The General Welfare Clause: Is the Power of Congress Constitutionally Unlimited?

Art. 1, Sec. 8. of the US Constitution: Congress “shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.” Does this clause mean that the US Government can legislate in any way that benefits the Union? According to Thomas Woods, the general welfare clause “was a restriction on the power of the federal government: it had to exercise the powers delegated to it with an eye to the welfare of the country as a whole, not to the particular advantage of one state or section.” That is to say, the Congress could provide for the general welfare of the United States only within its delimited powers listed in the US Constitution.

The complete essay is at Essays on Two Federal Empires.

Regulating Commerce by Mandate: The Death of American Federalism?

The mandate to buy health-insurance may be an unconstitutional encroachment of the U.S. Government onto the liberty of its citizens. Furthermore, the rigid federal rules in the health-insurance reform law of 2010 may represent yet another way by which the state governments have been rendered servile in begging Washington for breathing room in a domain that may be rightly theirs, constitutionally (i.e., beyond the enumerated powers assigned to the U.S. Government). The bigger story in this jurdical piece on healthcare is perhaps whether American federalism itself was finally being extirpated and expunged in favor of consolidation. 

The full essay is at Essays on Two Federal Empires.

The Conflict of Interest in a Silent Oligarchy Being Engaged in Its Public Policy

Goldman Sachs, which had played a role in enabling Greece to hide its public debt, urged investors in March of 2010 to buy shares in two big health insurance companies, UnitedHealth Group and Cigna. The reason: their rates were sharply up and competition was down. According to The New York Times, the White House claimed, “ the Goldman Sachs analysis shows that while insurers can be aggressive in raising prices, they also walk away from clients because competition in the industry is so weak.”[1] Rate increases ran as high as 50 percent, with most in “the low- to mid-teens” — far higher than overall inflation. 

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

1. David Herszenhorn, “Obama Wields Analysis of Insurers in Health Battle,” The New York Times, March 6, 2010.

On the Health-Insurance Mandate: Nullification or Judicial Review?

A Republican U.S. President pushes hard for the U.S. Government to play a more active role in K-12 education under the rubric of “No Child Left Behind.” A Democratic U.S. President pushes hard for the U.S. Government to require residents to purchase health-insurance. Some of the same Republicans who cry foul on the insurance mandate insist that “marriage” be federalized through an amendment to the U.S. Constitution. From whichever vantage-point one cares to assume, political consolidation at the expense of federalism seems to be the name of the game in American politics.

Proponents of the health-insurance mandate have argued that Congress acted within its authority under the U.S. constitution’s commerce clause. However, Ken Cuccinelli, the attorney general of Virginia, argued the U.S. Supreme Court has never ruled that the clause allows Congress to require citizens to purchase a good or service in commerce. Cuccinelli’s complaint suggested that the Virginia law that outlaws the federal government from forcing state residents to purchase health insurance trumps the federal law because it is a matter assigned to the states under the Constitution’s 10th Amendment rather than enumerated to the purview of the U.S. Government. In other words, the supremacy clause pertains only to powers delegated to the U.S. Government. That government is not supreme where the states are sovereign. The latter is substantial in principle, even if not recognized in practice; all powers not explicitly granted to the federal government remain with the states or the people, according to the Tenth Amendment to the U.S. Constitution.

So it is rather perplexing that the State governments have generally been sleeping through federal encroachments since the time of the CSA-USA war in 1861-1865. As repeated efforts to thwart federal encroachment failed, I suspect the state governments have given up, though several of them seem to have woken up in contesting the federal mandate on health-insurance. Yet the objection is issue-specific, and thus not apt to lead to any fundamental realignment from consolidation back to federalism. Americans tend to be issue- rather than systemic-oriented, and this is reflected in the focus of their elected representatives. Unfortunately, this can mean that no one is left watching the store itself; everyone is debating the particular products on the shelves—and with carefree indifference to even the most relevant history. For instance, the history of nullification has apparently fallen off the shelf, at least with respect to any collective memory.

In 1830, Andrew Jackson sent federal troops into South Carolina because its legislature had decided that it could nullify federal law encroaching on its domains of governmental sovereignty. The South Carolina legislature relented (though its succession document would be retrieved in 1858, after the Congress had just passed another tariff on rice and cotton exports. Jackson’s message was that nullification of federal law would mean the dissolution of the Union.

Nevertheless, the governor of Virginia signed a bill into law in 2010 nullifying the federal mandate. The policy argument against nullification stresses that state opt-outs would reduce the size of the insurance pool and thus reduce the anticipated cost-savings. Similarly, Gov. Mike Rounds of South Dakota, a Republican, signed a bill into law on March 12, 2010 declaring that the federal regulation of firearms is invalid if a weapon is made and used in South Dakota. On the day before, Wyoming’s governor, Dave Freudenthal, a Democrat, had signed a similar bill for that state. The same day, Oklahoma’s House of Representatives approved a resolution that Oklahomans should be able to vote on a state constitutional amendment allowing them to opt out of the federal health care overhaul. In Utah, lawmakers embraced states’ rights with a vengeance in the final days of the legislative session that week. One measure said Congress and the federal government could not carry out health care reform, not in Utah anyway, without approval of the Legislature. Another bill declared state authority to take federal lands under the eminent domain process. A resolution asserted the “inviolable sovereignty of the State of Utah under the Tenth Amendment to the Constitution.” Alabama, Tennessee and Washington are considering bills or constitutional amendments that would assert local police powers to be supreme over the federal authority. Rhode Island, Vermont and Wisconsin — none of them known as conservative bastions — were considering bills that would authorize, or require, governors to recall or take control of National Guard troops, asserting that federal calls to active duty have exceeded federal authority.

Given the Nullification Crisis in the nineteenth century, the actions of public officials at the state level in the twenty-first century seem foolhardy. They were on much firmer ground in contesting the validity of the federal law through the federal courts, which can declare a law of Congress unconstitutional. However, this means is not without drawbacks.  In particular, there is a structural conflict of interest in having the federal high court decide a matter between the government of which the court is a branch and a state government. Not surprisingly, the U.S. Supreme Court has tended historically to interpret the U.S. Constitution in the federal government’s favor. It is like having a member of one of the teams as the umpire and finding that that umpire tends to rule in favor of his or her own team. The surprising thing is that onlookers are surprised when this happens.

“Everything we’ve tried to keep the federal government confined to rational limits has been a failure, an utter, unrelenting failure — so why not try something else?” said Thomas E. Woods Jr., a senior fellow at the Ludwig von Mises Institute, a nonprofit group in Auburn, Alabama. Article 6 of the U.S. Constitution indicates that federal law is superior over state law where there is a conflict, but this doesn’t make sense outside of the federal government’s enumerated powers—for otherwise why even enumerate? To rely on elections for the needed correction is not sufficient, according to Mises. “Whether the political impulse of states’ rights and nullification will become a direct political fault line in the national elections this fall is uncertain.” It is almost never asked: “Who is the sovereign, the state or the federal government?”—a question put by State Representative Chris N. Herrod, a Republican from Provo, Utah. Technically (but not in practice), both governments have governmental sovereignty in the American federal system; it is not an “either/or” question.

The question is perhaps whether a balance between the two systems of governmental sovereignty within the American system can be restored simply by reacting issue by issue. Is it possible, moreover, for the American people to embrace a constitutional moment wherein the architectonic of the system itself is the issue?

Sources:

Kirk Johnson, “States’ Rights Is Rallying Cry for Lawmakers,” New York Times, March 16, 2010. 

Alexander Mooney, “Virginia Governor to Sign Law Firing Back at Health Care Bill,” CNN, March 24, 2010. 

Lehman Bros: Insufficient Accountability in Corporate Governance

In an executive meeting at Lehman in the summer of 2008, Skip McGee told Richard Fuld and the other top executives that the market was demanding “that we hold ourselves accountable.”  Essentially, he was pushing for Gregory’s outster.  What strikes me is what he didn’t say–namely, something like, “the stockholders are holding us accountable!”[1]  Had he said this, Fuld might have laughed. Of course, Richard Fuld was a major stockholder, so he might have viewed it as “holding myself accountable to myself.”  Given the inherent ethical conflict of interest in such a statement, I don’t think we can rely on corporate governance as a check on excessive managerial risk-taking when executives hold a substantial share of the stock.  Therefore, in including stock options in executive compensation to align executives' incentives with medium and long-term firm performance, boards should add institutional safeguards or accountability mechanisms to corporate governance. In business-speak, there is a cost incurred that boards may not be aware of in aligning executive compensation (and firm ownership) with future profitability.

The full essay is in Essays on the Financial Crisis.

1. Grace Wong and Aaron Smith, "What Killed Lehman," CNN.com, March 15, 2010. 

Unaccountability at Bank of America

Andrew Cuomo, who was the Attorney General of New York in February of 2010, filed suit then against Bank of America and two of the bank’s employees, Ken Lewis and Joe Price.  In his complaint, Mr. Cuomo said that the bank first chose not to disclose the losses involving Merrill Lynch, which topped $16 billion, to its shareholders who were voting to approve the deal. Then, the bank told federal officials that those same losses had persuaded bank executives to consider backing out of the deal, unless the government provided a second bailout. “Throughout this episode, the conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris and a palpable sense that the normal rules of fair play did not apply to them,” Mr. Cuomo said. “Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.”[1]

While “too big to play by the rules” and “too big to tell the truth” are striking  and warrant serious reflection in an economy wherein corporations are allowed to continue to operate even though they are too big to fail, my eyes are caught on something else in the quotes that is apt to be missed by many readers in the present era of corporate capitalism.  Consider “the conduct of Bank of America, through its top management…”  Does anything seem odd to you about this phrase?  In the wake of the US Supreme Court’s decision that corporations’ “free speech” is protected by the US Constitution’s first amendment, the debate on whether corporate entities should be considered legal persons has emerged from law school classrooms into the public square.  Reading “the conduct of Bank of America, through its top management,” I wanted to rewrite it as “the conduct of Ken Lewis and others in their capacities in working at Bank of America”.  This would be more accurate.  That corporate conduct must be through human beings means that corporate entities cannot themselves act or have conduct.  Accordingly, to say that a corporation apart from its human beings is a person does not make sense (because conduct applies to persons).  To say that BOA conducts itself through people is really to say that the conduct is done by the (human) persons.  

Besides questioning the corporate legal person judicial decision and the related decision that corporate “persons” have the same right to free speech as human beings have, I would argue based on my analysis here that the individual employees who were involved in the alleged understatement of losses and overstatement of an intent (and ability) to pull out of the deal (i.e., holding the economy hostage to get the feds to pony up in the deal) should be viewed as the recipients of the punishment.  Because a corporation is wealth rather than a person (i.e., it cannot go to jail), a fine could also be imposed on it even as the guilty employees go to prison for their conduct (regardless of the size of the fine on the bank).  But this wouldn’t mean that the corporation is being punished.  Rather, the stockholders (and anyone else who could otherwise draw on the retained earnings) would be punished  for lax corporate governance. If the employees’ fraud circumvented reasonable corporate goverance, however, perhaps the stockholders should not be punished/fined.

My point is that we should hold the individual decision-makers (and implementers) accountable (if they committed fraud) because they are persons.  Human beings commit fraud—not corporations.  So we should not fall under the illusion that some corporate entity greater than the sum of its human parts is somehow responsible (i.e., as if a corporation could make decisions apart from the human beings working in it).   A corporation doesn’t have hubris; persons do, which is to say human beings.  Projecting human qualities onto legal entities may feel good and be convenient for those who want to evade responsibility; what concerns me is when the rest of us unthinkingly go along with the illusion and take it for real, writing statements like ”the conduct of Bank of America.”  Reading this, one ought to think to herself, ”that doesn’t even make sense.”  Unfortunately, the lapse is so ubiquitous that few of us object to it, not to mention notice it.  When something that does not make sense comes to be routinely taken as a given, something is really wrong in a society.  The problem is particularly lethal when it is not even transparent because it is akin to flying blind.  Let’s just say that it is the financial interest of those human beings who benefit from corporate wealth that we continue to fly blind.

1. Louise Story, "Cuomo Sues Bank of America, Even as It Settles With S.E.C.," The New York Times, February 4, 2010.

The Aristocracy of the Moneyed Corporations

In Citizens United v. FEC on January 21, 2010, the US Supreme Court held by 5 to 4 that because US corporations are legal persons, they can contribute to political campaigns.   The assumption here is that corporations are more than the sum of an aggregate of persons—that is, more than citizens associating.  The corporate entity has rights in itself.  Ginsberg and Sotomeyer questioned in oral arguments whether free speech applies to spending money, and, moreover, whether corporations should be considered legal persons, much less citizens.  After all, they can’t be drafted, or vote.

A corporate is essentially privately owned wealth.  To say that wealth counts as speech seems spurious to me.  In fact, the whole legal person designation seems contrived.  Whereas the Roman republic fell to dictatorship, our republic may well have already fallen to oligarchy or corporatism.   So I agree with Barak Obama that the decision is worrisome.   Sen. Dick Durbin said that the banking lobby owns Congress after that lobby had sunk Durbin’s amendment to allow bankrupcy judges to modify mortgages in foreclosure (the banks want a veto, even if they contributed to the sub-prime mess).

If Goldman Sachs can spend virtually unlimited amounts of money on political campaigns, we can expect to see that bank’s influence over the government expand even beyond what influence it has over its own alums who occupy high policy-making positions in the US Government (e.g., Hank Paulson and Neil Kashkari at Treasury under Bush II).  If our republic is already compromised under the weight of huge concentrations of private capital, the US Supreme Court’s decision may well be enough to sink the republic…ironically in the name of liberty.  But liberty for whom?  Or does “whom” even apply here.

I contend that corporations are not citizens associating for political purposes.  There are indeed non-profit political organizations whose function it is to influence policy.  This is not a business corporation’s function.  Nor is spending money itself political speech.  Any CEO can stand outside his or her building and give a political speech for free.  But which citizens does the CEO represent in his or her association of citizens?  Stockholders?  They don’t approve corporate public affairs spending.  Employees?  They don’t either.  Customers?   We don’t approve what a CEO says just because we have purchased a bar of soap.  The US Supreme Court’s majority might well say that the CEO represents the legal person that is the corporation, but then it is not an association of citizens because associations are not said to be persons (rather, they consist of persons).  Is this too logical?  Too reasoned?  Maybe so. But maybe it shows the duplicity involved in referring to an account of private wealth as a person.  It seems to me that it is rather blatant case of anthropomorphism.  …humans treating our artifacts as having our characteristics.  We must really think we are something.

A Tax Unfair to Big Banks?

In a political economy in which large concentrations of privately-held capital, such as that of a bank or large corporation, can legally make political contributions, curiously as "free speech," even the President of the United States may actually be a paper tiger. Even when the federal government comes to the resue of a bank, Wall Street can evade any "strings" and even use the funds to pay out bonuses. Meanwhile, the American people take their elected representatives' speeches at face value, and this suites Wall Street just fine.  

Seeing to its own interests, Securities Industry and Financial Markets Association claimed that the bank tax proposed by the Obama Administration as part of the Financial Reform Act of 2010 might be unconstitutional because the levy would unfairly single out and penalize big banks.  For his part, President Obama urged the financial lobby to stand down when he introduced the tax proposal. “Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee," he said, "I suggest you might want to consider simply meeting your responsibilities.”[1] The banks had tried to head off criticism by starting new charitable programs and by structuring executive bonuses in line with principles set by the federal pay adviser, like paying bonuses mostly in stock instead of cash and deferring the payout of some bonus money in case business declines again.

However, new charities and stock compensation should not obfuscate the fact that banks too big too fail precipitated the financial crisis of 2008 and returned soon thereafter to trading on their own equity (e.g., Goldman Sachs), thanks in part to the TARP funds from Teasury.  

That the bank lobbyist organization was oriented nevertheless to void the new tax through lobbying and litigation, claiming it would hurt the big banks disporportionately, demonstrates that the bankers just didn't "get it." They should be glad that the resulting Reform Act left undisturbed the very existence of banks too big to fail. 

1. Eric Dash, "Wall Street Weighs a Challenge to a Proposed Tax," The New York Times, January 18, 2010.

Hints of a Shift Back to Federalism?

 In the US Senate race in Massachusetts between Scott Brown and Martha Coakley, there was some resistance to the proposed federal health care legislation. This pushback was in line with reinvigorating a federal system for the United States.

Several independent voters said they wanted to elect Mr. Brown to block the health care bill being considered by Congress.  They denounced the US House and Senate bills as full of deals for special interests — though several said they thought Massachusetts’ law extending near-universal coverage, one of the models for the national bill, had been largely a success. “It’s not perfect, but why should we have to pay again when we have health care?” said Ms. Grenham, who works as a physical therapist.[1]

That it is easier for a state government than the federal government to legislate on something like healthcare is no accident; the founders designed the US Government to be cumbersome precisely so most of the domestic legislating would be done by the state republics, which are closer to the people.  Hence Massachusetts has close to universal coverage while the majority of Texans might want to pass.  One size does not fit all in a heterogeneous empire-level Union.  For the US Government to go beyond its enumerated powers to duplicate what is already in Massachusetts would be to demonstrate the folly of consolidation and the related fallacy that every political unit in a federal system must have the same policy.  Although I firmly believe in universal coverage as a right rather than a privilege, I respect the right of the people of, say, Texas, to disagree and have a republic without it.   Such tolerance is necessary to a viable federal system.  Too many people imposing their agendas far from home must surely end in consolidation, which entails duplication where state governments are not already impotent.

1. Michael Cooper, "In Senate Race, Massachusetts Bucks a Political Stereotype," The New York Times, January 17, 2010.

Political Campaign Coverage: A Question of Substance

Popular election presumes meaningful discourse on current issues and political philosophy so the voters can distinguish the candidates.  Too often, however, the media takes its eyes off the ball and orients its coverage to the process rather than the content.  

For example, on the eve of a U.S. Senate special election in Massachusetts, The New York Time reported, “Volunteers and campaign workers staffed phone banks for each of the candidates in the Senate race here, as they concentrated on energizing voters to get to the polls on Tuesday.”[1]  Besides being rather obvious, this topic carries with it an opportunity cost—namely, the article that could have been written on the candidates’ political philosophies that go beyond, and thus do not reduce to the obsession on the health-care bill that was before Congress at the time.   To be sure, although it is short-sighted to use a Senate election as a referendum on a current issue, even that would be better than a focus on the campaigns’ mechanics.

Too often in presidential campaigns, media reports are on the process rather than the issues (forget political philosophies).  Because such campaigns are mostly retail rather than grass-roots (after the first few primaries), most voters rely on the media for information on the candidates.   There is a saying that might be pertinent: garbage in, garbage out. If an electorate has too much garbage to eat, the powers behind "the throne," such as those on Wall Street, can rest easy that their prerogatives will not be debated, and thus put at risk. Also, demogogues and corrupt officeholders thrive when the media is preoccupied with process over the candidates themselves. 

1. Katie Zezima, "Get-Out-the-Vote Pitches in Massachusetts," The New York Times, January 18, 2010.