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Government Spending and Economic Expansions

by Mike Kimel
Cross posted on the Presimetrics blog.

Government Spending and Economic Expansions

It is conventional wisdom that raising taxes, particularly during and just after a recession, will harm the economy. Last week I checked whether that was true. (The post appeared in the Presimetrics blog and the Angry Bear blog.) The post looked at every recession since 1929, and it showed that recessions that were accompanied by marginal tax rate cuts were followed by shorter, slower expansions than recessions that weren’t accompanied by marginal tax rate cuts. (Expansion, btw, is the term for the period between recessions.)

This week I will look at the effect of cutting back on government spending during and just after a recession. I’m going to do that with three graphs. The first shows the length (in months) of every expansion since 1929. The second looks at the annualized growth in real GDP per capita for each expansion period, and the third looks at the total growth rate in real GDP per capita over the length of the expansion period. In each graph, recoveries are divided into three groups based on what happened to the federal government’s spending as a share of GDP from the start of the recession to the period one year after the end of the recession.

Before I get started, let me describe the data I’m going to use… Data on the starting and ending dates for recessions comes from the NBER, the folks who call the start and end. Real GDP per capita comes from the Bureau of Economic Analysis’ National Income and Product Accounts (“NIPA”) Table 7.1, updated on April of 2010. Real GDP per capita is available annually from 1929 to 1946, and quarterly thereafter. Data on federal government spending comes from NIPA Table 3.2, and GDP figures come from NIPA Table 1.1.5.

As I did last week, I am going to assume that the real GDP per capita in any month is equal to the real GDP per capita for the quarter (or if prior to 1947, the year) in which it fits. In other words, the real GDP per capita (in 2005 dollars) for the first quarter of 2008 is $43,997, and I am assuming that the real GDP per capita in any of the three months in that quarter (i.e., January, February, or March of 2008) is equal to $43,997. Government spending and GDP are treated the same way. That assumption shouldn’t cause any major changes in the results and it will keep me from having to go off on tangents about how the data was smoothed.

With that, here we go. The first graph shows the length of each expansion, in months.

Figure 1

There aren’t a lot of recessions during which spending was cut, but on average, they tended to produce the shortest expansions.

The next figure shows the annualized growth rate during each expansion.

Figure 2

Once again, on average, the recessions during which federal government spending shrunk as a percentage of GDP tended to producer slower economic growth. Two out of the three recessions for which the government cut spending were among the three that produced the slowest economic growth. The third one actually produced rapid growth, but as the first graph showed, that expansion didn’t last all that long either. Which leads us to the third graph, which shows the total increase in real GDP per capita during each expansion.

Figure 3

To summarize – while there were weren’t all that many recessions during which federal government spending as a share of GDP fell, those recessions tended to produce shorter, slower expansions than other recessions. And btw, we get similar results if we use total government spending (i.e., federal, state & local) as opposed to just federal government spending.

Now… consider last week’s post, which showed that recessions during which marginal tax rates were followed by underperforming expansions. The two findings seem to suggest that when it comes to getting the economy moving again during and just after a recession, government spending seems to be more important than private sector spending. One reason this might true – during recessions most private sector players companies hunker down and cut spending, and they usually don’t start investing and hiring people until they’re reasonably sure there’s going to be demand for their products and services. Meanwhile, individuals cut back too, fearful they might lose their jobs.

With everyone waiting until the other guy moves first, there isn’t much of a foundation set down for future growth. But if the government steps in and acts when nobody else is willing to do so, it could create that more stable environment the private sector needs in order to get off the ground.

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What is the point of innovative financial instruments ?

Robert Waldmann
claims that, after the invention of the mortgage based security, which clearly served to diversify risk, there have been three main purposes : weakening the effects of prudential regulations, weakening the effects of prudential charters and making balance sheets look better.

I remain very ignorant about banking and real world finance. Some time ago, a commenter noted that while at first I said I was winging it I seemed much more confident and asked if I had learned a lot or if I was winging it louder. I am winging it louder.

I don’t know what innovative financial instruments have been invented. I tend to assume that the purpose of some is tax avoidance. For all I know, some are used to share risk, and might actually be socially useful.

A very short list of the financial innovations and their purposes follows after the jump


Why pool and tranche ? A common argument is that different investing entities have different risk preference, so it is useful to provide them with tranches of different safety. This doesn’t follow at all. In a simple model with no transactions costs and no non-traded assets, all agents buy all risky assets. The more risk averse invest more in the safe asset (treasury inflation protected securities or TIPS). There is no agent who wants a slightly risky AAA tranche but not a mezzanine or equity tranche. If all agents buy equal amounts of all tranches, there is no point in tranching. An intermediary is only needed to pool if the final investors would have to buy odd lots to diversify their portfolio. Individuals did not invest much in CDOs, they were bought by institutional investors who could have diversified on their own.

However, for the purposes of banks’ capital controls, what matters is the amount of AAA, Aaa etc, and not the risk. A special purpose entity which pooled, tranched and sold to a bank reduced the risk adjusted assets of the bank. The purpose of relaxing capital controls was clearly served.
Also some institutional investors have charters which require them to invest only in investment grade debt instruments. CDOs gave them a way to bear the risk of, say, defaults on liars loans, without breaking this rule. CDOs helped neutralize the prudential charter.

I think it must have been about the rating and not overall porfolio risk (value at risk).

Interest rate swaps

Can be reproduced with long and short, spot and forward positions in bonds. However, total assets and total debt are extremely different if the same transaction has the form of an interest rate swap. I think they clearly existed to change the leverage reported on balance sheets without changing any obligations from one party to the other.

Trust-preferred Securities

See post below. They are a way to list debt as equity.


A CDS can be reproduced with a REPO account. Consider firm A, firm B and AIG. Let’s go way back when AIG was AAA and assume that firm A is rated A.
First story, firm B buys a debt instrument from firm A and a CDS on the debt from AIG-FP. Firm B will be paid in full unless A and AIG both go bankrupt.
Second story Firm B buys firm A’s debt. Firm B opens a repo account at AIG-FP. It holds AIG bonds and a short position in Firm A bonds in it’s repo account. Firm B is paid in full unless Firm A and AIG both go bankrupt. Since AIG debt is rated safer as firm A debt, firm B has to send money to AIG to keep the repo account in the black and open. It is just like a CDS.

However, there are two differences. First some regulator might not count the repo account as making the debt safe – they definitely counted the CDS as making the debt safe. Second, and much more important, AIG has to issue a bond to make the second scheme work. To insure as much debt as it insured with CDSs AIG would have to issue $ 3 trillion in bonds. After doing that, AIG wouldn’t be rated AAA. The point of CDS is to make liabilities look small. They appear on the balance sheet at market value not at notional value.

AIG couldn’t make $3 trillion in debt instruments safe, yet, given accounting standards, debt rating practices, and Basel I capital controls, it was considered to have done so.

This made its balance sheet look better reasuring counterparties and top management.
Case_Shiller index bonds. Their purpose is neither to evade rules and regulations nor to buff balance sheets. They are useful to local governments trying to hedge risk. They were a total flop with trading volume around zero. They are the exception that proves the rule. Given the stated purpose and justification for financial innovation, they should have been a huge hit. They were a total wiff. This tends to make me more confident that the stated purpose and justification for financial innovation has little to do with reality.

I repeat I am ignorant. There may be other purposes to innovative financial instruments. Obviously I have only discussed the very few new instruments of which I am not completely ignorant. If anyone can describe an instrument which is used for a purpose other than the three I stressed (and, you know, is actually used unlike Case_Shiller bonds) please tell me in comments.

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The Collins Mixer

Robert Waldmann

Republican Susan Collins proposed an amendment to tighten bank capital reqirements. It passed unanimously, but might be removed in conference because the Obama Treasury is opposed. The world is upside down. One key issue is whether banks can use “Trust preferred securities” to evade satisfy capital requirements.
After the jump, I will ask the wikipedia to explain (yes I use the wikipedia and I’m not ashamed to admit it – OK I am ashamed but I admit it anyway). The bottom line is “They got away with doing thant !?!?!” Note US Democrats are fighting Europeans and Collins to keep the loophole open.

So Ms Wikipedia, what is a Trust-Preferred Security ?

The issuing company forms a Delaware trust (a Connecticut trust is also common) and holds 100% of the common stock of the trust. The trust then issues preferred stock to investors. All of the proceeds from the issuance of preferred stock are paid to the company. In exchange, the company issues junior subordinated debt to the trust with essentially the same terms as the trust’s preferred stock. All steps except the formation of the trust occur simultaneously. If the issuing company is a bank holding company, it will also usually guarantee the interest and maturity payments on the trust preferred stock.

OK so it is preferred stock with a full faith and trust guarantee on the payments – that is to say debt. What’s the point Ms Wikipedia?

if they are issued by a bank holding company, they will be treated as capital (equity/own funds) rather than as debt for regulatory purposes. This is why trust preferred securities are issued overwhelmingly by bank holding companies,

That’s a joke right? They can’t possibly get away with that can they? Of course that answers the question of what is the special purpose of the special purpose entity. I think the point is that, if a bank issued preferred shares and guaranteed payment on those preferred shares, then it would be too obvious that the shares are debt for regulators to pretend not to notice.

This is an absurd scam, but recall, our US government is arguing that it is OK. And a Republican (who isn’t even named Snowe) called BS.

I need a drink. Make it a collins.

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Seventh Circuit confirms rejection of Ch. 11 bankruptcy for tax avoidance

by Linda Beale
crossposted with Ataxingmatter

Seventh Circuit confirms rejection of Ch. 11 bankruptcy for tax avoidance purposes

What will they think up next as a way to avoid paying their fair share of taxes. One corporation decided to proclaim bankruptcy as a tax shelter. Luckily for the US, the bankruptcy judge would have none of it, calling the bankrupcy a sham and dismissing the bankruptcy proceeding. Posner and two other Seventh Circuit judges just affirmed that decision on appeal. See In re South Beach Securities, Inc., Seventh Cir. No. 90-3079 (May 19, 2010).

The characters in this escapade are not new to scandal sheets. The company’s sole creditor was “Scattered Corp”, which sold more LTV shares short than existed. The seventh Circuit concluded that wasn’t a violation of the securities laws but the Chicago exchange disagreed, ultimately driving Scattered out of the securities business though losing the suit for fraud against it. (HUH?!?–no wonder the financialization of the economy has left us with a zany economic system and markets that behave in very odd ways)

Posner notes that it was the US trustee, not the IRS, that objected to a bankruptcy that was phony and only for the purpose of evading taxes. The case is fun reading, because Posner speaks as always in everyday language as he ferrets through the statute on the question of whether the US Trustee can object to a bankruptcy reorganization on the grounds that it is merely for the purpose of tax avoidance. Ancillary questions include whether the US Trustee is a governmental unit (Yes, Posner says, except when he is acting as a trustee for the particular bankruptcy case at issue, which he wasn’t in this case) and whether he is a “party in interest” entitled to object to tax-evasive bankruptcies (Yes, Posner says, since he isn’t specifically excluded and is the congressionally ordained watchdogs of the US’s interests in bankruptcy proceedings). The Seventh Circuit clearly thought it was important for someone to watch out for the interests of the federal fisc in these kinds of cases.

The statute is a mishmash but the view that the U.S. Trustee can be a party in interest makes better sense, as this case illustrates; we’ll see that the case really needed a watchdog, and we cannot see what would be gained by everyone having to wait for the Internal Revenue Service to take action against Greenblatt’s tax shenanigans. The IRS did receive a copy of the plan and didn’t object to it, but may have thought that since it could always disallow the deductions later if the plan got confirmed and since it isn’t in the business of preventing abuse of bankruptcy per se, there was no need for it to intervene in the bankruptcy. And even if the U.S. Trustee was not a party in interest, the bankruptcy or district court, since it can hardly be thought required to approve an unlawful plan of reorganization, need not turn a deaf ear when the U.S. Trustee, or anyone else for that matter, argues the plan’s unlawfulness. Id.

As for the tax tale here, ultimately it involves Greenblatt, who owned or controlled all the entities involved and caused a loan to be made from one of those entities to South Beach and caused South Beach to proclaim bankruptcy. (Posner says that South Beach once was a broker dealer but really had nothing going at the time of this transaction.) South Beach’s disclosure statement says that the purpose of the bankruptcy is to monetize South Beach’s net operating losses. South Beach had no use for the losses, having no income. The idea was to permit Scattered to benefit from them–South Beach would be transferred to Scattered in the bankruptcy, and Scattered could then provide a capital infusion to South Beach so that South Beach could earn income (instead of Scattered) and use the losses. The limitations in the Code under section 382 might not apply or the special rules in 382(l)(5) might save the losses, Posner says (though he notes that the record in the case is too scattered to be sure). So Posner assumes that section 382 was not an insuperable hurdle. Posner concludes that Section 269,however, does pose a challenge: a change from a beneficial to an actual owner doesn’t trigger the provision, but Scattered does not appear to be the beneficial owner of South Beach prior to the transaction (even though Greenblatt probably is). Anyway, Posner concludes, the fact that the tax scheme probably wouldn’t have been successful doesn’t matter as far as the decision to disallow bankruptcy when there is nothing but a tax avoidance purpose. “The object of bankruptcy is to adjust the rights of the creditors of a bankrupt company; it is not to allow a solvent company to try to lighten its tax burden.” Id.

Posner also concludes that the plan had to be rejected since it wasn’t made in good faith. South Beach started out solvent when Greenblatt caused the series of transactions to take place that would put South Beach in bankruptcy and Greenblatt (he hoped) benefitting from tax attributes that otherwise would have been lost. There was no real debt or real creditors, and the sole creditor is an “insider” so the case simply doesn’t belong in bankruptcy court.

The concluding paragraphs of the case should be read by first year law students for sure. The court suggests that the misuse of the bankruptcy court for a tax evasion scheme raises “serious ethical and perhaps legal concerns” –for Greenblat and the parties in the bankruptcy proceeding, and for their legal advisers as well. The Court invites the US Trustee to seek sanctions against the parties and their law firms for abuse of the bankruptcy proceedings and frivolous law suits, and orders the attorneys to show cause why they should not be sanctioned.

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Maule and Pappas on progressive taxation and the decreasing burden on the rich

by Linda Beale
crosposted with Ataxingmatter

Maule and Pappas on progressive taxation and the decreasing burden on the rich

Maule and Pappas have been engaging in a debate on progressive taxation and the decreasing burden on the rich. See Canonizing the Rich, Part 1, Part 2, and Part 3.

As Maule shows in his posts, the rich have an increasing share of the income (an even larger share of the economic income–because they benefit much more than ordinary folk from tax expenditures in the Code, from capital gains preference to charitable contribution deduciton to mortgage interest deduction to life insurance exclusion, and more of adjusted gross income, a tax concept that excludes much of economic income). But they pay a much smaller proportion of that income in taxes now than they did in the period when our country was the most prosperous shortly after WWII–a decline from about 50% of the income in taxes to less than 20% of it paid in taxes. Meanwhile, our country has slid into a deficit spiral from the combination of gigantic tax cuts under Bush that were of primary benefit to the ultrarich (the 2001 tax cuts were projected to cost about $1.6 trillion over the first decade and have cost about $700 billion so far) and the huge increase in government under Bush from militarization and his “preemptive war” policy (costs of the Iraq-Afghanistan wars in human lives greater than 5000 and in dollars running to the multiple trillions–especially when long-term health needs of Vets and replacement costs for the expensive equipment is factored in).

So why would anyone think that these disastrous policies of cutting taxes for the rich should continue? Such a policy has no good outcomes–deficits, inequality that threatens democracy with oligarchy, political instability, poverty and the disease, lack of education, despair and often violence that can come from it. I wouldn’t want to live in a country where the well off live entirely within isolated islands of gated communities, surrounded by deep zones of poverty. I much prefer a country built on communities based on sustainability, where the wealthiest are merely rich and not “filthy rich.” A salary for a hedge fund manager or a CEO of a million a day (not uncommon in twenty-first century America) is, simply put, obscene when it is 300 or 400 or even 500 times the salary of the average worker. No one “earns” that kind of salary–it is a corrupt gift from peers who want the same return favor when the manager sits on their salary board.

People who disagree with me on this tend to say that my opposition to such inequality is just jealousy. No, it is concern for the very heart of this country’s democracy. And I suspect many of those who defend the low taxes for the wealthy put in place under the four decades since Reagan took office do so reflexively–because they are wealthy themselves and don’t want to feel guilt for their undeserved fortunes, because they hope to be wealthy themselves and want to get in on the privileges enjoyed by the wealthy few, because they make their incomes by serving the wealthy and perforce take opinions favoring their clients, or because they have been so indoctrinated by freshwater economist thinking that they buy into the myths of the wealthy as the entrepreneurs that make our civilization possible. Whatever their reasons, it is discouraging to see this defense of the US as tax haven for the wealthy.

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The Supremes did us a favor with Citizens United regarding Rand Paul et al

By Daniel Becker

Ok, if you have not heard, Mr Rand Paul made quite the impression during an interview with Rachel Maddow. The short of it: businesses should be free to discriminate as they see fit. It’s their right, though he’s not for discrimination. You know, citizens and all having equal rights.

Well, there is a problem with Mr. Paul and his like’s argument. The Supremes ruled that businesses (at least corporations) are people. You recall that “Citizens” United case? Seems to me, being that Corps are now citizens, they fall under the same citizen law regarding Civil Rights. That is they can’t discriminate. Thus, the entire argument that businesses have rights outside of citizens as presented by Paul et al is now moot.  The entire section of the Civil Rights act that Mr. Paul supported his argument on is now redundant within that law.

Of course, they could decide that being a corp and having the right to discriminate is more important than the right to spend on elections. But, I don’t think the US Chamber is willing to swap the money maker right for the right to be prejudicial. At least not based on what I received to day:

U.S. Chamber: DISCLOSE Act Is Partisan Effort to

Silence Critics and Gain Political Advantage
Donohue: ‘It’s Unconstitutional. It’s Un-American. And It Must Be Stopped’

WASHINGTON, D.C.—U.S. Chamber of Commerce President and CEO Thomas J. Donohue issued the following statement today in response to the House Administration Committee’s markup of the so-called “DISCLOSE Act:”

“The DISCLOSE Act is an unconstitutional attempt to silence free speech and a desperate attempt by Democratic Congressional Campaign Committee Chairman Chris Van Hollen and the immediate past chairman of the Democratic Senatorial Campaign Committee, Senator Chuck Schumer, to gain political advantage in the 2010 elections.

“Congress should not be wasting its time on an ‘Incumbent Protection Act,’ but instead should be focused on job creation. Nothing makes Americans angrier than members of Congress who are more concerned about protecting their own jobs, rather than creating new ones for unemployed constituents.

Hey Chamber and Rand Paul, you know what else is unconstitutional and unAmerican? Discrimination.  Infact that was the entire argument of Citizens United.

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Richard Abrams: debunking free marketarianism

by Linda Beale
crossposted with Ataxingmatter

Richard Abrams: debunking free marketarianism

I’ve often written here about the problems of the naive, black-or-white view of economics that has been fostered by the Chicago School and Milton Friedman acolytes who talk of “free markets” as though markets exist in vaccum tubes unaffected by the social, cultural and legal context around them. Debunking that “free market myth” is important, because without understanding the mythology of it most ordinary Americans will continue to be misled and fooled by those who devise and enact policies that affect our everyday lives. From “tea partyers” to Congress, from “the national association of manufacturers” to the US Chamber of Commerce, the “free market” is spoken of with almost reverent tones as though the market works on its own, as though businesses always do everything better than government, as though human liberty were intimately connected with letting mutlinational corporations set their own standards and make their huge profits without protections for the little guys along the way. Wrong, wrong, wrong–this pseudo-concept of free market has little to do with human liberty and lots to do with corporate profits for managers and shareholders. Time that ordinary Americans understood that.

So it is nice to see another academic talking sense on “free markets. See Richard Abrams, historian, on the Berkleley Blog (newly added to the progressive sites of interest blog roll), as he writes “Of ideology, recession and policy paralysis” (March 4, 2010). Here’s a useful excerpt offering “a little history” of our romance with competitive capitalism (and our failures to recognize how uncompetitive corporate capitalism ordinarily is):

For a relatively short span of years in our country’s history, mostly in the middle third of the 19th century, governmental policy withdrew from large areas of economic activity that traditionally had been regulated, leaving it increasingly to the price-and-market system to control the distribution of most resources and rewards. That is, traditionally in the U.S., going back to the start of the nation and continuing well into the 19th century, government – especially at the state and local levels – closely regulated much economic behavior, including of course labor relations, employer liability, and even the price and quality of goods for sale. By the second quarter of the 19th century, government began pulling back, reducing its mediating role between buyers and sellers, and between employers and employees, and yielding to private contract as the main governor of such economic relationships. By mid-century, the American economy did in fact closely resemble the model of “free,” competitive enterprise; i.e., competitive capitalism did work relatively well in regulating most markets and producing something close to a fair and level field among buyers and sellers and other competing interests (but not labor).

But along came the Industrial and Corporation Revolutions. More than a century ago, that is by the last quarter of the 19th century, the transformative growth and mergers of large corporations sharply limited private-sector competition as an effective and fair regulator of markets. As the late dean of American legal historians (James Willard Hurst) put it: “The corporation was the most potent single instrument which the law put at the disposal of private decision makers. In making it available, the law lent its weight to the thrust of ambitions which reshaped not only the business of the country but also its whole structure of power.”

The populist and progressive movements of the late 19th and early 20th century rose in response to the changed structure of power in the country. That is, various commercial and producer interests called on government to intervene, to regulate, to redress the disadvantages that the transformation of the economic scene had brought upon them.

Still, it took almost another half-century before some of the more important economists came to acknowledge that oligopolistic rather than free competition had corrupted their models of the so-called free market system. One such belated acknowledgment came in 1936. That was when economist Arthur Burns, who would later become chairman of the Council of Economic Advisors for President Dwight Eisenhower and then chair of the Federal Reserve Board during the Nixon Administration, made the remarkable discovery that, as he put it: “The widening use of the corporate forms of business organization are bringing, if they have not already brought, the era of competitive capitalism to a close.” That was half a century after the Corporation Revolution had occurred. (It would seem that economists are slow learners.) WE, of course, having experienced the arrival of the megacorporation, and of the conglomerate and multinational corporation revolutions of the past 50 years – WE could have said to Mr. Burns, hey! you ain’t seen nuthin’ yet!

Remarkably, the dominant economic theorists of the past 35 years have continued promoting public policies as if “competitive capitalism” remains vigorously functional. As one dissenting economist (John Munkirs) wrote several years ago, “The enduring belief in the existence of competitive market-structure capitalism is partially explained by the fact that basic economic beliefs are religious in nature, and being so, are difficult to modify.” “Partially explained.” The rest of the explanation has to do with how well the theology serves powerful entrenched interests with privileged access to the media and to politicians. And that privilege has grown all the greater with the recent Supreme Court’s decision overruling more than 100 years of congressional and state legislation designed to limit the power of large corporations to influence elections, and awarding corporations nearly full First and Fourth Amendment rights as “persons.”

(along the same lines, you might also enjoy reading Mark Thoma’s Proponents of a Failed Philosophy” in which he again shows that Fannie and Freddie and the CRA are not the source of the financial crisis, in spite of all the effort by GOP stalwarts to make them so.)

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Sen. Jeff Sessions’ Habitual Conflations and Misrepresentations

By Beverly Mann
re-posted with permission of the author
The Ann Arborist

Sen. Jeff Sessions’ Habitual Conflations and Misrepresentations

Prologue: The Slaughter-House Cases is the title of an 1873 Supreme Court opinion that was among the first to interpret some part of Section 1 of the Fourteenth Amendment, which was the part of that amendment that required the States to comply with the Bill of Rights and with other constitutional protections for individuals against government intrusion.

Or at least that was its purpose. But in Slaughter-House, a five-member majority of the Court interpreted one of the three main clauses of that section—the Privileges and Immunities clause, which states that “[n]o State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States—as applying only to the privileges and immunities accorded by United States citizenship, rights they said were limited to those that imposed some affirmative duty on the federal government itself.

Although the purpose of most of the litigation of that era that involved interpreting the Fourteenth Amendment was to undermine Reconstruction itself, such as United States v. Cruickshank, decided in 1876—the Amendment was supposed to effectuate Reconstruction by requiring the states to comply with federal constitutional and statutory law—the Slaughter-House litigation had a different goal entirely, one concerning the extent to which, within the confines of the Privileges and Immunities Clause, a state can regulate economic activity within its boundaries in order to protect the health and wellbeing of its residents.

In Slaughter-House, an organization of New Orleans-area butchers challenged the constitutionality of a state law that limited slaughterhouses to a specifically designated area at the southern edge of the city, south of the Mississippi in order to avoid waste contamination of the city’s water supply. The butchers invoked the Privileges and Immunities Clause, which, they argued, prohibited the state from infringing upon their constitutional right to exercise their trade and provide for themselves and their families.

The bare majority of justices interpreted the Privileges and Immunities Clause as not applying to, and therefore as not restraining, the police powers of states except as regards the rights that the Constitution identifies as incident to United States citizenship.

The opinion was written by Justice Samuel Freeman Miller, who according to Wikipedia was a former physician who wrote his medical school dissertation on cholera, one of the diseases rampant in New Orleans because of contaminated drinking water. The opinion, though well-meaning and undoubtedly lifesaving in its day, effectively nullified the Privileges and Immunities Clause by rendering either nonsensical or redundant of the Constitution’s Supremacy Clause. The result is a gimmicky, narrow-right-by-narrow-right “incorporation” of various constitutional rights, selected piecemeal by the Supreme Court over the decades, into protections against state incursion.

More after the fold

The recent op-ed piece by Senate Judiciary Committee ranking Republican Jeff Sessions in the Washington Post was striking enough. “Americans look for Supreme Court to restrain federal power, not expand it,” suggested, at least to me, that this conservative Republican senator was calling for the Court to rule in favor of allowing states and municipalities to, among other things, ban the sale or possession of handguns within their borders.

After all, the Court heard argument earlier this spring in a case called McDonald v. Chicago in which the petitioners are asking the Court to rule that the Second Amendment right to bear arms precludes not just the federal government but any government within the United States—states, counties, municipalities, too—from prohibiting the sale and possession of handguns (or any other type of gun).

The lower federal appeals court had noted that the provisions in the Bill of Rights, the first ten amendments to the Constitution, proscribe only the federal government from infringing upon the rights of individuals that those amendments guarantee. Or that at least that was so until the Fourteenth Amendment was enacted after the Civil War—an amendment that appears, in what is known as the privileges and immunities clause, to expressly bar states (and localities, which are chartered by states) from infringing upon the rights the Constitution gives to individuals—and that the Court, in a notoriously problematic 1873 opinion known as The Slaughter House Cases, said otherwise and nullified the privileges and immunities clause.

Rather than overrule Slaughter House outright, the Supreme Court later embarked upon a right-by-right process of deciding whether each particular right provided in the Bill of Rights was, in the Court’s opinion, so fundamental that it is “implicit in the concept of ordered liberty” or “deeply rooted in our nation’s history and traditions” as to be “incorporated” into another clause in the Fourteenth Amendment—the one known as the due process clause, which prohibits the states from “depriv[ing] any person of life, liberty, or property, without due process of law.”

And it turns out that way back during the Reconstruction Era, the Court had explicitly refused to “incorporate” into the Fourteenth Amendment’s due process clause the Second Amendment right to bear arms. Whatever the extent of the right to bear arms, that right isn’t sufficiently fundamental to be considered a due process right. Or at least it wasn’t, back then.

But that was then and this is now. A slew of civil liberties groups and professors of the right and the left have filed friend-of-court briefs in McCormick imploring the Court to overrule Slaughter House and acknowledge that a clause that provides that “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States”—which is what the privileges and immunities clause says—means that no state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States.

By repealing the repeal of the privileges and immunities clause, the Court would end its own prerogative to decide which of the provisions in the Bill of Rights is fundamental enough to be considered implicit in the concept of ordered liberty. The advantage of this would be that it would not only be the Second Amendment right to bear arms, which he Court held last year is a right that accrues to individuals rather than just well regulated militias (to borrow a phrase from the Amendment itself) that states and municipalities could not infringe upon; it would be all the rights provided in the Bill of Rights. Even those unloved by, say, Chief Justice John Roberts and Justice Antonin Scalia.

And until the oral argument in McCormick on March 2, this seemed possible. But after oral argument, it does not. A majority of justices, including some of the most insistently self-styled balls-and-strikes callers, will reject the invitation to overrule Slaughter House yet pronounce the right to bear handguns a fundamental right. This will enable them to preserve the right that Slaughter House reinstated to the states the right that the outcome of the Civil War and the enactment of the Fourteenth Amendment had removed from them: the right to deny individuals rights incorporated into the Bill of Rights that ideological conservatives don’t consider fundamental when it is someone else who is being deprived of them.

Which is par for the course, the course being the casual gliding back and forth between arguing for and arguing against the power of federal courts to overrule state laws, or for that matter, any laws, and to always call their outcome-determinative position anti-judicial-activist, even when, as Sessions does in his op-ed piece, it is a call for the courts to rule on the basis of conservative policy preference. Sessions says he wants—and thinks a majority of Americans want—the Supreme Court to declare unconstitutional any statute that expands the role of the federal government.

“People,” Sessions says, “are increasingly worried that Washington is exceeding the limits set by the Constitution, asserting too large a role in American life.” He then conflates the issue of the constitutionality of a statute—legislation enacted by Congress and signed into law by the president—and the entirely separate issues of rights conferred directly by specific provisions of the Bill of Rights and the Fourteenth Amendment, which because they are rights provided directly by the Constitution do not depend for their breadth or effect upon a statute. The right to speak freely, without government interference, exists independent of a statute that gives you that right. Any such statute would be redundant. But a statute that denies you that right in some respect may well be an unconstitutional infringement upon that constitutional right.

Whether deliberately or because he himself does not understand the difference between rights provided by statute and rights provided directly by the Constitution, Sessions claims falsely in his op-ed piece that Obama judicial nominee Goodwin Liu, a law professor at the University of California at Berkeley, “has argued that judges should treat the Constitution as an infinitely flexible document to be interpreted through nebulous ‘social understandings’ and [that therefore] the Constitution provides a right to government health care and welfare – a remarkable view of a document designed to curb the excess of federal power.”

Indeed it would be a remarkable view, but it is not one that Liu holds. And if Sessions read Liu’s writings and written answers to the questions he and other senators posed to him, in writing, he would know that. At least if he, Sessions, understands plainly written English. And if he understands that statutes create legal rights and obligations that the Constitution itself allows statutes to create but that the Constitution itself does not create directly. And if he understands that that is what the entire body of federal statutes does.

What Liu said is that he believes that the government should create rights to health care and certain welfare provisions by enacting statutes that confer those rights. He has said, in other words, that these are policy positions that he believes the government has the constitutional authority to create and that the government should create. In his responses to Sessions’ own questionnaire, Liu wrote that there is “no role for courts” to question Congress’s decision in 1996 to end welfare as an entitlement for some families, nor has he ever written anything elsewhere to the contrary. Nor, contrary to another of Sessions’ op-ed-piece claims, does Liu think the Constitution should be interpreted through consideration of foreign law. He responded to another of Sessions’ questionnaire questions by saying that “foreign law has no legal authority in the interpretation of the U.S. Constitution.”

Unlike so many conservatives, including some on the federal bench, Liu does not confuse his own policy preferences with substantive rights incorporated in the Constitution. He knows the difference. Which distinguishes him from Justices Scalia and Thomas in interpreting (or rewriting, as the case may be) at least one constitutional amendment: the Eleventh, which actually provides in full: “The Judicial power of the United States shall not be construed to extend to any suit in law [a lawsuit asking for a monetary award] or equity [a lawsuit asking not for a monetary award but instead for a declaration of law or for a prohibition of some action], commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.”

The Originalists/Textualists on the Court have repeatedly joined with their states-rights and pro-prosecutor/pro-police colleagues during the last decade or so to claim that that Amendment actually reads: “The Judicial power of the United States, and the Judicial power of any State, shall not be construed to extend to any suit in law commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens of the State being sued, or Subjects of any Foreign State.” Really.

Luckily, petitioner McCormick’s lawsuit is just a suit in equity, not a suit in law, because the Court is about to reaffirm that the Judicial power of the United States may be construed to extend to his lawsuit.

Beverly Mann
Ann Arbor, MI

I now blog at “The Ann Arborist”:

My expertise is in certain areas of constitutional law and federal-court jurisdiction. I often post on legal and political issues on Slate’s “The Fray” discussion board, these days under the pseudonym “la savante.” My political views are very progressive. I no longer practice law but do assist, pro bono, very occasionally, when asked, in cases in which my particular expertise hopefully is useful. (I discuss one such case in some depth in several posts in a recent “Fray” thread that is at I also have a blog now called The Ann Arborist, at I live near Ann Arbor, MI. Thus, the title of my blog.


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