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Friday, June 29, 2012

Incremental Change in the E.U.: A Banking Regulator


 The E.U.’s European Council, which represents the union’s state governments, agreed at the end of June in 2012 to make the federal bailout fund directly available to banks. Spanish banks had been seeking 100 billion euros. Counting the bailout funds as debt of the state rather than as bank debt would have further increased Spain’s relatively high borrowing costs. Counting the bailout funds as bank rather than state debt can be viewed as an instance of the E.U.’s “direct effect,” wherein the federal level can directly affect E.U. citizens and their private associations.  This distinguishes the E.U., by the way, as an instance of modern federalism, from the old foedus (i.e., treaty), or confederal (“alliance”) type of federalism as evinced by the American Articles of Confederation. 

The full essay is at "E.U. & U.S."

Thursday, June 28, 2012

SCOTUS Decision on Obama's Healthcare Act: The States v. The Poor

The U.S. Supreme Court ruled on June 28, 2012 that the mandate in the Affordable Healthcare Act (“Obamacare”) is not constitutional under the commerce clause (i.e., Congress cannot force citizens and residents to buy health insurance). As per Scalia’s dissent, “when Congress provides that (nearly) all citizens must buy an insurance contract, it goes beyond ‘adjust[ing] by rule or method,’” which is how “to regulate” has been defined. To adjust by rule or method is not to bring the product of commerce into being, but, rather, to assume its existence.  Instead of being considered a regulation affecting commerce between the states, the core element of the Affordable Care Act of 2010 survives in the decision as a penalty under “Congress’s enumerated power to ‘lay and collect Taxes.’ (Art I, sec. 8, clause 1).” Essentially, Congress has the authority to tax people who decide to go without health insurance. From Robert’s opinion for the Court, “the mandate can be regarded as establishing a condition—not owning health insurance—that triggers a tax—the required payment to the IRS. Under that theory, the mandate is not a legal command to buy insurance. Rather, it makes going without insurance just another thing the Government taxes . . . And if the mandate is in effect just a tax hike on certain taxpayers who do not have health insurance, it may be within Congress’s constitutional power to tax” (p. 32). This reasoning essentially saved the Act.

To be sure, the Court did not allow the Affordable Care Act to survive intact. Besides invalidating the rationale for the mandate under the commerce clause, the decision holds that states can refuse to go along with the expansion of Medicaid under which more of the poor, who are not able to afford insurance for lack of income, are to be included in the program. At the time, “the Medicaid program required states to cover only certain discrete categories of needy individuals—pregnant women, children, needy families, the blind, the elderly, and the disabled.” There was no mandatory coverage for most childless adults. In the expansion, all individuals under the age of 65 with incomes below 133 percent of the federal poverty line are covered.

It can be asked whether people who cannot afford insurance at all will be able to be covered by the expanded Medicaid program, given that the decision enables states to refuse the expansion. In its decision, the Court ruled that Congress cannot withhold the existing Medicaid funds of states that refuse to go along with the change. In her statement from the bench, Ginsburg noted that "seven members of the Court . . . buy the argument that prospective withholding of anticipated funds exceeds Congress' spending power." In other words, Congress cannot use its spending power to threaten states.  In his majority opinion, Chief Justice Roberts points out that Congress can offer additional grants to states—essentially bribing them into going along with the expansion—but a state’s existing Medicaid funding cannot be threatened.

House Minority Leader Nancy Pelosi (D-Calif.) reacted to the ruling by opining that, nonetheless, the states would find the Medicaid funds hard to resist. “A big expansion of Medicaid is part of this bill, as you know, and in order to make it saleable and tactical, we have 300 percent of the benefits described in this bill paid for in Medicaid to the states those first three years of the bill. I don't think the governors will turn that down,” she said. "First of all, the people will have the need; the urgency is there. They don't have to have any matching funds. . . . I believe that once this bill is rolling and states experience the benefits of it, it will be very hard for a state to say, ‘I'm not taking 100 percent of the coverage that Medicaid would provide for these people.’ That's our thinking on the subject," she added. She did not say, however, that after 2016 the states could have to pick up as much as 10 percent of the cost of the expanded benefits. Moreover, she did not address the possibility that ideology could trump even the financial incentives. 

Indeed, some Republican Governors were already holding back from saying whether they would accept the Medicaid funds. One Republican governor, Florida's Rick Scott, didn't waste any time in coming out against the expansion on the grounds that the government of Florida could not afford the increase. "Florida will opt out of spending approximately $1.9 billion more taxpayer dollars required to implement a massive entitlement expansion of the Medicaid program," the former health care executive said. At the time, roughly 4 million of 19 million Floridians lacked health insurance. That's a bit more than 20 percent of the population. To be sure, Scott acknowledged that for three years, from 2014 to 2016, the federal government would pay all the costs of the expansion, but after that, "the burden increasingly shifts to Florida taxpayers." Of course, those taxpayers are also U.S. taxpayers, and in this capacity they would be contributing to the expansion in other states beginning in 2014, without any benefit going to themselves. 

Thinking along such lines, Jacob Lew, the White House chief of staff at the time, predicted that the "vast majority of the states will come in. For those few that are slow to come in, they're going to have to answer to people why they're turning this down and why they're letting people go without coverage." However, Republican Governors such as Scott could appeal to other priorities, especially those that are favored by voters who already have health insurance. Accordingly, Scott argued that Medicaid was "growing three and a half times as fast as Florida's general revenue," and was already taking away money needed for education. In effect, Scott was already building an electoral majority with an interest in letting 20% of the population in Florida continue without health insurance. 

Accordingly, the Democratic leaders in the federal government may have been overly optimistic in assuming that universal coverage in these United States would result from the law. To be sure, some of the states that had Republican governments at the time would probably "flip over" to the Democrats at some point. It would be difficult for a later Republican governor to take the expanded benefits away. Even so, Scott's ideological preference for education over an expansion in medical entitlements for the poor can be expected to be more popular in some of the American republics than in others. The U.S. itself is a veritable empire, both in terms of territory and in being a union of republics. A one-size-fits-all federal law that involves ideological preferences is thus suboptimal. In other words, it makes perfect sense that states should be free to opt out of the expansion of Medicaid (i.e., as per their respective ideological preferences). There is, however, a cost, which is borne more by some than others.
 

Republican Governors Rick Scott (FL), Scott Walker (WI) and Bobby Jindal (LA)

Were other states, like Louisiana and Wisconsin, to say “thanks but no thanks” to the expansion, the Affordable Care Act would fall significantly short of providing universal health insurance. In the states without the expanded Medicaid, the poor people would presumably not be able to afford individual health insurance (which does not have the required cost advantages of group plans), and yet the mandate would apply so they would be subject to the tax imposed on people who do not have health insurance. The 4 million uninsured Floridians would find themselves suddenly subject to an annual tax collected by the IRS were they unable to afford the premiums for private individual insurance. Scott may really have been putting poor Floridians in dire straits. At the very least, Congress could exempt them from the tax, even if doing so would give other states more of an incentive to balk on the expansion.

As a guiding principle, Congress should encourage rather than thwart state-choice, restricting it when necessary to preserve the Union, even as Congress also provides minimum U.S.-wide protection to the minority position in any state so the people don't fall through the cracks. To fortify federalism without leaving the most vulnerable out in the cold in terms of health-care, the Congress could establish a minimum level of sustenance as a basic human right deserved by any American citizen. Given their sovereignty retained, the fifty American republics could decide for themselves whether to go beyond the “basic common 'human' denominator.” The federal government would be directly responsible for the floor, with the states having as their own programs anything above the foundation.

Sources:

National Federation of Independent Business et al. v. Sebelius, Secretary of Health and Human Services, et al., 567 U.S. Supreme Court (2012).

Alex Becker, "Obama Health Care Law: Republican Governors, Legislators Not Ready to Fully Commit," The Huffington Post, June 30, 2012. 

Robert Pear, "Republican Governor of Florida Says State Won't Expand Medicaid," The New York Times, July 2, 2012.  

Amanda Terkel, “GOP Governors Resist Implementing Obama’s Health Care Law Despite Supreme Court Ruling,” The Huffington Post, June 29, 2012. http://www.huffingtonpost.com/2012/06/29/gop-governors-obama-health-care_n_1637456.html

Monday, June 25, 2012

Citizens United Ruling Applied to States


On the basis of the supremacy clause (Art. 6, clause 2) of the U.S. Constitution, the U.S. Supreme Court ruled 5 to 4 on June 25, 2012 against Montana’s Supreme Court decision that had upheld a Montana law that stipulated that a “corporation may not make . . . an expenditure in connection with a candidate or a political committee that supports or opposes a candidate or a political party.” According to the majority on the U.S. Court, that court had already struck down a similar federal law in Citizens United by holding that “political speech does not lose First Amendment protection simply because its source is a corporation.” The Court had concluded that the federal government did not have a compelling interest in restricting that protection for corporations to prevent corruption.

Regarding the Court’s compelling state interest rationale, it is not evident that the reasoning in Citizens United that “independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption” empirically trumps the finding of the Montana Supreme Court that corporate political expenditures have led to corruption in Montana. As Justice Breyer writes in his dissent, “even if I were to accept Citizens United, this Court’s legal conclusion should not bar the Montana Supreme Court’s finding.” It is possible, in other words, that Montana’s government has a compelling interest whereas Congress does not. According to the New York Times, the “Montana Supreme Court had ruled that the state’s distinctive history and characteristics warranted a departure from the principles announced in Citizens United.” In other words, the empire-scale of the American union ought to have gone into the Court’s reasoning.

Like the E.U., the U.S. extends across a continent. Both unions are of such a scale as to be reckoned as empires in themselves (i.e., even without considering their influence abroad). Their respective comprising republics can be expected to have distinct cultures.  For example, the relationship between business and society in Montana might be very different from that which is the case in Delaware. Hence, states have different incorporation laws as well as approaches to constraining corporations.

To impose a “one size fits all” empirical assumption in terms of a government’s interest in forestalling or reducing corruption not only invites factual error, but also treats an empire as if it were merely a republic or kingdom therein. Therefore, in applying the first amendment to a particular state’s empirical circumstances, the federal Court should beware of applying the assumption of a single U.S.-wide empirical condition in lieu of the “facts on the ground.” More generally, presuming a single empirical condition across these United States can be reckoned as one of the means by which judicial (and political) consolidation has made such inroads at the expense of federalism. Over time, the further consolidating chokes the combination, which can be expected to eventually either collapse from the weight of its center or split apart from the built-up pressure of the inherent diversity of the member states.

Source:

Adam Liptak, “Supreme Court Declines to Revisit Citizens United,” The New York Times, June 25, 2012.  http://www.nytimes.com/2012/06/26/us/supreme-court-declines-to-revisit-citizens-united.html?hp



Congressional Ethics: Investing on Insider Info


To what extent should members of Congress be permitted to adjust their investment portfolios in line with general information on the economy gained as part of their legislative work? Whereas insider trading refers to information that is not available to the public on a particular company, the trades at issue as the U.S. headed toward a possible financial crisis pertained to diversified portfolios.

To take one example, John Boehner (R-Ohio), who would become the Speaker of the House after the 2010 Congressional elections, met U.S. Treasury Secretary Henry Paulson for breakfast on January 23, 2008. According to the Washington Post, “Boehner would later report the rearrangement of a portion of his own financial portfolio made on that same day. He sold between $50,000 and $100,000 from a more aggressive mutual fund and moved money into a safer investment. Boehner is one of 34 members of Congress who took steps to recast their financial portfolios  . . . after phone calls or meetings with Paulson; his successor, Timothy F. Geithner; or Federal Reserve Chairman Ben S. Bernanke, according to a Washington Post examination of appointment calendars and congressional disclosure forms. The lawmakers, many of whom held leadership positions and committee chairmanships in the House and Senate, changed portions of their portfolios a total of 166 times within two business days of speaking or meeting with the administration officials.”

The paper points out that the financial moves by the members of Congress were permitted at the time under congressional ethics rules.  Some ethics experts suggested that lawmakers should refrain from taking actions in their financial portfolios when they might know more than the public. In my view, we can assume that lawmakers will know more than the general public on matters relevant to investment decisions; the question is whether those decisions ought to be placed in blind trusts.

Lawmakers are going to know more than the public; merely sitting through hours of hearings will accomplish that. Indeed, part of the rationale for having a representative rather than a direct democracy is that representatives can be in a position to be better informed on the economy because lawmaking is at least in principle their full-time endeavor while they are in office. Essentially, the electorate delegates the popular sovereignty to the representative to focus on the lawmaking role.

Furthermore, human nature being what it is, we cannot but expect the lawmakers to have protected their investments by reducing the level of risk after learning that the U.S. economy could go over the cliff on account of being over-leveraged on subprime mortgages and over-securitized on them plus the related securitized insurance swaps. Adjusting their portfolios based on “insider information” on an upcoming stimulus plan is based on more particular information and thus more problematic even though it is not on a particular company. Regardless of the specificity of the information, however, any private gain from the public service is rightly generally regarded not only as unfair, but also inappropriate and unseemly.

At the very least, for lawmakers to use even the inevitable information they have on the general condition of the economy for private gain detracts from the notion that public service is a duty rather than an opportunity to enrich oneself. In this regard, having citizen lawmakers are preferable to careerists. However, even doing one stint in the U.S. House of Representatives could be financially lucrative, so even with term limits, the question of whether lawmakers should be able to adjust their investment portfolios would be relevant.

Although it is undoubtedly impossible to stop virtually any private benefit from accruing to members of Congress, their management of their own wealth should be separated from their public service where possible. The instrument of a blind trust makes this possible in the case of investments, assuming that direct and indirect communication with the managers of the trusts is preempted effectively. The trusts could even be mandated for several years after the lawmaker vacates public office.

More generally, the opportunistic orientation evinced by several lawmakers in January 2008 suggests that they may have viewed their respective offices less as stemming from a sense of a duty oriented to public service than as being an opportunity for personal gain. Rather than electing citizens who yearn for the office, perhaps we ought to seek out those who have reservations in place of ambition, yet would serve out of a sense of duty if called. In other words, whoever in the two parties gets people to run for the offices ought to be suspicious of people whose sense of duty seems all too comfortable and convenient to come out a sense of obligation. In other words, if it is easy to convince someone to run, then he or she probably is not the best person for public service.

Source:

Kimberly Kindy, “Lawmakers Reworked Financial Portfolios After Talks with Fed, Treasury Officials,” The Washington Post, June 24, 2012. http://www.washingtonpost.com/politics/lawmakers-reworked-financial-portfolios-after-talks-with-fed-treasury-officials/2012/06/24/gJQAnQPg0V_story.html?hpid=z1