Judicial Restraint

In violent times, you shouldn't have to sell your soul
In black and white, they really, really ought to know
--Tears for Fears

When seeking to justify his ruling that Obamacare was in fact a reflection of Congress's power to tax, Chief Justice Roberts made it a point to declare that it is not the Supreme Court's "job to protect the people from the consequences of their political choices."

Stated differently, the justice is saying, "The Court declares that this law is a tax, and Congress has authority to tax per the Constitution. If you don't like it, then take it up with Congress"--presumably via the voting booth.

A basis for Roberts' declaration is known as 'judicial restraint.' Judicial restraint is the idea that the Court should defer to the will of lawmakers whenever possible, and employ the Constitution to nullify legislation only in extreme cases. This is because lawmakers are directly accountable to voters who can reward or penalize legislative outcomes. SC justices, on the other hand, are not directly accountable to the people since they are appointed and tenured for life.

An early proponent of judicial restraint was Justice Oliver Wendell Holmes, who believed in "the right of the majority to put their opinions into law." Holmes once said that it was his job to help his fellow citizens go to Hell if they chose to do so via their elective choices.

Hopefully the Creator does not close the door to Hell behind Holmes the doorman...

Not surprisingly, Holmes became a favorite among Progressives. Any proponent of decoupling legal decisions from the Constitution will attract those seeking to advance their interests through political influence.

Judicial restraint possesses some features that seem attractive at first glance. Because judges usually defer to the will of lawmakers, then judicial opinions biased by personal interest seem less likely. Moreover, as Chief Justice Roberts suggested, bad law seems to be in the hands of the people, since they elect the lawmakers.

However, there are several problems with the idea of judicial restraint. If judges are prone to defer to the will of lawmakers, then the interpretive role of the judicial branch seems compromised. Over time, it would seem that lawmakers seeking to exploit judicial restraint would gradually push the limits of the law so that what was once extreme becomes middle of the road and prone to the bench's rubber stamp.

Rather than decreasing the possibility of interested judicial opinions, judicial restraint merely alters the expression of that interest. Judges may be motivated to express deference to laws under review because they have interests similar to, or rewarded by, a legislative body and/or its electorate. Judicial restraint provides cover for a judge's interests.

The real problems with judicial restraint lie in the argument that Chief Justice Roberts employs. If legislators enact 'bad' laws, and the SC defers to these bad laws, then the people's primary peaceful recourse is at the ballot box. But the window to express their displeasure is not immediate. It is every 2 to 6 years, depending on the office and where we are in the election cycle. A tremendous amount of 'bad' could occur in the meantime.

The more serious problem with the argument that bad law should be thrown back in the hands of the people is that, in a democratic election system, the 'people' represent the majority. If judges defer to laws enacted by majority rule, then they are not protecting the rights of minorities who opposed the law. In a positivist system such the one espoused by Justice Holmes above (i.e., the law IS the majority), then protecting the rights of minorities is a non-issue.

But in a system grounded in natural law as is our Constitution, then protection of the rights of the smallest of all minorities, the individual, is the crux of the matter.

Judicial restraint as invoked by Justice Roberts encourages mob rule, and compromises liberty.

Bernank Does Obamacare

A license to love, insurance to hold
Melts all your memories and change into gold
His eyes are like angels, his heart is cold
--Sade

From the creators of the famed Ben Bernank. The economic ramifications of Obamacare. So laughably sad.

Here are outcomes we can predict with near certainty:

costs - higher
quality - lower
wait times - longer

A few more likely outcomes I would have added to the skit. Innovation will likely go down as entrepreurial entry into healthcare sectors will be discouraged. Moreover, rather than supply remaining the same as suggested by the skit, it is likely that capacity will leave the system. Given higher demand/lower supply setup, shortages seem v likely.

Another EU Party

"On any other day, that might seem strange."
--Cameron Poe (Con Air)

Huge lift today in risk assets as the current EU shrimpfest revealed new plans about using the ESM facility to bail out banks sans 'austerity' measures and WITH Germany's support. Right now the plan remains a bureaucratic brief but it certainly fostered much market hope today.

The SPX was up 2.5% and closed at its highest level since early May. Commodities joined the party as well. Crude led the way--up 8%!

I took this opportunity to peel off some peripheral commodity exposure, some of it bought in the hole last week. Just tradin' 'em...

Right now, it's hard to discern whether this EU plan is for real, so it is difficult to discern how durable this rally could be. What I do know is that the solutions being discussed (borrowing, money printing, no deep spending cuts) have next to no chance of righting this situation.

Stated differently, I'm currently of the mind that this rally should be sold. And I plan to do just that if prices continue to march higher. Am particularly interested in shedding some more commodity exposure prior to the Next Time Down.

position in SPX, commodities

Throw It Off

Hey, think the time is
Right for palace
Revolution
--The Rolling Stones

When Democrats were busy jamming thru the health care bill in late Dec 2009 while most people were on holiday, I remember thinking that this reckless behavior might wake some people up. If people realized that this law, and the process employed to create it, was a threat to their freedom, then they would punish these politicians at the ballot box.

That is precisely what happened.

Many folks became engaged in the political process for the first time. The Tea Party movement, a movement based on the founding notions of free markets, fiscal responsibility, and limited government, grew in size and stature. And in November 2010, these people made themselves heard.

The silver lining of yesterday's Supreme Court decision may be that it is awakening yet another fraction of the citzenry, maybe even a critical mass, to the spectre of legalized plunder.

Did yesterday's decision tip the system? The Supreme Court appears to have given government the green light to do whatever it wants thru virtually unlimited power to tax. But is that power truly unlimited? If enough people conclude similarly to the Founders, then they may seek to curb that taxing power. Perhaps people will galvanize to throw off this government at the ballot box. 

Some are calling the upcoming election a referendum on the healthcare law. It may be more appropriately viewed as a referendum on freedom.

Fooled Again

And the parting on the left
Is now the parting on the right
And the beards have all grown longer overnight
--The Who

After discussing our flawed judicial process yesterday, I felt pretty much ready for any ruling rendered by the Supreme Court rendered on Obamacare today. But I must admit surprise. Am still chewing thru the 193 page opinion so my thinking is a work-in-process, but I'd like to share a few early thoughts here.

First, the gist of the ruling. The majority of the Court found the 'individual mandate' to be an invalid exercise of the Congress's power under the Commerce Clause and the Necessary and Proper Clause. This is a very positive finding that should have ended things right there. Indeed, many 'speed reading' members of the media anxious to score the scoop appeared to stop right there and began broadcasting that the Court had struck down the law.

The real eyebrow raiser followed, however. The four liberal judges and Chief Justice Roberts joined to declare the mandate as imposing a tax on those choosing to not buy health insurance, and concluded that the individual mandate should be unheld as within Congress's power under the Taxing Clause.

While I am not (yet) versed on all relevant Supreme Court case law, this ruling struck me as extraordinary when I initially read it--and hours later it still does. It appears to me that 'legislating from the bench' has taken on quite literal meaning here, as a majority of Supreme Court justices have endeavored to rewrite a statute rather than to interpret it. Moreover, it appears that this action places the power to tax in the hands of the judiciary.

The other portion of the ruling, and one that may be a 'sleeper' down the road in its effect, is that 7 of 9 judges concluded that the portion of Obamacare that requires states to expand Medicaid or face loss of Medicaid funding violates the Constitution (10th Amendment et al). It is not yet clear to me precisely what the ramifacations of this ruling might be, but in a vacuum this does affirm the principles of federalism. Can't help but think this might embolden some states to push back more strongly against federal laws that they feel are unjust.

Ron Paul was not surprised by the SC ruling, stating that "the Court has a dismal record when it comes to protecting liberty against unconstitutional excesses by Congress." He observes that everything that government does is in fact a 'mandate.' The broader issue is that "this compulsion implies the use of government force to those who refuse. The fundamental hallmark of a free society should be the rejection of force. In a free society, therefore, individuals could opt out of 'Obamacare' without paying a government tribute."

Attention will likely turn to this fall's election as a means for repealing the healthcare law. Perhaps the most positive outcome of today's ruling that it may motivate more people to engage in the process. Perhaps more people will consider the Tea Party tenet of limited government vis a vis our current position.

Judicial Review and Liberty

And the men who spurred us on
Sit in judgment of all wrong
They decide and the shotgun sings the song
--The Who

Citizens of the United States, and the world for that matter, await the Supreme Court's decision on the legality of Obamacare--particularly as it relates to the mandate that individuals must purchase health insurance. The High Court's decision is expected tomorrow.

I am certainly hopeful that the Court strikes down as much of Obamacare as possible.

Regardless of the direction of tomorrow's ruling, however, let me be clear that employing the majority opinion of nine tenured-for-life lawyers to dictate legality is not the basis for the rule of law. It is the basis for discretionary rule by men.

We know this is how the current system works because of the political influence gained by being able to appoint justices to the bench. Judges are appointed who are perceived to be of like mind to the political party that controls the appointment. When a different regime takes control, then it proceeds to appoint judges biased toward other interests.

This is discretionary rule. Discretionary rule was what the Framers sought to avoid.

The rationale behind the Supreme Court's authority is 'judicial review.' Judicial review is not a power granted by the Constitution. Instead it was a power granted to the Supreme Court by, yep, the Court itself in the early 1800s.

If the Framers thought that the Supreme Court should rule on the constitutionality of laws, then they would have surely enumerated this power into Article Three of the Constitution. However, the Framers knew that actions of judges can be politically motivated, and authorizing a federal court to render judgment on the rightness of law would almost certainly deliver power into the hands of the bench and those who decide who sits on the bench.

Interestingly, many Antifederalist arguments were grounded in the thesis that the Constitution as written would permit interested judges to populate the federal bench, which over time would compromise liberty.

The Antifeds were right.

Ruling on Arizona Immigration Law

Let me in, immigration man
I won't toe you line today
I can't see it anyway
--Crosby & Nash

Yesterday the US Supreme Court voted 5-3 to strike down some portions of Arizona law seeking to deter illegal immigration. Mainstream media are widely reporting that this ruling upholds federal authority to set immigration policy and laws.

What isn't being widely reported is that, of the 14 sections that originally comprised the Arizona law, 11 still stand, and the High Court ruled against only a portion of the 12th section. Moreover, the portion of the section that cleared the Court was the right of police to question their immigration status--in and of itself likely to drive many illegal immigrants to leave Arizona.

It should also be noted that last year the Court cleared an earlier Arizona bill that requires employers to electronically verify the immigration status of potential employees.

As such, the Arizona law provides a Court-approved framework for other states that do not want to sit idly by while illegal immigrants help themselves to resources that states have reserved for their citizens.

That said, it is still disturbing that the Supreme Court struck down any provisions of Arizona SB 1070. In his dissenting opinion (begins on pdf p. 30), Justice Scalia argues that there is nothing unconstitutional in the provisions of SB 1070 under Court review.

The Constitution provides that "the Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States" (Article IV, Section 2). However, if one state had particularly lax citizenship standards, then that state would serves as a gateway for unwanted aliens to obtain entry and resources in other states. Therefore, the federal government was given authority "to establish a uniform Rule of Naturalization...throughout the United States" (Article I, Section 8, Clause 4).

As long as states are not in violation of federal law, then the power to exclude unwanted aliens rests with the states. As Justice Scalia discusses, no provisions of SB 1070 violate federal law. Absent such violation, he concludes that Arizona is within its jurisdication.

Moreover, he observes that the primary impetus behind Arizona's legislation has been the inability, or unwillingess, of the Federal government to adequately protect the state's borders. Justice Scalia questions, "Must Arizona's ability to protect its borders yield to the reality that Congress has provided inadequate funding for federal enforcement - or, even worse, to the Executive's unwise targeting of that funding?"

We can confidently surmise how the Framers would answer that question...

Based on events over the past few weeks, it appears that federal priorities to allocate scarce immigration enforcement resources are not the problem here. The Obama administration recently proclaimed that it will exempt some 1.4 million illegal immigrants aged 30 or less from federal immigration law enforcement. Justice Scalia observes that we can confidently conclude that this is not a decision grounded in cost cutting, as the administrative cost of verifying exemption must necessarily be deducted from the cost of enforcement.

Justice Scalia does not mention this, but this situation raises the question of how a president can pick and choose among the laws that he is constitutionally obligated to execute. What President Obama appears to be engaging in is discretionary rule.

Scalia ends by asking the central question: "Are the sovereign States at the mercy of the Federal Executive's refusal to enforce the Nation's immigration laws?" He answers the question by filling the shoes of state attendees to the Constitutional Convention who, if a clause were written into Article 1 Section 8 that the President would obtain discretionary power over the immigration law enforcement, would surely have bailed from the convention.

The Justice concludes that Arizona has rightly moved to protect its sovereignty - not in contradiction of federal law, but in full compliance with it. "If securing its territory in this fashion is not within the power of Arizona, then we should cease referring to it as a sovereign State."

Valid Business Cycle Theory I

Dean Yeager: 'Doctor' Venkman. The purpose of science is to serve mankind. You seem to regard science as some kind of a dodge, or hustle. Your theories are the worst kind of popular tripe, your methods are sloppy, and your conclusions are highly questionable. You are a poor scientist, Doctor Venkman.
Dr Peter Venkman: I see.
--Ghostbusters

Not sure there is a more widely misunderstood phenomenon than the 'business cycle.' The sage Rothbard offers clarity in this regard.

First off, Rothbard observes that, in the 'old days,'  the standing term for all significant declines in economic activity was depression. With the onset of the Great Depression in the 1930s, policymakers and related economists resolved that such a situation should never happen again. Thus, they euphemized depressions out of existence, replacing them with watered down terms such as recessions, downturns, and soft patches.

Today, the popular view of the business cycle is the view made famous by Keynes (although, as Rothbard observes, Marx certainly influenced its popularity). Simply put, booms are the result of excessive consumer spending, and busts are the result of excessive consumer saving. Government is the great overseer, charged with tempering consumer spirits during uplegs, and stepping in to spend in place of austere consumers during downlegs.

Thus, and it is hard for me to type this with a straight face, government action serves to temper business cycle extremes.

Rothbard notes that this theory is problematic on a number of counts. One is that the general economy theory of which Keynesian cycle theory is a part espouses that supply and demand are in equilibrium in the market. Therefore, prices and factors of production are always moving toward equilibrium as well. How is it possible, then, that markets that are generally in equilibrium foster extremes that characterize booms and busts? Lacking a strong response to this question, mainstream economists have largely treated the equilibrium and business cycle theories as mutually exclusive--a primative ignorance reflective of poor science.

Today's economics also fails to explain the peculiar breakdown of the entrepreneurial function during times of depression. The function of the entrepreneur is to invest in productive methods after forecasting the potential payoff in light of the risks involved. The better the forecasting, the more successful the entrepreneur. Over time, entrepreneurs with poor forecasting abilities will be stripped of control of productive resources.

Markets, therefore, have a built-in natural selection mechanism for selecting talented entrepreneurs. Over the average period, we should not observe an inordinately large number of firms experiencing losses. How is it, then, that during economic declines that the business world suddenly experiences an enormous cluster of severe losses? According to mainstream economic theory, a point arrives where busiensspeople, previously adept at economic calculation, suddenly suffering large and unaccountable losses!?

A valid business cycle theory must account for this phenomenon of correlated losses--something that mainstream theory fails to do.

A third problem confronting mainstream business cycle theory is explaining why upstream capital goods industries experience early and more severe declines than downstream retail industries. Stated differently, why are booms and busts much more pronounced in capital goods sectors than in industries making consumer goods? If a decline in consumer goods is the cause of depression, then how is it that retail sectors are the last and the least to fall in economic downturns?

Keynesian business cycle theory is unable to adequately address these issues.

Fortunately, a valid theory of depressions and business cycles does exist although, as Rothbard observes, it remains largely neglected by present-day economists. In an upcoming installment, we will elaborate what is often referred to as Austrian Business Cycle Theory.

Current AA

But you know he'll always keep movin'
You know he's never gonna stop movin'
'Cause he's rollin,' he's the rollin' stone
--Gerry Rafferty

Current asset allocation across all financial security accounts:

cash  54%
equities  14%
fixed income  2%
alternative assets  30%

Alternative assets are ETFs/ETNs linked to commodities (14%) and short equity index (16%).

Deadly Healthcare

You had me down, 21 to zip
Smile of Judas on your lip
--Robert Palmer

The Supreme Court is likely render its verdict on the constitutionality of Obamacare in the next few days. The Intrade contract currently reflects a near 80% chance that the Court will rule the individual mandate unconstitutional. Note that the odds almost doubled since the SC hearings, and have crept higher recently on the back of public snippets from Justices Ginsberg, Kennedy, Scalia, and perhaps others.

While we await, here is an interesting article from a Russian economist who worked on Gorbachev's staff. He highlights (lowlights) the progression (digression) of the Russian healthcare system after the Soviet Union declared 'universal' health care coverage for its people in 1918.

Sadly, while some of his examples are sickening, they were totally predictable once socialized medicine was put in motion. With certainty, we can forcase the following consequences of socialized medicine: Resources will be squandered, quality falls, costs rise.

Standard of living declines.

The author raises another interesting point. Today's comparisons to other systems rarely compare apples to apples. Typically, comparison appearing in the media constitute more propaganda than fact. For example, oft cited stats on higher infant deaths in the US rarely add the important footnote that the US metric is more inclusive than elsewhere.

In fact, governments operating socialized systems are more likely to distort their data to make their systems look better. The author recounts the USSR practice of discharging near death patients so that their expiry would not count as in-hospital deaths.

A couple years back, Sarah Palin observed socialized medicine in the US would result in 'death panels' that would determine who would have access to critical care. While her choice of words may have been unfortunate, her observation was nonetheless on the mark. Health care resources are scarce and must be 'economized.' In unhampered markets, price is the primary rationing mechanism.

Socialized systems have no pricing mechanism. Instead, panels of bureaucrats must decide what health care resources get produced and who gets them.

A natural outcome of this, as the author notes, is a multi-tiered system where those who can can curry political favor get better care than others. He notes examples from Russian, UK, French, and Canadian systems.

These multi-tiered systems that favor special interests have not made it into mainstream media discourse here in the US. There is little doubt as to why, as the biased media realizes that broad awareness of this method of rationing health care resources would turn public opinion even more strongly against Obamacare.

Let's hope that we don't have to experience the squalor first hand before recognizing the deadly (quite literally in this case) flaws associated with increasing the degree of socialization in our health care system.