Archives: 10/2010

Heritage and Prop. 19

Over at the Huffington Post,  I scrutinize a recent Legal Memorandum published by the Heritage Foundation on the Prop. 19 ballot initiative.

Here is an excerpt:

The Heritage memorandum claims that if Prop 19 were approved, it would conflict with the federal criminal statute, the Controlled Substances Act and thus “invite litigation that would almost certainly result in [Prop 19] being struck down” as unconstitutional. This legal claim is dead wrong. While it is true that the supremacy clause of the Constitution makes it clear that federal law will override a conflicting state law, that clause simply has no application here. The federal law on marijuana remains in force, but that does not mean that a state government is under any obligation to assist the feds. As the Supreme Court noted in New York v. United States (1992), the state governments are neither “regional offices nor administrative agencies” of the federal government. Let’s take another example. Suppose Congress were to criminalize, say, cotton candy–would California be in violation of the Constitution because its police agents are not now empowered to arrest people producing and possessing cotton candy? No. Nor could Congress compel the California legislature to move against cotton candy producers and consumers. Here again is the Supreme Court: “Even where Congress has the authority to pass laws requiring or prohibiting certain acts, it lacks the power directly to compel the States to require or prohibit those acts.” (New York v. United States, 505 U.S. 144, 166 (1992)). Prop 19 is consistent with the constitutional principle of federalism.

For additional Cato scholarship on drug policy, go here and here.

Cost-Slashing? No, Cost-Shifting.

Here’s a poor, unsuccessful letter I sent to the editor of the Los Angeles Times:

Three and a half million Californians may become eligible for subsidized private health insurance in 2014 under ObamaCare [“3.5 million Californians would be eligible for healthcare tax credits, study finds,” October 6], but those subsidies will not “slash the cost” of their health insurance.  As ObamaCare causes health insurance premiums to rise by as much as 30 percent, the private-insurance subsidies will shift those costs to taxpayers.  A bipartisan majority of Americans opposes ObamaCare in part because such shell games increase costs rather than reduce them.

Yes, We Do Bribe Kids!

While politicians probably support many policies for college students in part because they think the policies will be educationally or otherwise beneficial, vote buying is no doubt also important. Of course, it’s hard to find a politician who will actually cop to the latter. On this morning’s Today show, however, Democratic National Committee Chairman Tim Kaine came about as close to doing that as you could possibly hope for. 

Responding to interviewer Ann Curry’s observation that President Obama has aimed a lot of campaigning at college students lately, Kaine noted that young people voted for Obama in record numbers in 2008, and “the message to young voters is pretty simple… we’ve done the largest expansion of the student loan program in American history… we’ve done a health care reform that allows youngsters to stay on their family insurance policy until age 26, and we’ve done important credit card reform that has helped young voters. So we have their attention….” 

Translation: Kids, vote the right way, and keep that free stuff coming!

The False Choice Between a VAT and Impossible Spending Cuts

Governor Mitch Daniels of Indiana has triggered a spat among policy wonks with his recent comments expressing sympathy for a value-added tax (VAT). Kevin Williamson of National Review is arguing that a VAT will probably be necessary because there is no hope of restraining spending. Ryan Ellis of Americans for Tax Reform jumped on Williamson for his “apostasy,” arguing that a VAT would be bad news for taxpayers. From a policy perspective, I’m very much against a VAT because it will finance bigger government, as explained in this video.

 

That being said, Kevin Williamson makes a good point when he says that some supply-siders have neglected the spending side of the fiscal ledger. And it certainly is true that Republicans don’t seem very interested in curtailing the growth of government. But does this mean, as Williamson argues, but that our choices are limited to 1) a 36 percent spending cut, 2) catastrophic deficits and debt, or 3) a European-style value-added tax.

I actually think it would be a great idea to reduce the budget by 36 percent. That would bring the burden of federal spending back down to where it was in 2003. Notwithstanding the screams from various interest groups that this would generate, nobody was starving in the streets when the budget was $2.3 trillion rather than today’s $3.5 trillion. But Kevin is unfortunately correct in noting that this type of fiscal reform won’t happen.

Kevin is wrong, however, in saying that we therefore have to choose between either Greek-style deficits or a VAT. According to the Congressional Budget Office, tax revenues over the next 10 years will increase by an average of about 7.3 percent each year - and that’s assuming the tax cuts are made permanent and the AMT is adjusted for inflation. Reducing red ink simply requires that politicians exercise a tiny bit of restraint so that spending grows by a lesser amount. This video walks through the numbers and shows how quickly the budget could be balanced with varying levels of spending discipline.

By the way, it’s worth pointing out that the VAT has not prevented gigantic deficits in nations such as Greece, Japan, Ireland, Spain, England, etc, etc. Politicians in those nations implemented VATs, usually with promises that the money would be used to reduce other taxes and/or lower red ink, but all that happened was more spending and bigger government (this cartoon makes the point in a rather amusing fashion). In other words, Milton Friedman was right when he wrote that, ”In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”

Washington State Regulator Can’t Prevent ObamaCare from Destroying Child-Only Market

ObamaCare has touched off a battle between Regence Blue Cross Blue Shield and Washington State Insurance Commissioner Mike Kreidler. From the commissioner’s press release:

Kreidler orders Regence BlueShield to cover children

OLYMPIA, Wash. – Insurance Commissioner Mike Kreidler ordered Regence BlueShield this morning to stop illegally denying insurance to children, effective immediately.

“Regence is in clear violation of state law that prohibits insurers from denying insurance to people on the basis of age,” said Kreidler. “I was shocked and deeply disappointed when Regence announced its decision last week to stop selling insurance to kids.”

The Affordable Care Act requires all health plans to cover kids with pre-existing conditions…

Regence Blue Shield, the largest health insurer in the individual market, notified Kreidler on Sept. 27 that, effective Oct. 1, it would no longer sell individual health insurance policies to kids.

From Regence’s press release:

We were shocked by the Commissioner’s action and press statement this morning. This gross politicization of such a complex regulatory problem does not help address the very real economic challenges of providing coverage to Washingtonians seeking individual insurance policies, especially children.

Over the past several months, we have had at least five separate conversations with the Commissioner and his staff regarding planned changes to how we would cover children under age 19. Our goal in those discussions was and continues to be a solution that would allow us to serve all of our individual members – including children – without exacerbating costs and increasing coverage risks for the entire pool. Never once did the Commissioner or his staff express any concern that these changes might violate state law. We’re disappointed that the Commissioner appears to have suddenly changed his perspective…

We’ve been very clear that we will insure kids during open enrollment periods when the child is not the sole subscriber – and we will do so regardless of health status. Dozens of carriers across the country have found it necessary to adopt similar policies.

We disagree with the Commissioner’s action today and will consider how it might impact our ability to offer coverage to all individuals across the state. While more than ten carriers have deserted Washington’s individual market – leaving three today – Regence has continued to insure these members despite losses of more than $33 million in the last three years. While we remain committed to our individual members, we simply cannot expose our broader membership to greater risk. Therefore, we believe the changes we made are in the best interest of the nearly one million Washingtonians we serve today.

Washingtonians want and need an equitable, stable insurance market that people can afford. We want to avoid the mistakes of the 1990’s when a small minority was allowed to game the insurance system by purchasing insurance only when they were sick, which led to rate spikes and the collapse of the individual market.

Either way, the child-only market is toast.

Anti-Obamacare Rulings a Trend or Just Coincidence?

I’m fond of saying that lawsuits don’t proceed at Internet speed – meaning that people are disappointed when I tell them that a new constitutional challenge to uphold property rights or free speech or individual liberty generally will take years to get through the courts, or that we’ll have to wait several months for a court to issue an opinion in some front-page case.  But lately it does seem that developments from the ongoing legal challenges to Obamacare are coming faster and faster, as if the train has now left the station and, to badly mix metaphors, it’s snowballing to an eventual collision at the Supreme Court.

That “gaining speed” phenomenon is mainly coincidence – given the more than 20 Obamacare lawsuits out there, briefing schedules, hearings, and rulings are bound to overlap at some point – but it has been interesting to compare and contrast the events of the last 10 days.  To recap some of the high points, this summer Judge Henry Hudson denied the government’s motion to dismiss Virginia’s law suit (read my comments here and Cato’s brief here).  Then two weeks ago, Judge George Steeh granted a similar motion in a case brought by the Thomas More Law Center in Michigan – in a cursory opinion I react to here and critique in this op-ed.

Last Thursday, Judge Roger Vinson issued a 65-page opinion allowing most of the lawsuit brought by 20 states, the National Federation of Independent Business, and two individuals to proceed (my reaction here).   This is an important ruling spelling out the unprecedented nature of the power Congress purports to assert here, with the individual mandate of course but also in potentially commandeering state officials and coercing them with strings attached to Medicaid funds and other regulatory burdens.

Finally, yesterday Judge Hudson held a hearing in Richmond on the parties’ cross-motions for summary judgment – which means both sides agree that no material facts are in dispute and the court should go ahead and rule on the law without having a trial.  (Cato filed a brief for this stage of proceedings as well.)  By all accounts, the hearing went well for Virginia; Judge Hudson was skeptical of the government’s argument that individual decisions not to enter the insurance marketplace was the sort of “local economic activity that has a substantial effect on interstate commerce” that the Supreme Court has said marks the outer bounds of Congress’s power under the Commerce Clause.  The judge also indicated that he would issue an opinion by the end of the year.

This is all heartening news – the courts that are seriously grappling with these lawsuits (and especially the highest profile cases brought by the 21 states) actually think the Constitution places limits on federal power.  Then again, I can’t believe that question is even up for discussion!  Stay tuned – and keep track of all the lawsuits at healthcarelawsuits.org.

Federal Reserve Bank Pay Soars

The public is concerned that governments are providing excessively generous compensation to their workers. Attention has focused on the high salaries and benefits of federal civilian employees and the often lavish pensions paid to state and local workers.

The compensation policies of the Federal Reserve System also deserve scrutiny. The chart compares average wages of workers in the U.S. private sector and workers in the 12 Federal Reserve Banks. In recent years, the average wage in the Fed’s regional banks has soared, reaching $84,054 in 2009, or 67 percent greater than the private sector average wage of $50,462. Meanwhile, the average wage of the 2,100 workers in the Fed’s Board of Governors in Washington reached $116,030 in 2009. (Federal Reserve Bank data is from this annual report table. Private sector pay is from the BEA, as discussed here).

However, there is a major caveat to this Federal Reserve Bank data. Bank employment has fallen from a stable level before 2002 of about 23,000 to just 17,398 in 2009. One reason is that a major Fed activity—check processing—is rapidly declining due to technological changes. Thus, it is likely that many lost Fed jobs were at relatively lower salary levels.

Nonetheless, despite a 26 percent workforce reduction since 1995, overall Fed Bank compensation costs (wages and benefits) have grown just as fast as the overall economy. Fed compensation costs doubled between 1995 and 2009 as U.S. GDP doubled. The Fed’s total current operating expenses—including compensation, buildings, etc—also doubled during this period. (The Fed’s expenses are from this table in its annual reports. I excluded the new “interest on reserves” expense).

In 2009, total average wages and benefits of Fed Bank workers was $124,974, or more than double the $61,051 average compensation in the U.S. private sector. Fed workers have very generous benefits, including rare perks such as subsidized cafeteria meals.

Let’s look at top end of the Fed’s workforce. In 2009, the average salary of the Fed’s 12 regional presidents was $340,323. In addition, there were 1,183 “officers” in the Fed Bank system with an average salary of $198,960, which is up 94 percent from the average officer salary in 1995.

Also note that the number of these high-paid “officers” in the 12 Fed Banks increased 25 percent between 1995 and 2009 (950 to 1,183), even as the number of overall Fed employees fell 26 percent, as noted. The system is thus becoming very top-heavy.

Federal Reserve annual reports are available online back to 1995. But a 1996 report from the Government Accountability Office discussed the fairly rapid rise in Fed operating expenses during the 1988 to 1994 period, thus indicating that rising costs have been an issue for some time.

How does this affect the general public? Rising costs result in fewer central bank profits being transferred to the U.S. Treasury. That means higher federal deficits or taxes. The GAO explains:

“The Federal Reserve is a self-financing entity that deducts its expenses from its revenues and transfers the remaining amounts to the U.S. Treasury. Because an additional dollar of Federal Reserve cost is an additional dollar of lost federal revenue, the costs of operating the Federal Reserve System are borne by U.S. taxpayers just like the costs of any federal agency.”

As a monopoly immune from competition, the Fed will tend to have a bloated bureaucracy. That makes oversight by Congress very important so that technological efficiencies gained in Fed functions such as check-clearing are passed along to taxpayers, and not gobbled up, for example, by rising numbers of high-paid officers. As the Congress next year looks for ways to reduce the budget deficit, it should look for cost savings at the Fed.

Policymakers might consider whether the Fed really needs 12 regional bank organizations, each with huge fortress-like buildings in cities across the nation. They should ask why the number of high-paid “officers” has increased, even as the number of overall Fed workers has fallen. And they should ask whether Fed employees really need such generous benefit packages—including, for example, both a defined contribution and a defined benefit plan.

I’m not convinced that we need a monopoly central bank. But until policymakers explore alternatives such as free banking, they should try to reduce costs at the Fed as they scour the entire budget for savings.   

(Assistance was provided by intern Michael Nicolini).