Sunday, July 29, 2012

There Is a Bigger Story Behind LIBOR

Published in The Tennessean, Sunday, July 29, 2012 and Forbes with archives.

by Richard J. Grant

It is often said in philosophy-of-science discussions that “if it explains everything, it explains nothing.” This reminds us of the most-used word to explain everything economic: “greed.” As British Chancellor of the Exchequer George Osborne described allegations of interest-rate index manipulation, “Through 2005, 2006 and early 2007 we see evidence of systematic greed at the expense of financial integrity and stability.”
We note in passing that the dates mentioned are conveniently before the current chancellor assumed office in 2010, but we are still waiting for any solid evidence that whatever actions the bankers took to manipulate the London Interbank Offered Rate (LIBOR) had more than a microscopic effect on the markets. This is not to say that LIBOR could not be manipulated: if anything, we should be amazed that ... keep reading

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays. E-mail messages received at:

Copyright © Richard J Grant 2012

Sunday, July 22, 2012

Social Contract? You Didn’t Build That

Published in The Tennessean, Sunday, July 22, 2012 and Forbes with archives.
by Richard J. Grant

Just as one drop of blood (real or imagined) made Elizabeth Warren a Cherokee for a while, she also believes that receiving $1 of benefit from government spending makes each of us a child of government forever. Last fall, at the beginning of her senatorial campaign (challenging Sen. Scott Brown in Massachusetts), she pooh-poohed charges of “class warfare” by assuring a group of supporters: “There is nobody in this country who got rich on his own — nobody.”
Sound familiar? President Barack Obama seemed at the time to be sharing the same scriptwriter and, in case we forgot, last weekend he reminded us: “If you’ve got a business — you didn’t build that. Somebody else made that happen.”
An unduly charitable interpretation of these words would take it that the president and Ms. Warren have noticed that most of life, including commerce, consists of interaction and cooperation with other people. Were that construal correct, then their words would not attract comment. But that is not what they meant. They were not talking about trade among free individuals but the obligation of the individual to the collectivity, the state.
Ms. Warren was more subtle than the president: “You built a factory out there? Good for you. … You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did.”
Notice that she portrays you, the individual, as a free-rider on the back of the collective. What a conservative would recognize immediately as the fruit of free cooperation in a culture that has prospered and survived the test of time, a socialist sees as gifts from the essential nanny state with an open-ended mandate to comfort and to protect us from our ignorance and our natural leaning toward social disorder.
Notice also that government is not essential for the provision of any of the services that Ms. Warren mentions. That we choose to supply such services through government reflects our preferences and judgment on costs.
I once worked for a company that built and maintained the public roads around its factories. Home schools outperform government schools. But government schools, when locally funded and controlled, outperformed those influenced by federal bureaucrats and union rules. Private fire protection has always been feasible, and not even in a police state would government have a monopoly over your personal security.
Ms. Warren lectures us: “Now, look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”
While we appreciate that Ms. Warren might allow us to keep some of what we produce, we should remind her that nowhere in the U.S. Constitution is there any mention of a “social contract.” We have never needed a government or any other waster of capital to tell us how to provide for the next generation. It’s in our blood.
Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays. E-mail messages received at:

Copyright © Richard J Grant 2012

Sunday, July 15, 2012

So What Exactly Do We Get For Our New Tax?

Published in The Tennessean, Sunday, July 15, 2012 and Forbes with archives.

by Richard J. Grant
The key to understanding the Patient Protection and Affordable Care Act (PPACA) is not whether the provision formerly known as the “individual mandate” is now a penalty or a tax but what burden it imposes. The act’s remaining political support depends on a failure to recognize the incidence and magnitude of the total burden imposed on people by the whole act.
From the beginning, support for federal government intrusion into medical care depended on the belief that we could get something for nothing. The reigning mythology is that “health care is different” and that a government bureaucracy can and must protect us from that multitude of professionals and “evil corporations” that offer medical-related products and services. Not understood is that the same freedom to trade and enter into contracts that has yielded fine service and rapid innovation in other sectors would work no less well for health care.
When Supreme Court Chief Justice John Roberts transformed the individual mandate penalty into a tax, he did eliminate one minor burden. Those who choose not to comply with the specifications of the mandate will no longer be lawbreakers: they merely give up their exemption from the tax. But the cost of this small gain (and elimination of the Medicaid mandate, which would have extorted billions from the states and their taxpayers) was that the PPACA, with its other burdens, would stand.
Although it appeared that Roberts had placed limits on the federal government’s Commerce Clause regulatory powers, he allowed the government to achieve much the same effect through taxation. University of Chicago law professor Richard Epstein pointed out that the Supreme Court had long understood that “taxation and regulation are close substitutes, so a limitation on one power matters little if the other power is still available.” He insisted that Roberts was wrong and that “the power to regulate commerce and the power to tax should not be separated.”
This lost opportunity for constitutional fidelity will bear on our future just as the burdens of defective past decisions bear upon us now. Epstein would draw our attention to the constitutional language that gives Congress the power to “lay and collect Taxes” only in order “to pay the Debts and provide for the common Defence and general Welfare of the United States.” Adherence to the original meaning would rule out taxation for the purpose of redistributing income among citizens as is now mandated under the PPACA. Such a reading would also have protected us from most of the other federal transfer-payment programs that now threaten our solvency.
The PPACA is expected to add several billion dollars per year to our debt problem. Management of the “insurance exchanges” alone will require over $60 billion per year in subsidies. The act imposes a cluster of new taxes, but the biggest burden will be borne by those who must comply with all the new regulatory provisions. That includes patients and customers, whether they know it or not.
Passage of the act in 2010 put the Department of Health and Human Services, the Internal Revenue Service, and a multitude of other agencies to work writing volumes of new regulations. News reports claim that at least 13,000 pages of regulations have already been drafted.
Who could believe that this imminent flood of regulatory pollution will contribute to the “general Welfare”? For those who believe that our medical system is a mess, the PPACA is an example of why.
Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays. E-mail messages received at:

Copyright © Richard J Grant 2012

Sunday, July 08, 2012

Must the Court Demonstrate the Constitutionality of Its Newly Discovered Tax?

by Richard J. Grant
Although the Affordable Care Act contains many new taxes that will soon come into effect, most recent attention has been focused on whether or not the individual mandate provision within the act constitutes a tax.
The Supreme Court has recently ruled, in NFIB v. Sebelius, that what the legislation calls a “penalty” can be construed for constitutional purposes to be a tax. This leaves open the question of what kind of tax it is. The closest that the court came to a clear statement was that it was a tax on “not obtaining health insurance.” But this appears to tax inactivity, which suggests that it contains the same defect as the use of Commerce Clause powers to regulate inactivity.
To overcome this objection, the court insists that “the Constitution does not guarantee that individuals may avoid taxation through inactivity.” But the first and only example it gives is that of a capitation, a head tax “that everyone must pay simply for existing.” Congress may impose such a tax, but it is a direct tax, which means that its revenues must be proportionate among the states according to population.
Since the first administration, revenue-hungry governments have attempted to narrow the definition of “direct tax.” But the current court is incorrect to claim that when the Constitution was written “it was unclear what else, other than a capitation,” might be a direct tax. The definition clearly included accumulated property, which is why, when Congress passed a tax on ownership of carriages, James Madison objected that it was an unapportioned direct tax. In citing that case, Hylton v. United States, the current court noted that the tax was upheld by “reasoning that apportioning such a tax would make little sense, because it would have required taxing carriage owners at dramatically different rates depending on how many carriages were in their home state.” Rather than accept this as an example of narrowness or ambiguity of the definition of “direct tax,” the court should have rejected it as an example of expediency that subordinated the demands of the Constitution to the desire for revenue.
Perhaps expediency motivated the current court to reinterpret the individual mandate penalty as a tax. But it skated over what is being taxed. Imposing a tax for “not obtaining health insurance” implies, somehow, that having health insurance is the state of nature and that the taxable action or commodity is its negative.
To tax inactivity and pretend that it’s an indirect tax makes no more sense than the “regulation of inactivity,” which the court has now limited. The individual mandate’s penalty might best be described as a head tax with full exemptions for those who meet the minimum insurance coverage requirement and full or partial exemptions for those with incomes below defined levels. Even with the exemptions, the burden of the tax that remains falls directly on those persons who were the targets of the penalty. It is also unapportioned.
A head tax is a direct tax. That the court failed to demonstrate the constitutionality of its newly discovered tax is clearly recognized by the dissenting justices. They write: “The holding that the individual mandate is a tax raises a difficult constitutional question (what is a direct tax?) that the court resolves with inadequate deliberation.”
But if the court is guilty of expediency, the dissenting justices were too polite.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

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Follow on Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Sunday, July 01, 2012

When the Court Does Congress' Homework, Liberty Is at Peril

by Richard J. Grant

The good thing about reading bad judicial decisions is that they get better toward the end. The bad thing is that the ending, the dissent, doesn’t count — though it might be used by future judges to help them think more clearly about how the law really should be understood.

Such describes last week’s U.S. Supreme Court decision in the case of National Federation of Independent Business v. Sebelius, which served to uphold the 2010 health-care reform with the Orwellian name, the Patient Protection and Affordable Care Act.

On the eve of the decision, most observers thought it obvious that part or the entirety of the act would be found incompatible with the Constitution. As it turned out, four of the justices concluded that the act “exceeds federal power both in mandating the purchase of health insurance and in denying nonconsenting States all Medicaid funding. These parts of the Act are central to its design and operation, and all the Act’s other provisions would not have been enacted without them. In our view, it must follow that the entire statute is inoperative.”

To these dissenting justices, an act of Congress that is incompatible with the supreme law of the land is not legal and cannot be enforced in a court of law. Against the majority holding, they wrote that the “values that should have determined our course today are caution, minimalism, and the understanding that the Federal Government is one of limited powers.”

Just as the Constitution limits the powers of Congress, it limits the powers of the Supreme Court. The dissenting justices made the point that their duty is to determine what the law is now, not what it should be in the future. Determining law for the future is Congress’ job; if it doesn’t do its job, no other branch can bail it out.

Five justices, Chief Justice John Roberts and the four in dissent, recognized that the Commerce Clause, which gives Congress the power to regulate interstate commerce, could not be used to save the act’s individual mandate provision. But Roberts decided to judge the provision not as a mandate-with-penalty, which is how Congress actually framed it, but rather as how Congress could have framed it, as a tax.

In this decision, Roberts, who wrote the majority opinion, acted a bit like a parent who does his child’s homework for him. The child can run wild and never learn anything, but how is the teacher to recognize and correct the problem before the final exam? The child gets credit for something that he never did, and the consequences don’t show up until later. What is the moral lesson?

In order to market and pass the act, the president and the congressional majority insisted that the mandate was not a tax. It would not have passed otherwise. But now, for constitutional purposes, it is suddenly claimed to be “independently authorized by Congress’ taxing power.” Perhaps, like the spoiled child, they learned this from history: Social Security was also marketed and then constitutionally defended using such chameleon tactics.

As the dissent points out, the court has decided “to save a statute Congress did not write.” Why should we care? “The fragmentation of power produced by the structure of our Government is central to liberty, and when we destroy it, we place liberty at peril.”

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at:

Follow on Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012