is more then a tax on just the rich.

Likewise, the following chart derived from a recent study breaks down oil company ownership in the US.

*All direct ownership not included in IRAs
**Mutual funds not held in IRA's, pensions, hedge funds of by other institutions
*** Among others, includes charitable trusts, university endowments, and other financial companies

Also note that due to the overlap in categories and the use of data from multiple source in the linked study, I had to make an estimate for individual investors, mutual funds, IRA's and pensions where the real percentage value could be off be a couple of percent. The data for executives and hedge funds was directly reported from the study.

Notice how small of a percent of stock ownership is in the hands of the executives, the object of resentment and perceived target of increased taxes on corporations and capital. Also this is for the entire industry; the percent for the large integrated oil and gas companies, such as Exxon Mobil is even less at 0.7 percent. Also note that the bulk of ownership fits in retirement accounts, mutual funds and pensions, all largely owned by the middle class. Many of the individual investors are also small, as it includes your average guy with an E-Trade account.

I agree with the quote that JSK cited about the art of taxation in that it, "consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing", but we derive different meaning from it. The corporate tax is good at this, because it is a hidden tax paid by people who don't even know they are paying it. So as far as raising revenue, sure its effective at JSK implies with the quote, but it comes at significant economic cost. I wonder if the mass of people who not only tolerate corporate taxes but champion them would have the same attitude if they knew they were arguing for themselves to be taxed more?


Tuesday, October 28, 2008

On Judicial Activism

The NY Times has produced this article which details the staggering amount of conservative judges appointed to the United States Circuit Courts over the last decade or so. The impetus for writing the article is a case which was recently heard by the Eighth Circuit (which, as you can see here, is a combination of red and blue States). A recently passed South Dakota law forces any doctor who is giving advice to a woman contemplating abortion to tell her that "abortions terminate the life of a whole, separate, unique living human being." If the doctor does not utter those precise words, in that specific order, he has committed a crime. I will not here go into the unbelievably nonsensical nature of such a law and how it essentially robs doctors of autonomy and certain First Amendment rights. The law is relevant here because a group of doctors in South Dakota filed suit claiming the law was invalid and seeking to enjoin its enforcement. The District Court sided with the doctors. It deferred to scientists on the matter of whether human life starts at conception. An appellate panel upheld that ruling.

The Eighth Circuit, in a 7-4 decision, overturned the District Court's ruling, claiming that it was "objectively true that human life begins at conception." Apparently, the Eighth Circuit has been staffed with scientists, not judges. I mean...that has to be the case, or else how could seven of them be so sure about the truth of this matter when even the scientific world has yet to reach a solid consensus? Or perhaps, what is much more likely, the judges let their personal beliefs guide their voting in this specific instance.

I write this not to criticize the opinion or even the Eighth Circuit's thinly-veiled activism. What I have a problem with is the fact that not a single conservative commentator has called these judges out on their activist ruling. I speak specifically about all these religious conservatives and even United States Congressmen, who so vocally condemn "liberal activist judges" whenever they feel that those judges have abused their inherent Constitutional powers. Their main claim, of course, is that judges may only interpret the laws created by the legislature - they may not simply create new laws and rights whenever their intuition calls for it. Thus, when in Roe v. Wade the Supreme Court held that the Constitution implied a right to privacy, conservatives were outraged and immediately condemned the Court for its activism. They claimed, and still claim, that the Court was not interpreting the Constitution, but merely creating a new right out of thin air.

Interesting, now, how the tides have turned in the present case. Conservative judges on the Eighth Circuit have now "interpreted" the First Amendment in a way that allows a State to force a doctor to say words which he may not believe (or worse, scientifically disagree with). That's funny...I don't see those words anywhere in the Amendment. I guess the judges must have made that up.

Where are the activism cries? Where are those conservatives who were so concerned about the proper role of the judiciary? What ridiculous hypocrisy. This case reveals the true nature of those who employ the term "judicial activism." It's merely a code word, used by people who disagree with the substantive outcome of any specific case. It is a pejorative insult, slung by those who could not convince a majority of judges to feel the same way they do. And when those judges do agree with them, but employ the same judicial method that those people once abhorred? Not a problem...because they sided with us this time.

Some may say I'm being too partisan on this issue - that I'm not being fair to conservatives because liberals too only like judges who side with them on their issues. But that's not the point. Find me a liberal commentator, professor, scholar or politician who uses the term "activist judge" to describe judges they disagree with. There aren't any (or at least, so few in comparison to conservatives). The "activist judge" slander campaign was mainly a conservative attack on liberal judges. Thus, I believe I have every right to call out those same conservatives when their silence goes seemingly unnoticed by others. That silence speaks volumes about the legitimacy of the "activist judge" critique. It was, and still is, nothing more than a hypocritical slander campaign, leveled against judges who simply disagreed with conservative ideologies.



A few points, both in concurrence and contention.

On Hypocrisy
I looked into this case a bit, not being aware of it prior, and in my limited understanding of it, I have to agree with your point about hypocrisy. The justification for this being Constitutional was essentially that because the bill defined person, "an individual living member of the species Homo sapiens, including the unborn human being during the entire embryonic and fetal ages from fertilization to full gestation" that it was therefore acceptable to mandate this disclosure. This rather tautological argument does appear to be rather "activist" in nature. However, I do disagree with JSK's implied reasoning for why this is in violation of the 1st Amendment. He states that this is faulty at least in part because the state can force doctors to say something that, he may not believe (or worse, scientifically disagree with)." But since when is a personal belief in the truth of a statement a condition of of being allowed to remove oneself from mandatory disclosure laws? Drug companies must disclose "likely" side effects of their drugs, police officers must reiterate Miranda Rights, individuals can not distribute campaign literature unless they disclose from what group funding originated; none of these groups are waived from being forced into this speech because they personally do not agree of believe what is being said. The reality is, the arguments on both sides of this have motives that have less to do with any fundamental right and more to do with a certain policy that they agree in. I'm agreeing with your accusation of hypocrisy, but that charge more then goes around to almost everyone now.

The reality is that neither major party or the mainstream right or left actually believes in fundamentally protecting the Constitution. Social conservatives, as you put it, who base much of the claim for the overturning of Roe in steadfast beliefs in adhering to the Constitution and therefore interpreting it through a originalist viewpoint, are often the same people who are in agreement with expanding the size and role of the welfare state, all of which was declared unconstitutional under an orginalist interpretation. Likewise, those on the Left who have been outraged by recent actions on habius corpus, domestic spying, etc, and argue the their outrage is based in destroying the Constitution are the same people who don't seem to have any problem with Hilary Clinton's proposal, for example, of enacting a foreclosure moratorium, which is a clear violation of contractual rights and obligations as well as the Constitutional ban on post facto laws. Where is the outrage here, if the outrage were indeed grounded in the Constitution? The reality is, that very few people who claim that any given policy should be restricted based on Constitutional grounds actually fundamentaly believe that. It is just a means of appealing to authority in order to achieve the policy goal one wishes.

For example, both of our Presidential candidates have essentially stated they don't actually believe in adhering to the constitution. Obama, in a 2001 radio interview, before he was under the scrutiny of a Presidential campaign, was talking about the Supreme court, the civil rights movement and how it failed to redistribute wealth. He had this to say:

...the Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in society. To that extent, as radical as I think people try to characterize the Warren Court, it wasn't that radical. It didn't break free from the essential constraints that were placed by the Founding Fathers in the Constitution...

And that hasn't shifted and one of the, I think, tragedies of the civil rights movement was... [the]tendency to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalition of powers through which you bring about redistributive change.
Essentially he is admitting that the Founders intended to place constraints on the powers of the Federal government, specifically in this case the ability to redistribute wealth. He is then criticizing the Court for not "breaking free." Therefore, he has no intention of actually abiding by an objective Constitution, but rather having it "evolve". The entire interview can be listed to here.

Similarly McCain, in reference to his campaign finance laws stated:
"I would rather have a clean government than one where quote First Amendment rights are being respected, that has become corrupt. If I had my choice, I'd rather have the clean government."
So he does not fundamentally believe in individual rights either. Those rights are only protected in so far as the government does not see a more important national cause. But if that was the intent of the Founders, why have a Constitution in the first place? Why not just allow democracy to do whatever the majority deems fit?

On the Idea of Activist Judges
Though I agree with you on the hypocrisy point, my dissent is largely in how you seem to suggest that the notion of an "Activist Judiciary" is only a concocted one and the reality is that there are just differing "judicial philosophies." Though there may be hypocrisy from many of the messengers, that does not change the message, and this is a more then legitimate claim.

It is true that as the Founders would say, "reasonable men can disagree," but we have not been adhering to the notion of a constitutional republic for 70 plus years now. FDR began the dismantling of the Constitution and it has continued ever since. Many of his programs were deemed unconstitutional and therefore he tried to stack the court. He famously stated, "We have been relegated to the horse-and-buggy definition of interstate commerce." So he is saying then that there is an "old" definition of the Constitution. That therefore implies, there is a "new" version. This ultimately means he had no intention of abiding by Constitutional law as had been determined by years of precedent, but rather wanted the Court to become activist. Even the term "Progressive" has its roots in an understanding that we had moved beyond the need for the original meaning of the Constitution and the role of government, There was an acknolegment that advocates of such policies were not adhering to the Constitution as had been in the past.

FDR eventually got what he wanted over the years as he appointed judges that shared his desire. They overturned the recent precedent created when the court originally struck down his Railroad Retirement Act, National Industrial Recovery Act, and Agricultural Adjustment Act. How could this possibly not be "activist" when juts a few years prior, the courts had struck down any expansive definition of the interstate commerce clause? Now we have bastardized the clause to allow the Federal government to get involved in virtually everything and this is the legal backing behind the modern welfare state.

Likewise, Roe v Wade was similarly "activist." Roe's reasoning essentially derived from the following chain of logic.

1. No unreasonable search and seizure as well as no quartering of troops implies that there is a Constitutional right to privacy or at least in ones personal home.

2. Under this notion of this implied right to privacy, state contraceptive bans were deemed unconstitutional in Griswold v. Connecticut.
(So I'm in general agreement to this point)

3.Because Griswold had to do with reproduction, the right to privacy likewise extends to the notion of abortion.

This is a huge very week stretch to get to this last point. The argument for why privacy applied with contraceptives was because this act only occures in the privacy of the home (which is more directly implied in the Constitution) between intimate consenting individuals. Furthermore, and importantly, in order to enforce this law, it would require search and seizure within the home and investigation of sexual behavior. Abortion does not fit into this framework at all. However closely the two may be linked in purpose, they are worlds apart in terms of privacy. Abortions do not take place in the privacy of ones personal home, preventing them does not require investigation of private sexual behavior, and they involve persons(doctors) other than sexual partners. Furthermore, a commercial transaction occurs. If this broad of a definition of privacy where applied in general, then that means that all laws that states enact to regulate commerce, restrict use of drugs and other substances, control what can be manufactured, and mandate things ranging from required smoke detectors to barring the use of led paint in your home are all unconstitutional because they violate the principal of privacy. Obviously there are very few people, and even fewer who argue pasionatly about protecting abortion, that would argue for this.

The other component was citing the 14th amendment. A state law infringing on a fundamental right is reviewed under a rigorous "strict scrutiny" standard to detemine of the Federal Government has the power to overturn a state. The right must be "deeply rooted in the history and traditions" of the American people or "implicit in the concept of ordered liberty" at the time of the Amendment's enactment. But most states had laws restricting abortion at the time, an no one in the late 19th century was arguing abortion was "deeply rooted in history and traditions." So this argument is not only factually incorrect, but absurd.

Casey v Planned Parenthood more or less acknowledged how pathetic this reasoning was.

We do not need to say whether each of us, had we been Members of the Court when the valuation of the state interest came before it as an original matter, would have concluded, as the Roe Court did, that its weight is insufficient to justify a ban on abortions prior to viability even when it is subject to certain exceptions. The matter is not before us in the first instance, and, coming as it does after nearly 20 years of litigation in Roe's wake we are satisfied that the immediate question is not the soundness of Roe's resolution of the issue, but the precedential force that must be accorded to its holding.

So essentially the Court is admitting that the reasoning behind Roe was faulty (or at least is unwilling to reaffirm its reasoning), but it was only upholding its core principals because there was now precedent. But the only reason why there was precedent was because of faulty reasoning!

So I will wait and see what variations of precedent JSK is able to put together to argue for the legitimacy of these two examples I give. However, even if such a thing can be done, it can only be done so because we have had over 70 year are such lose interpretations of the Constitution, where there is virtually no restricts on the power of the state, and individual rights can be created and destroyed at the whim of a justice, so that a "reasonable" individual can now construct justification for basically anything. We are far gone from the days when we actually lived under constitutional government.



On Hypocrisy

I’m glad that EJB agrees with me that the Eighth Circuit opinion strays from a reasonable reading of the Constitution. He unfortunately disagrees with me on the First Amendment issue present in this case. His point, apparently, is that there are other places where individuals are forced to express certain speech that they may otherwise not want to. Let me first say that his rebuttal misses the mark by shifting the debate so that I must now defend his examples. Hypothetically, then, I could simply defend my original point (which was a literal reading of the First Amendment) by refusing to justify his examples and claiming that they too are unconstitutional. But I don’t even need to go that far, because his examples are inapposite.

My original point, of course, was not that the law was unconstitutional simply because the doctors might disagree with their forced utterances – that is merely an aggravating factor. The law is unconstitutional because it serves no legitimate government purpose. A law which violates any constitutional amendment must pass strict scrutiny – that is, it must be narrowly tailored to fulfill a vital government interest. This is where his examples break down. The Miranda warnings pass strict scrutiny because there is a definite and important government interest in making sure that those in custody are aware of their rights. This benefits both the apprehended and the government – the former because he may have been unaware of his rights and the latter because informing someone in custody of their rights will decrease the risk that they can get off on a technicality. Similarly, disclosure laws and product safety warnings serve the important government interest of protecting consumers from information asymmetries and bodily injuries. In the present case, however, the law cannot pass strict scrutiny. What is the important government interest here? Is it to protect life? Clearly it is not because 1) if the woman’s life is in danger, then trying to dissuade her from having an abortion does not protect life but actually does the opposite and 2) the judges have simply decreed what “life” is defined as! EJB correctly points out the tautological nature of their opinion. Judges cannot simply create an important federal interest by mere fiat.

I also totally disagree with EJB’s “reality.” The claim that people who oppose or support abortions “have motives that have less to do with any fundamental right” and more to do with “policy they like” is creating a distinction where there is no difference. That is, the “policy they like” is the protection of a fundamental right! Pro-choice supporters urge protection of privacy and bodily integrity. Pro-life supporters urge the protection of a “right to life.” Thus, there could be nothing further from the truth to hold that either side of this debate could care less about rights.

EJB claims that my accusations of hypocrisy “go[] around to almost everyone now.” Why? How are pro-choice supporters hypocrites for opposing this South Dakota law? Because they tacitly support mandatory disclosure laws or consumer protection laws? Please. I don’t see any justification for leveling this claim.

Apparently, one such justification is that both Presidential candidates do not abide by the Constitution. Here, EJB confuses activism for the notion of the Constitution as a living document. Obama’s comments cannot necessarily be read as “criticizing” the Court for not breaking free of the constraints. It seems to me that that entire quoted section is a defense of the Court – a claim that counters the oft-employed conservative attack of “judicial activism” during the Warren years. This is especially true considering that Obama is talking about the civil rights movement. I think something EJB fails to appreciate is the sui generis nature of the civil rights movement. Because the Constitution was a document that protected and ensconced slavery and racial bias, it was necessary to force a change in the system by straying beyond the literal words of the document. If this is “activism,” then count me in.

On Activist Judges

I am deeply saddened by my learned friend’s belief in the notion of “judicial activism.” He sets up a false dichotomy of “old” Constitutional definitions and “new” ones. This is only the case if you subscribe to the “originalist” school of Constitutional interpretation – a method of interpretation that is so riddled with fallacies that I could not hope to fully expound upon them here (here's an article that dismantles the myth of "originalism" pretty well, though). EJB’s assumption that because FDR disliked the way “interstate commerce” and been defined in 1790 and thus pushed for a more modern interpretation of that term must necessarily imply that judges were “activist,” ignores the simple fact that interstate commerce had actually evolved since 1790! The originalist viewpoint is self-defeating from the start – it assumes, incorrectly, that the Founding Fathers intended every word in the Constitution to be perpetually defined by that era’s parlance. The Framers were not this stupid. The judiciary cannot be this stupid. If that reading were true, then the only guns we could own would be muskets and flint-locks. “Men” (in terms of suffrage) as defined in 1790, would not include those who do not own land. “Cruel and unusual” punishments would mean only those punishments which were, at that time, considered cruel and unusual! The consequences of an “originalist” interpretation are absurd. As Professor Erwin Chemerinsky of Duke Law School puts it:

...specific intent originalism often leads to absurd conclusions.
If the Constitution's meaning is defined only by the drafters'
specific views, the Constitution could not govern the modern world.
Congress' power under article I to raise an Army and Navy could not
include the Air Force because that was not the framers' specific

Thus I agree that “progressive” means realizing the need to move beyond traditional definitions. This need directly coincides with the actual changing nature of American culture and technology. EJB seems to believe that if a Court overrules precedent, it is being “activist.” This is not the case for if it were so, it would mean that reasonable men could not change their minds on any opinion. That one definition of “interstate commerce” took hold and replaced an older one does not evidence “judicial activism.” It merely recognizes the changing landscape of the American economy.

And this is the real problem with anyone who uses the term “judicial activist.” They tend to level that claim simply because they hold an opposing viewpoint and did not get their way. To claim that a decision is “activist,” one would have to prove that the decision was entirely unreasonable and mere fiat. That the notion of “interstate commerce” broadened is true. That this new interpretation is irrational is just simply not true. The only evidence anyone who levels a claim of judicial activism can ever point to in the hope of proving total unreasonableness is that they disagree and that previous court’s disagreed. If that were enough, then why bother having a Court at all? Every issue would be settled, all words clearly defined. Change and growth would be halted entirely. We would live our lives under a law that pretended to adhere to 18th Century standards. Does that really make any sense??

OK, so here we go with the Roe stuff. I’m not going to launch into some long-winded defense of the Supreme Court’s reasoning in Roe – not because I can’t, but because this is not a Constitutional Law seminar class. I don’t have the time or the patience to explain why Roe is not “activist.”

I will say this though – someone who claims that Roe v. Wade was “activist” must also claim that certain other subsequent cases were “activist” which relied on Roe or employed similar reasoning. These cases include Brown v. Board of Ed (ordering desegregation of schools), Griswold (holding that States could not criminalize the sale of contraceptives), Loving v. Virginia (holding that States could not criminalize interracial marriage), and Lawrence v. Texas (holding States could not criminalize sodomy). Like Roe, these cases rest on the undeniable fact that society evolves and has evolved since the writing of the Constitution. Thus, under an “originalist” interpretation method – to which, I assume, EJB adheres – there would be: 1) legally segregated schools; 2) State bans on condoms, birth control pills and other contraceptives; 3) State bans on interracial marriage; and 4) the criminalization of homosexuality. Is this what the Framers had in mind for our country? According to EJB’s flawed Fourteenth Amendment analysis, they did. Now, I cannot chastise my friend for incorrectly stating the standards since he is not in law school. The “deeply rooted in the history and traditions” of the American people idea is NOT the standard for finding an implied right. As Justice Kennedy wisely stated in Lawrence v. Texas, it is a starting point, not an endpoint. Supreme Court cases recognize the evolution of societal standards and do not – to the detriment of Justice Scalia – simply employ a “traditional” standard.

As far as Casey “acknowledging” Roe's “weak reasoning,” this point is wholly unsubstantiated. The quote EJB highlights says nothing about the weakness of the argument, but instead simply notes that the legal question that was before the Court in Casey did not involve the soundness of the Court’s method of constitutional interpretation. This is not in any way damaging to the Roe opinion.

The real problem, of course, is that any claim of "judicial activism" is hopelessly subjective and mostly inconsistent. Take EJB's response, for example. Nowhere can he adequately define what "judicial activism" is, although it's pretty clear he believes it exists and is adamantly against it. The closest thing I could find is this: "such lose interpretations of the Constitution, where there is virtually no restricts on the power of the state, and individual rights can be created and destroyed at the whim of a justice, so that a "reasonable" individual can now construct justification for basically anything." The use of words like "loose interpretations," "virtually no restrictions," "created and destroyed," "whim of a justice," and "construct justification for basically anything," already presume his conclusion (that judicial activism exists). What are "loose interpretations?" Who decides that? What objective standard are we holding these decisions up to? What's the difference between "creating" and "protecting" a right? Well, it will please EJB to know that in my two years of Constitutional law studies, I have seen plenty of arguments fail because they could not adequately "construct justifications." For instance, we do not have a right to vote. We do not have a right to life. We do not have a right to death. We do not have a right to dignity. We do not have a right to health care. These are rights that the Court refused to find in the Constitution. Perhaps one day, a new Court will interpret the Constitution to hold one or more of these rights impliedly. But just because we have not respected them previously, does not mean they are non-existent. The Framers even recognized this by adding into the Constitution the Ninth Amendment.

I know I cannot convince those of you who agree with EJB. But I will, however, suggest to you a fantastic book entitled "The Myth of Judicial Activism." It is a wonderfully coherent look at what is meant by the phrase and also a fantastic empirical study of past cases. If it does not convince you of the utter emptiness of the phrase "judicial activist," then I guess we're stuck with a worthless term for the indefinite future...


Monday, October 27, 2008

More of This, Please

We couldn't have put this any better ourselves.

This entire campaign season has really felt like an "endless purgatorial reality show."
It's over soon, right?


A Case To Keep an Eye On

So there is a small obscure legal case that is in the works that has potential to set precedent moving forward that could have an important role in shaping our health care system into the future. Three retired men whom have saved money for private health care coverage for their retirement wish to opt out of the Medicare system. For a second article, you can read here. The crazy part about the system currently however, is that if one opts out of Medicare, that person must also opt out of Social Security. Furthermore, if you are enrolled in Medicare, you are forbidden to purchase additional private insurance outside of a few restricted MediGap programs, which must work in conjunction with the normal medicare system. In addition you can not participate in Health Savings Accounts. Apparently the government won't let you save them money even if you want to.

Anyway, these men wish to opt out of the prior, because they prefer to seek superior, unrationed private care as well as desiring to keep their private information out of the hands of a government bureaucracy. They wish to stay enrolled in Social Security however. The result is that a suit is being taken up.

Now beyond the lunacy of this policy, this struck me as having potential consequences moving forward that are much more profound then the condition of these few men. If the courts indeed rule that the government is within its right to force participation in Medicare if one wishes to participate in Social Security, then this greatly strengthens the ability of the government to ration health care in general through statute. The baby boomers are nearing retirement and therefore they will soon be enrolled in Medicare. Furthermore, it is very likely that there will be an expansion of government run health care programs in the next Congress, so between the two a much larger percent of the population, perhaps even the majority will be enrolled in government run health programs in the near future.

As costs continue to escalate through the entire system, and Medicare and Medicaid move into insolvency, the government will be forced to increase its rationing efforts, restricting access to patients. We are already beginning to see this in Medicare where doctors are not reimbursed 100%, so that they are forced to squeeze more patients into a short period of time, or in some cases doctors are just refusing to participate in Medicare or are limiting the amount of new patients. If the courts rule in favor of the current government policy, this will allow it to enact in the future a rationing method long employed by the Canadian system, that being that it is illegal to purchase privately funded health care even if done so with your own money. Though I doubt it would be explicitly made illegal here, for all practical purposes is would be so if it were tied to other programs, just as Social Security and Medicare currently are, so that if you do go ahead and purchase private care, you lose access to all other programs or see various tax credits and deductions nullified. This is how the Federal Government currently gets away with mandating that states comply with the drinking age; they threaten to take away hiway funding if they don't cooperate.

The argument for such a policy in Canada has been that it is unfair to purchase health care privately that uses resources that can not be used by the public system. So as a means of rationing to reduce costs, this action is prohibited. This forces everyone to utilize the rationed public system where certain procedures are restricted. The result is that many Canadians who have money often come to Boston, Cleveland or Seattle for superior treatment. Canada's argument is very similar to the rationale used in the 90's when Social Security and Medicare were linked, where the argument at the time was to prevent a "two tiered system." It was unfair that some individuals would be able to have higher quality treatment, even if they could afford it without burden to the tax payer.

So keep an eye on this. I will likely comment on it when a decision is reached. It may be an indicator of to what degree you will have options and choice in your health care moving forward into the future.



Interesting case, EJB. It sounds like an issue that, no matter what the trial outcome, will be appealed to the Circuit and eventually Supreme Court. Let's just hope they feel that the issue is ripe for certiorari, or else the question may never be fully answered. I too recognize the bizarre nature of this policy. It seems difficult to argue that the connection between Social Security and Medicare is so strong that one cannot subscribe to the former without participating in the latter. This will come in handy later, but first, a few clarifications.

Contrary to EJB's assertion, Canada's health care system does not prohibit individuals from buying private health care. It leaves this decision up to the individual provinces, most of which have simply enacted legislation that has disincentivized private health care. Dr. Robert Steinbrook wrote this article, published in the New England Journal of Medicine, calling for the Canadian government to let private health care providers increase the types of services they can provide. He points out that while much of Canada's total health care spending comes from the public sector, there is still room, even under the current system, for private providers:

As explained in a 2003 report, the Canadian health care system is "unique in the world in that it bans coverage of . . . [physician and hospital] core services by private insurance companies, allowing supplemental insurance only for perquisites such as private hospital rooms. This ban constrains the emergence of a parallel private medical or hospital sector and puts pressure on the provinces to meet the expectations of middle-class Canadians."1 That only 70 percent of total health care funding in Canada comes from the public sector — less than in many European countries but considerably more than in the United States — reflects the fact that private payments are common for other expenditures, including drugs, dental services, optometry, and home care. Private insurance and private care are also common in niche areas, such as work-related injuries and cosmetic surgery.

I also have the feeling that the US government is in no rush to duplicate the Canadian system because of its notorious "wait lists." And I agree with EJB that these wait lists are deplorable. However, this one negative consequence of the Canadian system should not end the conversation regarding the efficacy of universal health care. Dr. Robert Bell, in a letter to the WSJ, writes that Canadians spend about 55% of what Americans do on health care and enjoy longer life-expectancies and lower infant mortality rates. He also details a plan to target and eliminate long waiting times. Let's not short shrift the Canadian system.

Similarly, the Canadian Supreme Court recently ruled in Chaoulli v. Quebec that the 1984 Health Insurance Act cannot be read to prohibit the purchase of private health insurance. The Health Insurance Act actually left it up to each province to decide for itself whether it wanted to allow or prohibit private health care providers. This case marks the end of that reading - at least in Quebec - because such an interpretation would violate Canadian citizens' right to life (something we could really use down here in the States).

The case EJB briefly refers to when he mentions Congress conditioning highway funds on state drinking laws is South Dakota v. Dole. There, a 7-2 Supreme Court majority, headed by Chief Justice William Rehnquist, held that Congress has the power, as provided by the Taxing and Spending Clause, to attach reasonable conditions to funds it disburses to the States. EJB claims that the Federal Government "gets away" with doing this; but actually it is a perfectly legitimate power that has always been assumed as part of the Taxing and Spending power. It is important to notice, I think, just who supported this decision. Both Justice Scalia and Justice Marshall joined with the majority opinion. This startling fact (startling because Scalia is probably the most conservative Justice in recent memory and Marshall was quite possibly the most liberal) reveals that the decision was not political. Justices with drastically differing political views were able to overcome those differences and decide that a proper interpretation of the Constitution called for this holding.

Two ideas follow from this. First, the power of Congress to attach reasonable conditions to disbursements is not unlimited. Dole sets up four restrictions for Congressional conditioned spending: 1) it must promote the "general welfare"; 2) the condition must be explicit and clear; 3) there must be a reasonable relation to some legitimate federal interest; 4) other Constitutional provisions may supersede the conditional grants.

Thus, we would have to ask if tying Medicare to Social Security meets these four conditions. To me, that seems a very difficult task. However, it may not even get to that stage. For, it is important to note that the Dole case involved the Federal Government disbursing money to the States in exchange for their cooperation in certain federal mandates/programs. Dole has nothing to say about individuals accepting Federal money. There may be significant distinguishing characteristics here that make Dole inapposite - for instance, the idea that the Taxing and Spending Clause does not extend its reach to private citizens, but only applies to the States. It is also important to consider that while Medicare is considered a privilege, Social Security payments (once established) are considered to be a property right, the removal of which would be subject to the the due process provision of the Fourteenth Amendment, and actionable via 42 U.S.C. 1983.

So, like I said earlier, there are many legal issues here that I hope the higher courts decide to deal with. Will Dole apply, thus shifting the burden onto the Government to defend its conditioning one program on another? Will Goldberg apply, thus forcing the Court to deal with Due Process concerns in the event that social security entitlements are lost? I would add one more thing, in response to EJB's concerns that any decision would be a catalyzing precedent for further liberalization. I think that, no matter what the outcome, the District Judge will likely attempt to limit her holding to the specific facts of the case. Courts do this when dealing with matters where they are likely to be walking a fine line between interpreting laws and violating the separation of powers. I would be surprised to find a decision written in broad terms. Thus the decision might not have has many negative or even positive consequences as might be imagined.



JSK brings up a lot of points here; I am going to try to hit all of them.

1. "Canada's health care system does not prohibit individuals from buying private health care." So yes, this is not a complete ban as JSK has said, and in some cases it it not actually a banned, but rather an implicit one by creating legislation that highly disincentivizes the development of private methods of delivering care. Even though people buy many "extras" through private means, even JSK admits though his quote that, " bans coverage of . . . [physician and hospital] core services by private insurance companies." My point still stands, that even if this is not universal through the entire system, banning or severely limiting private access is still a heavily employed method of rationing in Canada.

2. [Canadians] enjoy longer life-expectancies and lower infant mortality rates.
This is a classic example of the expression "there are lies, bigger lies, and statistics." When you actually look at what constitutes the data behind this often repeated "fact" that government run health care proponents often use, you see the truth is quite different.

Infant mortality rates are relatively high in the US compared to other developed nations for two reasons. First, the definition of infant mortality that is used by different nations differs greatly and the US definition is one of the most highly inclusive ones, so that many new born children who die in other nations are not reported in the statistic as they are in the US. As Economist John Goodman concludes in his study:
"Taking into account such data-reporting differences, the rates of low-birth-weight babies born in America are about the same as other developed countries in the OECD [Organization for Economic Cooperation and Development]. Likewise, infant mortality rates, adjusted for the distribution of newborns by weight, are about the same."
The second reason, and to me what makes the fact that we are not lower then most nations more impressive, is that in the US, when prebirth conditions become threatening, we often attempt to save the unborn children via C-Section, and at a rate much higher then in most countries. Many are indeed saved that would have died (myself included; I was two months premature); however, the mortality rates of these sickened early born children are higher the average. In other less developed countries they would have never been born in the first place and therefore would have not been included in the mortality statistic t begin with.

Similarly, life expectancy statistics have to be taken with a grain of sale, because they include factors outside that of the heath care system. So for instance because we drive more then most nations, we have a higher rate of death by car accidents. We also for whatever reasons, have a relatively high homicide rate. Both of these are not reflective of the health care system. As Economist Mark Perry points out, if life expectancy data is adjusted for car fatalities and homicide, the US has the highest life expectancy rate in the world. Now whether these calculations are correct or not
, doesn't change the point that there are many factors that go into life expectancy other then the quality of heath care. I would argue that the American propensity for obesity (our eating and exercise habits) has a lot to do with dragging down our life expectancy, and not the health care system.

This is why when actually trying to analyze the merits of a health care system compared to another, we should not be primarily looking at statistics that have a multitude of factors, but rather look at metrics that actually measure how well a heath care system works once it is employed. When you look at things like cancer survival rates, the US has the highest in the world. So for instance, "Women who get breast cancer in Europe are four times more likely to be diagnosed when the tumor has spread and are less likely to survive the disease than women in the United States." Or another is, "For leukemia, for example, the American survival rate is almost 50%. The European rate is significantly lower, at just 35%. Esophaegeal carcinoma is often deadly - but American patients far much better than those across the Atlantic. 5 year rates in the U.S. are 12%; European, just 6%." The chart to the left from the Economist shows US 5 year prostate cancer survival rates. Both avove quoted stats and others found here.

I think my point is made.

3. Canadians spend about 55% of what Americans do on health care (Presumably at no lost benefit, which I talked about in my previous point). But why do Canadians and other nations with government health care spend less? Well there are many reasons but I will address two of the major ones, if not the primary reasons.

Other nations give you less health care, essentially you get what you pay for. Through rationing techniques, government restrict access to health care in various ways in order to reduce costs. The result is a much lower "quantity" of health care. So for instance:

Canada lags badly behind the United States in terms of basic diagnostic machinery. Indeed, Canada lags behind most Western countries. The OECD analyses the availability of such machinery and ranks the various countries. Canada's results are striking: it ranks 21st of 28 OECD nations for CAT scanners, 19th of 22 in availability of lithotriptors (used to treat kidney stones and gallstones), and 19th of 27 in availability of MRIs. Canada ranks 6th of 17 in availability of radiation equipment.
This would be the reason why the wait times are so notoriously long in Canada; there simply isn't enough "health care" available due to rationing. And despite this being an election year issue every cycle and more and more money promises have been made to lessen lines, they continuously get worse. And as I pointed out in my previous point, this IS done at the expense of quality, which can even be anecdotaly confirmed by the fact that so many Canadians come to the US for health treatment. Another example:

Antipsychotics, the main treatment for schizophrenia, have been revolutionized in the past decade. Newer drugs are linked with fewer and more benign side effects. In the United States, 60% are on the newer drugs. In Spain, only 20% are, while in Germany, fewer still at just 10%. Some patients, of course, may opt for the older medications but studies suggest most prefer (and do better on) the new so-called atypical antipsychotics. Thus, when it comes to the treatment of mental illness, Europeans get the best the 1970s provided.
The second major reason for why heath care costs so much here is that through our tax subsidy system, we incentivize over consumption. Because insurance paid for by your employer is tax free, but expenditures paid out of pocket have to be done so with after tax income, there is an invective for the both the employer and the employee to structure compensation packages with larger amounts of insurance and less cash. The result is the evolution of heath insurance in this country to something that is less like insurance and more like prepaid care via low deductibles and co payments. As is a problem with any type of third party payer system, private or public, when the cost of a transaction is paid for up front and not at the point of sale, there is an incetive to purchase excessive amount because the marginal cost of doing so is nothing or very little. So for instance, instead of waiting to go to your doctor on Monday for a minor ill, you go to the more expensive emergency room on Sunday because it only costs you at that point of transaction a small copay. Without this tax subsidy, health insurance would have likely developed more in line with auto insurance, where regularly occurring payments are done out of pocket, and the insurance only kicks in when you have catastrophic damage. This would reduce the moral hazard of over consumption and reduce prices as demand falls. A more detailed discussion can be found here. A survey illustrating this moral hazard can be read here. What we have seen is that the US pays a very low percentage of its expenses out of pocket even compared to most western nations, and this trend has only increased over time as the chart shows.

I would also mention as a side note, that Canada has lower drug cost because of price controls. US firms continue to sell drugs to Canadians at these lower prices because the marginal cost of producing more pills is less then the price received; however, in the absence of the American market, the more costly fixed cost of research and development could not be covered. In essence US consumers are subsidizing low cost Canadian drugs. So we are partially paying for their health system and though I am not familiar with the legal technicalities of it, I am surprised the US had not brought suit to Canada in the WTO over this for unfair trade practices.

4. Regarding the Highway Funding Analogy, States don't "get away" Perhaps I was unclear, but I am not calling into question the legality of the Federal government withholding funding to states. My analogy was simply that like in the case where the Federal government is not allowed to explicitly force the states into the drinking age laws, so that it "gets away" with this by implicitly doing so via essentially extorting the states, a similar technique could be used in the case of restricting private health care by extorting you through the loss of other programs such as Social Security.

5. The conditions that the government has to comply with to withhold entitlements and Goldberg v. Kelly and Social Security as a property right.
I agree that the current link between SS and Medicare seems iffy, but the whole premise of my post was watch this case. IF the courts uphold the move, then that would imply that the 4 criteria that JSK outlines have indeed been interpreted to have been upheld. If this is the case, it follows that this rationale could be used to ration health care moving forward.

Furthermore, I can't say I was aware of Goldberg v Kelly, but I was aware of Helvering v. Davis, which stated that, "The proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way." This essentially means that you have no right to any benefit simply because you have paid into the system your whole life. FICA payments are simply taxes like any other. I am not going to comment further, not knowing the technicalities that differentiate these two cased. Perhaps it is simply because of my lack of knowledge in the subject, but barring that I wouldn't be surprised that to say that at a minimum there is some fuzziness between these two cases and further precedent will have to be written in order to clarify exactly if the government can deny SS. But either way, it is mute because as JSK states, Medicare is a "privilege" legally and other heath care would likely fall under this same notion.

So If you've made it this far, I applaud you. At least it will justify the greatly above average time it took me to write this response. :)


Sunday, October 26, 2008

Financial Bailout Act III

So I earlier posted on the financial bailout and among other things talked about how in our panic, the purpose of the $850 billion bill was quickly evolving, and that Congress basically gave the Treasury an open ended check. First it was to buy bad mortgage securities, then it was to buy equity stakes in banks, eventually forcing nine institutions to sell part of themselves to the government. Now, as lobbying forces descend on Washington armed with the precedent of government bailouts, other industries are lining up for their share.

Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.

The betting is that many with their hands out will be successful, especially with financial markets in a stomach-churning dive and predictions the economy is about to tumble into a deep recession.

Lobbying efforts are intensifying.

The Financial Services Roundtable wrote Treasury officials on Friday requesting that the initiative to buy $250 billion in bank stock grow to cover insurers, auto companies, securities dealers and U.S. subsidiaries of foreign companies, including banks.

Who's going to be next? Lets just socialize all risk in the economy and make the government part owner in every industry? I've lost some money in the stock market recently. Where's my bailout?



I must preface my response by noting that there is a certain, noticeable, interior inconsistency between the first and second parts of my blabbering. This is because the first part (in which I defend the policy) is premised on the idea that the bailout was intended to remedy the current credit freeze. The second part, which seems contradictory, is only so if one rejects the premise underlying the first part; namely, that the bailout is not going to increase liquidity and stimulate bank loans, but will, instead, simply act to reshape the relationship between industry and government.

I think allowing other industries to accept some of the bailout money is actually a pretty good idea. The open-endedness of the bailout plan allows for a high degree of flexibility in its approach to dealing with the financial crisis. If the 850 billion came conditioned upon its use for one or two narrowly defined purposes, then the Treasury would be unable to alter its plan in the event that lawmakers and economists discover new and better ways to help ease the crunch. I think it's also important to note that the article does not assert that these industries are asking for a larger bailout. Thus, the bailout amount would stay the same; however, different portions of it would go towards various uses which had not been originally discussed.

Now I see that part of EJB's argument is a type of slippery slope idea and it's probably a valid one. Allowing different industries to take a piece of the government handout would, perhaps, set a dangerous precedent for the future - should the economic condition worsen.

However, the credit market is absolutely frozen. I supported the bailout because, originally, it was intended to improve the liquidity of these major banks - thus allowing them to loan and borrow more money. The article EJB links to seems to suggest that allowing these other industries to take a piece of the pie will also help to unfreeze the credit market:
"The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market," Bartlett wrote Neel Kashkari, the Treasury Department official running the bailout program.

If that were true, I'd have to fully support the move (especially since I'm crossing my fingers that my law school loans come through for one more year).

Unfortunately, there's this news from the NY Times. It turns out banks aren't actually using the new money to make new loans - they're simply buying out smaller banks. I was going to make a separate post about this, but I figure this is as good a time as any to break the bad news. Under the guise of "improving liquidity in the market by incentivizing new bank loans," the Treasury has essentially begun to fund a new round of bank consolidations.

This is not good. Instead of targeting the crippling credit freeze, the government has decided it would rather try to reshape the banking industry. I'm not bothered by the pro's or con's of this move - I'm bothered by the fact that I don't know the pro's or con's of that move because we never heard any debate on the issue. The government's ulterior motive was never discussed ex ante. We ought to have been fully informed so that Congress could have had a meaningful debate on the subject.

So, linking this back to EJB's initial post. The article he links to seems to claim that letting other industries in on the bailout money would help to improve liquidity and would require no extra tax-payer money. The truth of that proposition, though, must be seriously scrutinized in light of the fact that "improving liquidity" by helping banks to make new loans has seemingly ceased to be a governmental priority. EJB asks, "Where's my bailout?" Until this week, I could have responded that he doesn't get one because bailing him out would not significantly help improve the status of our credit market. But, apparently, no part of the bailout is doing this anyway. Nuts.


Not Such A Crazy Plan?

I don't even know why I'm bothering to open up this line of discussion, but in the interest of presenting all sides of the story: 401K's are failing.

Say what you will about trust in the free market, but the simple fact is many people lost up to 20% on their 401k's with this crash. Imagine if social security had been privatized. 401k's open individual employees to the systemic risks of investing in the market. This is especially dangerous when your average employee at any given job is uninformed about how to even manage investments. Plus, those who couldn't get loans before (and many who can't get loans now) are dipping into their 401k's just to pay off debt. What do we say to them? Tough luck?

I'm not arguing for nationalization, I still don't think it's coming. But it is pretty clear that, like Social Security, something has to be done because there is just no money to sustain 401k's.

The now infamous Teresa Ghilarducci, the professor who is testifying before Congress, calculated a possible scenario for those with $100,000 in their 401ks:

"She calculated what you would end up with in 10 years if you had $100,000 in your account in August and lost 20 percent of it last month. If you were paying 2 percent in administration fees — as many 401(k) plans charge — and the stock market remained flat for three years — a real possibility given how it has performed — and then earned 1 percent per year — as it did in the 1970s — you would have $67,000 by the end of the decade, she said." “With a flat market at best and high fees, it is likely they will have less than they and their employer put in,” she said.

I think I'm going to start putting some money under my mattress...


p.s. - This is in no way a concession of my previously (and currently) held beliefs that Congress will not nationalize 401k's and that fear of such action is premature.


It appears this topic just won't die, but I'll still indulge. The argument that 401ks are "failing" is ludicrous. We are in a bear market period, just as we have had before. Stocks by their nature are vo
latile, and that is why stock investment is very risky in the short run. But this volatility is why investors on average achieve high rates of return (8 percent inflation adjusted) in the long run compared to binds (3 percent) and why long term, diversified investment (like in 401ks) is very safe. As I love charts, I point your attention to the one below, which shows the cumulative, inflation adjusted value of a $1,ooo dollar investment in 1962 thought 2007 (this was the last year of annual data), which is approximately the time that one works in his or her career (45 years). But even add roughly a 20% drop for 2008, and you would still be better off.

There has never been a 20 year period in which the stock market was lower at the end of it compared to the beginning, including the Great Depression. To illustrate my point even further, I included a 1 percent annual stock account fee and a 0 percent bond account fee (in reality, bonds have fees as well, and any government run program will also have costs). The professor's 2 percent fee example is high; the average is closer to 1%. But even with 2 percent, stocks still outperform bonds. Furthermore, many of these fees are under the control of the participant based on what funds they buy and whether they want paper or electronic statements or other options they can chose from.

But this kind of analysis, that the professor gives, of being a lump sum over a period of time is deceiving, because this isn't even how these accounts work. First, you don't place a lump sum; you buy regular increments over a period of time so that you employ what is called dollar cost averaging. This means you buy some shares when they are low, some when they are high and over time, this smooths out the performance and makes it less volatile. The even bigger fallacy in her argument is that she cherry picked a period to begin the drop and then took a historical period that happened to be bad as assumed this to be the norm. In reality, if you only had ten years left before retirement (how her example implies), then you likely wouldn't have all stocks anyway. Every personal investment adviser will tell you that when your young and have time to wai
t, you buy more stocks in your retirement accounts, but as you get older you buy more bonds for your accounts because you cant afford to risk the drop off. They even have time adjusted accounts now that automatically adjust this for you so you don't have to manage it yourself.

Now yes, you could ignore this advise and keep all stocks, but you are given "options" with 401ks which JSK described in a recent post and seems to agree is superior then not having options. This is the real reason why certain people dislike these accounts. Any time people are given freedom to chose their behavior, there is going to be an inequality of results. Some people will take the better advise, and some know how to manage investment better. A government run program, even if its returns are far worse makes it "fair" by forcing equality of being on everyone.

But lets go with the professor's very flawed example for a moment. Lets assume we'll now have another 1970s period. Well why did the 70's stock market act the way it did? Well quite the opposite of being the "free market" it was because government monetary and fiscal policy destroyed the stock market. Operating under the now
proven false premise of the Phillip's Curve, the Federal Reserve inflated the money supply drastically causing the heavy inflation of that period. Now mix this with a much higher nominal capital gains tax rate in the 70's, which in turn is not adjusted for inflation, and the result is an average inflation adjusted capital gains tax of between 80 percent and 150 percent over this period! No wonder the stock market didn't perform well. If the government is going to take your entire gain, why would one invest? For more on this you can read this.

As long as we don't employ these similar policies again, the stock market should not have a similar long run behavior. Now maybe government will and then we can argue for the professor's plan, but that sounds similar to arguing that the remedy for taking a daily dose of poison is to take the counter medication. Well why not just stop taking the poison in the first place?

Though not by design, the 70's era stock market was a living example of how Lenin described how the bourgeoisie (those who own capital, ie stocks) could be destroyed, "the way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

If we decide to learn from our past, a similar scenario will not occur.



I'm not going to defend the Professor's work, because I really don't know enough about the details and mechanisms of this process. I'll leave it up to the readers to do their own research and come to their own conclusions about whether to believe EJB or not. But I will point out one thing which sticks out as a fundamental philosophical point.

EJB says:

Now yes, you could ignore this advise and keep all stocks, but you are given "options" with 401ks which JSK described in a recent post and seems to agree is superior then not having options. This is the real reason why certain people dislike these accounts. Any time people are given freedom to chose their behavior, there is going to be an inequality of results. Some people will take the better advise, and some know how to manage investment better. A government run program, even if its returns are far worse makes it "fair" by forcing equality of being on everyone.

First of all, returns from government-run programs are only "far worse" if you actually receive and follow good advice regarding your 401k. Because your 401k is subject to the volatility and systemic risk inherent in the market, there is absolutely no guarantee that you'll make any positive return whatsoever. Some people are just more naturally risk averse than others and it seems to me that there are those who would rather take the government run program because you're guaranteed at least SOMETHING. 401k's, however, are phasing pensions out and this is a problem. EJB is correct to say that I am in favor of options...thus I would say that 401k's should continue to exist, but only as supplements to a pension plan, if the employee so desires.

Another fault with EJBs reasoning here is the idea that people might "ignore" good advice. What this assumes is that they even have access to that advice in the first place, which cannot be assumed. Not all of us enjoy researching market information as much as EJB seems to. Not everyone even has basic access to the means of initiating that research. So it is just not the case that, if your 401k suffers, it's because you "ignored" good advice. Even those who do enjoy access to market advice can fall prey to incompetency, through no fault of their own. To these people, EJB would seem to say 'tough luck.' Suddenly equality, and specifically equality of opportunity, is a vice? Pension plans "force" equality on people?

If this were merely a case about "inequality of results" then I would graciously accept the argument that 401k's are a better means of retirement savings. But this euphemistic language hides the fact that what's really happening here is that the 401k system favors those who already have the means to access competent retirement/market advice. These are the people who need the least help with retirement. It is the menial job workers, those who cannot hire a private investment firm to aid them with their account, that suffer the most when the market tanks. We should not take away their ability to rely on their employers for retirement, like so many did during the time when pensions were standard. 401k's can stay, but they should not wholly replace pension plans.