Relevant and even prescient commentary on news, politics and the economy.

More on the activity/inactivity canard in the ACA litigation

by Beverly Mann

Last week, one of the law blogs I read regularly mentioned a post from May 11 on a law blog read regularly by a lot of law geeks (but not by me) about the oral argument in those cases a day earlier. The blog is The Volokh Conspiracy. Its bloggers are prominent rightwing or libertarian-right law profs, most of whom once were law clerks to a conservative Supreme Court justice. This particular post was by Georgetown law prof. Randy Barnett, who is a veritable font of rightwing legal theory and suggestions for rightwing laws and legal arguments.

He also is, from what I can tell, the farthest right of that blog’s bloggers. Earlier this year, one of the big, big names on that blog, Orin Kerr, wrote that he was pretty darned certain that under the Supreme Court’s Commerce Clause and Necessary and Proper Clause rulings, the ACA was constitutional. One of the other bloggers there—probably Barnett, but I don’t recall—disputed that.

Anyway, in his May 11 post, Barnett recounted an exchange between acting Solicitor General Neal Katyal, who was arguing the appeal on behalf of the government, and panel judge Diana Gribbon Motz, a Clinton appointee. To refresh your memory from two weeks ago, all three of the panel members are Dem appointees, the other two of them appointed by Obama. Also to refresh your memory, the main challenge to the constitutionality of the ACA is that the Constitution’s Commerce Clause does not give Congress the authority to regulate inactivity. To which the government has responded that the decision to not buy health insurance and to instead rely upon the largess of the government, hospitals and ultimately those who do pay health insurance premiums to get emergency medical treatment, is activity. And that in any event, under the Supreme Court’s longtime Commerce Clause jurisprudence, that Clause coupled with the Necessary and Proper Clause gives Congress the power to regulate markets and that therefore there is no activity/inactivity distinction for Commerce Clause purposes.

The Commerce Clause gives Congress the power, in the Constitution’s precise words, “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes”.

In his post, Barnett pointed out something that was not in the other reports I’d read about the oral arguments: that in a lengthy exchange with Katyal, Motz indicated that she buys the activity/non-activity distinction, because she believes the definition of the word “regulate” means “regulate activity.” She kept insisting that if the failure to buy health insurance is inactivity rather than activity, then, under her understanding of the definition of the word “regulate,” Congress couldn’t regulate it.

Katyal flubbed the response to this. Partly. He noted the Supreme Court’s most recent relevant Commerce Clause/Necessary and Proper Clause decision, Gonzales v. Raich, a 2005 opinion that held that the federal statute enacted under the Commerce Clause powers that criminalizes the growing and use of marijuana applies even to homegrown marijuana that is not sold even intrastate, much less in interstate commerce, and that is just for the personal use of the grower. The rationale: that even those actions impact the interstate market for marijuana. Since the Commerce Clause gives Congress the authority to regulate interstate markets, Congress can, under the Necessary and Proper Clause, regulate things that otherwise cannot be regulated under the Commerce power if those things impact the interstate market.

Motz, though, missed the point. Growing marijuana is an activity, she pointed out, so how is Raich relevant to whether Congress can, under the Commerce Clause together with the Necessary and Proper Clause, regulate inactivity? Well, um, maybe that what’s relevant isn’t the particular reason why the Commerce Clause alone isn’t enough and must be aided by the Necessary and Proper Clause, but instead that if something—whether activity only within a state’s boundary, or instead inactivity, or instead whatever—impacts a market that Congress has the power under the Commerce Clause to regulate, then Congress has the constitution authority to regulate it as necessary and proper under the Commerce Clause.

Katyal apparently was too dumbfounded to explain this. According to a report I read, he was assigned to handle those oral arguments only a two or three days before the date of the arguments, and that might be one reason; the top person at the Solicitor General’s office normally personally only does that in the Supreme Court (and then, rarely).

A day or two after those oral arguments, Obama’s nomination of a man named Donald Verrilli to replace Elena Kagan as Solicitor General was voted out of committee. It’s scheduled for a full vote in the Senate on June 6. Here’s some of what the New York Times said about Verrilli’s background last January when Obama nominated him:

Before joining the administration (in 2009), Mr. Verrilli spent two decades as a prominent litigator with the law firm of Jenner & Block, where he was chairman of its Supreme Court practice group, while also teaching First Amendment law as an adjunct professor at Georgetown law school.

He participated in more than 100 Supreme Court cases and argued 12 of them. He has also argued about 35 times before federal appeals courts and state supreme courts.

Verrilli won’t be arguing the Sixth Circuit ACA-case appeal there on June 1. But presumably, he’ll be arguing the upcoming ACA appeals in the other federal appellate courts-including the two in the Eleventh Circuit, one of which is the most high-profile one nationally because the lower-court judge, Roger Vinson, pronounced the entire ACA unconstitutional, the other in which the lower-court judge ruled the entire statute constitutional. And he’ll eventually defend the statute’s constitutionality in the Supreme Court. Enough said. I’m pretty sure of it.

By which I mean that the case will be argued for the government as sharply and expertly as the cases will be argued for the other side by former Bush Solicitor General Paul Clement, who, now in private practice, was retained to represent the statute-challengers in the Roger Vinson case in the Eleventh Circuit. Unless, of course, Verrilli’s nomination is filibustered.

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I am not a Libertarian Because I Believe in Freedom and Property Rights, And I’d Like to Minimize Government Coercion

by Mike Kimel

I am not a Libertarian Because I Believe in Freedom and Property Rights, And I’d Like to Minimize Government Coercion

I wandered over the Libertarian Party and I found their Platform. I’m sure there are a few items here and there with which some libertarians disagree, but in general, it seems to me to be a pretty fair representation of libertarian beliefs, so I encourage you to read the whole thing. That said, I do not believe libertarians live up to their stated beliefs. Here’s the first sentence of the pre-amble:

As Libertarians, we seek a world of liberty; a world in which all individuals are sovereign over their own lives and no one is forced to sacrifice his or her values for the benefit of others.

To that end, of course, the libertarian philosophy also seeks to minimize government, in particular, government coercion.

More below the fold!

And it is precisely here – in the first sentence of the pre-amble, and its implications, where libertarians go off the rails. Consider the following… my neighbor, whom we have never met and might not even have seen (we’re not certain) despite living in this house for two years, seems to enjoy letting her lawn grow uncontrollably. (Feel free to substitute “loud music” or “noxious fumes” or “toxic waste” or “rats and other vermin” or “vile (like there are any other kind) windchimes” or “measles”, etc., to make the story more relevant to you.) As I type, the place is something of an eyesore: weeds, overgrown bushes and knee-high grass. Now, a libertarian would say that our neighbor, being the home-owner, has the right to do what she will with her property, and I should mind my own business and my own property. As it happens, I agree. I may wish she would have weed collection trimmed, but the weeds are on her property and she paid for the right to do what she wants on that property.

My problem is that my neighbor also has taken upon herself to make choices about what happens on my property. See, the weeds she has chosen to grow, or rather, allow to grow, have seeds, and she has chosen to allow the seeds from her weeds to cross onto my property instead of keeping them on her property. Put another way, she has made a decision that I either have to have dandelions and weeds on my own lawn, or I have to expend resources (some combination of time, effort, and money) to eradicate outbreaks. The more weeds she chooses to cultivate on her property, the more resources I have to apply to keep weeds in check on my property the following year. But it isn’t just me – she is also making the same decision about the lawns of other people on the block too.

Now, in this instance, there is a simple solution that anyone who truly believes that property rights should be sacrosanct and nobody should be coerced by anyone else should be willing to agree upon. See, she should have every right to cultivate weeds on her property, but should have zero right to place weeds (actively or passively, it makes no difference to the rest of us) on anyone else’s property. Put another way – it should be her responsibility to ensure that she does not cultivate weeds on our property without our say so.

Now, it turns out that the city has some rules about this. Last year I saw signs placed on some people’s doors saying essentially: “clean your lawn or the city will do it and bill you for it.” As far as I can tell, a libertarian – every libertarian I have come across, would view that as coercion. I, on the other hand, see things differently – were the government to allow people to create infestations on their property that inevitably spread onto their neighbors’ property, the government is essentially coercing the neighbors of those that would grow weeds into either growing weeds themselves or spending an inordinate number of resources fighting it. And to some extent, the libertarians, and I, are both partly right. But here’s what they’re missing; someone will be coerced, no matter what, as long as there are people who will grow weeds. Or play loud music or emit noxious fumes or dump toxic waste or allow rats and other vermin to proliferate or put up vile windchimes or refuse to get their kids vaccinated for measles, etc. In the end, the question is – who will be coerced, how many will be coerced, and how bad will the coercion be? I tend to come down on the side that the coerced party should be the one that is the first to try to coerce others, and that the coerced party should be as small as possible, and that the coercion should be the least bit possible. And it is clear that while libertarians may say the same thing, it isn’t true, as the one they don’t want to see coerced is my neighbor, but they have no problems coercing everyone else on the block.

Now, frankly I can understand how many libertarians don’t see this. Many of them are misfits or eccentrics. Others simply can’t reason out that there are two sides to every equation (and this, six decades after Coase!). Some like to view themselves as lone wolves, in no way beholden to the rest of society. Some find they can be more successful in business if they don’t pay taxes and/or find export their costs onto third parties. And of course, there are the thugs. Guess which group will take over if libertarians ever get their way.

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Get the Lead Out II

There is an absolutely serious hypothesis that the sharp drop in violent crime in the USA since the early 1990s is due to the EPA and, in particular, to the shift from leaded to unleaded gasoline roughly two decades earlier.

Kevin Drum notes that James Q. Wilson ascribes about half of the total decline to lead exposure. The hypothesis makes sense, lead poisoning too mild to cause other symptoms is very strongly correlated across individuals with violent behavior.

The hypothesis has clear implications for violent crime in other countries, since the USA banned lead early. The UK went unleaded in 1986 12 years after the USA. The USA violent crime peak came in 1995. So the predicted UK crime peak would be in 2007.

In get the lead out I, I thought the USA went unleaded (for new cars) in 1973 so with an arithmetic fail, I predicted 2008 for the UK. Notably, the post is dated 2008 so I had only a very tiny bit of data.

Now they have the number of reported violent crimes for two more years 2008/9 and 2009/0 (I have no idea why they report by a period other than the calender year).

I have a huge ugly pdf with the data I need and much much more.

The bottom line is that the total number of violent crimes was basically identical in 2004/5 2005/6 and 2006/7 then declined about 17% by 2009/10. The predicted peak of 2007 corresponds about as precisely to the data as is conceivable. This really was an out of sample prediction (except I forgot the year of the US requirement that new cars use unleaded but that’s my fault not the fault of the lead hypothesis).

A hypothesis has yielded a correct out of sample prediction about violent crime rates. This isn’t just extrapolating the trend, the prediction was made right at the time of the predicted peak.

The problem is that I have too much data. I have an illegible screen shot, but I will just retype the relevant numbers after the jump.

update: My post with the prediction (and mis remembered date of unleaded in the USA) is here. I would have just edited without admitting it was an update, but Mark Sadowski has already commented on the post (I thought he was more into geld than lead).

The numbers
Total Violence Against the Person Offences

1998/99 502,778
1999/00 581,034
2000/01 800,913
2001/02 850,326
2002/03 845,078
2003/04 967,228
2004/05 1,048,095
2005/06 1,059,583
2006/07 1,046,187
2007/08 961,099
2008/09 903,447
2009/10 871,712

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Another edition of my diatribe on QE-II. Here I reply to Noah in comments who discussed debt deflation and also explain my guess about what happened going beyond the evidence.

Why does expected inflation matter (so that we should be pleased at an increase in nominal interest rates not matched by an equal increase in real rates) ? I can see how the real interest rate matters (no sign of an effect — literally I can’t guess if the change is up or down).

I can see how actual inflation can make a difference. But how does expected future inflation make a difference. One way is if someone has a 30 year fixed interest rate mortgage without the option to repay immediately (or a substantial penalty for early repayment). That person will consume less if expected inflation falls because the expected present value of interest payments will rise and they can’t refinance.

I am sure that there is at least one such mortgage somewhere (there is at least one of everything). I’m not so sure there are a thousand. My understanding is that there are two possibilities — fixed rate with option to repay and refinance and floating rate.

Now let me motivate the null hypothesis (that QE-II did very little as would QE-III). What if the interest elasticity of demand for 7 year Treasury notes is huge ? First we can’t tell this from looking at market prices — elasticity is a statement about the slope (and level) of demand not the market clearing price for slowly changing quantities. Second this means that reducing the amount of 7 year notes to be held by the public would have a small effect on, well first of all the price of those notes (which has gone *down* during the period of the QE-II purchases) and secondarily on everything else.

The point is that the QE-II experiment makes it possible to identify the demand curve for 7 year notes for the very first time. And with $600,000 less on the market, their price has gone down. This is proof of nothing (two data points with a large disturbance term can’t be). But it is just about all the relevant evidence we have.

Now what would we expect to see if this elasticity were very high ? Of course investors didn’t know that (like economists many thought QE-II would have a big impact). I would guess an increase in price when QE II is anticipated but actual purchases haven’t started, then a decrease in price when the actual purchases start and it turns out that they didn’t have the anticipated effect.

This is exactly what happened. A coincidence ? Very possible, but the 7 year nominal interest rate looks exactly precisely as it should if lots of people thought QE-II would work and they were totally wrong.

Look at the graph

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Fahrenthold 538

I think this article “GOP freshmen get a tough lesson in politics” by David Fahrenthold in the Washington Post perfectly illustrates everything which is wrong with US political journalism.

The theme of the article is explained as follows

“the same hoarse-throat tactics that helped them bring down incumbents last year — attacks on a health-care plan, town-hall heckling — have now been used against them.”

My initial , of course, is that not all health-care plans are the same and not all attacks on health-care plans are the same.

But the article is infinitely worse than I imagined. Hence the rest of the post after a jump.

This question is addressed in the article as follows (I believe I have been complete and thorough)

freshman Rep. Bill Huizenga (R-Mich.) …

Huizenga, however, rejected the idea that the Democrats were simply re-using the same scare tactics that Republicans used to attack President Obama’s health care law.

“They are lying,” Huizenga said. In contrast, he said, “we’ve got facts.”


“In a court of law, you say it once, and you offer a piece of evidence, and that fact is no longer in dispute,” said Rep. Trey Gowdy (R-S.C.), previously a prosecutor. But, in town-hall meetings, Gowdy said he’s been forced to repeatedly re-prove the same point: that the GOP plan would not affect seniors who are already on Medicare.

These are the only discussions of what is true and what is false about health care plans. The rest is all discussion of politics. The assertion that Democrats “are lying” is not contested anywhere in the article.

A grand total of one Democrat is quoted, and he is not quoted on the question of whether he is lying

Here is all of the quotation of Democrats in the article.

“They’re like the classic schoolyard bullies,” said Rep. Steve Israel (D-N.Y.), head of the Democratic Congressional Campaign Committee, “who throw punches — and then when you throw a punch back, they beg for forgiveness.”

The claim that Democrats “are lying” is not contested in any way.

Note also, the other brush with reality — Gowdy claims that many people in town halls think that the Republicans are going to elimiante medicare also for people currently on Medicare. This claim of fact is not supported by any evidence. Fahrenhold just accepts his word for what happened in his absense.

Gowdy is not asked to explain why he added the qualifier “who are already on Medicare.”

Also his claim about the Ryan plan is false. The Ryan plan incorporates the Medicare cuts in the PPACA which apply to some people currently on Medicare. Republicans continue to denounce those cuts. Gowdy voted for them (as did almost all current members of the House except for 4 Republicans who voted no on the budget resolution, 2 (including Boehner) who didn’t vote and a few surviving blue dogs).

Growdy’s “piece of evidence” is a plainly false claim of fact contradicted by the text of the resolution for which he voted. In a court of law, that would be perjury (if he were under oath) or at least contempt of court.

But he isn’t in a court of law. He is talking to a Washington Post reporter, so he can say something which is demonstrably false and won’t be called on it.

The Post will publish the unsupported claim that Democrats “are lying” but won’t note the fact that a Republican said something false.

In defence of Grady, he might actually believe that the Medicare privatization is the only thing the resolution says be done to Medicare. I’m sure he often votes without knowing what he is voting on. So his plainly false claim might be the result of ignorance not dishonesty.

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Here’s to hoping: wage, salary, and income gains

There are reasons to expect the second half of the year to be be stronger than the first. Here are two: (1) the rebound in industrial activity following supply chain disruptions, and (2) possible impetus to investment spending coming from the depreciation allowance that expires this year. These factors, though, are just dressing up what may be weak underlying demand. Why? Because without significant jobs growth, it’s unclear that we’ll see the wage, salary, and income generation needed for a healthy continuation of the deleveraging cycle.

On the bright side, the Q1 2011 Gross Domestic Income, GDI, report does show a smart rebound in wage and salary accruals. The problem is, that corporate profit growth, which generally leads wage and salary accruals growth, is slowing. (GDI is the income side of the BEA’s GDP release and you can download the data here.)

The chart illustrates annual domestic profit and wage/salary growth spanning 1981 Q1 to 2011 Q1. The series are deflated by the GDP price index. Real domestic profit growth has been robust, peaking at 65% Yr/Yr in Q4 2009 and decelerating to 7% in Q1 2011. The surge in corporate profits brought real wage and salary accruals growth to a 2.1% annual pace in Q1 2011.

With higher input costs and slowing productivity gains, domestic profit margins are likely to be squeezed unless demand re-emerges smartly. The implication is that real wage and salary accruals growth may be nearing ‘as good as it gets’ territory during the aftermath of a balance sheet recession.

And labor’s losing it’s share of the pie. The chart below illustrates the various component contributions to annual gross domestic income growth. (the best that I could do on size vs. clarity – click to enlarge)

The data are quarterly data spanning 1981 Q1 to 2011 Q1 and deflated by the GDP price index. Wage and salary accruals have become a smaller part of income growth in the last decade. Spanning 1981-2000, the average contribution to income growth from wage and salary accruals was 1.5% (simple average), where that spanning the years 2001-current was just 0.3%. The average corporate profit contribution held firm over the same two periods, roughly 0.3%.

Growth momentum has slowed over the period, however, the deceleration in wage and salary contribution is quite striking. I can’t explain it even with the ‘demographic shift’; but this trend is likewise reflected in the employment to population ratio.

Wages, income, spending power, consumption, saving – they’re all different ways to say the same thing: earned income can be spent in one of three ways, on taxes, consumption, or saving. And in this recovery, saving via income gains is important as households further deleverage. We can’t afford compensationless expansion.

The key to growth in 2011 and 2012 is wages, salaries, and income – here’s to hoping.

Rebecca Wilder

Update: Spencer has a foreboding point in comments from my earlier post on GDP. He notes that inflation measured by the GDP deflator probably understates the impetus to domestic prices – domestic purchases is more appropriate at a 3.8% annual rate. The implication, according to Spencer via Email is, “If the inflation rate is really 3.8%, not 1.9 %, it strongly implies that the dominant cause of the economic weakness is higher inflation, not supply chain disruptions.”

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Robert Waldmann’s "How to Solve Many Problems," This Time with a Question Mark

by Mike Kimel

Robert Waldmann’s “How to Solve Many Problems,” This Time with a Question Mark

The other day I noted that the S&P 500 leads the economy. A few days before that, my colleague, Robert Waldmann suggested that perhaps it might make sense for the government to issue bonds and use the proceeds to buy risky assets, such as stocks.

Leaving aside the question of whether the government can pick winners, or whether most investors can either (not to mention the government’s recent willingness to swap good debt for bad debt held by banks, which amounts to a very dumb version of what Robert suggested), does the fact that the S&P seems to lead the economy provide a reason for the government to follow Robert Waldman’s prescription? And if the government did get into that business, would the correlation between the S&P 500 and economic activity go away? Or might this even be a more efficient or effective way to conduct monetary policy than buying and selling securities from a small group of banks (and where the purchases and sales are telegraphed so the folks on the other side can game the system), which is how things are done even when times are good?

This was written on the fly in less than five minutes, including finding the old links, so I haven’t thought any of it through, but… what am I missing here?

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GDP – a disappointing report

Yesterday I addressed the weak high-frequency indicators, specifically with respect to leading indicators of investment spending on equipment and software (durable goods). I argued that Q2 has not started off well, given that the real core orders for capital goods are down compared to the January to March average.

The BEA reported that Q1 2011 growth was 1.8% on a seasonally-adjusted and annualized basis, which is unrevised from the first release but the composition of spending changed somewhat. On the margin, Q1 2011 looks a bit less stellar (if you can call 1.8% annualized growth ‘stellar’) with consumption growth being revised downward to 2.2% over the quarter (previously 2.7%). Below is an illustration of the Q1 2011 contributions to GDP growth before 8:30am (1.75%) and after 8:30am (1.84%).

I think that the story is pretty simple: higher gasoline prices is even worse for consumption than initially anticipated, and inventory accumulation remains a large driver of economic performance.

It’s still way to early to predict what the entirety of 2011 will bring – the IMF forecasts 2.8% annual growth – but the bar’s rising on the quarterly growth trajectory to attain that level of growth. I suspect that forecasts will be revised downward.

Although this is purely conjecture since the April figures are only recently rolling out, Q2 2011 growth is unlikely to be much better. Investment spending is already looking weak for April. And consumption growth may be lackluster on auto sales (H/T spencer) – durables consumption accounted for half of the quarterly growth rate in consumption (0.66% contribution to total GDP quarterly growth). Government spending is a drag, so it’s up to net exports!

Let’s look at what’s happened to the spending components of GDP during the ‘recovery’.

The chart illustrates the cumulative growth in the spending components of GDP (ex inventories). Exports and imports have bounced back on a strong rebound in international trade, 21% and 20%, respectively. Domestic spending is being driven largely by investment spending: consumption is 4% above it’s lows, while fixed investment spending is up 8% (of course, the decline was much larger). Government spending is broadly unchanged (-0.2%) since the outset of the recovery.

There’s much more to this report, like profits and wages, so I’ll revisit if time permits.

Rebecca Wilder

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Negotiations, Not Love Songs

My wife had knee surgery recently.* One of the great things about our then-current health insurer is that they provide complete data—list price, what they negotiated, what they paid, what you owe. Since we’re in the “doughnut hole,” I’m tracking more frequently than I usually would.

And the bills—possibly because we were moving to a new provider—were processed quickly. So what you see below is, in percent form, the amount of the list price (in relation to the whole) and the net benefit to the provider (ibid.).


As you can see, the surgeon’s list price isn’t even close to the level he received, while the hospital and, especially, the anesthesiologist, did relatively better.

There are multiple possible reasons for this, and I don’t pretend this is representative of what everyone—or even everyone with my now-sadly-former Insurance Provider—would receive. The key finding is that all of these contracts and negotiations were carried on by a single entity (my insurance carrier) with each provider. Promises were made—volumes, volume discounts, speed of processing, and whatever else was agreed—and contracts agreed between parties.

All before I get involved.

Which means that the final figures are set in stone. I don’t get to negotiate them. Maybe I get to negotiate a payment schedule, but the levels themselves are set. So even if I believe that the pie should be distributed differently—that the hospital (and maybe the anesthesiologist my wife didn’t want in the first place) should get a little less while the surgeon gets a bit more, for instance—I don’t get a say in that.

Nor do I get the information before choosing an insurer. (If I even get to choose, which I do not in the case of employer-provided health insurance.)

Short version: my choices have no direct effect. There is a “market” for health care, but patient usage and expenditures has no direct effect on it.

*This occurred just as the company was being acquired and therefore our health plan was being transferred from one provider to another, but that’s another story for another time.

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