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

Being Early to the Party: Bad for Links, But Good for Information

Yahoo! News, Tuesday early afternoon

Dr. Black, Wednesday, just before noon.

Brad DeLong, about fifteen minutes after Dr. Black

Me, Monday morning.

But this isn’t a “First Mover” claim. It’s a note that there are no “savings” in getting rid of the website. There aren’t even the “registration fee” that applies to private enterprises. Commenter Bryan at Skippy notes:

The Federal government is the registrar for the .gov TLD [Top Level Domain], so the only cost is storage and bandwidth on government servers.

The cost of locating and removing a site is probably the equivalent of 20 years of ignoring it.

So not only is “the Sheriff” going after chump change, the actions aren’t even going to save any money.

The difference between Joe Biden and Paul Ryan appears to be that one isn’t even talking about real money.

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Is the House Trying to Encourage Criminal Activity?

I left out of the last post why David Vitter (claims) he is blocking the two SEC nominees:

Sen. David Vitter (R., La.) will block two nominees to the Securities and Exchange Commission until the agency announces whether victims of R. Allen Stanford’s alleged Ponzi scheme are owed compensation from the Securities Investor Protection Corp….

“We’ve known for some time that the SEC waited far too long to take action against Allen Stanford, and now they’re dragging their feet in responding to the victims. I will continue to hold them accountable—including holding these nominations—until these fraud victims get an up-or-down answer from the SEC,” Mr. Vitter said in a statement.

Well, economics can help him here. Even old economics, such as the pieces cited by Casey Mulligan in a disingenuous piece he wrote for the NYT last week. (No NYT link from this non-subscriber. I believe the NBER pieces are ungated, but haven’t checked from a network without access.) As the Stigler piece notes, optimal spending should be based on your expectation of catching criminal activity.*

So I expect that David Vitter is up in arms about what his colleagues in the House are doing:

The Republican-led House of Representatives is poised to pass, as early as Wednesday, a sweeping spending bill that would slash funding for the regulatory agency responsible for policing against excessive speculation and price manipulation in oil markets.

This rather understates the CFTC’s purvey. As their website notes:

Congress created the Commodity Futures Trading Commission (CFTC) in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency’s mandate has been renewed and expanded several times since then, most recently by the Commodity Futures Modernization Act of 2000….

[T]he futures industry has become increasingly varied over time and today encompasses a vast array of highly complex financial futures contracts.

Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, protecting market participants against fraud, manipulation, and abusive trading practices, and by ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk. [emphasis mine]

That’s right; the CFTC is responsible for regulating derivative trading activity. Which is why…

The Obama administration requested more than $300 million for the fiscal year that ends on Sept. 30, a steep increase because the CFTC gained sweeping new powers under last year’s broad revamp of financial regulation—short-handed as the Dodd-Frank Act.

This is pure Stigler. More responsibility, higher expectation of detecting malfeasance, higher budget necessary for optimal crime enforcement. Otherwise, you end up more criminal activity going undetected as the risk of being caught is reduced.**

So what is the House doing?

The House bill would provide $171.9 million for the agency, a decrease of about $30 million from the $202.2 million given to the agency the prior year.

With the duties expanded by around 50%, the budget gets cut by 15%. Within the Stigler framework, we should expect (without any multiplier effect***) that it will be 43% less likely that any given criminal activity that falls under the CFTC’s jurisdiction will be detected and prosecuted.

The House wants to make the Stanford Ponzi scheme, or something similar, more likely to occur. Will David Vitter be decrying this, even as he blocks nominees?

*That this concept is outdated at best is subject for a future post, but it’s a fine baseline assumption.

**As I said, it’s a simplified model, but functional if one assumes continuities.

***Short version: this is where the model needs to be revised. The incentives to commit crimes are greater (detection less likely). That Mulligan could find no better cite than these works as the defence of his idiocy (as noted, no NYT link from me) is damning.

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Senators Who Committed a Crime Demands Rule of Law

David Vitter (R-DiaperPuta) stands firm:

Sen. David Vitter (R., La.) will block two nominees to the Securities and Exchange Commission…

Daniel Gallagher Jr., a partner at the law firm Wilmer Cutler Pickering Hale & Dorr LLP who was nominated to join the SEC, and agency commissioner Luis Aguilar, who was nominated for a second term….both require Senate confirmation, haven’t encountered any substantive opposition partly because they were paired together as a Republican and a Democrat in order to reduce incentives for partisans to blow up their nominations.

But senators often use the confirmation process to pressure federal agencies to meet various demands. By placing a “hold” on the nominees, Mr. Vitter is delaying a confirmation vote by the Senate.

BarryO was strangely silent during Vitter’s re-election campaign, not once declaring that having committed an actual crime would be a reason to resign.

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On the Job Market

by Mike Kimel

On the Job Market

Recently, my employer went through a merger. As part of the process, my position disappeared. I turned down a different position that was offered, the result being that at the end of the month I will no longer be with my current employer. Yes, I am aware of how bad the job market is, and yes, I learned a lot at and enjoyed my job, but without getting into a lot of inside baseball, it was time to go. In fact, it has been time to go for a while. Sometimes it takes something like this to tell you something you already know. So, yes, I have butterflies in my stomach (I’ve never been on the job market with this many mouths to feed), but I’m also looking forward to what comes next.

So… time to assess the situation. Here’s what I got.

Step 1. Financial assessment. Job loss means a financial hit, but we can hang in there provided unemployment doesn’t last too long.

Step 2. Education / Work history. I am a trained economist (Ph.D. in economics from UCLA, two master’s degrees, and a bachelor’s degree in mathematics / economics). I have fifteen years of experience since leaving graduate school, having worked for a Big 4 (at the time, Big 6) accounting firm, two Fortune 500 companies, and for my own consulting practice. While a consultant, I also taught economics and advanced statistics in the MBA program at Pepperdine University for five years. Some of the work experience is international. Industries I’ve done work for include telecom, utilities, investment banks, brokerages, consumer goods, software, hardware, aerospace and military.

Step 3. Work categories / skills. Most of my work falls into a few different categories:

a) Statistical / econometric analysis, including designing some fairly sophisticated algorithms. I’ve built models for macroeconomic analysis, demand forecasting, costing, capital allocation, equity valuation, commodity valuation, marketing research, and hedging. Over the years I’ve used the most common statistical and pseudo-statistical packages, like SAS, SPSS, EViews and VBA.

b) Regulatory work in utilities, both as an employee and as a consultant. Some of that work was for foreign companies, and some of that was performed abroad.

c) Strategy work. I think the most fun I ever had was developing and leading implementation of strategies for dealing with new competitors while a manager at a Fortune 500 company. I’ve also had the opportunity to do some strategy work in other capacities, including as a consultant, and some of that has been abroad as well. Strategy is always a lot of fun.

d) Management. My work experience includes a few years as a corporate manager, running groups like economic policy & analysis, strategic marketing, and competitive strategies. I’m good at motivating people, and I enjoy mentoring junior staff… which explains what I enjoyed teaching as well.

e) Language skills. Though born in the US, I grew up in South America, and am fluent in Portuguese and Spanish. I’m a bit rusty from lack of recent use, but nothing that two weeks in Rio, Buenos Aires or Montevideo wouldn’t fix.

f) Writing. I do write frequently on economic and business issues, and co-authored a book. I like to think I have learned to explain reasonably complex concepts, including the results of statistical analyses, to lay audiences.

Step 4. Deciding what type of job to target. I’ve been very lucky in life, and I can safely say I have enjoyed almost every day in my last fourteen years of work. (And yes, I have fifteen years of work experience.)

Looking back, I’ve tended to really like oddball problems and a fair amount of autonomy. Give me the project that is already two months late, that nobody knows how to do, and from which everyone is backing away. The fun problems are the ones that make you sweat. Consulting jobs often provide a lot of interesting problems, a lot of autonomy, and a minimum of formality.

On the other hand, I have had a few jobs in the corporate world where I had the freedom to poke my nose into a lot of different tents, and in such cases it can be very easy to get involved in cool projects. All you need is a willingness to follow your nose in the direction of bad news. In the corporate world, nobody wants to be involved with bad news. But fixing the issues that created the bad news is often the most interesting work in the company.

I’ve never worked in a “Wall Street” type job, but I’ve done a fair amount of work that is probably interchangeable: hedging models, forecasting prices and demand for equities and commodities, and of course, designing statistical algorithms.

Step 5. Preparing a resume, and lining up references. Available upon request.

Step 6. Tap your network. That’s the purpose of this post. Anyone looking for someone with my skills and background? Know of anyone who is? Know of someone I should contact? Know someplace I should look? I’d be grateful for any pointers or assistance.

Minor correction. For legibility, contact info shown below rather than within the post.

Should you want to reach me, my e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at gmail.com.”

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I Hate It When My Cynicism is the OPTIMISTIC Version

I wisecracked yesterday chez DeLong that, given the current political climate, I wouldn’t invest in a company without political connections using his money, let alone my own.

What I didn’t realize at the time was that the Supreme Court already had decided earlier yesterday that investing in mutual funds should be a hazardous activity:

Janus Capital Group Inc (JNS.N) and a subsidiary cannot be held liable in a lawsuit by shareholders over allegedly false statements in prospectuses for several Janus mutual funds, the U.S. Supreme Court ruled on Monday….

Janus, in appealing to the Supreme Court, argued that the funds were separate legal entities and that neither the parent company nor its subsidiary was responsible for the prospectuses and could not be held liable.

Janus, being the two-faced G-d of Theatre, would approve of his namesake’s claim: “Well, we own the company, we paid for the prospectus, we marketed the prospectus, we made assurances to investors based on our Due Diligence about the prospectus—why would you blame us if something goes wrong?”

Or, for the positive spin,

Mark Perry, the attorney who represented Janus, said he was delighted the Supreme Court agreed with the company’s position that only the party ultimately responsible for a statement can be sued for fraud in such private investor lawsuits.

“The court’s clarification of the scope of primary liability under the securities laws is important not just for the parties to this case, but for all participants in the securities markets, including bankers, lawyers, accountants, and investment advisers,” he said.

We knew nothing. We always Know Nothing. You are paying us for our “expertise,” but We Know Nothing.

Gresham’s Law will follow:

William Birdthistle, an associate professor at the Chicago-Kent College of Law who had written an amicus brief on behalf of First Derivative Traders…said the ruling’s most dramatic impact could be to encourage other industries to adopt the split management structure of the mutual funds sector as a way to avoid liability.

“What this ruling says is that as long as there are separate legal entities, even if management totally dominates all aspects, there’s no liability,” Birdthistle said. “This is going to open the eyes of those not in the funds industry who are going to say: ‘Wow, those guys are bulletproof’,” he said.

“Bulletproof” is not something you want in someone who is supposedly representing your interest.

Anyone stupid enough to invest in the U.S. mutual fund industry after this ruling must be someone who believes they’re “managing my 401(k) to take control of my future,” even though the company only offers three options, one of which is Company Stock.

The next time someone tells you about the evils of Moral Hazard, assure them that the Supreme Court doesn’t believe in it.

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Financial Services Intermediation

Traditionally, non-commercial banking (i.e., everything except savings deposits and consumer loans) was about one of two things:

  1. Tax arbitrage or
  2. Regulatory arbitrage

    The rest is window dressing; that is, it was basic financial intermediation, usually for the purpose of helping Corporate and/or High Net Worth clients.*

    That was until the late 1990s and the Noughts, when the third level came to liquidity-prominence:

  3. Credit rating arbitrage

The third is the most chimerical of all, becausemdash;unless you’re selling to or buying from the company that is involved (which has correlation issues, as I noted long ago)—neither party (in theory) has control over the outcome of events. It’s asymmetric information on both sides: not so much gambling against the house as shooting craps in the alley, not certain whether there is a bobby down the block.

All of which is an indirect way of saying: Go Read Kash Mansori. Especially if you think US institutions are managing better than the EU is. (Hint: it may be true on the governance level, but the financial institutions’s exposure appears to tell another story.)

*Think corporate deposits, lines of credit, commercial loans, IPOs that are often used in part to pay off debt, and the like. Normal course of business options, with the selection influenced by tax or regulatory considerations.

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The economy , markets and inflation

Demand destruction. Demand destruction. Demand destruction.

That is all one seemed to hear from analysts and managers for months as food and energy prices soared. But now that we are actually seeing demand destruction, no one seems to recognize it.

Yes, much of the May drop in auto sales was due to supply chain interruptions. But the bulk of the other economic weakness is due to higher inflation generating weak income and demand growth. Over the past six months the monthly change in real average weekly earnings has been:

Nov. Dec. Jan. Feb. Mar. Apr.

-0.1 -0.6 -0.3 -0.0 -0.7 -0.2

The change in real personal income excluding transfers, the single best determinate of consumer spending, has been:

Nov. Dec. Jan. Feb. Mar. Apr.

0.1 0.2 1.1 0.0 -0.1 0.1

The January 1.0% jump was due largely to the payroll tax cut.


Given this weakness in real income, it should be no surprise that consumer spending and the economy has weakened.


Real average weekly earnings growth is a leading indicator much like the stock market in that it has forecast 10 of the last seven recessions. But every recessions was accompanied by falling real weekly earnings.

The consensus still is calling for significantly higher growth in the second half. But this depends on weak food and energy prices allowing real incomes to expand. Over the last month commodity prices have weakened and this is encouraging for the inflation outlook. But so far the commodity price weakness looks more like a correction than a trend change. Oil prices in particular have not broken cleanly below $100 and Brent crude is still above $110. Copper, aluminum and other metals prices have yet to break below their 12 month moving average and their current drop is not out of line with past corrections, as in early 2010. Meat prices have fallen sharply, but grain and soybean prices are still near their record highs. Cotton prices, for example, are still well above their year-end level.

What demand destruction is really about is firms ability to pass higher cost through to the final consumer. Corporate managements and analysts have assumed in their earnings forecast that firms will have no trouble realizing higher prices. In an inflationary spiral this is a safe assumption. But demand destruction implies that we are not in an inflationary spiral

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The Historical Relationship Between the Economy and the S&P 500, Part 3: The S&P 500 and the Employment to Population Ratio

by Mike Kimel

The Historical Relationship Between the Economy and the S&P 500, Part 3: The S&P 500 and the Employment to Population Ratio

A few weeks ago, I had two posts looking at the relationship between the S&P 500 and real GDP (Part 1 and Part 2).

The first post noted that using data from 1950 to the present, the adjusted close of the S&P 500 appears to lead real GDP by about 10 quarters… and real GDP appears to lead the S&P 500 by 16 quarters. That is, each factor appears to influence the other with a lead time of a few years. In the second post, I noted that while the S&P 500’s influence over real GDP appears to have remained relatively stable over the decades, real GDP’s influence over the stock market seems to have gone by the wayside some time in the 1970s.

Today’s post is similar to Post #1, but instead of looking at how the S&P 500 influences real GDP and vice versa, it looks at the relationship between the S&P 500 and the civilian employment to population rate.

The adjusted close for the monthly S&P 500 comes from Yahoo. The employment to population ratio is generated by the Bureau of Labor Statistics, but I pulled it off the Federal Reserve Economic Database (FRED) maintained by the Federal Reserve’s St. Louis Branch. Monthly data is available for both series – data for the S&P 500 was available going back to 1950, and the employment to population ratio was first computed in 1948.

Following the same practice as in Post #1, I computed the correlation between the S&P 500 and the employment to population ratio, the correlation between the S&P 500 and the employment to population ratio lagged one month, the correlation between the S&P 500 and the employment to population ratio lagged two months, and so on, all the way through 15 years worth of lags. I also computed the correlation between the employment to population ratio and lags of the S&P 500. Graphically, it all looks like this:

Figure 1.

The graph shows that the S&P 500 doesn’t seem to lead the employment to population ratio. The correlation between the S&P 500 and the employment to population ratio in the same period exceeds the correlation between the S&P 500 and any lagged employment to population ratio.

However, the employment to population ratio does appear to lead the S&P 500… and the correlation is highest at about 123 months… or about ten years. In other words, the share of the population that is employed seems to lead the stock market, with the strongest effect generally being observed ten years out.

I’ll be looking at how stable that result is in the next post in the series, but for now, let’s just take it on faith that the result doesn’t just go away when we change the dates in our sample. So… assuming the results are stable, they suggest the following story: more employed people mean more people putting money in the stock market, more people buying stuff, and more companies making stuff. Nevertheless, all these good things happening take a while to have an effect on stock prices. In fact, a ten year lag time seems to indicate that the benefits of more employment don’t get felt until the next business cycle comes around.

Now the really bad news… here’s what the employment to population ratio looks like:

Figure 2.

I note a few sorry portents….
1. The employment to population ratio peaked at 64.7% in the year 2000.
2. Its since dropped quite a bit, and is now at a level last since in the 1980s.

Anyway, in closing, a few more notes
a. I am not an investment adviser. I’m merely looking at some historical correlations, and this is only part of the story. I would strongly advise against trading on this information.
b. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at gmail.com.

The Historical Relationship Between the Economy and the S&P 500, Part 3: The S&P 500 and the Employment to Population Ratio

A few weeks ago, I had two posts looking at the relationship between the S&P 500 and real GDP (Part 1 and Part 2).

The first post noted that using data from 1950 to the present, the adjusted close of the S&P 500 appears to lead real GDP by about 10 quarters… and real GDP appears to lead the S&P 500 by 16 quarters. That is, each factor appears to influence the other with a lead time of a few years. In the second post, I noted that while the S&P 500’s influence over real GDP appears to have remained relatively stable over the decades, real GDP’s influence over the stock market seems to have gone by the wayside some time in the 1970s.

Today’s post is similar to Post #1, but instead of looking at how the S&P 500 influences real GDP and vice versa, it looks at the relationship between the S&P 500 and the civilian employment to population rate. The adjusted close for the monthly S&P 500 comes from Yahoo. The employment to population ratio is generated by the Bureau of Labor Statistics, but I pulled it off the Federal Reserve Economic Database (FRED) maintained by the Federal Reserve’s St. Louis Branch. Monthly data is available for both series – data for the S&P 500 was available going back to 1950, and the employment to population ratio was first computed in 1948.

Following the same practice as in Post #1, I computed the correlation between the S&P 500 and the employment to population ratio, the correlation between the S&P 500 and the employment to population ratio lagged one month, the correlation between the S&P 500 and the employment to population ratio lagged two months, and so on, all the way through 15 years worth of lags. I also computed the correlation between the employment to population ratio and lags of the S&P 500. Graphically, it all looks like this:

Figure 1.

The graph shows that the S&P 500 doesn’t seem to lead the employment to population ratio. The correlation between the S&P 500 and the employment to population ratio in the same period exceeds the correlation between the S&P 500 and any lagged employment to population ratio.

However, the employment to population ratio does appear to lead the S&P 500… and the correlation is highest at about 123 months… or about ten years. In other words, the share of the population that is employed seems to lead the stock market, with the strongest effect generally being observed ten years out.

I’ll be looking at how stable that result is in the next post in the series, but for now, let’s just take it on faith that the result doesn’t just go away when we change the dates in our sample. So… assuming the results are stable, they suggest the following story: more employed people mean more people putting money in the stock market, more people buying stuff, and more companies making stuff. Nevertheless, all these good things happening take a while to have an effect on stock prices. In fact, a ten year lag time seems to indicate that the benefits of more employment don’t get felt until the next business cycle comes around.

Now the really bad news… here’s what the employment to population ratio looks like:

Figure 2.

I note a few sorry portents….
1. The employment to population ratio peaked at 64.7% in the year 2000.
2. Its since dropped quite a bit, and is now at a level not seen since the 1980s.

Anyway, in closing, a few more notes
a. I am not an investment adviser. I’m merely looking at some historical correlations, and this is only part of the story. I would strongly advise against trading on this information.
b. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at gmail.com.

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It’s not about regulating markets, after all! It’s about regulating the individual!

by Beverly Mann

Ah! It’s not about regulating markets, after all! It’s about regulating the individual!

ATLANTA — In perhaps the weightiest of the dozens of challenges to the Obama health care law, a panel of appellate judges grappled Wednesday with the essential quandary of the case: if the federal government can require Americans to buy medical insurance, what constitutional limit would prevent it from mandating all manner of purchases and activities?
Kevin Sack, New York Times, Jun. 8

In my last post, Markets and the ACA: Why the Supreme Court Will Uphold the ACA, I wrote:

[Santa Clara law prof. and ACA-litigation blogger Brad Joondeph is] right (see my earlier post), but only if, as he says earlier, the market for health insurance is defined so narrowly that health insurance is viewed as a commodity, a product, independent of the product’s purpose and effect. And then, the constitutional issue would not, I think, be whether Congress has the authority under the Commerce Clause, aided by the Necessary and Proper Clause, to regulate the health insurance market, but instead whether this violates some other constitutional limitation. You know: the slippery-slope-to-government-compelled-consumption-of-broccoli argument.

Turns out I was onto something.

Dan posted the post on Thursday, a day after the oral argument in the 11th Circuit court of Appeals in what is broadly viewed as the key ACA lawsuit because the plaintiffs include 26 states and because the trial-court judge, Pensacola-based Roger Vinson, struck down the entire ACA because he ruled that the Act’s individual-mandate requirement is unconstitutional and said the entire statute is too dependent on the individual-mandate provision to “sever” that provision from the rest of the statute. But I’d written my post on Tuesday, in anticipation of the oral argument, and posted it on my blog that day.

But from reports I’ve read about the oral argument on Wednesday, it looks to me like that appellate panel will decide the case not on the basis of the limits of the Commerce Clause but instead on a more general civil liberties ground. They may cloak it as a Commerce Clause issue—and certainly that is what Paul Clement, the attorney representing the 26 states wants the court to do—but, really, given the questioning and comments from the swing judge on that appellate panel, and therefore the basis on which that panel will decide the case, this would be an improper conflation of Commerce Clause issues and what is known as “substantive due process” issues. And I think, ultimately, it is the substantive due process question on which the Supreme Court will decide the case. This is so even though conservative legal types detest the very concept of substantive due process.

Substantive due process is a doctrine of constitutional law that holds that there are limits, inherent within the Constitution, to the extent to which the government can interfere with basic personal choices, irrespective of how much procedural due process that individual is accorded. It’s a concept completely independent of procedural due process—the right to due process of law before the courts can strip you of life, liberty or property.

Procedural due process is all about the limits of what courts can do. Substantive due process, by contrast, is almost always about the limits of what a legislature can do. The doctrine holds that there are some personal choices that are inviolate under the Constitution. It is the much-ridiculed-by-right-wingers legal principal on which Roe v. Wade was based. Roe v. Wade, for its part, was based on a 1965 Supreme Court case called Giswold v. Connecticut, which created the substantive-due-process right of individuals to make deeply personal decisions for themselves and struck down as an unconstitutional violation of that privacy right a state statute that prohibited the use of contraceptives. And it is the principal on which in an eloquent 2003 opinion, Lawrence v. Texas, by Justice Kennedy, the Court struck down Texas’s anti-sodomy criminal statute.

Rehnquist, Scalia and Thomas dissented in Lawrence on the ground that, in their view, there is no such substantive-due-process right—no privacy right concerning intimate personal decisions—in the Constitution. Scalia and Thomas might change their minds, though, but only about the intimate decision not to buy health insurance, especially because that right is just too similar to the intimate right not to eat broccoli.

The 11th Circuit panel members are Joel Dubina, a conservative Reagan appointee to the district (trial-court level) court and a G.H.W. Bush appointee to the appellate court, whose daughter is a freshman Alabama congresswoman who campaigned on a promise to try to repeal the ACA; Frank (female, despite her name) Hull, a moderate Clinton appointee; and Stanley Marcus, a moderate-to-conservative G.H.W. Bush appointee to the district court and Clinton appointee to the appellate court.

According to one report I read, Marcus early in the hearing said he viewed the central issue in the case—the constitutionality of the individual-mandate provision—as less a Commerce Clause issue than a civil liberties issue: Does the mandate violate the civil liberties of individuals by requiring them to obtain healthcare insurance? That’s a different question, and a broader one, I think, then whether Congress has the authority under the Commerce Clause, aided by the Necessary and Proper Clause, to mandate the purchase of healthcare insurance by those who can afford to buy it. Congress may have that authority under the Commerce Clause, but the legislation still might be unconstitutional if it violates another provision of the Constitution, here presumably the substantive due process right to be compelled to buy something. Presumably, because no one, least of all Clement, used the term “substantive due process right”. But he sure the words “compel,” “liberty” and “individual.” Early and quite often:

“The Commerce Clause only gives Congress the power to regulate, not to compel.” …

“It boils down to the question of whether the federal government can compel people into commerce to better regulate the individual.” …

“In 220 years, Congress never saw fit to use this power, to compel a person to engage in commerce.” …

“The whole reason we do this is to protect individual liberty.” …

When Hull said she believed the decision not to buy insurance involved some “economic activity” that impacts the healthcare market (and that therefore, under the Supreme Court’s interpretation of Commerce Clause powers, Congress has the authority under the Commerce Clause, coupled with the Necessary and Proper Clause, to regulate), Clement reportedly responded that, despite this, Congress has no constitutional authority to force people to act to buy coverage.

Clement attempts to thread a needle.

In 2005, in Gonzales v. Raich, the Court held that under the Commerce Clause, aided by the Necessary and Proper Clause, Congress has the power to prohibit an individual from growing marihuana, not for sale, much less for sale in interstate commerce but instead for his personal use, because this effects the interstate market for marijuana. Only O’Connor and Thomas dissented. The challengers to the constitutionality of the ACA’s individual-mandate provision have focused on the “compel” part; sure, the Congress can prohibit activity something under the Commerce Clause, but it can’t compel activity under the Commerce Clause. But once you acknowledge that the failure to obtain health insurance impacts the interstate market for healthcare by directly impacting who pays the uninsureds’ emergency medical costs, you’ve pretty much conceded—logically, at least—that the Commerce Clause, assisted by the Necessary and Proper Clause, allows Congress to regulate this, irrespective of whether it does this by compelling the purchase of insurance or instead in some other way.

This is true whether the acknowledger is the lawyer for the challengers to the constitutionality of the law or instead the judges hearing the case.

All three of the judges on that panel acknowledged the obvious: that the failure to obtain health insurance impacts the interstate market for healthcare by directly impacting who pays the uninsureds’ emergency medical costs. And Clement didn’t deny it. So much for, “It boils down to the question of whether the federal government can compel people into commerce to better regulate the individual.” It boils down to that only if the federal government isn’t compelling people into commerce also to better regulate the healthcare-coverage market. Most laws, federal as well as state and local ones—including the federal one at issue in Raich—regulate the individual. Whether they better regulate the individual or not.

Clement understands this, of course, but also recognizes the need for a straw to grasp at other than the Commerce Clause one. Thus the civil liberties straw, which the judges themselves offered the statute’s challengers even before Clement (who argued after the federal government’s lawyer, acting solicitor general Neal Katyal, did) began his argument:

Marcus: “If they could compel this, what purchase could they not compel?” …

Dubina: “I can’t find any case like this. If we uphold this, are there any limits [on the power of the federal government]? …

Marcus: “I can’t find any case [in which the courts upheld the constitutionality of] telling a private person they are compelled to purchase a product in the open market…. Is there anything that suggests Congress can do this?”

Well, no, not precisely. But there are Supreme Court cases that upheld what, for civil liberties purposes, amounts to the same thing. They’re the cases that upheld the constitutionality of the Social Security Act and the Medicare Act by allowing the government to compel contributions to these separate funds, which are not part of the general tax revenue fund (OK, in theory, anyway), for the sole purpose of insuring a retirement income and health insurance for those over age 65. True, the specific “enumerated” Constitutional authority Congress used to enact those laws was the taxing power, not the commerce-regulation power. But that matters only if the commerce-regulation power isn’t broad enough to reach this. If it is—and under Supreme Court precedent, it is, if the failure to have health insurance significantly impacts the healthcare market, which it does—then this distinction is without a difference. You know. A meaningful (or as lawyers say, a material) difference.

In questioning Katyal, the judges were asking for a so-called “limiting principle,” a logical line beyond which federal regulatory authority cannot go. But if the issue is individual liberty, is it really logical to have that line depend on whether the compelled payment is for a product in the open market rather than for a similar product issued by the government? Isn’t the civil liberties issue really what the goal and effect are? That’s certainly the issue in most civil-liberties challenge to the constitutionality of a statute. Why isn’t it, here?

Blowing away the smokescreen erected by the focus on the individual-mandate provision’s use of private insurance—and isn’t it just a smokescreen, really?—why does this infringe on liberty more than the Social Security and Medicare taxes do?

The bottom line, in my opinion, is that the Commerce Clause gives Congress the power to regulate, including the power to compel, without infringing on civil liberties, if what Congress is compelling is what it could compel through its taxing power, without infringing on civil liberties. Congress couldn’t (to use the conservatives’ preferred example) compel Americans, via the tax code, to eat broccoli. Or to buy it. That pretty clearly would violate substantive due process rights, a.k.a. individual liberty rights, even if under the taxing power Congress otherwise would have that authority. But Congress could, for example, extend Medicare to all Americans and amend the Medicare tax law to pay for it, without violating the Constitution’s individual-liberty guarantees.

That’s the limiting principle. At least it should be.

Postscript regarding Paul Clement

In his May 8 article about Wednesday’s oral argument in the 11th Circuit in the ACA case in which Paul Clement is representing 26 states in challenging the constitutionality of the statute, New York Times reporter Kevin Sack wrote that those states are paying Clement $250,000 to handle the appeal in that court and eventually in the Supreme Court.

That’s a stunning amount, even though the amount each state will pay is relatively small. These are two appeals in a single case that involves, entirely, arguments of law. There is no trial transcript, nor trial-court orders on motions, nor volumes of business records—the things that usually raise appellate legal fees to astronomical heights. And the legal arguments are the standard ones being discussed ad nauseam in legal circles. Clement’s hourly fee on this will turn out to be something close to $1,000, I’d bet.

Maybe lines like, “It boils down to the question of whether the federal government can compel people into commerce to better regulate the individual,” as he told the panel on Wednesday, makes this guy worth his price. But if so, it’s only because the judges will assume that since he’s Paul Clement rather than, say, another lawyer, that line makes sense.

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