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


The employment report came in much as the ADP report had suggested it would. Payroll employment was little changed at 54,000. This is considerably weaker than over the last few months and is in line with other data that suggest the economy has weakened significantly.

The household survey reported that employment rose by 105,000 while the civilian labor force grew by some 272,000. Consequently the unemployment rate ticked back up to 9.1% from 9,0%.

Even with the uptick in the unemployment rate my fed policy index is still calling for a fed funds rate of 1.0%. This implies that the Fed should not renew QE II as the current easing ends.

The workweek was unchanged at 34.4 hours. So with the small gain in employment aggregate hours worked was only up 0.1%

Average hourly earnings rose by 0.3%, but the year over year gain in average hourly earnings is only 1.8% — a near record low.

With weak hourly earnings and only a 0.1% gain in hours worked average weekly wages are only up 2.7 % from a year ago. With the CPI at 3.1% as of April it should be no surprise that the economy is weak.

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Stock Market Adjustment

The stock market is adjusting to weaker 2011
economic and earnings growth. Business executives,
analysts and economists have yet to reduce their 2011
estimates, So the important question is how much of the lower
growth is already discounted. The consensus had been for
double digit earnings gains in 2011. But now it appears that
earnings growth will be less than nominal GDP growth —
the low single digits.

The revised first quarter GDP deflator of 1.9% appears to be
weaker than what other measures of inflation are reporting.

It is low. Within the report the deflators for both gross domestic purchases
and the personal consumption expenditures ( PCE) rose at a 3.8% rate.

The low GDP deflator stems from the way GDP is calculated.
GDP subtracts imports from final demand to indirectly estimate
production. When you buy an imported car it is reported in PCE.
But GDP measures production, not consumption. To go from
consumption to production that imported car has to be backed out
of the data by subtracting imports. So subtracting imports is the right way
to calculate GDP.

But when import prices surge — in the last quarter they rose at a 21.8% rate —
this methodology tends to distort the GDP deflator and causes it to understate
inflation. It happens every time oil prices spike.

So the reported low 1.9% inflation rate should be taken with a grain of salt
and viewed as a data distortion.

If the inflation rate is really 3.8%, not I.9 % it strongly implies that the dominant
cause of the economic and stock market weakness is higher inflation,
not supply chain disruptions.

This analysis strongly reinforces my belief that as long as wage gains are as
weak as they are, the economy can not sustain higher inflation. If and when
inflation accelerates it generates weaker economic growth, not a self reinforcing
inflationary spiral.

Moreover, unit labor cost is now rising faster than the non-farm business deflator.
Last year strong productivity and falling labor cost meant that firms could absorb
higher commodity prices and still report strong earnings growth. That is no longer
true. Firms now need to try to pass these cost increases through and the revised first
quarter data implies that business executives, economists and analysts are still
too optimistic about firms ability to raise prices.

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New wrinkles in the ACA litigation – Part II

by Beverly Mann

New wrinkles in the ACA litigation – Part II

Okay, well, now y’all know from reading Part I that under the Constitution’s Article III requirement that plaintiffs in lawsuits have some “particularized” (and ya know what that means, from reading Part I) injury or be in imminent danger of suffering one, and that the imminent danger can, theoretically, be hardship due to the anticipated violation of the plaintiffs’ rights. So you’ll be able to sail right through the federal-court-jurisdiction questions in the Civil Procedure section of the multi-state part of the bar exam.

You’ll also be able to understand what happened last Friday in the ACA case scheduled for oral argument on Wednesday in the Sixth Circuit federal appellate court.

The case is Thomas More Law Center, et al. v. Obama. Thomas More Law Center is a rightwing organization whose purpose is to challenge the constitutionality of laws or government policies or government actions against a particular individual that the far right finds offensive. Almost always, the underlying cause is a culture-wars issue, although sometimes the immediate issue being litigated is a more general procedural or constitutional-rights issue.

For example, a few weeks ago, a friend asked me whether I would be willing to advise a Thomas More lawyer on a procedural issue concerning access to federal court for a couple who are my friend’s friends and who are entwined in a legal morass stemming from their protests at an abortion clinic, for which they were prosecuted. My friend knows I know loads about the procedural issue, known as the Rooker-Feldmandoctrine, an absurd Supreme Court-created bar to access to federal court in order to challenge the constitutionality of state-court actions. I was happy to oblige, partly because this couple’s due process rights, were, in my opinion, violated, and partly because that doctrine itself violates the Fourteenth Amendment. On March 7, in an opinion called Skinner v. Switzer, the Supreme Court finally killed the doctrine, or tried to; because Skinner does not expressly say, “We overrule Dist. of Columbia Ct. of App. v. Feldman,” the 1983 opinion that created the doctrine on the basis of the Court’s interpretation of a statute that was amended in 1986 to remove the part of that statute that the Court was interpreting, some of the lower federal courts are ignoring Skinner. Just as I’d predicted on Mar. 7 when I read the opinion.

But I digress.

The et al. are four individuals who are members of the Thomas More organization. (It’s apparently an organization that has a membership, like the NAACP, the ACLU and the NRA, rather than just a law firm.) The organization’s standing to sue is derivative of its members’ standing—the ones that do have standing, that is, and only the members who actually will be forced by the ACA to buy health insurance or pay the penalty even arguably have standing. Turns out that the only one of the individual plaintiffs who, at least from the plaintiffs’ earlier filings, claimed that injury and provided specifics about it—that she did not have health insurance and that the $700 per month she said she would have to pay under the ACA would cause her significant financial hardship—actually bought health insurance through her employer last October, after the lower-court decision, for less than $400. The plaintiffs revealed this in their response to the court’s briefing request, which they filed last Wednesday.

Two of the other four individuals are not even claiming a lack of health insurance and therefore any injury from the mandate. The other one—his name is Steven Hyder—has claimed that the mandate “negatively impacts me now because I will have to reorganize my affairs and essentially change the way I live to meet the government’s demands,” but he provided no specifics.

Voila! On Friday, the government filed a motion asking the court to dismiss the appeal because, the government said, no plaintiff has standing to litigate this because no plaintiff has shown that he or she would suffer an injury from the mandate. Hyder’s claim, the government says, is a mere conclusory statement; without facts supporting the conclusion, it’s not enough to establish standing. And the others clearly haven’t established standing. And, because the trial-level judge, who is based in the Eastern District of Michigan, ruled that the ACA is constitutional, the government wants the appellate court not to “vacate” (hold null and void) that judge’s ruling, an action that normally the appellate court would do in such a circumstance.

The government’s request that the appellate court dismiss the appeal yet leave the trial judge’s ruling intact strikes me as pointless. Yes, the plaintiff who voluntarily bought health insurance in October did have standing when the lawsuit was filed and when the trial judge issued his ruling last summer. But trial-court rulings have no effect except in the case in which the ruling was issued. They don’t even set the law in that court’s own judicial district. That ruling, if it remains in effect although the appeal is dismissed, probably wouldn’t even effect the rights of these plaintiffs—most significantly, of course, the Thomas More Law Center—because they were denied the right to an appeal.

At the oral argument on Wednesday, or before that in a filed response to the government’s motion, the Thomas More lawyers will get specific about the basis for Hyder’s claim of financial hardship and about whether the other two individuals now have health insurance. If they all have health insurance, then, the mandate won’t cause them financial hardship or, irrespectively of finances, force them to do something they don’t want to do. They don’t have standing.

But, assuredly, some plaintiff in some other ACA case does. Or will.

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New wrinkles in the ACA litigation – Part I

by Beverly Mann

New wrinkles in the ACA litigation – Part I

On May 23, the three-judge federal Fourth Circuit appellate panel that two weeks ago heard oral argument in the two cases in Virginia challenging the constitutionality of the ACA issued an order asking the parties to brief the question of whether a federal statute known as the Tax Anti-Injunction removes the federal courts’ “jurisdiction”—i.e., legal authority—to hear a case filed “for the purpose of restraining the assessment or collection of any tax.” The statute, subtitled “Prohibition of suits to restrain assessment or collection,” is part of the IRS Code.

The relevant part of the statute reads:

Except as provided in sections 6015 (e), 6212 (a) and (c), 6213 (a), 6225 (b), 6246 (b), 6330 (e)(1), 6331 (i), 6672 (c), 6694 (c), and 7426 (a) and (b)(1),7429 (b), and 7436, no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.

The panel asked for briefing on three questions. The first one has two parts. It asks, generically, whether the statute, when applicable, divests the courts of jurisdiction to hear this type of case, and, if so, whether it does that in these cases. The two parts, each of which references a particular earlier Supreme Court holding—one in a 1962 opinion called J.L. Enochs v. Williams Packing & Navigation Co., that created an exception to the statute when the statute otherwise would apply, the other a 1974 opinion called, Bob Jones University v. Simon, saying that in that particular case, the exception created in Williams Packing doesn’t apply—appears to me to be just a clumsy way of asking whether, if the penalty assessment is a “tax,” the ACA cases come within the exception created by Williams Packing.

Clearly, the statute indicates that when it is applicable, it divests the courts of jurisdiction to hear the case.

The second question asks whether “a challenged exaction”—here, the fee that must be paid through the IRS for failure to purchase health insurance—can qualify as a “tax” under the Anti-Injunction Act whether or not it qualifies as a tax for purposes of Congress’s taxing power under Article I of the Constitution, the part of the Constitution that lists most of Congress’s powers.

The third question asks whether, if the Anti-Injunction Act does apply to these lawsuits—that is, if the exaction is considered a tax for purposes of the Act—the plaintiffs (the State of Virginia, in one of the lawsuits; Liberty University and a few named individuals, in the other lawsuit) will have “the ability to challenge the exaction … in a refund suit or otherwise.” Williams Packing held that the statute would violate the Fifth Amendment’s due process clause unless an exception to the statute’s applicability is created if there otherwise will never be an avenue in which the plaintiff can challenge the constitutionality of the tax and obtain redress if the tax is unconstitutional; that’s the exception that Williams Packing creates. But the ability to sue to request a refund of the tax once the tax has been paid usually will suffice, according to Williams Packing, for due process purposes.

The two ACA cases were decided at the trial-court level by different judges. The judge in the case filed by Virginia ruled that the “mandate” part of the ACA is unconstitutional. The judge in the Liberty U. case ruled the entire ACA constitutional.

The Anti-Tax Injunction Act was never an issue in the Virginia case, because Virginia itself will not be subject to the penalty for failure to obtain health insurance. In fact, for that reason, the three-judge panel will dismiss that lawsuit, saying that Virginia has no legal “standing”—no right—to challenge the statute’s constitutionality because the state will have no concrete injury from the statute. That much was clear from the oral argument. The Constitution’s Article III, which creates the federal judicial branch, gives the federal courts the power to hear only certain identified types of “cases” or “controversies.” The Supreme Court has always interpreted the case or-controversy” language to mean that only parties that have sustained or are about to sustain a “particularized”—i.e., a concrete—injury, have “standing” to sue. You can’t sue if your injury is only hypothetical. You have to have an “injury in fact.”

But at least some of the individuals in the Liberty U. case, if not the U. itself, apparently do have standing to challenge the mandate’s penalty fee. And the Anti-Injunction Act became an issue in that case because the Justice Dept. had called the penalty fee a “tax.” Rather than relying just on the power that the Constitution gives Congress to regulate commerce, and its authority under the Constitution to enact laws “necessary and proper” to execute its commerce-regulating power, the Justice Dept. claimed that Congress also had the authority under its taxing power to enact the ACA, including the mandate provision. The Justice Dept. then invoked the Tax Anti-Injunction Act and claimed that the court lacked jurisdiction to hear the part of the case that challenges the constitutionality of the mandate and the penalty “tax.” But the trial-level judge rejected the characterization of the penalty fee as a tax, saying it’s more accurately characterized as a regulatory penalty. Holding that he had the authority to consider the constitutionality of the ACA, he ruled the law constitutional.

The Justice Dept. didn’t raise the Tax Anti-Injunction issue on appeal. But the judges now have, and what’s clear from the May 23 order is that, at least at this point, they plan to characterize the mandate penalty as a tax for purposes of that statute. That’s a curious view, since the purpose of the taxing power is to raise revenue and the purpose of the Anti-Injunction Act is to allow the revenue to be raised, unencumbered by court injunctions. The purpose of the ACA’s mandate is to require almost everyone to have health insurance, and the point of the penalty is to require everyone to comply with that mandate. Which is why the panel apparently has concluded, accurately, in my opinion, that the penalty is not a tax under Article I of the Constitution. And which is why, if that the Tax Injunction Act nonetheless applies to the penalty, the Supreme Court will reverse them. And, on this issue, it should. The penalty does raise revenue, but only incidentally, just as other government fines, including fines as criminal sentences, do. But fines aren’t taxes.

There’s also, at least in my opinion, a big question whether the Anti-Injunction Act applies even when what’s at issue is clearly a tax, if, as here, what the plaintiffs are asking for is just a declaration (called a declaratory judgment) that the statute is unconstitutional, rather than asking the court to enjoin collection of the tax. In Williams Packing and Bob Jones University, the plaintiffs were asking the court to enjoin the collection of the tax. In the ACA cases, they’re asking the court to declare the statute, or at least the mandate provision, to which the penalty fee is only an enforcement tool, unconstitutional. A purpose of the lawsuits is to restrain the assessment or collection of the fee, but they’re not asking the court to do that directly.

Meanwhile, in an ACA case scheduled for oral argument on June 1 in the Sixth Circuit appellate court, the court that hears federal appeals from Michigan, Ohio, Kentucky and Tennessee, the three-judge panel asked the parties on May 12, the day after the argument in the Virginia case, to briefly brief three questions, two of which concern whether the controversy is “ripe” for resolution—that is, whether, given that the ACA mandate doesn’t begin until 2014, the plaintiffs have alleged an injury in fact, and, if not, whether they’ve alleged “an ‘imminent injury’ creating a case or actual controversy under Article Ill and the Declaratory Judgment Act” this long before the effective date of the mandate provision. The panel also requested briefing on whether the IRS’s enforcement mechanisms impact whether there is a current or imminent injury because, the plaintiffs claim, they must plan long ahead for this extra expense.

The panel also asked a question about the substance of the case: whether these plaintiffs are claiming that the statute is unconstitutional on its face—i.e., that it is unconstitutional vis-à-vis everyone—or whether instead they’re just claiming that the statute is unconstitutional as it would be applied to them and others like them but not to everyone.

The parties filed their brief briefs on Wednesday. And from there, the plot thickens.

Part II to follow. (Rdan…appeared in wrong order but corrected)

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