Archives: July, 2011

Obama Administration Fights Privacy Act Liability

In February 2004, privacy advocates were put off by a Supreme Court case called Doe v. Chao, in which the Court found that the Privacy Act requires a victim of a government privacy violation to show “actual damages” before receiving any compensation. The Act appeared to provide for $1,000 per violation in statutory damages, but the Court interpreted the legislation to require that actual damages be proven, after which the victim would be entitled to a minimum award of $1,000. (Statutory damages are appropriate in privacy cases against the government because government bureaucrats pay little price themselves when their agency gets fined. A penalty is required to draw oversight and political attention to violations of the law.)

Doe v. Chao was a close call given the statutory language, and the Court chose the outcome that would limit the government’s exposure to Privacy Act liability. Doing so marginally weakened the government’s attentiveness to the already insubstantial protections of the Privacy Act.

A companion case to Doe v. Chao has now reached the Supreme Court. FAA v. Cooper, which the highest court recently agreed to hear, involves a victim of a government privacy invasion who alleges “actual damages” based on evidence of mental and emotional distress. Cooper, a recreational pilot who was HIV-positive, had chosen to conceal his health status generally, but revealed it to the Social Security Administration for the purposes of pursuing disability payments. When the SSA revealed that he was HIV-positive to the Department of Transportation, it violated the Privacy Act. Cooper claims in court that he suffered mental and emotional distress at learning of the disclosure of his health status and inferentially his sexual orientation, which he had kept private.

In the Ninth Circuit Court of Appeals and now in the Supreme Court, the Obama Administration has argued that it doesn’t have to pay the victim of this privacy violation because mental and emotional distress do not qualify as “actual damages.” No one disputes that Cooper has to present objective proof of harm as a check on the truth of his claims. But the government isn’t saying that Cooper is faking distress at having his health status and sexual orientation illegally exposed by the government. The government is arguing that the court should limit “actual damages” to economic injury simply because it’s the government being sued.

The doctrine of sovereign immunity holds that the state is generally not subject to lawsuits. The state can make itself liable by a clear statement in legislation that it agrees to be sued. In the Privacy Act, Congress did exactly that: it created a cause of action against the government for Privacy Act violations.

But now the Obama Administration is arguing that the statute should be interpreted narrowly based on sovereign immunity. It’s an attempt to limit Privacy Act liability once again, insulating government officials from consequences of their wrongdoing. The Court should reject the sovereign immunity argument. Congress made the government subject to suit, and the chips should fall where they may on the question of what constitutes “actual damages.”

Putting aside sovereign immunity, what about the “actual damages” question? Should the Court recognize mental and emotional distress as a harm coming from privacy violations?

Privacy is the subjective condition people enjoy when they have the power to control information about themselves and when they have exercised that power consistent with their interests and values. People can, and often do, maintain privacy in information they share with a limited audience for limited purposes. Privacy is violated when that sense of control and controlled sharing is upended.

A privacy violation is called a “violation” because of the loss of confident control over information, which, depending on the sensitivity and circumstances, can be very concerning and even devastating. When privacy violations have this effect–not idle worry about who knows what, but the shock and mortification of having specific, sensitive information wrested from one’s control and exposed–that’s the case when actual damages should probably be found. If the Privacy Act is to protect the interest after which it’s named, the Court will recognize proven mental and emotional suffering as “actual damages.”

Did Dodd-Frank End Too-Big-To-Fail?

With the one-year anniversary of the Dodd-Frank Act approaching, it seems a reasonable time to ask if the Act achieved one of its primary stated goals:  ending the too-big-to-fail status of our largest banks.  After all, we are beyond the financial panic and the Act has had a year to work.

Now one could simply ask, what does the law say?  Well, to give its proponents some due, Dodd-Frank does suggest in a few sections that large banks, or other companies, will not be rescued.  But then previous laws also said that Fannie Mae and Freddie Mac wouldn’t be rescued either.  So much for the letter of the law.  And of course there are various holes in Dodd-Frank that do allow bondholders to be rescued.   Section 204 is very clear that the FDIC can buy the outstanding debt of a failing firm.  If they buy such debt at par, then that sounds like a bailout to me.

Ultimately the success of Dodd-Frank will depend upon whether the law convinces market participants that bailouts are over.  For if they believe otherwise, the largest firms will be able to borrow at cheaper rates and grow at the expense of their rivals, becoming even more “too-big-to-fail”.  Just look at the history of Fannie Mae to see how this could play out.

So what do the debt markets say (if they could speak)?  The accompanying chart shows the difference between funding costs for the largest banks ($10 billion plus) and the smallest ($100 million and less), the dotted line shows the same relationship for the largest over mid-sized banks, to help determine how much of this advantage might be driven by economies of scale.

First one of the more interesting facts:  historically the largest banks have had to pay more for borrowing, an average of 61 basis points more, over the last 30 years.  During the financial crisis and even since the passage of Dodd-Frank, that relationship was turned on its head and the largest banks enjoyed a funding advantage, currently around 30 basis points.  These numbers may sound small but an advantage of around 30 bp allowed Fannie and Freddie to basically take over the mortgage market.

Despite whatever Dodd-Frank intended, the debt markets are speaking pretty loudly:  too-big-to-fail is still with us.

I Hope I’m Wrong, But Here’s Why Republicans Will Lose the Debt-Limit Fight

There are three reasons why I’m not very hopeful about the outcome of the debt-limit battle.

1. There is no unity in the GOP camp.

Republicans have been all over the map during this fight. Some of them want a balanced budget amendment. Some want a one-for-one deal of $2 trillion of spending cuts in exchange for a $2 trillion increase in the debt limit. Others want some sort of spending cap, akin to Senator Corker’s CAP Act. Some want to mix all these ideas together in a cut-cap-balance package. Others want Obamacare repeal.  And the latest proposal is Sen. McConnell’s proposal to let Obama unilaterally raise the debt limit.

These are mostly good ideas, but the failure to coalesce around one proposal – preferably one that is easy to understand – has made the Republican position difficult to define, defend, or advance.

2. The fear of demagoguery is high.

As I explained months ago, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner are trying to spook financial markets with hyperbolic warnings about a risk of default. This is blatant dishonesty and demagoguery, but Republicans are nervous that this tactic might be successful if there is a high-stakes showdown as the government’s borrowing authority runs out.

For those with short memories, this is what happened with TARP back in 2008. The initial bailout proposal was rejected, leading to short-run market gyrations, and many Republicans panicked and switched their votes to yes.

3. Republicans don’t control the Senate or the White House.

I’m stating the obvious, of course, but people seem to forget that any debt limit increase will need to get through the Senate and get signed by Obama.

Imagine you are Harry Reid or Barack Obama. Is there any reason why you would acquiesce to Republican demands? Yes, you need to at least pretend to care about big government, wasteful spending, and red ink, but why not hold firm and then strike a deal based on make-believe spending cuts? That’s exactly what happened during the “government-shutdown” debate earlier this year.

This post, incidentally, is not an attack on Republicans. I’m very willing to attack GOPers when they do the wrong thing, but I’m not sure they deserve to get hammered in this case.

Simply stated, I don’t think there’s a winning strategy, so I don’t see any point in going nuclear.

If nothing else, at least Republicans resisted the siren song of tax increases, which is not a trivial achievement since Democrats clearly were hoping to trick GOPers into giving up one of their strongest political positions.

One Difference between Statists and Non-statists

A non-statist would never write something like this:

We had a big surplus. It was time to do something with it. Brad DeLong, a former Clinton administration official and an economist at the University of California at Berkeley, didn’t want to see the surplus spent on tax cuts. He wanted to see it spent on public investments.

To a statist, all resources belong to the state.  The government doesn’t tax 40 percent of your earnings; it magnanimously spends the other 60 percent on you.  When the government reduces your taxes, it isn’t taking less money from you; it’s spending more of its money on you.

The above quote comes from an article titled, “We Have a Taxing Problem, Not Just a Spending Problem.”  But since statists believe that not taxing equals spending, both halves of that title actually mean the same thing: “We Have a Not-Taxing-You-Enough Problem.”

Relegate Mandatory Data Retention to the Dustbin of History

Greg Nojeim of the Center for Democracy and Technology reports on yesterday’s hearing in the House Judiciary Committee on H.R. 1981, the Protecting Children from Internet Pornographers Act of 2011. (I lamented the bill earlier this week, as did Julian Sanchez last week.)

Rep. Sensenbrenner [(R-Wis.)], Chair of the Crime Subcommittee, opened the hearing with an extraordinarily strong attack on the bill. Saying the Committee should relegate mandatory data retention to the dustbin of history, he attacked the data retention provision on economic and privacy grounds. “I believe this bill is bad policy and I will do my best to kill it.” He also said, “This bill runs roughshod over the privacy rights of people who use the Internet for thousands of lawful purposes … this bill should be defeated and put in the dustbin of history.” He also lashed out at the provision in the bill (Section 7) that would give the U.S. Marshals administrative subpoena authority to investigate unregistered sex offenders, reminding the Subcommittee that as Chairman of the full Committee during the debates about reauthorizing the Patriot Act in 2005 or 2006, he had examined the issues surrounding administrative subpoenas and determined that admin subpoena authority would be too much a risk to privacy to confer on the gov’t.

Kudos to Rep. Sensenbrenner for considering the privacy consequences of this bill and the risks in conferring too much power on the government. I’d be in favor of his keeping these concerns in mind with policies well beyond data retention.

‘The Government Would Really Like for You to Have a Wheelchair’

USA Today’s Kelly Kennedy is going to town on Medicare & Medicaid fraud.  Today, she writes:

In California, as English-as-a-second-language Medicare recipients line up for other services, a person will approach them in line and “They’ll say, ‘The government would really like for you to have a wheelchair,’” said Julie Schoen, director of special projects for California’s Senior Medicare Patrol. Then, she said, the scammer will take the Medicare recipient to a “clinic” for an exam.

The patient will often receive a wheelchair, but not a motorized wheelchair worth about $3,600 for which Medicare will be billed, Schoen said…

“It’s a big problem,” Schoen said. “The scammers really know how to do it well, but the guy with Parkinson’s who needs a chair has to fight for it.”…

In South Dakota, people fall victim to television ads, said Melissa Wood, program director for Senior Medicare Patrol in South Dakota. The ads show seniors using electric wheelchairs to fish or visit a shopping mall, and tell them that, as Medicare recipients, they qualify for free.

“The people have no idea it’s fraudulent,” Wood said. “I think in the past year or so, it’s picked up because of all the advertisements.”

The scammers also collect people’s Medicare numbers, which they then use fraudulently or sell to another company to use, Wood said.

But never fear.  Your trusty public servants are on the job:

The federal government is cracking down on medical-equipment providers who either overcharge Medicare for motorized wheelchairs or obtain them for people who don’t need them, Medicare and Justice Department records show.

Medicare plans to almost triple the number of anti-fraud strike forces it operates nationwide, from seven to 20, U.S. Health and Human Services Department budget documents show.

Almost triple!  Too bad fraud experts say Medicare would have to increase its anti-fraud efforts 10- or 20-fold to address fraud in a serious way.

Congress will never do that, of course, because the game is rigged – not just to allow fraud, but to protect fraud.

A Medicare Reform Model Everyone Can Love

That’s the title of this week’s column for Kaiser Health News.  An excerpt:

As luck would have it, we have a home-grown model for Medicare reform that would contain spending and improve the quality of care. This model appeals to both Republican and Democratic ideals: it satisfies the Republican desire for individual ownership and control, but emulates a social insurance program revered by Democrats. The key to improving health care for seniors is … to make Medicare look more like Social Security.

With this column, I have finally managed to work my favorite Seinfeld quote into my professional writing.