Congress and the Constitution

The Senate has an "omnibus" spending bill and Senator Coburn's webpage has a spreadsheet the summarizes all the "earmarks" in the bill. The Senator's spreadsheet is worth a look. Here are a few of the things Congress is considering spending money on. Keep in mind that since the government is running a deficit, we might as well say these are some of the things Congress is borrowing money for:

• $1 million - City of Rockville sanitary sewer rehabilitation project
• $2.5 million - Long Creek Watershed Management District for a stormwater and water quality project
• $1 million - City of Hamtramck for water and sewer line rehabilitation
• $1 million - County of Riverside, Moreno Valley, CA, for facilities and equipment related to trauma care
• $16.1 million - John F Kennedy Center for the Performing Arts and its affiliate, as authorized by the Elementary and Secondary Education Act
• $10.5 million - National Board for Professional Teaching Standards. . . .
• $25.6 million - National Writing Project . . . .
• $1 million - Planning, Design, Renovation and Revitalization of Historic Building
• $1 million - For event and meeting space infrastructure at the Bangor Regional Arena and Meeting Complex
• $0.5 million - To acquire blighted property and renovate facilities to create an industrial park
• $1 million - For the acquisition of facilities in Covington, LA to be used for community services and economic development
• $1 million - (City) Demolition of Blighted Buildings
• $1.25 million - For construction of a senior center
• $1.55 million - For improvements to the Pigeon Harbor Industrial Park
• $1 million - For construction of facility that will accommodate an education and interactive learning center
• $1 million - To renovate the facility for the Jewish Vocational Service and to provide equipment and furnishings
• $2.5 million - Legal Advocacy for Crime Victims (Nationwide)
• $1 million - Bronx River and South Bronx Waterfront
• $1 million - Washington State Methamphetamine Initiative
• $4 million - Marine Aquaculture Lab Operations
• $4.5 million - Center for Water Technology and Policy
• $2 million - Sensors for Monitoring Chesapeake Bay Watershed Health
• $2 million - Center of Teacher Excellence
• $4 million - Life Sciences Commercialization Laboratory
• $5 million - Phase II construction, National Center for Natural Products Research, Oxford, MS
• $2 million - Market Development, WI
• $2.6 million - Agricultural Pest Facility, HI
• $3.49 million - Formosan Subterranean Termites Research, New Orleans, LA
• $1.65 million - Human Nutrition Research, Boston, MA; Houston, TX; Kannapolis, NC
• $1.45 million - Mosquito Trapping Research/West Nile Virus, Gainesville, FL
• $1.25 million - University of Alabama, Rural Health Entrepreneurial Development Project, Tuscaloosa, AL
• $2.4 million - Bank On USA demonstration projects, HI

This is just a really, really small part of the entire list.

Why is Congress spending money on these things, much less borrowing money for them? I suppose the answer to this question is simple, i.e., this is the way our rent seeking system of politics works these days.

I think the more important question is: Why do members of Congress think they have been granted the power to spend money on such things? Our Constitution defines our government, presumably, to be a limited government with specifically enumerated powers. You've read the Constitution. It goes something like this:

The Congress shall have Power . . . . To borrow money on the credit of the United States; To regulate Commerce with foreign Nations, and among the several States . . . . To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States; . . . . To establish Post Offices and Post Roads; To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries; . . . . To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years; To provide and maintain a Navy. . . .

I just can't find in my copy of the Constitution that Congress has the power to create a center for teacher excellence, or the power to renovate buildings for religious vocational services, or the power to create industrial parks, or the power to be an advocate for crime victims, or the power to demolish blighted buildings for city governments, or the power to provide facilities for trauma care. I suspect that if I had time to read through Senator Coburn's entire spreadsheet I would find no more than one or two percent of the spending items were associated with the actual enumerated constitutional powers of Congress.

Does it make sense to ask if the United States Government is now, properly speaking, a constitutional form of government?

Constitution & Health Care

I've been reading Judge Hudson's opinion concerning the recently passed "health care reform" statute. I'm not sure I can continue to endure the pain. I am suspicious of the logical gyrations that seem to be integral, these days, to constitutional jurisprudence. I think we should weep for our lost Constitution. But, perhaps, when the smoke clears on all the court challenges a bit of our Constitution will have been returned. After all, it seems to me that the gyrations of constitutional analysis are probably most needed when it should be easy for us to see that an act of Congress, and/or the President, is unconstitutional.

Let's consider a bit of the analysis in support of the constitutionality of the statute as summarized by Judge Hudson:

"Critical to the Secretary's argument is the notion that an individual's decision not to purchase health insurance is in effect 'economic activity.' The Secretary rejects the Commonwealth's implied premise that a person can simply elect to avoid participation in the health care market. It is inevitable, in her view, that every individual--today or in the future--healthy or otherwise--will require medical care. . . .The Secretary maintains that the irrefutable facts demonstrate that '[t]he conduct of the uninsured--their economic decision as to how to finance their health care needs, their actual use of the health care system, their migration in and out of coverage, and their shifting of costs on to the rest of the system when they cannot pay--plainly is economic activity.'" (p 11-12).

This analysis by the Secretary seems pure nonsense to me. The analysis seems to conclude that the actions of the uninsured, whatever the actions are or aren't, are plain old "economic activity." Well, I have been known to suggest to the students in my economics classes that "everything is economic." So, I'm with the Secretary in concluding we have lots of "economic activity" involved in choosing or not choosing "health care." But the nonsense in all of this is that we really should be asking what that "economic activity" has to do with the constitutional powers granted to Congress. Does Congress have the power to regulate any (and all) "economic activity?"

I think the short answer to this question is simple. NO.

Article 1 Section 8 specifically grants the power to Congress to regulate interstate commerce. It is not the case that economic activity is equal to interstate commerce. Commerce means someone buys a good or service from someone else. Interstate commerce means the buyer involved in the act of commerce is in one state and the seller involved in the same act of commerce is in a different state. If the buyer and seller engaging in the act of commerce between consenting adults are in the same place, such as when I buy a big mac at McDonalds for lunch, then it is an act of intrastate commerce. Congress has the power to regulate the buying and selling between people in different states, it does not have the constitutional power to regulate the buying between people in the same place or in the same state.

The Secretary's analysis is fun, but it seems a waste of time, resources, and taxpayer dollars because Congress is not supposed to have the constitutional power to regulate any/all economic activity, only the specific form of economic activity that involves exchange between a buyer in one state and a seller in another state.

Of course, the constitutional issue in this case involves whether Congress has the power to mandate that people purchase health insurance coverage. I certainly think that a person who chooses not to purchase health insurance has made an economic choice, but an economic choice is not economic activity, nor is an economic choice always an act of commerce. Apparently Judge Hudson concluded that the constitutional power to regulate interstate commerce was not the power to compel an act of commerce, whether of the interstate or intrastate variety. That certainly seems the sensible and correct conclusion to me. If I choose not to purchase insurance, or any other good, I have chosen not to engage in an act of commerce. It is even sensible to point out that I might sometimes not choose to engage in an act of commerce because I think the tax Congress has imposed on the commerce results in a price that is too high for what I get in return from my purchase. I hope that Congress does not have the power to both tax an act of commerce and then compel me to engage in that act of commerce as well.

I think the constitutionality, or unconstitutionality, of this statute should be quite straightforward. Congress has the power to regulate an act of commerce between a buyer in one state and a seller in another. Pretty much all of my actions to purchase health care services involve intrastate commerce. Why? Because I go to see my doctor in his office, and even if my doctor's office is in another state, the act of commerce between me and my doctor always takes place at one location. And, while the prescription drugs I purchase may come from a factory outside of Colorado, I always buy my prescription drugs from the Walgreens around the corner, which once again is a act of commerce at one location. The straightforward analysis of Congress's constitutional power is that Congress does not have the power to regulate, prohibit, or compel any of these sorts of acts of commerce I engage in frequently.

I can think of one sort of act of commerce in all of this that might involve me in an act of interstate commerce. I might purchase health insurance from a business which has its offices in a state other than Colorado. If I did, then Congress would have the constitutional power to regulate this act of purchasing/selling insurance. But, the power to regulate this commerce is not the same thing as the power to compel the act of commerce (which would then not be an act between consenting adults). In this area of constitutional power, I suspect that Congress has actually been neglecting it's constitutional duties. I think many states regulate health insurance providers in a way that amounts to erecting a barrier to interstate commerce. State law in many cases does not allow an individual to purchase health care insurance coverage from an insurance business which is located in a different state. If Congress would use it's interstate commerce power to prohibit such state regulations, then the cost of health care insurance would be less than it is these days. But, noooo, Congress acts instead to use power in unconstitutional ways.

It is unfortunate, perhaps even characteristic of an unjust government, that the Supreme Court, over time, has come to understand the Constitution in ways that encourage all the conceptual gyrations of lawyers and professors because, I think, the gyrations are efforts to encourage us to conclude the Constitution means something other than what the words in the Constitution actually mean. The words written into the Constitution seem to me to describe a government significantly limited in scope, and not a government that is supposed to have the power to regulate any "economic activity." The words written into the Constitution were chosen from the conceptual perspective of individual liberty and it seems to me the constitutional power of the Court was meant to be exercised in defense of individual liberty. Conceptual gyrations and gymnastics seem to me to serve the purpose of removing limits from Congressional power and thus infringing on individual liberty.

A Repeal Amendment

RANDY BARNETT & WILLIAM HOWELL:

Any provision of law or regulation of the United States may be repealed by the several states, and such repeal shall be effective when the legislatures of two-thirds of the several states approve resolutions for this purpose that particularly describe the same provision or provisions of law or regulation to be repealed.

Why amend the Constitution in this way?

The Repeal Amendment would help restore the ability of states to protect the powers "reserved to the states" noted in the 10th Amendment. And it would provide citizens another political avenue to protect the "rights . . . retained by the people" to which the Ninth Amendment refers. In short, the amendment provides a new political check on the threat to American liberties posed by a runaway federal government. And checking abuses of power is what the written Constitution is all about.

I think this is probably a good idea. However, I'm not sure 2/3 of the state legislatures would ever act to repeal a federal law or regulation. Still, I think it would probably be good if a number of state legislatures made efforts today to push this amendment. It would probably be a good thing is there were more people who looked at the Constitution and compared and contrasted the government implied by the Constitution to the governments we have today.

Speaking Sense To Government

FIVE ECONOMISTS TALK SENSE, instead of nonsense with respect to government and the economy. Here are some of examples:

"Nobel Prize-winning economist Edward Prescott examined international labor market data and showed that changes in tax rates on labor are associated with changes in employment and hours worked. From the 1970s to the 1990s, the effective tax rate on work increased by an average of 28% in Germany, France and Italy. Over that same period, work hours fell by an average of 22% in those three countries. When higher taxes reduce the reward for work, you get less of it."

"Having "skin in the game," unsurprisingly, leads to superior outcomes. As Milton Friedman famously observed: "Nobody spends somebody else's money as wisely as they spend their own." When legislators put other people's money at risk—as when Fannie Mae and Freddie Mac bought risky mortgages—crisis and economic hardship inevitably result. When minimal co-payments and low deductibles are mandated in the insurance market, wasteful health-care spending balloons."

The 2010 health-care law undermined positive reforms underway since the late 1990s, including higher co-payments and health savings accounts. The law should be repealed before its regulations and price controls further damage availability and quality of care. It should be replaced with policies that target specific health market concerns: quality, affordability and access. Making out-of-pocket expenditures and individual purchases of health insurance tax deductible, enhancing health savings accounts, and improving access to medical information are keys to more consumer involvement. Allowing consumers to buy insurance across state lines will lower the cost of insurance.

You really should read the whole piece.

Congressional Corruption

HOT AIR:

"The scholarships were publicly intended as charity, a way to impact the community by giving underprivileged students an opportunity to get an education they otherwise may miss. Instead, the two Representatives turned it into an entitlement program for the children and grandchildren of the already-powerful. Regardless of whether the CBC had explicit language barring the awarding of funds to family members, anyone with a sense of ethics would have known that putting that scholarship money into the hands of their own family violated the ostensible spirit of the charity. It also shows Bishop and Johnson as greedy, self-absorbed malefactors whose only consideration of the power they hold is how it can personally benefit themselves and their family."

Ain't Rocket Science

PETER BOETTKE:

"I don't possess a crystal ball, so I cannot forecast the economic future. But I do know that it is not good to expand the monetary base 140% or to run deficits the size we have, or accumulate public debt as we have. . . . This 'ain't rocket science'! There will be a day of reckoning due to the monetary mischief and fiscal irresponsibility.

I also know that the problems we are facing are not 'market problems' --- it is not that actors are all of a sudden 'irrational', and it is not that markets are inherently 'unstable'. Everything we are seeing in market behavior is a rational response to the environment created by public policy. This is not a psychological problem we are dealing with, it is a public policy problem. Bad public policy produce bad incentives which in turn produce bad results. Ultimately, this is a problem of bad ideas which result in bad public policies. Again, this ain't rocket science. The role of the economists in all of this should be like my Dad when I was a teenager (and truth be told an adult), and grab policy makers by the shoulders star them squarely in the face and state clearly 'this isn't rocket science' and explain clearly the Econ 101 basics of why the decisions we have made so far have not been correct."

Right on and well said: "Everything we are seeing in market behavior is a rational response to the environment created by public policy."

Unintended Health Insurance Consequences

WASHINGTON (AP):

Some major health insurance companies will no longer issue certain types of policies for children, an unintended consequence of President Barack Obama's health care overhaul law, state officials said Friday.

[ . . . ]

The major types of coverage for children - employer plans and government programs - are not be affected by the disruption. But a subset of policies - those that cover children as individuals - may run into problems. Even so, insurers are not canceling children's coverage already issued, but refusing to write new policies.

The administration reacted sharply to the pullback. "We're disappointed that a small number of insurance companies are taking this unwarranted and unnecessary step," said Jessica Santillo, a spokeswoman for the Health and Human Services department.

Yesterday it was unintended consequences of "financial reform."

I wonder how people in the administration know these actions by insurance companies are "unwarranted and unnecessary?" It seems to me they must lack the knowledge these businesses need in their efforts to make a profit, and thus a living for many people, by supplying others with health insurance. The "health care reform" statute seems to attempt to force insurance businesses to structure risk pools in specific ways that would not otherwise have been chosen by these businesses. It seems to me one likely result of such government actions will be that at least some insurance businesses find that it is better to stop insuring than to try to earn a living insuring and following the government's new statute.

Economists on Government & This Recession

JOHN B. TAYLOR:

Some argue that we need more deficit spending—another stimulus package—to boost the economy. I agree that the economy needs a boost, but not in the form of increased deficit spending. In my view, the economy is being held back by high deficit spending and related policy uncertainties. The large deficits are causing the federal debt to explode, raising concerns about how it will be financed.

VERNON L. SMITH:

So what has been the government’s response in the current crisis? Besides spending stimulus, it was tax incentives for new home buyers and cash for clunkers if you bought a new car. All three are programs for borrowing output, homes and cars from future production and sales. Using subsidies to pump up home sales beyond what people could afford was the problem that led to the crisis. Now the problem is touted as the solution.

Liability For An Uncertain Future?

WALL STREET JOURNAL:

The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings.

The odd plea is emerging as the first consequence of the financial overhaul that is to be signed into law by President Obama on Wednesday. And it already is creating havoc in the bond markets, parts of which are shutting down in response to the request.

Standard & Poor's, Moody's Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law.

The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies say that, until they get a better understanding of their legal exposure, they are refusing to let bond issuers use their ratings.

[ . . . ]

Once the bill is signed into law, advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating.

That is a change from the current law, which considers ratings merely an opinion, protected like any other media such as a newspaper.

Perhaps this is a nice illustration of the unintended consequences of actions taken by government, in this case Congress and the President. I assume Congress and the President did not intend for providers of bond credit-ratings to respond to their legislation by deciding to no longer be providers of bond credit-ratings.

On the other hand, perhaps Congress and the President did intend for this result. Who will provide bond credit-ratings if private businesses won't? I guess government could.

I also wonder why it is thought to be a good idea to say a provider of credit-ratings has liability for actions taken by others who consult these ratings. It seems to me that trying to create such liability amounts to saying the providers of credit-ratings should be liable for an uncertain future. The future is inherently uncertain, and while credit-ratings may provide some information about the risk involved in certain kinds of actions taken today, it seems to me foolish to believe that credit-ratings accurately predict the uncertain risk, much less remove the risk.

Tax Cuts For The Most Fortunate

Treasury Secretary Timothy Geithner:

We believe it is appropriate to let those tax cuts that go to the most fortunate expire

Most fortunate?

So, I wonder how these guys think a person gets income? To use a phrase like "most fortunate" suggests to me that they don't think income is earned, because if it is earned then large income may go to those who work hardest and that have the greatest abilities in producing goods and services for others.

I wonder how these guys think a person gains wealth? It seems to me wealth is chosen. In order to have wealth, I think a person has to choose to save something out of current income by not spending everything that he or she earns. I don't think the bottom line is that a person is fortunate to have wealth. It seems to me a person is wise to try to choose wealth by not consuming all that he or she earns.

Tax Increases & The Economy

Ever wonder about the idea that tax increases can be bad for the economy? Well the TAXPROF BLOG points out that apparently the Chair of the Council of Economic Advisers has just published research which "indicates that tax increases are highly contractionary":

Christina D. Romer (Chair, Council of Economic Advisers) & David H. Romer (UC-Berkeley, Department of Economics) have published The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, 100 Am. Econ. Rev. 763 (2010). Here is the abstract:

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.

Since the lead author is an adviser to the President, I'm wondering why the President, and members of Congress as well, are interested, especially in a period of recession and high unemployment, in letting tax cuts during the Bush Presidency expire. Hmmm. . . .tax increases "are highly contactionary." Maybe these elected representatives think the Romers aren't very good economic researchers? Maybe these elected representatives think there is good reason to believe things will be different this time around? Maybe these elected representatives have other goals than seeing the economy pull out of this recession?

Congress Created Them All

DON BOUDREAUX in a letter to the Washington Post:

You’re right to worry that Uncle Sam responded to the public’s anxiety about terrorism by creating an overgrown intelligence bureaucracy with bloated budgets that strain our wallets and arbitrary powers that mock the Constitution as they threaten our freedoms . . . Will bureaucrats in, say, the new Bureau of Consumer Financial Protection spend taxpayer funds more wisely than do bureaucrats in the NSA? Is the power to command people to purchase health insurance, or the power to prohibit consenting adults from buying and selling certain kinds of financial instruments, really so mild and beneficial that we should calmly welcome the exercise of these powers while we simultaneously quake with fear at the exercise of “intelligence” powers?

July 4, 1776

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness -- That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, -- That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. -- Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States.

. . . And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Federal Taxes on the Rich & the Poor

Average Federal Tax Rate by Income Quintile, 1979-2007

From the CONGRESSIONAL BUDGET OFFICE:

The pattern of average tax rates has varied over time. The lowest three income quintiles have seen steady declines in their average rate. The tax rate on the fourth quintile was flat over most of this period, before declining in the early part of this decade. The tax rate on the top quintile has fluctuated more, with periods of increases and decreases.

By the way, since this information comes from the CBO, we should assume that every member of Congress has this information available to him or her, or at least to staff members. So, the next time a member of Congress in on a soapbox opining about taxes on the rich and the poor, you will be able to judge the veracity of the assertions.

Independence Day?

CHIDEM KURDAS:

Our government has managed to create endless opportunities, but not for ordinary people—only for political operators and influence peddlers, with the Obama Administration pushing some 4,500 pages of medical and financial regulation just in its first 18 months.

Something to celebrate this Independence Day, eh?

What Do Inequality Data Mean?

Steven Horwitz has an interesting post on inequality data. Here is the way he understands what the data means:

Carroll uses a nice analogy from Schumpeter that I'd never heard before: the distribution of income is like a hotel with some really fancy rooms on the top floors and some very basic ones on the bottom. All the rooms are always full, but who occupies which rooms changes from year to year.

If one wants to stretch the analogy a bit more, it's also the case that each year brings a new upgrade to every room. What constitutes a "basic" room gets slightly more luxurious each year as standards of living rise, and the same is true on other floors. It might be the case that the upgrades to the top floor rooms are proportionally greater than those to the basic and middle floor rooms, but given that the occupants of the rooms switch around from year to year, those greater improvements at the top are still consistent with improvements in the absolute standard of living for many.

And to take the analogy even further: if we account for immigration and other new entrants to the labor force, it's as if the hotel keeps adding rooms/floors on each year at the lower/basic level, enabling everyone else to potentially keep moving up (assuming that some occupants die or leave the country!).

I've often noted in my courses that aggregate data hide a large amount of important information. In the case of the static aggregate income distribution data, we cannot see what happens over time and within each income quintile.

It seems that many people assume a person who is in the lowest income quintile in any year will also be in the lowest income quintile 5 years and 10 years later. It also seems many assume that a person in the top income quintile in one year will still be in that top income quintile 5 years and 10 years later. If you check out Mr. Horwitz's post you can learn that such conclusions are not well-founded. For example:

Of those taxpayer households in the lowest quintile of income in 1999, 57.5% had moved up at least one quintile by 2007 and over 30% jumped two quintiles or more.

Of those in the top 1% in 1999, only 44.6% were still there in 2007.

Oil Spills & Executive Powers

I recently commented on the following taken from a speech by President Obama:

"Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company's recklessness. In order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent third party.

I asked if such actions as these promised by the President fall within existing statutes and also the responsibilities of the courts? The point of the earlier comment was different than this. So, I want to explain my concerns about what the President said in his speech.

In order to determine who has a legitimate claim for damages against BP, and in order to determine the amount of such damages, I think it is the case that the President, or an independent third party picked by the President, will have to make decisions and take actions that are supposed to, constitutionally, be within the Judicial power of government.

Shouldn't it be a significant concern to ask, and answer, whether or not the President has exceeded his constitutionally granted Executive power to inform the CEO of BP that he must set aside $20 billion? If a President can decide what a legitimate claim is against BP, and if a President can decide how much compensation must be paid by BP, then what is the difference between the Judicial branch and the Executive branch of government?

Oil Spills, Oil Producers & Governments, Part 2

We might find another illustration of how earlier, and not easily seen, federal government actions could be involved in the BP Gulf Oil spill by wondering about something the President said in his recent OVAL OFFICE SPEECH:

Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company's recklessness. In order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent third party.

I don't understand this idea that the President will tell BP it has a liability for this accident, and further that the President is going to require BP to create an escrow account to be administered by an "independent third party." Don't such actions fall within existing statutes and responsibilities of the courts?

My first thought is to wonder about why the President would think actions such as these are appropriate and necessary. I have assumed all along that BP is liable for the damages caused by the oil spilled because of an accident involved with it's production of oil. I certainly expect that if I caused oil to be spilled on my neighbor's property, that I would be fully liable for the damages my actions caused to my neighbor. So, I assume BP understands already that it is liable for the damages.

This also leads me to wonder about why the President has been spending so much time and effort in his public speeches insisting that BP is going to be made to pay for the environmental harm it has caused. Once again, I assume that in the same way that I know I would be made to pay for harm I cause to others, BP knows it will have to pay for the harm it's actions have caused others.

But, now I think that perhaps I should start to by a bit more of my normal, cynical and dismal economist self. Do I smell a rat?

Perhaps I do. THE OIL POLLUTION ACT OF 1990 "imposes liability for removal costs and damages resulting from an incident in which oil is discharged into navigable waters or adjoining shorelines or the exclusive economic zone." Yep, just what I assumed to be true. But, the Act also limits liability:

Liability is limited by specific dollar amounts, which vary depending on the type of vessel or facility involved. These limits do not apply in the case of gross negligence or willful misconduct or the violation of an applicable federal safety, construction, or operating regulation or for failure to cooperate in certain specified ways.

Oh my, perhaps BP believed it would not be fully liable for the damages caused by an accident that resulted a spill such as is occurring in the Gulf. Can you imagine, Congress created a statute in 1990 (and some President must have signed it) that both made it clear that BP was liable for damage caused by this accident, and at the same time the statute told BP (and all other oil producers in the Gulf) that it's liability was limited, that it would not be fully liable.

Well, you can see the incentives partial liability creates for BP and every other oil producer in the Gulf. At the margin, this limited liability statute should result in BP being at least a little less cautious in it's operations than it would otherwise be. Same incentive and response by all the Gulf oil producers as well. In other words, by limiting liability with this statute Congress and the President did two things: (1) Incentives to produce oil in the Gulf were increased, and (2) the probability of an accident occurring in the Gulf was increased.

Now we come to the second sentence in the limited liability quotation above. I suspect members of Congress also understood the incentives they would create by limiting liability. So, of course, Congress also writes laws that allow for the Executive Branch to regulate how BP, and the other oil producers in the Gulf, go about the business of producing oil from Gulf waters. Do you remember hearing reports after the accident, and before the Oval Office speech, that BP had requested that the government agency overseeing its operations modify several permits in the last day or two before the accident? I'm guessing this indicates that the government regulatory agency was at least supposed to be closely involved in making sure BP's actions met with all the things government thought BP was supposed to be doing.

I think this is another illustration of government's involvement in the actions of people and businesses in the economy that we cannot easily see. It is my view that government should not limit liability, and that especially in the case of deep water oil production government's role should be to strictly enforce full liability.

And, because government regulatory actions are involved in oil production in the Gulf, my default position has to be that government has some part to share in this accident, unless it can be shown that BP violated permits and regulations that if followed would have prevented this specific accident from happening.

Finally, returning to the President's statement quoted above, I think there are some additional serious issues to bring up. I will do that with another post in the future.

Enough Money?

TOM SOWELL on politicians and enough money:

"One of the many shallow statements that sound good-- if you don't stop and think about it-- is that 'at some point, you have made enough money.'

The key word in this statement, made by President Barack Obama recently, is "you." There is nothing wrong with my deciding how much money is enough for me or your deciding how much money is enough for you, but when politicians think that they should be deciding how much money is enough for other people, that is starting down a very slippery slope.

Politicians with the power to determine each citizen's income are no longer public servants. They are public masters."

You should read the whole piece.

Oil Spills, Oil Producers & Governments

The accident in the gulf is a pretty ugly sight. I'm sure there is no person alive who actually likes the accident and the aftermath, which of course continues.

Today you can read news reports of our political leaders holding hearings to point fingers and hold the culprit's feet to the fire. And, of course, you may have read or heard the President castigating the oil producers and promising to kick the appropriate butts.

You can also read reports that assert British Petroleum made numerous bad decisions that led to the accident, and which were made in an effort to save some costs and improve profits. Even if there is some truth to such allegations, there may be more involved in terms of the incentives and the tradeoffs than meets the eye.

I make this last assertion myself because I'm come to believe government policy is almost always involved, and it is almost always well hidden from us, unless we are able to spend much time reading statutes, regulations, and executive orders.

STEVEN HORWITZ has written about just one example related to this accident:

"The Jones Act is actually section 27 of the MMA and requires 'that all goods transported by water between U.S. ports be carried in U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents.' This, of course, includes the Gulf of Mexico. Thus any attempt to move equipment from one U.S. port to another for the purpose of either stopping or cleaning up the Deepwater Horizon leak must involve U.S. ships, fully constructed in the U.S., etc..

Of course in a world of globalized trade few such ships exist. In fact, a number of foreign-constructed or crewed ships are in U.S ports at the moment and could easily transport oil sucking equipment or more booms to the Gulf, but the Jones Act prevents them from doing so. Like the school buses that sat in a parking lot while folks were stranded during Hurricane Katrina, those non-U.S. ships and their equipment are sitting idle while an environmental disaster unfolds."

Professor Horwitz mentions the buses and Katrina because he wants to point out that the Jones Act was apparently waived two days after the hurricane. I haven't read the Jones Act, so I am not aware of whether the Act itself includes conditions by which it might be waived. Perhaps it does. Or, perhaps Congress must act to repeal the Act, something suggested by Professor Horwitz, and something I agree would be a good idea. In any case, Professor Horwitz does point out that apparently the President does not agree that Act should be waived or repealed since he writes: "Meanwhile, President Obama and others continue to insist that such a blanket waiver is 'not needed at this time.'"

So, who might benefit from not waiving or repealing the Jones Act? My guess would be some union or unions, and that is the view of Professor Horwitz as well. If this seems plausible, then it should also seem plausible to you that the President is making political calculations when he decides to trade off this against that. Not too surprising to me, and not really unlike the tradeoffs some assert BP made and should not have made.

It seems to me there are other aspects of this accident and the aftermath that involve government policies, regulations, and actions that are hidden from our easy view. I'm always suspicious this might be the case when our elected leaders in Washington rush to microphones and hearings to point fingers. I will try to add at least one or two additional illustrations in the next day or two.