The Constitutionality of the Affordable Care Act

I am not an expert on Constitution law, so my opinion is of limited value but as you might have guessed, I will give an opinion anyway.  Yesterday’s decision on the Affordable Care Act is of course now constitutional law but it is not the decision I would have preferred.  The Constitution was written to limit governmental powers and the decision expands it by permitting the government to fine individuals through taxation for not buying health care.  As Richard Epstein, a professor of law at New York University, writes in “A Confused Opinion”

Chief Justice Roberts has ignored this fundamental principle: If direct regulation is beyond the scope of the Commerce Clause (as he held), then taxation as an indirect route to the same regulation should be off limits as well (as he failed to hold). This is a baby that should not be split. His attempt to do so undermines his ruling, the court and the Constitution.

The Court has been swift to protect political rights but slow to protect economic rights.  The two are intertwined and both deserve protection. 

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Hoover and the Great Depression

A student recently asked me about Herbert Hoover’s role in the Great Depression. To answer that question, I quote Robert Higgs from Crisis and Leviathan to describe his actions and to correct a common myth.

WHAT DID HOOVER DO? The traditional answer, of course, is nothing. If the man in the street remembers anything about Herbert Hoover it is that his middle name was Laissez-Faire and he did nothing while the American economy went to rack and ruin. As usual the knowledge of the man in the street leaves something to be desired. The popular remembrance of Hoover’s quiescence in the face of the depression is a myth. The Great Engineer may have had his faults, but fiddling while the economy burned was not one of them. “Do nothing” was never his motto; his middle name was actually Clark…

President Hoover rejected completely the liquidationist school of thought. He believed that the federal government could and should take actions to cushion and reverse the economic decline. As time passed and the government’s policies failed to arrest the contraction, the Hoover administration intervened more actively. Because later the New Deal went so much further, Hoover’s antidepression policies are customarily pilloried as at best “far too little, much too late”. Yet no previous administration had done nearly so much to remedy an economic bust. (In the presidential campaign of 1932, candidate Roosevelt criticized Hoover for failing to balance the budget).

Hoover‘s first action after the stock market crashed was to make reassuring speeches, a practice he continued throughout his unhappy term in office. This struck him as seemly-after all, if the President himself were to play the role of Chicken Little, what would the public do? It also comported with his theory of recovery. He believed that recovery hinged on a revival of private investment spending, which required an adequately optimistic state of “business confidence”. By maintaining a personally sanguine outlook, at least in his public pronouncements, Hoover hoped to encourage investors to pour their money into new factories and equipment. Although, he has been ridiculed ever since for his reassuring displays, they could hardly have done much harm.

Hoover next resorted to a series of meetings in November 1929 with the leaders of selected businesses, labor unions, and farm organizations. Ostensibly the parleys produced only choruses to sing in harmony with the President’s melody of optimism. (Apparently accomplishing nothing of substance, they inspired J.K. Galbraith to invent the amusing and insightful concept of the “no-business meeting”.)

But it is possible-one cannot know for sure-that the meetings did have an important effect, ironically a harmful effect. From the employers attending his conferences the President extracted a promise not to cut wages any faster than the cost of living declined. He believed that real wage cuts, besides being unfair and productive of strife, would reduce consumer purchasing power and thereby exacerbate the recession. Whether because of fidelity to the Presidents or for other reasons, many employers did not reduce money wages much until well into 1931. Meanwhile deflation proceeded apace. Workers who continued to receive the same money wage were getting an increasingly higher real wage. Given the extreme decline of the demand for labor, which happened to be greater in the sectors most refraining from wage cuts, a higher real wage implied a magnified reduction in the quantity of labor that employers would find it worthwhile to hire-that is, the increased real wage caused a great deal of unemployment. Unfortunately, as Lester Chandler has observed, the President “seems to have paid little attention to wage rates as a determinant of costs of production.”

Hoover backed various measures to stimulate federal spending and extensions of the government’s credit, including increased appropriations for public works and the Federal Land Banks, creation of the Agricultural Credit Banks and the Home Loan Banks, liberalization of the Federal Reserve Banks’ lending authority by the Glass-Steagall Act of 1932, and passage of Emergency Relief and Construction Act of 1932, which allowed the federal government to give (officially, to lend) the state governments funds to use for relief of the unemployed. Hoover also used his discretionary authority to reduce immigration-he supposed that an immigrant would either become a public charge or displace someone else from a job. To quiet the unsettling international disputes over reparations and war debts, he secured a moratorium on intergovernmental payments. None of this suggests a dogmatic adherence to laissez-faire…

The administration’s most important antidepression action, the creation of the Reconstruction Finance Corporation, clearly benefited from the emergency rationale and the wartime analogy. The RFC Act, which became law on January 22, 1932, was officially entitled, “An Act to provide emergency financing facilities for financial institutions, to aid in financing agriculture, commerce, and industry, and for other purposes.

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Bain Capital and Make-work Bias

Mitt Romney claims to have created 100,000 jobs as the head of Bain Capital.  In a new political add, the Obama campaign claims that he destroyed jobs.  The both feed into a common error in voters’ understanding of economics. 

Steven Rattner, who oversaw the auto rescue/bailout for President Obama, recognizes that both campaigns stray from economic reality in focusing on Bain’s role in job creation.

I think the ad is unfair. Mitt Romney made a mistake ever talking about the fact that he created 100,000 jobs. Bain Capital’s responsibility was not to create 100,000 jobs or some other number. It was to create profits for his investors, most of whom were pension funds, endowments and foundations. It did it superbly, acting within the rules and acting very responsibly and was a leading firm. So I do think to pick out an example of somebody who lost their job unfortunately, this is part of capitalism, this is part of life. And I don’t think there’s anything Bain Capital did that they need to be embarrassed about.

Bryan Caplan exquisitely explains this misunderstanding in The Myth of the Rational Voter.

The public often literally believes that labor is better to use than conserve.  Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress, but as a danger.  i call this make-work bias, a tendency to underestimate the economic benefits of conserving labor.  Where noneconomists see the destruction of jogs, economists see the essence of economic growth—the production of more with less. 

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Signaling and Tax Reform

Candidates for elected federal office must run a dangerous political gauntlet that can both wound the candidates’ election prospect as well as their ability to govern if elected.  One tradeoff that they must make is between committing their vote on issues and maintaining neutrality to allow negotiating.  Voters know where a candidate stands when they signal their positions but committed votes on too many issues transforms a congressman or senator into an ineffectual ideologue who is unable to cut deals.  Voters may not know where the pragmatist stands but she can engage in the give and take required to pass legislation in divided government.  A great candidate may be able to convey their ideology without committing their vote.  Most elected candidates are a little above average.

Most republican candidates have committed their votes on tax reform by signing the following pledge

I, _______________, pledge to the taxpayers of the _____ district of the state of__________, and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Democrats have left themselves a little more negotiating room on taxes but have less specifically committed to maintaining current levels of entitlements to be funded by increasing taxes on “millionaires and billionaires.”

Voters seem to prefer ideologues but the intransigence it causes does not bode well for the nation’s fiscal well-being. We face a long period of mounting debt caused mostly by deficits in entitlement programs.  Political stalemate preserves the status quo and will eventually bankrupt entitlement programs causing a fiscal crisis similar to what Greece, Italy, and Spain face today. 

Neither Republicans nor Democrats control a 60 seat majority in the Senate after the election.  The other party will be able to block any legislation from either side that could solve the problem. 

I prefer small government to large, but I would rather have a big government like Germany’s than ineffectual government like Greece’s.  My guess is that most Republicans have the same preference.  Similarly, Democrats who insist that the rich fund a more government expenditures should recall that all countries, even the poorest have wealthy elites.  Only a handful lead by the United States have a health middle class.  Our political and economic institutions have not primarily benefited the 1% but the 99%.  As I prefer Germany to Greece, I believe that most Democrats would likewise prefer the smaller safety net of the Eisenhower administration to that of Greece.  Certainly there is room for compromise.   

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Susan Sarandon

In Capitalism and Freedom, Milton Freidman penned the then controversial but now status quo thought on the relationship between economic freedom and political power.

Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.

Competitive capitalism may have created a third power, celebrity.  People with high profiles that evolves into public fascination gain celebrity status.  Michael Jordan has it, Karl Malone who had more points, more rebounds and almost as many assists did not.  Barak Obama has it and Mitt Romney does not.

Susan Sarandon has managed to turn her celebrity into political power and has brought attention to many causes she has supported over the years, but that celebrity has hit a political wall.  A friend of democrats and the left, she claims that she has been subject to government surveillance and that she has been a denied clearance to visit the White House.  I will assume that the her claims are true. 

Celebrity does not usually translate to expertise and my libertarian leanings often put me on different sides of causes that she has supported but I am mystified as to the threat she posses to the government.  As Voltaire taught, “I may not agree with what you say, but I will defend to the death your right to say it.”

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Jay on Cohabitation

Meg Jay’s article on cohabitation (“The Downside of Cohabiting Before Marriage”) is a great illustration of the use of the scientific process.  I believe that reading and understanding it is a good investment of time and effort, particularly for a young person considering cohabitation.  Jay begins with an observation.  Beginning in 1960, there has been a tremendous increase in cohabitation.  Currently, 7.5 million people live together without marriage and half of all marriages will be preceded by cohabitation. 

An observation is followed by questioning and measurement.  A survey of young adults found that two thirds believed that cohabitating before marriage was a good way to reduce the probability of divorce.  This belief is contradicted by experience as measured by research.  Cohabitating prior to a commitment to marry increases the probability of divorce.

A hypothesis is formed to explain the higher divorce rate of cohabitors: the population of cohabitors was different than the population as a whole; they were less bound by social norms and therefore both more likely to cohabitate and divorce. As cohabitation became the norm and the result that divorce rates among cohabitors remained higher, other hypotheses were needed.  One was that cohabitation itself introduced risk to a marriage following cohabitation. 

Jay describes the new hypothesis.

Moving from dating to sleeping over to sleeping over a lot to cohabitation can be a gradual slope, one not marked by rings or ceremonies or sometimes even a conversation {This is called sliding into cohabitation]. Couples bypass talking about why they want to live together and what it will mean.

WHEN researchers ask cohabitors these questions, partners often have different, unspoken — even unconscious — agendas. Women are more likely to view cohabitation as a step toward marriage, while men are more likely to see it as a way to test a relationship or postpone commitment, and this gender asymmetry is associated with negative interactions and lower levels of commitment even after the relationship progresses to marriage. One thing men and women do agree on, however, is that their standards for a live-in partner are lower than they are for a spouse.

Sliding into cohabitation wouldn’t be a problem if sliding out were as easy. But it isn’t. Too often, young adults enter into what they imagine will be low-cost, low-risk living situations only to find themselves unable to get out months, even years, later. It’s like signing up for a credit card with 0 percent interest. At the end of 12 months when the interest goes up to 23 percent you feel stuck because your balance is too high to pay off. In fact, cohabitation can be exactly like that. In behavioral economics, it’s called consumer lock-in.

Lock-in is the decreased likelihood to search for, or change to, another option once an investment in something has been made. The greater the setup costs, the less likely we are to move to another, even better, situation, especially when faced with switching costs, or the time, money and effort it requires to make a change.

I might add that I am more likely to like any research that picks up an idea used by economists. 

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Florida and Welfare Reform

Florida passed a law requiring applicants for welfare to take a drug test.  Applicants pay for the test but those who pass are reimbursed by the state.  Applicants found using drugs would be ineligible for welfare for a year although the children of the drug users would still be eligible through a third party.  Since the state began testing in July, 96% of the applicants were drug free.  Another 2% were disqualified for using drugs and the remaining 2% were not completing the application process for unknown reasons. 

Based on these numbers, Catherine Whittenburg (“Welfare drug-testing yields 2% positive results”) calculates the cost of testing versus the estimated savings in welfare payments to taxpayers. 

Cost of the tests averages about $30. Assuming that 1,000 to 1,500 applicants take the test every month, the state will owe about $28,800-$43,200 monthly in reimbursements to those who test drug-free.

That compares with roughly $32,200-$48,200 the state may save on one month's worth of rejected applicants.

The savings assume that 20 to 30 people -- 2 percent of 1,000 to 1,500 tested -- fail the drug test every month. On average, a welfare recipient costs the state $134 in monthly benefits, which the rejected applicants won't get, saving the state $2,680-$3,350 per month.

But since one failed test disqualifies an applicant for a full year's worth of benefits, the state could save $32,200-$48,200 annually on the applicants rejected in a single month.

Net savings to the state -- $3,400 to $8,200 annually on one month's worth of rejected applicants. Over 12 months, the money saved on all rejected applicants would add up to $40,800-$98,400 for the cash assistance program that state analysts have predicted will cost $178 million this fiscal year.

I like Whettenburg’s “back of the envelope” calculations and I have some thoughts but reach no conclusions.  Utilitarians and libertarians might find the savings insufficient to justify the cost in terms of return on dollars invested or government intrusion in private lives but I doubt that typical taxpayers would come to the same conclusion based on classroom experiences.  While covering the composition of federal, state, and local budgets in class, students frequently suggest that tax payers could save billions of dollars by eliminating welfare fraud. One time this happened, I decided that it was a good time to bring up the principle of tradeoffs. Fraud can be eliminated but at a cost. I took an informal survey of students and found that they view welfare fraud as being so morally reprehensible that they would increase payments for enforcement even if the cost of enforcement exceeded the reduction in welfare due to fraud. I repeated the survey in several other classes and found the same result. 

The reported statistics may miss important costs and benefits.  Potential applicants who use drugs will self-select out.  Why put up the money for the test if you are not going to pass?  The number of applicants should decline.  These non-applicants still need money.  Some will engage in or increase their participation in prostitution, illegal drug sales, and other criminal activity to support their drug use.  While a taxpayer may dismiss the cost of drug use on the user, it is more difficult to ignore the impact on the users’ children and the victims of their crime.  Other non-applicants might give up drugs to qualify for government assistance. 
Many economists have found that taxpayers in ethnically diverse communities are less willing to pay welfare than taxpayers in homogenous communities.  Raghuram Rajan summarizes this view in “Fault Lines” (page 95).

We should also not minimize the importance of population heterogeneity.  “There but for the grace of God go I” offers a powerful rationale for social insurance.  People are more willing to be taxed to benefit others if they believe that the benefits go largely to people like themselves, and not disproportionately to groups they do not identify with.  This may also explain why Americans give generously to charities: they have more control over who the beneficiaries are.  Politicians who want to derail benefits legislation have often been quick to raise the specter of hard-earned taxpayer money going to the undeserving, irresponsible, and lazy, and such demagoguery is especially potent when the bogeymen look and behave differently from their constituents.

By demonstrating that welfare recipients are not drug users, taxpayers in heterogeneous communities may ironically be more willing to fund welfare programs.  Requiring welfare applicants to pass a drug test will create many interesting questions for economists to answer in their research. 
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