Unlimited Democracy

Hayek:

The true value of democracy is to serve as a sanitary precaution protecting us against an abuse of power.  It enables us to get rid of a government and try to replace it by a better one.  Or, to put it differently, it is the only convention we have yet discovered to make peaceful change possible. . . . In its present unlimited form democracy has today largely lost the capacity of serving as a protection against arbitrary power.  It has ceased to be a safeguard of personal liberty, a restraint on the abuse of governmental power which it was hoped it would prove to be when it was naively believed that, when all power was made subject to democratic control, all the other restraints on government power could be dispensed with.  It has, on the contrary, become the main cause of a progressive and accelerating increase of the power and weight of the administrative machine. . . . As everything tends to become a political issue for which the interference of the coercive powers of government can be invoked, an ever larger part of human activity is diverted from productive into political efforts . . . . In other words, we have under the false name of democracy created a machinery in which not the majority decides, but each member of the majority has to consent to make bribes to get majority support for his own special demands. [The Political Order of a Free People, 137-138]

Political Incentives

Hayek:

People who hope to be re-elected on the basis of what their party during the preceding three or four years has conferred in conspicuous special benefits on their voters are not in the sort of position which will make them pass the kind of general laws which would really be most in the public interest. [The Political Order of a Free People, p. 28]

Roberts & No Reason

Justice Roberts in the health care opinion:

The Framers gave Congress the power to regulate commerce, not to compel it, and for over 200 years both our decisions and Congress's actions have reflected this understanding.  There is no reason to depart from that understanding now. [p. 24]

I agree with the first sentence.  Congress does not have the constitutional power to compel commerce, either interstate or intrastate.  This should be thought to be the case regardless of Congressional actions in support or to the contrary.

I find the conceptual view implied by the second sentence to be of concern.  The second sentence seems to me to imply that if Justice Roberts did believe there was a reason to depart from "that understanding," then he might have been willing to make that departure by way of the Court's opinion at hand.  If this is not implied, then it seems to me Justice Roberts would have chosen to leave this sentence out of his opinion.  I wish he had.

So, why is this of concern?  I think the conceptual view implied by this sentence is that, when useful, the Court should change the way the Constitution is understood by way of Court opinions.  Of course, the proper, constitutional way to change the meaning of the Constitution is to amend the Constitution.  Article V specifies the proper way to change the meaning of the Constitution, and the proper way does not include a grant of power to the Court to do so.

The Court should make the constitutional view clear, nor murky as I think this sentence does.  If it seems appropriate to point out there is no reason to depart from the historical understanding of the Constitution now, then I suggest that Justice Roberts should also add: "and if there was reason to change this understanding, then the Court cannot and will not attempt to do that.  If there is such reason, then the constitutional way of changing the meaning of the Constitution is to carry out the requirements found in Article V."

Sadly, for me, it seems that long ago most of the Justices have come to see their constitutional role in the conceptual way implied by this quote.

Hayek on The Value of Science

Hayek in Rules and Order:

There is another related misconception about the aim and power of science which it will be useful also to mention at this point.  This is the belief that science is concerned exclusively with what exists and not with what could be.  But the value of science consists largely in telling us what would happen if some facts were different from what they are.  All the statements of theoretical science have the form of 'if  . . . , then . . .' statements, and they are interesting mainly in so far as the conditions we insert in the 'if' clause are different from those that actually exist. . . . the chief value of all science is to tell us what the consequences would be if conditions were in some respects made different from what they are. . . . Fruitful social science must be very largely a study of what is not: a construction of hypothetical models of possible worlds which might exist if some of the alterable conditions were made different.  We need a scientific theory chiefly to tell us what would be the effects if some conditions were as they have never been before.  All scientific knowledge is knowledge not of particular facts but of hypotheses which have so far withstood systematic attempts at refuting them. (p. 17)

The Court & The Commerce Clause

Reading a Court opinion, as I am doing this morning, I am some times bored, some times entertained, some times nauseated, and some times I'm just baffled.  Consider the following tidbits from Chief Justice Roberts in the health care opinion announced yesterday:

1. The Federal Government "is acknowledged by all to be one of enumerated powers."

2. The enumeration of powers is also a limitation of powers, because "[t]he enumeration presupposes something not enumerated.

3. If no enumerated power authorizes Congress to pass a certain law, that law may not be enacted, even if it would not violate any of the express prohibitions in the Bill of Rights or elsewhere in the Constitution. 

4. The Constitution authorizes Congress to "regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."

5. We have recognized, for example, that "[t]he power of Congress over interstate commerce is not confined to the regulation of commerce among the states," but extends to activities that "have a substantial effect on interstate commerce." 

I'm baffled.

Of course these quotes come from what Justice Roberts has written over several pages.  Quotes 1-3 summarize the meaning of our Constitution of enumerated powers.  Quote 4 is the enumerated power in our Constitution which is known as the commerce clause.  Quote 5 is a good statement of what the Court has come, over the years, to actually think about the Constitution's commerce clause.

I don't understand how quotes 1-4 can fit with quote number 5.  The last quote says that Congress has been granted more power over commerce, specifically it has been granted power to regulate intrastate commerce, than the power we find granted to Congress when we read the words actually written in the Constitution.

I do like the Justice's choice of words "not confined."  I think this is telling.  I think it is inconsistent with quote 2 which says our Congress is a legislature of limited powers.  It seems to me reasonable to suggest that "not confined" is pretty much the opposite in meaning to "a limitation of powers."

It also seems to me reasonable to conclude that over the years the Court has come to change the meaning of the commerce clause.  But, in doing that, the Court has done more.  It seems the Court has turned a constitution for a government of limited powers into a constitution for a government that is "not confined" to expressly enumerated powers.

And, if so, it seems reasonable to conclude that the Court, over the years, has essentially amended the Constitution.  Of course, if you read the Constitution, you will not find that the Court has the constitutional power to amend the Constitution.

Perhaps it is time to put away the Court's commerce clause jurisprudence and end the contortions the Court must go through in presenting it's opinions to convince us that a written constitution for a limited government can also be a constitution for a government that is unconfined?

ACA, Court, & Constitution

I've hardly had time to read any of today's Court opinion, but my sister called earlier and asked if I was surprised.  Well, no surprise on my part.

One reason is that for quite a number of years now many justices seem to be operating on the premise that their job is to encourage every one to believe that it is constitutional for Congress to infringe upon economic liberty.  Of course, there are several ways in which the ACA infringes individual economic liberty.  Perhaps for many justices the details of the infringements don't much matter since the Court's jurisprudence over the past several decades has mostly rested upon the proposition that economic liberty is not one of the liberties protected by the Constitution.  In principle, then, today's opinion is no surprise.  Still, prior to the opinion I had hoped there would be enough justices on this Court who would be hard pressed to concoct a reason for why a constitutionally limited government could force people to participate in interstate commerce so that Congress could then regulate what it forced.  This take me to the second reason I was not surprised.

The second reason I was not surprised is that decades ago members of the Supreme Court came to the opinion that the fact that Congress had the power to tax meant Congress could use the power to tax to do what it otherwise could not constitutionally do.  I don't remember exactly, I think this was an opinion that said Congress could create Social Security even though there was no enumerated constitutional power to do so, but I'm not going to look this up right now.  In any case, without having read the opinion yet, this seems pretty much what this Court opined.  That is, the statute's mandated commerce is not constitutional, but since Congress has the power to tax, Congress can impose a tax on a person who does not purchase health insurance.  Therefore, Congress has the power to impose the mandate after all.  I know, I'm making the whole darn mess sound so circular.  But, that's what it sounds to me like what the Court has decided today.  Congress can do what it doesn't have the power to do.  I suppose this will surprise some, but at least one previous Court has reasoned in just this way.  So, no surprise on my part.

All of this reminds me of perhaps a third reason I should not be surprised, and this is because of one of my economist heroes is Friedrich A. Hayek.  Specifically, Hayek opened Rules and Order with:

When Montesquieu and the framers of the American Constitution articulated the conception of a limiting constitution that had grown up in England, they set a pattern which liberal constitutionalism has followed ever since.  Their chief aim was to provide institutional safeguards of individual freedom; and the device in which they placed their faith was the separation of powers.  In the form in which we know this division of power between legislature, the judiciary, and the administration, it has not achieved what it was meant to achieve.  Governments everywhere have obtained by constitutional means powers which those men had meant to deny them.  The first attempt to secure individual liberty by constitutions has evidently failed.

Constitutionalism means limited government.  But the interpretation given to the traditional formulae of constitutionalism has made it possible to reconcile these with a conception of democracy according to which this is a form of government where the will of the majority on any particular matter is unlimited. . . .

In other words, by 1973 when this was published Hayek was specifically pointing out that our constitutionalism had failed to limit government and protect individual liberty.  So, no surprise when, today, the Court again fails to see in our Constitution the protection of individual economic liberty.  Perhaps this failure of constitutionalism is because so many on the Court over the years have failed to carry out their part in the separation of powers?  That is, for decades now many on the Court seem to have seen their job as saying what Congress does is constitutional because Congress did it.

Messing With Spontaneous Order

What happens when you mess with spontaneous order?  80% of NHS trusts experiencing drug shortages

Books That Shaped America

The Library of Congress has a list of Books That Shaped America.  I think there are 88 books on the list, but only 15 of these have shaped me, and 2 were because I saw the movie.  Do you suppose this helps explain why I seem to find so few others who share my love of liberty?  I mean, why are John Locke and Adam Smith not on this list?  At least Atlas Shrugged is on the list, but I liked The Fountainhead better.

Pervasive Externalities

Elizabeth Anderson posts a short essay in which she writes:

Externalities, asymmetrical information, and other collective action problems are even more pervasive in economic life.  Countless ways of conducting business reap gains for some while imposing unjust costs on others. Create a cartel. Stuff rat feces in sausages. Engage in insider trading. Dump toxic waste in rivers. Market useless medicines. Withdraw renewable resources at unsustainable rates. Stuff insurance contracts with obscure loopholes, collect premiums from customers, and then deny their claims. Fill corporate boards with cronies who reward top managers with huge bonuses even when they fail to meet contracted performance requirements. Rig the terms of a complex loan to trap financially unsophisticated borrowers into spiraling debt and fees. Get rating agencies to certify worthless assets as AAA. Use leverage to reap profits from self-generated asset bubbles, sending the global economy into financial collapse when they burst. Without extensive regulation, markets happily accommodate such negative-value-added business plans. Tomasi sometimes acknowledges this fact. But he puts a heavy thumb on the scales against regulation by describing economic activity in general in terms of “self-authorship” and “economic liberty.” Such descriptions cut no normative ice with respect to destructive or predatory business plans. Nor should judges, who lack the expertise to assess economic regulations designed to stop such abuses, use such exalted abstractions to strike them down."

The point of the essay is to offer a critical review of Tomasi's Free Market Fairness.  I've not read Tomasi's book yet, so my comment here is about the conceptual view in this quotation.


It seems to me the first two sentences in the quoted paragraph are making use of the normative framework of economic efficiency.  Specifically, reference is made to what sounds like a negative externality because it is asserted that there are ways of conducting business that are thought to impose unjust costs on others.  While this sounds like a negative externality, and thus a market failure, it seems well off the efficiency mark to me.

I will admit that many economists have used the phrase "imposed costs" when discussing negative externalities, and this has been done for quite a long time now.  I think there have also been not just a few economists who have told negative externality stories by talking about "the victims" of imposed external costs.  However, such ideas are not really expressing the conceptual conclusions that fall out of negative externality models.

The problem of negative externality market failure is not that businesses, or consumers, "impose" costs on others.  The efficiency problem is not that there are victims of the actions of businesses, or the actions of consumers.  The problem, pure and simple, is that the allocation of resources that characterizes the market equilibrium (for a perfectly competitive market) is inefficient when a negative externality is associated with the market.

From the normative point of view of efficiency there are no victims and no one is at fault.  When there is a negative externality the market simply fails to achieve an efficient allocation of resources when a market equilibrium is reached.  If this doesn't seem to be correct to you, then consider the way in which the negative externality market failure can be corrected.  The correction is of course a Pigovian tax, or an excise tax, which is equal to the marginal external cost at the efficient quantity of output.  The idea is quite simply that a market fails to allocate resources efficiently when there is a cost which is "externalized," or that is to say, a cost which is not internalized in the choices taken by buyers and sellers.  To fix the efficiency problem the troublesome costs have to be internalized through the use of a Pigovian tax.  No one needs to be punished, no personal fault needs to be assessed, and no one needs to be compensated on efficiency grounds.  The correction involves a bit of "tweaking" to "fix" the market by internalizing the marginal external costs.

Note also that since on efficiency grounds there are no victims and there are no persons to fault for efficiency transgressions, there seems to me no meaningful concept of "unjust" external costs.  There may well be "unjust" costs associated with the economic activities of people that lead to air pollution, but such costs have to be called "unjust" on normative grounds other than economic efficiency.

Moving on the what comes next in the quoted paragraph, consider whether any of the actions in the list of suspect business practices and plans are associated with negative externalities.

The creation of a cartel is not a negative externality.  It would result in a monopoly market failure.  Efforts to create a cartel are associated with "collective action problems," but not from the social point of view, only from the point of view of the "collective" which in this case is the cartel.  As Mancur Olson explained in The Logic of Collective Action we should expect very few cartels to exist without the force of government helping to hold the cartel together.  Of course this also means that if we think we see a cartel within the United States it is probably the result of government policy.

Stuffing rat feces in sausages is not a negative externality because there is no third party, only a buyer and a seller.  It is certainly a bad business practice, but it does not result in an inefficient allocation of resources.  I can suggest at this point a pretty handy way to decide if there is a negative externality involved.  Assume there is a negative externality and consider the Pigovian tax that would be needed to correct the inefficiency.  In the case of rat feces stuffed in sausages, we would ask government to impose a Pigovian tax so we achieved the efficient amount of rat feces in sausages (don't forget now that the efficient quantity of rat feces is zero only in very special cases).  If the policy response seems silly, like it does in this case, then there probably is no negative externality!

Dumping either toxic or nontoxic waste in a river is probably the classic illustration of a negative externality.  So, here is the case that perfectly fits my explanation above that the efficiency problem is not associated with victims or with the unjust imposition of costs.  The problem here is that without a means of internalizing the marginal external cost the equilibrium allocation will have an inefficiently large amount of toxic or nontoxic waste in the river.  Perhaps government compulsion can get the efficient amount of waste in this case, perhaps not.

I shouldn't think that insider trading was a negative externality efficiency problem.  Just that word "insider" suggests otherwise, don't you think?  Don't misunderstand, I can be convinced that insider trading is something of a policy concern, but not on the grounds of negative externality, or even on the grounds of efficiency concerns associated with asymmetric information.  Insider trading seems to me to be associated with the specific rules and regulations governments have created over many years because of the earlier government action to allow the formation of corporations with limited liability.  And, the policy concerns may well be efficiency concerns, but I'm inclined to say these efficiency concerns are a classic illustration of government (efficiency) failure.

Well, I could go on with the rest of the list, but I'm getting a bit tired of this exercise, and I suspect you are as well.  I just thought I could write a few things down that would help my future students understand what the concepts of efficiency, market failure, and negative externalities really mean.  Plus, if former students take the time to read this, I'm hoping they will be reminded of why I've urged them to: JUST SAY NO TO EXTERNALITY ABUSE!

McCloskey on Markets & Government

Deirdre McCloskey has posted a wonderful short essay over at Bleeding Heart Libertarians.  You should read the entire piece because there is far too much good stuff in the essay for me to make not of here.  However, I will make note of her summary of the master narrative of High Liberalism:

The story is, in a few brief mottos to stand for a rich intellectual tradition since the 1880s: Modern life is complicated, and so we need government to regulate. Government can do so well, and will not be regularly corrupted. Since markets fail very frequently the government should step in to fix them. Without a big government we cannot do certain noble things (Hoover Dam, the Interstates, NASA). Antitrust works. Businesses will exploit workers if government regulation and union contracts do not intervene. Unions got us the 40-hour week. Poor people are better off chiefly because of big government and unions. The USA was never laissez faire. Internal improvements were a good idea, and governmental from the start. Profit is not a good guide. Consumers are usually misled. Advertising is bad.

McCloskey finds this narrative to be factually mistaken.  I agree.  So, now, click through to the essay and read her defense of the conclusion that this narrative is mistaken.

You should also read the interchange of comments to follow the essay.  She writes some remarkable responses there are well.  Here is one response I especially like:

Dear Jason, Your sober and sophisticated words are correct. As I said, some state action is desirable. I lived in England in 1959 as the laws against soft-coal burning were taking effect, and there is no entity but a state that could have achieved such a good compulsion. But good compulsions are much rarer factually than people think who talk of "services" or congresspeople who talk of "programs," and that's most people these days. It is why I lean against. It is wrong to put the issue at the "cosmic" level. That after all was my point: let us get down to the facts, if facts is what we are assuming. But this much is true in the cosmos: states have monopolies of violence, and use them; markets and gifts do not. Of the three realms of state, market, and grace, I want every time, acknowledging in the style of Ronald Coase that we can't do this analysis on a blackboard, to see the actual evidence that violence is necessary before I sign on to using it to achieve "actual consequences." I have a bias towards markets and what Boulding called the grants economy ("grace" I am calling it here, theologically speaking: caring for children, loving your friends, feeding the poor), and I have a bias against monopolies of violence, so easily tempted to be used to enrich ones friends and tyrannize over the poor and weak. I repeat what I said to Brian: I do not understand the reflex to defend the massive modern state. As Hayek said, the more complicated the society the worse is the argument for top-down Reason as the way to organize it. Sincerely, Deirdre McCloskey

I tell my students all the time that when thinking about government and public policy it is important to recognize that social interactions involve either voluntary behavior and cooperation or they involve force and compulsion.  Government operates in the realm of force and violence, while the market process is what emerges from the realm of voluntary human interactions.  I suggest that the way McCloskey has described the use of government force in this comment is the best way to think about government and policy issues.  I too have a bias against the use of violence and a bias toward the use of markets and grace.  I suggest that voluntary social interactions should be the normative default position, and to move away from the default position should require some good evidence that a proposed act of government violence is necessary.

Presidents & Budgets

Recently President Obama drew attention to Presidents and their budgets with the following comments:

"I'm running to pay down our debt in a way that's balanced and responsible.  After inheriting a $1 trillion deficit, I signed $2 trillion of spending cuts into law," he told a crowd of donors at the Hyatt Regency. . . . "I just point out it always goes up least under Democratic presidents.  This other side, I don't know how they've been bamboozling folks into thinking that they are the responsible, fiscally-disciplined party. They run up these wild debts and then when we take over, we've got to clean it up."

The President was apparently relying on an analysis by Rex Nutting to support his comments.

I decided to take a look at the US budget for myself.  I suggest we can get a reasonably good idea about the President's assertions without all the detailed assumptions and calculations of Mr. Nutting.  I think the charts presented above and below are most useful in this regard.

Let me start by noting that the President only proposes a budget.  Congress is not required to pass the President's budget.  Congress could create and pass it's own budget.  However, Congress has not passed a budget at all since, I believe, fiscal year 2008.

President Obama's budget proposal for the 2013 fiscal year was made public on February 13, 2012.  The 2013 fiscal year begins in October 2012, and Congress is statutorily required to pass a budget by April 15 prior to the start of the new fiscal year.  Of course, budget or not, Congress and the President still spend money.

Since the President proposes and Congress chooses, subject of course to the President's veto pen, I think it is interesting to compare the President's annual proposal for spending with the amount actually spent.  I am interested in making comparisons between proposed and actual spending across as many Presidents as I can by using data available online.  Unfortunately, the information I was able to find online only went back as far as President Clinton's last six budgets.  What I found is presented in the charts above and below. Click on either chart to get a larger version to look at.  The information in these charts comes from Table 1-3 in the Historical Tables for each budget year.  Note that the number for actual FY 2012 spending is still an estimate in the Historical Tables.

Notice that the President's proposed outlays are never the same as the actual outlays, and that for most years proposed and actual do not seem very far apart.  It also seems that actual outlays were roughly flat for the first four years of the Clinton presidency presented in this chart, and that for the last two years of Clinton's presidency, and certainly by the Bush presidency, Congress and the President were choosing to spend at a quicker pace over time.

Notice also that for FY 2009 the actual outlays are significantly greater than the spending proposed in February 2008 by President Bush.  In addition, note that President Obama's first two budget spending proposals were significantly greater than the actual spending in FY 2010 and FY 2011.  Perhaps President Obama has signed $2 trillion of budget cuts into law, but given the size of his proposed budgets for FY 2010 and FY 2011 it seems to me likely that these budget cuts were chosen by Congress and not by the President.

FY 2009 seems unique among the fiscal year comparisons in the chart.  For FY 2009 there was a significant increase in spending beyond the amount requested by President Bush.  I think it is important to recognize that President Bush made his request for FY 2009 in February of 2008.  President Obama was elected in November of 2008, one month after FY 2009 began.  President Obama took office in January 2009, three months after the beginning of the fiscal year.  Although President Obama did not present his first budget, which was for FY 2010, until February 26, 2009 the President asked Congress to spend quite a bit of money for FY 2009.  For example, President Obama's first "stimulus package" was signed by him in February 2009, and this would have been part of the actual spending number for FY 2009, and not part of President Bush's budget request.  Perhaps President Obama did "inherit," so to speak, a $1 trillion deficit for FY 2009, but it seems fair to say that a significant part of this deficit resulted from proposals made to Congress by President Obama himself.

Consider the chart presented below which shows each President's proposed budget deficit versus the actual budget deficit.  The first thing I notice is that there are four years of actual deficits that are above the zero line which means there are four years of actual budget surplus shown in the chart.  Each of these budget surpluses happened during the Clinton Presidency.

Of course the most obvious aspect of the proposed versus actual deficits chart is that from FY 2009 on the size of the government's deficit has been very large compared with any of the earlier years.  President Obama asserted: "They run up these wild debts and then when we take over, we've got to clean it up."  There are some "wild" deficits shown in the chart, but they are found within the Obama years, and it seems to me that as late as February of this year, there has been no budget proposal that fits with the idea of cleaning any of it up.

Mill On Liberty

Here are a couple of quotes from J.S. Mill on the meaning of liberty:

The object of this Essay is to assert one very simple principles, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion.  The principle is, that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection.  That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.

The only freedom which deserves the name, is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it. 

Appreciating Hayek

MARIO RIZZO:

I think the most important insight of Hayek was to understand that knowledge in any large society is decentralized. The most important function of social institutions is to mobilize this knowledge in such a way that it can been used by individuals in making their decisions. Thus: the impossibility of rational calculation under socialism (a conclusion Mises came to in a somewhat different way), the importance of the rule of law, the importance of cultural-social rules, and so forth. Compare that with, in my view, the misguided trivality of Paul Samuelson’s behaviorist theory of revealed preference or Richard Kahn’s mechanical multiplier or Maynard Keynes’s contributions to economic policy guided by his elite hand. I could go on. In just about every class I teach I tell students about the meaning and the significance of Hayek’s idea of the decentralization of knowledge in society. This idea alone has the power to change minds dramatically. One student told me it changed her life. I do not care if students remember the Weak or Strong Axiom of Revealed Preference or the necessary conditions for perfect competition if they remember Hayek’s ”The Use of Knowlege in Society.”

North or South, What's The Difference?

I took this image from Google Earth.  I think it is interesting because of the contrast between the "north" half of the picture and the "south" half of the picture.  The upper portion of the picture seems to me to depict a standard of living that is much greater than the standard of living in the lower portion of the picture.

Can you guess where this is?  Can you guess what explains the difference between the upper and the lower portions of the picture?

I hope you won't cheat and check out the following links before trying to answer these questions.  Daron Acemoglu and James Robinson can help you understand the difference.  So can Mancur Olson.

Or (shameless plug), if you live close to Colorado Springs you can take my course next Fall Semester to learn the answer.

Prices

Ludwig von Mises:

He who believes the formation of prices to be arbitrary easily arrives at the demand that they should be fixed by external regulation. [A Critique of Interventionism, p. 97]

Individual Mandate: What Would James Madison Say?

From a letter Madison wrote in 1829:

Yet it is very certain that it grew out of the abuse of the power by the importing States in taxing the non-importing, and was intended as a negative and preventive provision against injustice among the States themselves, rather than as a power to be used for the positive purposes of the General Government, in which alone, however, the remedial power could be lodged.

In other words, the power to regulate commerce between the states, in Madison's view, was to give Congress the power to knock down state government barriers to interstate commerce.

Hmm.  That means Congress has the power to stop state government barriers to citizens within their states purchasing health insurance from sellers in other states.  That would certainly seem to help reduce the cost of health insurance.  Alas, Congress has not been interested in such action.

I do believe Madison would say the health insurance mandate is unconstitutional.

I believe I'm a Madisonian.  I wonder if there are any people in government today who would be Madisonian?

Blame Capitalism

Ludwig von Mises:

It is popular today to blame capitalism for anything that displeases.  Indeed, who is still aware of what he would have to forego if there were no "capitalism"?  When great dreams do not come true, capitalism is charged immediately.  This may be a proper procedure for party politics, but in scientific discussion it should be avoided. [A Critique of Interventionism, p. 53]

Unfortunately, it seems these days the most of what people think they know comes to them through the lens of party politics.

Individual Mandate 101

The Washington Post has a piece that explains the individual mandate.  Unfortunately, I think the explanation must be incorrect.  Here is the reason given for the mandate: 

Where the policy came from: The individual insurance mandate was the brainchild of conservative economists, as a way to address “free-riding” in healthcare without going all the way to a single-payer system.

The conceptual problem here is the assertion that the mandate is about fixing the problems associated with free-riding behavior.

The reason I think this must be incorrect is because free-rider behavior is one of the reasons for concluding that a public good is a source of market failure.  A public good has two characteristics: (1) nonrivalry in consumption and (2) nonexcludability.  Health care is both rival (we each consume our own units of health care) and excludable (a person can be physically excluded).  Health care goods and services are private goods, not public goods.  Private goods do not have the free-rider problem.

The problem of adverse selection with respect to insurance is really what the mandate is supposed to be about.  The problem of adverse selection is seen in recognizing that individuals at greatest risk will be more likely to seek to purchase insurance than will individuals at least risk.  A business trying to earn a profit by supplying the ability of others to pool risk may find that it is difficult to do this without having a risk pool with both high risk and low risk individuals.  The consequence may be that insurance businesses offer insurance at premiums that many of the people facing higher risks find too expensive, and perhaps the market will fail to supply efficient risk pooling.  This also suggests a sort of vicious circle.  When the insurance businesses discover the need to increase premiums this will also decrease the incentives for low risk individuals to think insurance is worth the price.  If so, then even fewer low risk individuals will choose to pool risk by purchasing the insurance.  The policy answer that is typically suggested is to force both low risk and high risk individuals to be in the insurance risk pool.

I suspect the idea that adverse selection is a market failure is incorrect.  The reason is that I suspect the conceptual analysis of adverse selection assumes knowledge that no one can know.  We cannot know, given that people differ with respect to their preferences to accept risk, which people would be willing to pay for insurance at the efficient price.  Surely it cannot be efficient to force everyone into the risk pool.  For efficiency we would have to be able to identify which individuals would choose to join the efficient risk pool. This we cannot know in practice, even though we can certainly do conceptual analysis assuming we actually know all the relevant information.

This also suggests, it seems to me, that the insurance mandate in the ACA does not fit the conceptual efficiency concerns found in the model of adverse selection.  After all, this mandate compels all individuals to purchase insurance, and there is no effort to discover the efficient risk pool.

My last comment on the quotation above is about the idea of a "conservative economist."  I wonder what the definition of "conservative economist" is?  Most of the economic analysis of public policy these days relies on the normative framework of pareto optimality, a.k.a. efficiency.  It seems to me that economists of all political stripes do efficiency analysis.  Both free rider behavior and adverse selection come from efficiency analysis, and thus I'm thinking an economist is an economist.  If it makes sense to refer to a "conservative" or a "liberal" economist, then I think it is likely that economist is acting politically and not as an economist.

ACA Oral Argument

There were many interesting things said in oral argument before the Supreme Court yesterday with respect  to whether or not the Affordable Care Act (ACA), a.k.a. Obamacare, is constitutional.  At issue is whether the enumerated constitutional power of Congress to regulate interstate commerce includes the power to compel a person to purchase health insurance.

Very early on Justice Kennedy asked the Soliciter General, who was arguing in support of the constitutionality of the health insurance mandate, the following question: "Can you create commerce in order to regulate it?"  The answer was: "That's not what's going on here, Justice Kennedy, and we're not  seeking to defend the law on that basis."

I wish Justice Kennedy had asked his question in the following way: "Can Congress compel commerce in order to regulate it?"  I think this is a better, more precise, way to put the key constitutional question with respect to the health insurance mandate.  The action of Congress is actually not to "create," it is to compel many individuals to do something they would not choose to do on their own volition.  It seems to me that the constitutional power of Congress is the power to regulate voluntary exchanges between a buyer and a seller located in different states.  It seems obvious that the power to regulate exchanges (commerce) cannot include the power to compel exchanges.

Of course, Justice Kennedy's question seems very close to my question, but I think that there are many potentially different implications that follow from using "create" rather than "compel."  I suggest that using "create" makes the action of Congress seem much more benign than it truly is.  A definition of "create" at dictionay.com suggests the Justice was asking: "Can you cause commerce to come into being in order to regulate it?"  Certainly, put in this way, the action by Congress under Court review seems almost a good thing.  After all, "creation" is generally a good thing, and in the realm of economic affairs it seems to be generally accepted that more economic activity is better than less.

So, I fear, that asking the question in the way Justice Kennedy did, makes it conceptually pretty easy to decide the answer is yes.  After all, if the action of Congress is to create commerce that is "good for everyone" then it could seem to make sense for Congress to create commerce in order to regulate it.

However, we should conclude that Congress cannot create commerce.  Congress might participate in commerce, but it cannot create commerce.  Searching online dictionaries provide a couple of useful definitions of "commerce" in this regard:

an interchange of goods or commodities

the buying and selling of goods.

These definitions suggest that my definition of interstate commerce, i.e., a buyer and a seller located in different states, is on target.  It also suggests that we should not think that commerce is created.  Commerce emerges through the voluntary actions of different individuals. Commerce is not created by the actions of either a buyer or a seller alone.  Commerce emerges from the actions of a buyer and seller in an interaction between the voluntary actions of each.

Consider that Congress can engage in commerce by being either a buyer or a seller, but of course it cannot be both buyer and seller.  What would we say if Congress attempted to "create" commerce by either (a) telling a person she must buy something from the US Government, or (b) telling a person she must sell something to the US Government?  On the surface either (a) or (b) might appear to be commerce because we could observe a "buyer" and a "seller," but neither would be commerce.  Both (a) and (b) involve an action by Congress to compel either a buyer or a seller to act as the government commands.  Congress cannot "create" commerce, or create an exchange between a buyer and a seller without using force to compel one or the other individual, or perhaps even both, to act in a way that would not otherwise be chosen for themselves.

I suggest the appropriate question to evaluate the constitutionality of the health insurance mandate in the ACA is: Does Congress have the power to compel a person to purchase something she would not otherwise purchase?  The answer, of course, is NO.

Police Power & The Health Care Mandate

Yesterday I wrote about the interstate commerce clause which grants Congress the constitutional power to regulate interstate commerce. My analysis did not involve the way the Supreme Court has come to understand the interstate commerce power over time. I think any citizen should be able to read his or her Constitution and have a chance to understand what Congress has the power to do and what it does not have the power to do.

Unfortunately, the constitutional jurisprudence of the Supreme Court has, over time, allowed Congress to regulate almost any (and every) aspect of economic activity. It is as though the Court has amended the words of the interstate commerce clause. In order to understand the Constitution these days, a citizen probably will have to become an expert in Supreme Court opinions.

If according to past Court opinions Congress has the power to regulate almost any aspect of economic activity, is it possible within this body of Court opinions to conclude the health insurance mandate is unconstitutional?

I listened to an interview of one of the attorneys in the case on a morning radio show. Apparently, it is thought that a fundamental conceptual way to decide that the health insurance mandate is unconstitutional is not to directly confront the enumerated commerce power, but instead to consider the meaning of the police power which is supposed to be a power reserved to the states by the 10th Amendment.

This police power contention may have some relevance but I think it is likely to rely on an incomplete understanding of the meaning of the police power.

Let's take it for granted that in fact the police power is a power reserved for state governments and that Congress does not have police power. The way in which this fact might be related to the question of the health insurance mandate is to consider the attributes of the police power. Specifically, the police power is a power that applies to every individual. For example, murder is prohibited by state governments constitutionally through the police power. Any person who commits murder has committed a crime. Every person is prohibited, by the police power of state government, from murdering another. There is no exception. 

How might this aspect of police power be related to the health insurance mandate? The mandate requires every person to have health insurance. This attribute of the mandate is an attribute of the police power, not an attribute of the commerce power. The idea of the commerce power is that, as I wrote yesterday, Congress has the power to regulate exchanges between people. If a person chooses not to engage in a regulated exchange, then the power of Congress cannot reach that person. If Congress regulates commerce in wheat, then a person who does not touch wheat cannot be subject to the regulation. The health insurance mandate is applied to persons regardless of their choices or their actions. This is an aspect of police power, not the commerce power.

This makes some sense to me because it is a conceptual idea that suggests that Congress cannot compel a person to engage in an exchange so that Congress can then regulate the person's exchange that it forced. If this action by Congress is allowed as a part of the constitutional power to regulate interstate commerce, then indeed any aspect of a person's life would seem subject to regulation by Congress.

However, the police power, properly defined, has another important attribute. The police power is the power to prohibit. The police power involves the power of government being used to prohibit actions by people that will harm the person or property of another. Consider various crimes such as murder, theft, assault. Each of these is an action that government prohibits under the police power, and each of these involve actions by a person that harms the person or property of another. So police power has at least two attributes. One is that it applies to every person, and the second is that it prohibits actions that harm the person or property of another.

The health insurance mandate involves Congress asserting it has the power, not to prohibit harm to another, but to compel a person to help another. It seems to me that whether this power to compel applies to everyone or not, it cannot be, properly defined, a power that resides within the police power. So, I suspect this path to arguing that the mandate is unconstitutional will not work with the Court.

It seems that the Court has yet to confront the question of whether Congress has the power to compel commerce under the interstate commerce clause. It seems to me the best approach to this issue is to indeed say the Court has not confronted the question in the past, and therefore, there are no Court opinions that provide a precedent the members of the Court might feel they must follow in deciding this issue.

Perhaps there is an idea from the first commerce clause opinion, penned by Chief Justice Marshall, that justices today might find of central importance. Justice Marshall wrote that however interstate commerce is defined it cannot be defined in a way that implies there is nothing Congress cannot regulate. The insurance mandate, if declared constitutional, would imply there is nothing Congress cannot regulate in our lives. While it seems to me that many members of Congress, and many of those who have been our Presidents, already believe there is nothing in our lives that cannot be constitutionally regulated by Congress, I think the very idea of our Constitution would be voided by such an opinion by the Supreme Court.

It seems to me the constitutional issues in the health insurance mandate should be simple. The Court should opine that regulating commerce, by definition, means regulating exchanges that people voluntarily choose to engage in. Congress does not have the constitutional power to compel commerce because the action by Congress to compel is not, be definition, the same thing as the action by Congress to regulate.