Today, the Cato Institute releases my latest working paper, “50 Vetoes: How States Can Stop the Obama Health Care Law.” From the executive summary:

Despite surviving a number of threats, President Obama’s health care law remains harmful, unstable, and unpopular. It also remains vulnerable to repeal, largely because Congress and the Supreme Court have granted each state the power to veto major provisions of the law before they take effect in 2014.

The Patient Protection and Affordable Care Act (PPACA) itself empowers states to block the employer mandate, to exempt many of their low- and middle-income taxpayers from the individual mandate, and to reduce federal deficit spending, simply by not establishing a health insurance “exchange.” Supporters of the law do not care for this feature, yet they adopted it because they had no choice. The bill would not have become law without it.

To date, 34 states, accounting for roughly two-thirds of the U.S. population, have refused to create Exchanges. Under the statute, this shields employers in those states from a $2,000 per worker tax that will apply in states that are creating Exchanges (e.g., California, Colorado, New York). Those 34 states have exempted at least 8 million residents from taxes as high as $2,085 on families of four earning as little as $24,000. They have also reduced federal deficits by hundreds of billions of dollars.

The Obama administration is nevertheless attempting to tax those employers and individuals, contrary to the plain language of the PPACA and congressional intent, and to deny millions of Americans the opportunity to purchase low-cost, high-deductible coverage. Employers, consumers, and even state officials in those 34 states can challenge those illegal taxes in court, as Oklahoma has done. States can also block those illegal taxes—and even stop the federal government from operating an Exchange—by approving a strengthened version of the Health Care Freedom Act.

The PPACA’s Medicaid expansion, which would cost individual states up to $53 billion over its first 10 years, is now optional for states, thanks to the Supreme Court’s ruling in NFIB v. Sebelius. Some 16 states have announced they will not expand their programs, while half of the states remain undecided. Yet the Obama administration is trying to coerce states into implementing parts of the expansion that the Court rendered optional. States can replicate Maine’s lawsuit challenging this arbitrary attempt to limit the Court’s ruling.

Collectively, states can shield all employers and at least 12 million taxpayers from the law’s new taxes, and still reduce federal deficits by $1.7 trillion, simply by refusing to establish Exchanges or expand Medicaid.

Congress and President Obama have already repealed the third new entitlement program the PPACA created—the Community Living Assistance Services and Supports Act, or CLASS Act—as well as funding for the “co-op” plans meant to serve as an alternative to a “public option.” A critical mass of states exercising their vetoes over Exchanges and the Medicaid expansion can force Congress to reconsider, and hopefully repeal, the rest of this counterproductive law. Real health care reform is impossible until that happens.

It doesn’t create a lot of confidence in Europe that tiny little Cyprus, with a GDP less than Vermont, is now causing immense turmoil.

Though to be more accurate, events in Cyprus aren’t causing turmoil as much as they’re causing people to examine both government finances and bank soundness in other nations. And that’s causing anxiety because folks have taken their heads out of the sand and looked at the reality of poor balance sheets.

Looking closer at the specific mess in Cyprus, an insolvent financial sector is the cause of the current crisis, though the problem is exacerbated by the fact that the government has dramatically increased the burden of government spending in recent years and therefore isn’t in a position to finance a bailout.

But that then raises the question of why Cyprus is bailing out its banks? Why not just let the banks fail?

Well, here’s where things get messy, particularly since we don’t have a lot of details. There are basically three options for dealing with financial sector insolvency.

1. In a free market, it’s easy to understand what happens when a financial institution becomes insolvent. It goes into bankruptcy, wiping out shareholders. The institution is then liquidated and the recovered money is used to partially pay of depositors, bondholders, and other creditors based on the underlying contracts and laws.
2. In a system with government-imposed deposit insurance, taxpayers are on the hook to compensate depositors when the liquidation occurs. This is what is called the “FDIC resolution” approach in the United States.
3. And in a system of cronyism, the government gives taxpayer money directly to the banks, which protects depositors but also bails out the shareholders and bondholders and allows the institutions to continue operating.

As far as I can determine, Cyprus wants to pick the third option, sort of akin to the corrupt TARP regime in the United States. But that approach can only work if the government has the ability to come up with the cash when banks go under.

I’m assuming, based on less-than-thorough news reports, that this is the real issue for Cyprus. It needs taxpayers elsewhere to pick up the tab so it can bail out not only depositors, but also to keep zombie banks operating and thus give some degree of aid to shareholders and bondholders as well.

But other taxpayers don’t want to give Cyprus a blank check, so they’re insisting that depositors have to take a haircut. In other words, the traditional government-imposed deposit insurance regime is being modified in an ad hoc fashion.

And this is why events in tiny Cyprus are echoing all over Europe. Folks in other nations with dodgy banks and unsound finances are realizing that their bank accounts might be vulnerable to haircuts as well.

So what should be done?

I definitely think the insolvent institution should be liquidated. The big-money people should suffer when they mismanage a bank. Shareholders should lose all their money. Then bondholders should lose their money.

Then, if a bailout is necessary, it should go only to depositors (though I’m not against the concept of giving them a “haircut” to save money for taxpayers).

But Cyprus apparently can’t afford even that option. And the same is probably true of other European nations. 

In other words, there isn’t a good solution. The only potential silver lining to this dark cloud is that people are sobering up and acknowledging that the problem is widespread.

Whether that recognition leads to good policies to address the long-run imbalances – such as reductions in the burden of government spending and the implementation of pro-market reforms – remains to be seen.

The Fund for American Studies has long done excellent work educating students on the principles of individual liberty and free-market public policy.  Many Cato scholars and interns have been involved with its programming over the years, including Roger Pilon and Randy Barnett in the legal field.  I now have the privilege of serving on the Board of Visitors of TFAS’s Legal Studies Institute (along with Randy and others who are familiar to those who follow Cato’s work), and heartily recommend its summer program for law students looking for a DC experience that includes an internship, class credit, mentoring, high-level briefings and panels, and career development.  The application deadline has now been extended to April 3.  Here are the details:

LEGAL STUDIES INSTITUTE                                     

May 23 – August 2, 2013                                                                                             

Washington, D.C.                                                                             

PROGRAM COMPONENTS

• Legal Internship: Participants will be placed in a 9-week summer legal internship where they will work full-time and gain substantive experience in the legal profession. Internship sites include law firms, courts, public interest organizations and the legal departments of trade associations, corporations and government agencies.

• Briefings and Activities: Participants will attend private briefings at institutions of the judicial, legislative and executive branches and will meet with prominent judges, lawyers and judicial scholars. Previous guest speakers have included; Supreme Court Justice Antonin Scalia, Former Attorney General Michael Mukasey, U.S. Court of Appeals, Ninth Circuit Chief Judge Alex Kozinski and D.C. Federal Court of Appeals Judge Douglas Ginsburg among others.

• Career Development Activities: Workshops will be held to help prepare participants for success in their law careers, and planned networking events will facilitate professional interaction. 

• Attorney Mentor Program: Each participant will be matched with an experienced lawyer who will serve as a professional mentor during and after the program. 

• Constitutional Law Course for Credit: You will be enrolled in a constitutional law course titled “Originalism and the Federalist Papers.” Classes will be held at Georgetown University Law Center. Students will receive credit from Ohio Northern University Pettit School of Law, or for an additional fee from Georgetown University Law Center. The course will be taught by Federalist Society lecturers, Professor John Baker, visiting fellow at Oriel College, University of Oxford and Visiting Professor at Georgetown University. Professor Randy Barnett, the Camack Waterhouse Professor of Legal Theory at Georgetown University Law Center and Professor Roger Pilon of the Cato Institute will also lecture. 

• Housing: Students will live in fully-furnished apartments in downtown Washington, DC and are matched with other Institute participants. The apartments provide easy access to the DC metro transportation system. 

• Scholarships: 75% of students receive scholarship awards based on financial need and merit.

APPLICATION INSTRUCTIONS

Applications will be accepted until the extended deadline of April 3, but applicants are encouraged to apply as early as possible.  Visit www.DCinternships.org/LSI for more details and to begin an application. Questions may be directed to Jennifer Fantin, LSI recruitment and admissions assistant at admissions [at] tfas [dot] org  or 202.986.0384.