Repudiating Public Debt

"That's a helluva good idea."
--Lou Brown (Major League)

My a-ha moment of the day came from this Rothbard article. In it, Rothbard contrasts private debt and public debt. He also suggests that public debt should be repudiated.

Stated differently, Rothbard thinks that we should default on our public debt.

Private debt involves a borrower who contracts with a lender for the use of some of the lender's property (usually in the form of money) for some period of time. Typical terms require the repayment of principal plus interest over some period of time. If the borrower takes on more debt than can be repaid, then the debtor has effectively stolen property that belongs to the creditor. One individual has committed an act of aggression against another's property.

In a just society, only voluntary forgiveness by the creditor would let the debtor off the hook. Otherwise, government's proper role is to assist the creditor in defense against this aggressive act. (As Rothbard observes, draconian 'debtor's prisons' are seemingly ineffective in this regard as they inhibit the debtor from working to pay back the delinquent loan.)

Where property rights are respected, private debt is policed by the need to repay the creditor; there is no bailout coming from the government. The price of credit (a.k.a. the interest rate) also governs lending in unhampered markets. Borrowers deemed to be higher risks will be charged more by lenders.

Public debt is different.

In public debt transactions, the borrower is the government. Both the borrower and the lender understand that the loan will be paid back not out of the pockets or hides of politicians, but out of the looted pockets of taxpayers. And here is my 'a-ha' straight from Rothbard:

"The government gets the money by tax coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future."

Rothbard really connects the dots here. A buyer of government bonds is essentially funding government projects under the expectation that government will plunder its people for repayment. That plunder occurs through either direct appropriation of property via taxes, or indirect appropriation of property via inflation. Either way, holders of government bonds can be seen as proponents of forceful invasion into the freedom of others.

Why should citizens be bound by debt taken on by a ruling elite that contracted these debts at the citizens' expense?

Rothbard suggests that the just and least destructive way to settle such debts is outright repudiation (read: default). Various US states have done so before, including waves of defaults following the Whig-run Second Bank of the United States inflation/bust of the late 1830s and the end of Reconstruction in the 1870s.

But wouldn't default destroy the credit of the United States? Wouldn't future borrowing costs would go through the roof as no creditor in his/her right mind would lend to a country that has defaulted on $trillion$ of loans?

Precisely, says Rothbard. The primary argument for repudiation is that it impairs future regimes from taking on public debt again. Savings and investment stay where they make the most impact - in the private sector. Moreover, private sector contracts are voluntary, and no one is forced to borrow and repay (as is the case with public sector debt).

One implication for me personally is that, if I want to be consistent with this idea (and I do), then I should not own any government bond that employs taxes as means for repayment (which is essentially all of them). Today I sold all of my government bond exposure except for cash proxies that might hold short term paper directly or indirectly tied to the government. Given the arrangement of most securities accounts, not sure how I can avoid cash-like instruments that carry short term government debt exposure.

At any rate, I now understand that if I buy government bonds, then I am sanctioning the use of force on others.

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Global Solvency Problem

"There is a wall of water coming toward New York City!
--Man on Radio (The Day After Tomorrow)

Dr J points out the diminishing returns of monetary intervention. In addtion to the reduced impact on stock prices, he also shares the below graph that reflects increasingly diminished effect on the 'real' economy. Global PMI has been trending lower since 2010 and is now ticking below the 50 level indicative of recession.

Note also that the current trend is a continuation of a trend that was in place prior to the 2008 meltdown.

This should not be surprising, of course. Monetary intervention is the provision of liquidity. Stated differently, it is money printing. Printing money cannot provide economic resources that the world desperately needs to cover their debts while maintaining standard of living.

The world has a solvency problem, not a liquidity problem. And, as John observes, liquidity does not produce solvency.

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Constitutional Taxation

Should five percent appear too small
Be thankful I don't take it all
--The Beatles

The Constitution gave Congress power to tax:

"The Congress shall of 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; but all Duties, Imposts and Excises shall be uniform throughout the United States." (A1 S8 C1)

It is evident from the above that this original taxing power was not unlimited. Taxes could only be applied toward three areas: debt service, common defense, and general welfare. Moreover, there is a principle of uniformity that holds here. Common defense and general welfare implies that tax proceeds could not be distributed using a progressive scale toward particular groups. The uniformity principle is also evident in the specification that tariffs and excise taxes 'shall be uniform' from state to state.

Further down in Article 1, the framers imposed further limits on Congress's power to directly tax individuals. This is undoubtedly due to the central role of taxes in motivating the Revolution with England, and to the framers' understanding of property rights in the framework of natural law:

"No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken." (A1 S9 C4)

Once again the principle of uniformity applies. The only type of tax that could levied on individuals directly was a head tax that did not discriminate on any basis. Instead, all would be taxed by the same amount.

The framers did not consider an income tax of any kind. There is little doubt as to why. An income tax violates principles of natural law--that people should be secure in their person and possessions, and that income taxes reflect a violent intervention in the pursuit of individual interests. The framers certainly knew that the probability of the Constitution being ratified would be near zero if it included an income tax provision.

Nearly 150 years later, of course, politicians were able to amend A1 S9 C4 to permit the taxing of income at the discretion of the federal government.

The income tax amendment is so inconsistent with the rest of the Constitution that it sticks out to anyone who understands the Constitution's grounding in natural law. Indeed, the amendment is similar to another egregious constitutional error - the one that legalized people as the property of others.

Both enslave some people for the benefit of others.

Switch in Rhyme

The shadow's high on the darker side
Behind those doors, it's a wilder ride
You can make or break, you can win or lose
That's a chance you take, when the heat's on you
And the heat is on
--Glenn Frye

Although the ink was barely dry on the Constitution before politicians began challenging its basis in natural law, the Supreme Court largely upheld, with notable exceptions of course, its libertarian underpinnings for the better part of 150 years.

The Great Depression, however, increased pressure to scrap the idea of limited goverment in favor of central planning and control. FDR's New Deal was a primary source of this pressure. Because of their radical departure from limited government precedents, New Deal laws like the National Industrial Recovery Act soon found their way before the Supreme Court.

Of the justices sitting on the Court at the time, four of them consistently opposed New Deal legislation. Justices Butler, McReynolds, Sutherland, and Van Devanter became known as The Four Horsemen.

The chief swing voter on the Court was Justice Owen Roberts. In early New Deal cases, Roberts typically sided with the Horsemen, thereby striking down much of FDRs program.

This frustrated FDR to no end. In fact, the president went so far as to propose that he should be able to name additional justices to the Court in order to 'lighten the justices' workload.' Although even FDR staffers thought his 'court packing' scheme went too far, pressure was increasing on the Court to bend to the progressive will.

In 1937 the Supreme Court court ruled on West Coast Hotel v Parrish. The case questioned the constitutionality of minimum wage legislation. In previous rulings, the Court had largely invalided such legislation. One year earlier, in fact, Roberts had joined the Four Horsemen in striking down a similar piece of minimum wage legislation in Morehead v Tipaldo.

This time around, however, Roberts switched sides, joining a majority in favor of minimum wage provisions.

Interestingly enough, FDR withdrew his formal court packing scheme at about the same time.

As such, Roberts' reversal has come to be known as "The Switch in Time that Saved Nine" in deference to the notion that external pressure swayed the Court.

After the Parrish, Roberts consistently sided with majorities that upheld New Deal laws and reversed previous rulings made on principles of limited government.

As the Four Horsemen retired, FDR replaced them with his own cronies to obtain a super majority and the Court commenced an activist binge unlike the country had seen before.

So here we are today. Another Justice Roberts does another historic switch as external pressure mounts to do so. Once again, the Court rules to expand government power over the individual.

As we recite the eerie rhyme of history.

Imposing Morality

Matthew Harrison Brady: But your client is wrong. He is deluded. He has lost his way.
Henry Drummond: It's a shame we don't all possess your positive knowledge of what is right and what is wrong, Mr Brady
--Inherit the Wind

Although the focus of this article is on 19th century libertarian Lysander Spooner, I was more interested in Rothbard's recount of the role of the pietists and liturgicals in 19th century America. Actually, Rothbard's recount is a more of a review, as we have considered much of the story before.

Pietists believed that a religious person must experience a real-time conversion of sorts that made him/her morally just in action. In mid-19th century America, pietism took on a normative bent, meaning that people needed to watch over the behavior of others and participate in their conversion if necessary. Protestants generally supported this view.

This religious view leaked into politics, when pietists reasoned that they could do an even better job of converting their fellow man by using the force of government to do so. The Republican Party of the 1850s thru 1890s became the pietists' political vehicle. During this period, the Republican Party was commonly known as the 'party of great moral ideas.' Republicans backed such social movements as prohibition, public schools, and abolition.

Liturgicals, on the other hand, believed that salvation was achieved by following the creed of the church. The experts in the creed were the leaders of the church, not the State. Liturgicals had no interest in forcing others into being saved. They merely wanted to be left alone to pursue their interests. Episcopalians, Lutherans, and Roman Catholics generally supported this view.

The Democratic Party of the 1850s thru 1890s was the party of choice for liturgicals. Liturgicals profoundly believed that moralilty was not the business of the State. The Democratic Party was commonly known as the 'party of personal liberty.'

This arrangement continued until the mid 1890s, when a confluence of factors drove the libertarian liturgical vein out of the Democratic Party. Replacing it was a socialist populism, a secular pietist of sorts prescribing that people in society should behave in ways that support a leveling of economic and social status, and that it is the job of the State to impose this view of 'social justice.'

What happened to the liturgicals? Many of them defected to pietist or populist groups, perhaps sensing opportunity to advance their interests using State force. Others simply backed away from politics and focused on their religious pursuits.

Over the past 100 years, lack of engagement in political process has penalized those who believe morality is not the business of the state. Liturgicals and others who believe that people should be able to pursue their interests unencumbered by forceful intervention by others have no meaningful political vehicle to advance their view, although perhaps the Tea Party movement is changing that.

Meanwhile, America is dominated by two political parties, each trying to impose their version of morality on others using the strong arm of the State.

Penalties, Taxes, and Rewriting Law

There's something happening here
What it is ain't exactly clear
--Buffalo Springfield

In the Affordable Care Act (ACA), the 'individual mandate' requires people to purchase health insurance. If they do not purchase health insurance, then they must pay a penalty. Failure to pay the fine results in criminal prosecution.

This is how the statute was written and presented to the American people. When asked repeatedly about whether the individual mandate was really a tax, DC Democrats repeatedly denied it. President Obama famously did so himself on national television.

However, when arguing before the Supreme Court, federal government lawyers asked the justices to consider the argument that, indeed, the individual mandate was indeed a tax. The government's brief states, "the minimum coverage provision is independently authorized under Congress's taxing power."

Previous cases argued before the Supreme Court have established clear lines between taxes and penalties (Scalia et al dissenting, 18). A tax is an enforced contribution to provide for the support of the government. Taxes 'raise revenue' for government programs. A penalty is an exaction imposed by statute as punishment for an unlawful act.

Because previous statutes have occaisionally blurred the two concepts, previous Courts have sought criteria that guides distinguishing a penalty from a tax. "When an act 'adopts the criteria of wrongdoing' and then imposes a monetary penalty as the 'principal consequence on those who transgress its standard,' it creates a regulatory penalty, not a tax." (Scalia et al dissenting, 18-19)

The simple question then, is whether the exaction imposed by individual mandate provision is a penalty or a tax. Clearly, as demonstrated by Scalia et al dissenting, 19-21, the statute itself imposes a penalty. The statute itself calls the exaction a penalty at least 18 times throughout the Act.

The dissenters observe that Congress may have developed the ACA on the basis of taxing but it chose not to do so in this case. From Scalia et al dissenting, 18:

"...we cannot rewrite the statute to be what it is not. 'Although this Court will often strain to construe legislation so as to save it against constitutional attack, it must not and will not carry this to the point of perverting the purpose of a statute...' or judicially rewriting it. In this case, there is no simple way, 'without doing violence to the fair meaning of the words used,' to escape what Congress has enacted: a mandate that individuals maintain minimum essential coverage, enforced by a penalty."

As we now know, Chief Justice Roberts labored to do otherwise (Roberts opinion, 31-44). By editing out the word 'penalty' and replacing it with the word 'tax,' the chief justice has rewritten law from the bench.

Roberts opined that judges should restrain from lawmaking since this is something that should be directly taken up between Congress and the people. However, by rewriting the statute in the form of a tax, he has done precisely this.

Most people understand that the primary reason why DC Dems did not slant the statute in the context of a tax is that taxes are politically unpopular with many Americans. A tax of the magnitude implied by the ACA may have made it generally unpalatable among the people during its development in 2009-2012. By waiting until after the law was passed and signed before declaring it a tax, Roberts has provided some measure of political cover for lawmakers.

Whether this political cover is effective or not remains to be seen. Plausibly, the American people will see through the process used here as one of gimmickry and subsequently reject its legitimacy. Moreover, Republican are already using the ruling to claim that Democrats duped people into supporting one of the largest tax increases on record. This could injure Democrats on the campaign trail.

In any event, it is hard to imagine a more straightforward example of judicial rewriting of law in the history of Supreme Court jurisprudence.

Radical Truth

"Heres to the men who did what was considered wrong, in order to do what they knew was right...what they KNEW was right."
--Benjamin Franklin Gates (National Treasure)

All discoveries occur inside of a particular age. However, some discoveries yield truths that are not relative. Instead, these truths endure various ages.

It was during the Enlightenment that many people for the first time discovered the self-evident (i.e., requiring no elaborate proof) truth that the proper state of man is to live freely, unencumbered by violent intervention from others. Prior to this period, it was broadly accepted that people must live under a system of forceful government.

What makes the Framers remarkable is that they sought to implement a system that reflected the new-found truth on a large scale. These people were truly radicals, seeking to throw off tyranny and build something heretofore unheard of.

Did they design it perfectly out of the gate? No. Did they always practice what they preached? No.

But their imperfect practice has no bearing on the validity of the underlying truth itself. More likely, it helps explain why liberty has been so difficult to achieve.

Indeed, more than two centuries after the Declaration was written, the world largely remains skeptical that Jefferson’s truths are in fact durable (‘inalienable’). That man’s natural state is one of freedom rather than of submission remains a radical concept to this day.

The debate that is being carried out in real time involves whether liberty truly is an inalienable right.

Supreme Switch

"I think that when statesmen foresake their own private conscience for the sake of their public duties, they lead their country by a short route to chaos."
--Sir Thomas More (A Man for All Seasons)

Following last Thursday's ruling, I read several theories positing that Chief Justice Roberts slanted his position on the Affordable Care Act (ACA) case to quell accusations about 'court bias'--particularly among left-leaning intellectuals in the media and elsewhere.

Then CBS's Jan Crawford broke this story yesterday, citing sources close to the deliberations that Roberts changed his position and allied with the four Liberals to salvage the centerpiece of the ACA known as the 'individual mandate.' The story does not directly claim that boosting the image of the court was Roberts' intent although innuendos were made.

The Crawford piece reports that, in the full Court conference that followed the oral arguments in March, Roberts sided with what ultimately became the four dissenting justices, who were of the opinion that the ACA should be struck down in its entirety. Being chief justice, Roberts elected to write the historic opinion himself.

Crawford's article observes that by May, sources of 'external pressure' were building in the form of countless new articles and editorials warning of the damage to the Court, and to Roberts' reputation, if the individual mandate was struck down. While some justices 'turn off' the media when cases are pending to avoid potential for influence, Crawford reports that Roberts stays plugged in, and is sensitive to how the public views the Court.

It was during this period that Crawford's inside sources said the Roberts became "wobbly" on his position, and soon began to pursue the tax argument. Roberts even tried to pursuade the dissenters, particularly Justice Kennedy, on the tax argument's merits, but they would have none of it. On the contrary, it was Kennedy, who by his voting record and opinions may in fact be the most libertarian member of the Court, who dogged Roberts to return to his original position. Kennedy also had a heavy hand in writing the dissent.

The fact that the four dissenters wrote a joint opinion that does not mention Roberts, even in the section where they sided on the mandate's unconstitutionality w.r.t. the Commerce Clause argument, was no accident. Rather, it was a signal that the four justices were upset with Roberts' switch and his logic, and no longer wished to engage in debate with him.

Crawford is careful to note that it is not known why Roberts switched his view. Perhaps he truly felt that his arguments were consistent with the Constitution he swore to uphold.

However, and this is ME writing rather than Crawford, the tortured logic of his opinion w.r.t. the tax argument (see Roberts: 31-44) suggests otherwise. When I read jumbled thought processes that include arguments that even a junior high schooler might refute, I suspect that the writer is either unclear in his/her position, or stuggling mightily in an unnatural way to make a viewpoint 'work.'

From there, postulating that CJR had ulterior motives, such as preserving the integrity of institution that he heads, that were clouding his judgment, is easy to do.

This is speculation, of course. Only the Creator knows what motivated Roberts to act as he did. However, if he did indeed choose to act in a manner that favored the Court's institutional standing over individual liberty, then this is a classic case of judicial interest impairing freedom.

Health Insurer Windfall

Lost inside
Adorable illusion and I cannot hide
I'm the one you're using, please don't push me aside
--Blondie

It has been proposed, and many people seem to believe, that the Affordable Care Act (ACA) somehow reigns in health insurers. Markets have certainly been betting otherwise since the ACA came under construction in 2009, as the below chart in United Healthcare (UNH) reflects.

In fact, health insurance stocks initially sold off last Thurs on premature headlines that the Individual Mandate had been struck down, only to recover once the full ruling was understood.

The ACA can be viewed as a government sponsored windfall for the health insurance sector. After all, the industry will be welcoming 30 million new customers who are being sent the industry's way at the point of a gun.

Moreover, insurers will reprice pools of policies higher to compensate for increased risk of having to take on people with actuarially costly conditions. Clearly, the younger and the less risky will pay more for insurance under this cost shifting arrangement. Many insurers have already been raising premiums on their 'better' customer policies.

Finally, layers of regulation that accompany the ACA raise large barriers in front of entrepreneurs thinking about climbing into the health insurance industry. New firms will be less likely to enter the sector, in turn reducing the likelihood of competition that improves quality and efficiency.

As it has done for at least a century, the federal government is once again acting in a manner that protects the franchises of 'big business.'

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Legal Precedent

Duke of Norfolk: Oh, confound all of this! I'm not a scholar. I don't know if the marriage was lawful or not. But dammit, Thomas, look at these names. Why can't you do as I did and come with us, for fellowship?
Sir Thomas More: And when we die, and you are sent to heaven for doing your conscience and I am sent to hell for not doing mine, will you come with me, for fellowship?
--A Man for All Seasons

I have read last Thursday's Supreme Court decision from cover to cover and some sections several times. It has been difficult to set down because of this case's importance. The opinions put forth by these judges have extraordinary implications for individual liberty.

Moreover, it seems to me that the validity of judicial decisions should not be estimated by the extent to which appointed-for-life judges side with each other. As FDR demonstrated for all to see, it is quite possible to pack a court with political interest. A law is not a just one by edict, but by the extent to which it is consistent with the rights of man.

The validity of judicial rulings, therefore, is best evaluated by digging into the opinions themselves. In their opinions, justices  must bare their thought processes for all to read. Although they cannot directly alter the composition of the bench, the citizenry can surely evaluate the strength of legal arguments expressed in the opinions to assess the extent of jurisprudence or jurisimprudence evident in the minds of the people writing those opinions.

Were more people to do this, they might conclude that a practice frequently employed in court opinions, that of citing rulings and opinions of past cases to justify opinions on current cases, holds less legitimacy than judges seem to attribute.

In chewing thru the legal precedents cited in the healthcare ruling, I am reminded of the journalistic practice of quoting sources. Find sources that you agree with, and cherry pick quotes that fit the context that you are building. Voila, a prime source of media bias...

Judges can employ similar methods when writing opinions.

If a judge cites a precedent opinion from a former judge that was commited to strong central government like Joseph Story, or from a judge committed to majority rule like Oliver Wendell Holmes, or a from a majority of judges during the period when FDR packed the court, then just how much 'true' legal information can one glean from these precedents? Just because it was noted or ordered so in the past does not make it right.

Instead, the quality of a judicial opinion must be grounded in the judge's thought process itself. Justifying current law because 'we did it that way in the past' is a poor substitute for a well reasoned mind. A well reasoned mind surely recognizes that courts throughout history have been rife with interest that taints opinions.

Yes, citing precedents, like citing sources, can augment an argument. But grounding a legal decision in an interested judicial past past seems like Pilate washing his hands, or the blind leading the blind.