Archives: 03/2012

Judicial Modesty and Severability

As we digest the Obamacare oral arguments of the past three days, here’s a brief note on yesterday’s severability issue. The academics and pundits who assured us that the Court would easily dispose of  this case—8-1 or, at worse, 6-3—were not only set back on their heels by Tuesday’s sharp attacks on the government’s Commerce Clause arguments, but even more, perhaps, by the openness of the Court’s conservatives to throwing the whole thing out. Thus, their spin now, championed prophylactically yesterday by The New York Times, is that the Court must “recognize limits on its own authority to overturn well-founded acts of Congress.” Heaven forfend us from judicial activism.

Heartening as it may be to find the Times and its followers discovering at last the virtues of judicial modesty and limited power, were the Court to rule that compelling individuals to engage in commerce is beyond Congress’s power to regulate already existing commerce, and to rule further that because the Patient Protection and Affordable Care Act’s mandate is inextricably bound up with its guaranteed issue and community rating provisions, as even the government admits, all of which constitutes the “heart of the Act,” the whole thing must go, that would not be an exercise of judicial activism.

Indeed, were the Court to ignore Justice Scalia’s plea and take upon itself the task of sifting through the Act’s 2,700 pages to try to determine what should stay and what should go—Justice Ginsburg’s “salvage job”—it would then be engaging in the kind of policy judgments that are reserved to the political branches—the very essence of judicial activism. Of course, the Court could also notice that Congress originally had a severability clause in the Act, but it took it out in the final version. That’s pretty good evidence that Congress wanted Obamacare to stand or fall in one piece.

Should A Bank’s CEO also be the Chairman of the Board?

One of the more contentious issues in corporate governance, particularly as it relates to the stability of financial institutions, is whether a company’s CEO should also be the Chairman of the Board of the company.   In the case of Goldman Sachs, the union American Federation of State, County and Municipal Employees (Afscme) felt it was needed to separate those two positions.

First, in my humble opinion, this is ultimately an issue for shareholders to decide upon, at least for non-financial companies that don’t receive taxpayer bailouts (let’s set aside the autos).  If shareholders believe separating the two enhances value, then as long as it consistent with the terms of the corporate charter, they are welcome to try.  If they are wrong the market will correct that error.  In this regard the agreement between Goldman and Afscme is a loss for shareholders, as they are being denied the opportunity to vote on the issue.

But Goldman is a bank holding company; therefore able to access the Fed’s discount window and receive other benefits not available to non-banks.  So it would seem reasonable to me to place restrictions upon those feeding at the government trough that reduce the likelihood of using said subsidies.  By this standard, separating the CEO from the Chairman position is no longer simply a choice for shareholders, but an empirical issue relating to bank safety.

So what does the data suggest?  While we are lacking a direct test for Goldman Sachs, or even investment banks in general, a recent study in the April 2012 issue of the peer-reviewed Journal of Banking and Finance does shed some light.  The authors go back to the Savings and Loan crisis and ask: did the separation of CEO and Board Chair display any influence on whether a thrift failed or not?  The study’s conclusions are:

We find that thrifts were more likely to survive the thrift crisis when their CEO also chaired the firm’s board of directors. On average, chair-holding CEOs undertook less aggressive lending policies than their counterparts who did not chair their boards. Consequently, taxpayer interests were protected by thrifts that bestowed both leadership posts to one person. This is an important policy issue, because taxpayers become the residual claimants for depository institutions that fail as a result of managers adopting risky strategies to exploit underpriced deposit insurance. Our findings corroborate recent evidence that manager-dominated firms resist shareholder pressure to adopt riskier investment strategies to exploit underpriced deposit insurance.

While this is just one study and I don’t expect it to settle the debate, it should make us all a little more modest about pushing corporate changes that may actually make banks less stable rather than more.  Or in the words of Yale Law Professor Roberta Romano, we should resist the temptation to rely on “quack corporate governance.”

Debating TSA’s Effectiveness

The Economist has been hosting a spirited debate between Kip Hawley, former head of the Transportation Security Administration, and security expert Bruce Schneier, probably the agency’s most prominent (and fierce) critic. The reaction from readers suggest that the overwhelming weight of opinion is with Schneier, who writes:

Exactly two things have made air travel safer since 9/11: reinforcing the cockpit door, and convincing passengers that they need to fight back. Everything else has been a waste of money. Add screening of checked bags and airport workers and we are done. All the rest is security theatre.

Hawley falls back, repeatedly, on the claim that the new measures must have been effective and worth the cost, since there have been no successful attacks on airplanes over the past decade. By which logic my magical tiger-repellant rock is also highly effective—I’d be willing to part with it for a few thousand dollars, which when you think about it, is a small price to pay for peace of mind. As Schneier observes, successful attacks were an extraordinary rarity before 9/11 as well—and academic studies, the excellent work of our own John Mueller—provide no support for the thesis that the enormous expenditures on airport security since have meaningfully reduced the risk. Oddly, neither do any of Hawley’s anecdotes about various foiled plots—which involve admirable intelligence and law enforcement efforts disrupting terror cells long before they get anywhere near an airport.

Schneier concludes with a look at the positive costs of all this questionable screening. If time is money, Schneier estimates that the economic costs of travel delays, multiplied by millions of passengers, dwarfs TSA’s budget each year. Moreover, as those delays—and “enhanced” procedures that sometime seem deliberately designed traumatize survivors of sexual abuse—push travelers into riskier modes of transportation, more lives are likely to be lost without terrorists having to lift a finger. But the most profound cost may be our acceptance of the procedures themselves—and of a society where intrusive searches and arbitrary rules are just a normal part of getting around:

The goal of terrorism is not to crash planes, or even to kill people; the goal of terrorism is to cause terror. Liquid bombs, PETN, planes as missiles: these are all tactics designed to cause terror by killing innocents. But terrorists can only do so much. They cannot take away our freedoms. They cannot reduce our liberties. They cannot, by themselves, cause that much terror. It’s our reaction to terrorism that determines whether or not their actions are ultimately successful. That we allow governments to do these things to us—to effectively do the terrorists’ job for them—is the greatest harm of all.

But one form of TSA screening is clearly highly effective: The agency recognized that Schneier’s arguments posed a clear and present danger to its budget, and successfully campaigned to have him excluded from a recent congressional hearing at which he’d been slated to testify.

Obamacare Argument Post-Mortem

Now that I’ve woken from the first full night’s sleep since the Supreme Court’s three-day Obamacare marathon began, I can share my thoughts on how the argument went, in case you haven’t seen my first and second days’ reports for the Daily Caller:

  1. The Anti-Injunction Act: On an argument day that can best be described as the calm before the storm, it quickly became clear that the Supreme Court would reach the constitutional issues everyone cares about. That is, regardless of how the justices resolve the hyper-technical issue of whether the Anti-Injunction Act is “jurisdictional,” this law – which prevents people from challenging taxes before they’re assessed or collected – does not apply to the Obamacare litigation. There were also hints that the Court was skeptical of the government’s backup merits argument that the individual mandate was justified under the Constitution’s taxing power. Perhaps the only surprising aspect of the hearing was how “cold” the bench was; it’s rare for the justices to allow advocates to speak at length without interruption, but that’s what they generally did today. That’s yet another indication that the Court will get past the AIA appetizer to the constitutional entree.
  2. The individual mandate: From Justice Kennedy’s noting that the government is fundamentally transforming the relationship of the individual to the government, to Chief Justice Roberts’s concern that “all bets are off” if Congress can enact economic mandates, to Justice Alito’s invocation of a hypothetical burial-insurance mandate, to Justice Scalia’s focusing on the “proper” prong of the Necessary and Proper Clause – and grimacing throughout the solicitor general’s argument – it was a good day for those challenging the individual mandate.  Paul Clement and Mike Carvin, who argued for the plaintiffs, did a masterful job on that score, showing again and again the unprecedented and limitless nature of the government’s assertion of federal power.  The solicitor general meanwhile, had a shaky opening and never could quite articulate the limiting principle to the government’s theory that at least four justices (and presumably the silent Justice Thomas) were seeking.  While trying to predict Supreme Court decisions is a fool’s game, the wise should take note that if Tuesday’s argument is any indication, Obamacare is in constitutional trouble.
  3. Severability: The most likely ruling on severability is that all of Obamacare will fall along with its fatally flawed individual mandate.  While such a result would be legally correct, it would still be stunning.  Perhaps even more remarkable is that the severability argument proceeded under the general assumption that the mandate would indeed be struck down.  This was not a mere hypothetical situation about which the justices speculated, but rather a very real, even probable, event.  There’s still a possibility that a “third way” will develop between the government’s position (mandate plus “guaranteed issue” and “community rating”) and that of the challengers (the whole law) – perhaps Titles I and II, as Justices Breyer and Alito mused (and as Cato’s brief detailed) – but the only untenable position would be to sever the mandate completely from a national regulatory scheme that obviously wouldn’t work without it.
  4. Medicaid expansion/coercion: The justices don’t want to reach the factually complicated and legally thorny Medicaid issue.  That may be another marginal factor pushing one or more of them to strike down all of Obamacare under a straightforward severability analysis and leave the “spending clause coercion” issue for another day.  This was perhaps the most difficult of the four issues to predict, and having heard argument doesn’t really make that task easier.  A majority of the Court was troubled by the government’s “your money or your life” stance, but it’s not clear what standard can be applied to distinguish coercion from mere inducements.  Then again, if this isn’t federal coercion of the states, I’m not sure what is.

General post-argument reaction: All of my pre-argument intuitions were confirmed, and then some:  The Court will easily get past the AIA, probably strike down the individual mandate, more likely than not taking with it all or most of the rest of the law (including the Medicaid expansion).  Still, it was breathtaking to be in the courtroom to see the Chief Justice and Justices Scalia, Kennedy, and Alito all on the same page.  (For example, when Justice Kennedy’s first question during yesterday’s hearing was, “Can you create commerce in order to regulate it?” – a question hostile to the government – my heart began racing.)  Much as I’d love to think that my briefs helped get them there even a little bit, ultimately it’s the strength of the constitutional claims and the weakness of the government’s positions that prevailed – or will prevail if the opinions that come down in three months follow along the lines set by this week’s arguments.  They may not of course – trying to predict the Supreme Court isn’t a science—but I’m coming out of this week feeling very good.

Finally, for links to all of Cato’s briefs and my last series of op-eds on the Obamacare litigation, see Monday’s blog post.

Give Talks with Iran a Chance

In today’s Philadelphia Inquirer, my co-author Doug Bandow and I argue that Washington must engage Tehran in order to keep it from following the same course as Pyongyang—a nuclear regime ruling over a population anguishing under international sanctions.

Negotiating with Iranian leaders will not resolve the nuclear issue in the next few months. What’s needed is a process that encourages Tehran to make tactical concessions, such as persuading it to forestall uranium enrichment at higher levels and allowing for more intrusive inspections. Next month, when Turkey hosts talks between Iran and the “5+1 group”—the United States, Russia, China, Britain, France, and Germany—American officials should move toward adopting a long-term policy that incorporates Iran into the community of nations. Diplomacy remains the best means of containing Tehran’s nuclear ambitions. Unfortunately, diplomacy is unpopular with those who see war as the answer to most international problems.

But an attack is not in America’s national interest. Rather than promoting regime change or bringing hope and prosperity to the region, an attack will unify a divided country, likely lead to a regional conflagration, and potentially leave the global economy in turmoil. Moreover, an attack would be counterproductive. As those opposed to the prospect of military action have argued, bombing Iran is the fastest way to ensure that Iran gets a bomb.

The U.S. is willing to allow Iran to have civilian nuclear power, but not nuclear weapons. As Doug and I argue in our piece, “Virtually no one wants Iran to develop nuclear weapons. But war would almost certainly leave America worse off, and sanctions could well fail while punishing the Iranian people for no good reason.”

This Friday, the Cato Institute is hosting a half day conference to examine two main questions surrounding the Iranian nuclear program: What are the prospects for a diplomatic solution? And what are the options should diplomacy fail? Two excellent panels with diverse views, including the Skeptics’ own Justin Logan, will debate the topic. You can sign up here or watch it live here.

Cross-posted from the Skeptics at the National Interest.

We’ve Added Feathers and it Still Won’t Fly?!?

Economist Rick Hanushek argues today that there is no evidence to suggest  “weighted student funding” will improve public school outcomes as its bipartisan backers hope. He contends that simply tying school-level funding to students, and thereby bypassing some of the budgetary role of districts, will create no systemic incentive for improvement and will not advance more substantive reforms.

He’s almost certainly right. Instead, Rick contends that districts should be financially rewarded based on their performance, borrowing a key aspect of the free enterprise system. But just that one aspect… and that’s a problem. There is no reason to believe that slapping a single isolated aspect of the market system on to the side of our state school monopoly will transmogrify it into a model of efficiency and responsiveness. Any more that strapping feathers to a brick can make it fly.

Rick is of course right that no system can produce the outcomes we need and want unless excellence is rewarded and failure penalized. But much more is needed to achieve those ends than simply funding successful schools or districts at a higher level. In the free enterprise system, the entrepreneurs who create successful products and services are personally rewarded for that success. They are free to enter the marketplace with their new ideas and to risk their own and their investors’ money in the hope that those ideas are sound–losing it if they are mistaken. If successful, they can raise capital for expansion by being able to offer a return on that investment, and grow organically or by taking over and turning around failing competitors. None of that is possible within a monopoly school system.

A great deal of empirical evidence exists indicating which education policies work, which don’t and why. The clear conclusion is that market freedoms and incentives are the answer to our education woes. But these freedoms and incentives cannot be retrofit, piecemeal, into our creaking, ossified, Rube Goldbergian school monopoly.

Being a Global Power on $469 bn a Year

A passage from an op-ed in yesterday’s Wall Street Journal caught my attention, but it took me a day to sort out the details. Mark Thompson at Time’s Battleland blog helped close the loop.

The op-ed (republished at the Foreign Policy Initiative) praised Rep. Paul Ryan for reversing the automatic cuts in the Pentagon’s budget, as mandated in the Budget Control Act. The article explains:

These cuts will eviscerate the United States military if Congress does not quickly pass a law to undo them this year. Gen. Martin Dempsey, the chairman of the Joint Chiefs of Staff, has made plain the consequences of sequestration: “We would no longer be a global power. (emphasis mine)

I was skeptical, knowing a bit about sequestration, and also a bit about Gen. Dempsey. Did he really say that? Did he mean it?

After all, the suggestion is absurd on its face. Under sequestration, the Pentagon’s base budget will average $469 billion a year in constant, 2012 dollars between 2013 to 2022.  We spent $464 billion in 2006, plus $130.5 billion for the wars in Iraq and Afghanistan (also in constant 2012 dollars). Were we not a “global power” in 2006? We spent, on average, $452.9 billion a year in the entire post-Cold war period (1990 to 2012). Have we not been a “global power” since the collapse of the Soviet empire?

For that matter, Ronald Reagan’s last budget, for FY 1989,  spent $524 billion on the Pentagon. At the time, we accounted for about a third of global military spending. Today we account for almost half. Would we truly cease to be a global power if we contributed 43 or 44 percent of global military spending, while the next largest spender – China – accounted for 10 or 11 percent? (See the charts that I posted late last week).

I understand that money spent – either in real terms, or relative to what others spend – is not the sole criteria to consider when calculating a country’s power. But I have a hard time believing that China’s spending is four times more effective than our own. And if it is, we have a very different sort of problem on our hands.

Thankfully, Gen. Dempsey has clarified his remarks, revealing that he understands the facts far better than the op-ed writers. “The idea that I really wanted to get across,” he told reporters on Wednesday, “was that we wouldn’t be the global power that we know ourselves to be today.”

He went on:

Will we remain a global power? Ya, of course. We have demonstrated that we can provide the nation options. … But we’re going to be providing a lot fewer options and a lot less capacity.

I wouldn’t quarrel with that. If we were to return to pre-9/11 spending levels, the United States would still be a global power. We could not afford, however, to be the world’s policeman without placing undue burdens on our men and women in uniform. As U.S. military spending declines, therefore, we should expect, and hopefully demand, that other countries take primary responsibility for defending themselves and their interests. They must fill the capacity gap that has been covered for too long by U.S. troops, and paid for disproportionately by U.S. taxpayers.