A few readers have now asked me about the “libertarian” reaction to yesterday’s Supreme Court ruling that allows companies to use boilerplate contract provisions that require consumers to arbitrate any disputes individually rather than coming together as a class action for arbitration purposes (let alone being able to bring claims into court).  That is, where an individual claim isn’t worth that much money (about $30 in yesterday’s case of AT&T Mobility v. Concepcion), no lawyer will take the case and so only by having a class file collectively, the argument goes, will justice be served.

The ruling broke down 5-4 on “conventional” lines, with an opinion by Justice Scalia, joined by the Chief Justice and Justices Kennedy, Thomas, and Alito, holding that the Federal Arbitration Act trumped (“preempted” by operation of the Constitution’s Supremacy Clause) California law that was more favorable to the plaintiffs.   Justice Thomas also filed a concurrence, noting that “state public policy against arbitration” is not enough to revoke a contract with an arbitration agreement.  Justice Breyer dissented, joined by Justices Ginsberg, Sotomayor, and Kagan, arguing that certain class action waivers are unenforceable.

Here’s some more background (edited from a useful summary I received in a Heritage Foundation email):  A cellular telephone contract between the parties provided for arbitration of all disputes, but did not permit classwide arbitration.  After the Concepcions were charged sales tax on the retail value of phones provided for free under their service contact, they sued AT&T, and their suit was consolidated with a class action alleging false advertising and fraud.  The district court denied AT&T’s motion to compel arbitration.  The Ninth Circuit affirmed, reasoning that the Federal Arbitration Act, which makes arbitration agreements valid and enforceable except on such grounds as exist to revoke any contract, did not require arbitration because the prohibition on classwide proceedings was “unconscionable” under California law.  The Supreme Court reversed, stating that arbitration agreements must be placed on equal footing with other contracts and California’s rule was preempted by the FAA and its strong federal policy favoring informal arbitration.

I’ll leave it to my colleagues Walter Olson, our expert on civil litigation, and Roger Pilon, who has written and spoken extensively on preemption, to comment on the particulars of the opinion if they wish.  What I will say generally is that (1) we at Cato take the enforceability of contracts quite seriously, but (2) preemption is a very technical area of law that has to be examined on a case-by-case, statutory-provision-by-statutory-provision basis. See, for example, this Cato Supreme Court Review article from a few years ago, and also the relevant section of last year’s “Looking Ahead” essay that presciently previewed the Concepcion case (kudos to Erik Jaffe!).  Finally, Roger will be writing an article piece on this term’s preemption cases for the next Review – but you’ll have to wait till Constitution Day in September for that!

The U.S. Commerce Department just released its initial snapshot of first-quarter economic growth this morning. The new news is that economic growth slowed to 1.8 percent, a disappointing rate that will do nothing to shrink unemployment. The old news is that the report continues to label rising imports as a “subtraction” from gross domestic product (GDP).

According to the prevalent Keynesian view, rising imports depress economic growth by causing domestic demand to “leak” abroad. Every good or service we import is one less that must be provided by U.S. workers, or so the thinking goes. Note the final, highlighted sentence in this passage from today’s report:

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

In Table 2, the Commerce Department calculates that rising imports subtracted 0.72 percentage points from real GDP in the first quarter. This will be widely interpreted as meaning that GDP growth would have been 2.5 percent last quarter if those burdensome imports had not increased.

This is all bunk, as I try to explain in a Cato study released earlier this month, titled, “The Trade-Balance Creed: Debunking the Belief that Imports and Trade Deficits Are a ‘Drag on Growth.’”

One source of confusion is the fact that the government estimates GDP, not by measuring what we actually produce each quarter, but by measuring what we spend. The government doesn’t know whether private households, corporations, or the government are spending on a domestically produced good or an imported good, or how much of an exported good is made up of imported components. To avoid over-counting, it subtracts total imports from total domestic expenditures to derive what was produced domestically. The subtraction of imports only cancels out the overstatement, not real GDP.

In fact, as I argue in the study, imports contribute to real GDP growth by providing raw materials, parts, and machinery at more affordable prices for a broad swath of U.S. industry. And when consumers save money on imported goods and services, they have more left over to spend on other domestic goods and services. If the money we spend on imports does not come back to buy our exports, it returns to buy U.S. assets, which also contributes to economic growth through lower interest rates and direct investment in our productive capacity.

As a final refutation of the prevailing creed, I present evidence that shows that the U.S. economy consistently performs better during periods when imports and trade deficits are rising as a share of GDP compared to periods when they are decreasing.