Friday, June 29, 2012

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?

Thursday, June 28, 2012

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.

Monday, June 25, 2012

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.

Thursday, June 21, 2012

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!

Tuesday, June 19, 2012

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.