Archive for the ‘ USA & Canada ’ Category

Democrats staying one step ahead of the blame

A Reuters/Ipsos poll late last week reiterated what has been true for the majority of the time that this fiscal cliff saga has rumbled on: that if the USA goes over the fiscal cliff, the Republicans will be blamed more than the Democrats.

It seems like this fact has conditioned a lot of the Democratic approach to negotiations, sitting back as Boehner fails to come up with a proposal that even his own party will sign up to, portraying the GOP as a party which is behind the times when it comes to progressive taxation, and a party which is ignoring the will of the majority following Obama’s re-election.

This is very much like the Democratic approach to the FY 1996 budget, where Clinton and Gingrich went head to head. Clinton was prepared to resist Republican demands, even if it meant shutting down federal government, and was unwilling to sacrifice popular federal programmes so long polls showed that Republicans would get the majority of the blame for any shutdown.

Tell Newt To Shut Up! is the definitive guide to those winter ’95 budget negotiations, and quotes a conversation between a senior Republican (perhaps Dick Armey – though don’t quote me on that) and Vice President Al Gore. The Republican tells the veep that his party are willing to shut down the government unless the Democrats agree to their proposed spending cuts.

“Our numbers show that if you do that, you guys lose,” Gore replied.*

That dynamic has been very much at play in 2012 too.

* At least approximately. It’s not online and I don’t have a copy of the damn book. Wanted to get the blog out before the deadline (it’s late enough as it is) but if anyone knows the exact quote or has the book (I think it’s p. 146) then let me know…


Fiscal cliffhanger

I’ve been following, albeit not blogging, this one closely, not least as every market report of the last month or so has had to explain what it is and what it means. I’m going to assume some knowledge and just note a few particular aspects about it. There’s an idea doing the rounds that there isn’t too much to worry about because, as neither Democrats or Republicans want to raise taxes, they’ll let the automatic tax rises happen, then strike a deal, so they can claim credit for “cutting” taxes for the bottom 96 percent rather than raising them on the top 4 percent. As they is the possibility of retroactive application of these measures, then the crisis can be averted after the deadline and still avoid the cliff’s full force. It seems like quite a big fuss to cause for a basically semantic point – sure, incumbent Republican Representatives may have right-wing  primary challengers to fear more than anyone for the next election, but I think most people know the difference between an expired tax-cut and a tax raise. True, Ezra Klein points out that Democrats do actually want to raise some taxes, but then so do Republicans. So it’s a question of which taxes are being raised, and who will bear the brunt, so I think there are still substantive issues to overcome, and the idea that a deal will be straightforward once the deadline expires is simplistic (even if it does instill a sense of urgency).

The thesis that there is a mutually beneficially desire for Dems and the GOP to cut taxes after a rise rather than pre-empt the rise (and so the fiscal cliff with have limited impact) is interesting, however, because of how recent this it is. No-one was entertaining thoughts of retroactive tax cuts and technical tactical maneuverings two months ago – if you spoke to to analysts and traders, the majority would say that they anticipated a deal with time to spare. This meant that stock markets, which have already seen impressive gains for the year, could push on – especially in Europe. Yet at the same time the good news of a resolution is not seen as priced in, so a resolution, it is anticipated, could see prices spike higher. Even U.S. indices, which haven’t seen gains in December, don’t really seem to have the bad news priced in (S&P 500 is up 12 percent on the year). And as the deadline closes in, stocks may finally be easing off on gains, but people in the market are still inventively coming up with new reasons why a deal isn’t getting done, and new reasons for longer term optimism. And I’m not saying they’re wrong to, it’s just interesting that had you put it to them two months ago that we’d have 2 business days til New Year and no deal, I think they’d have been less phlegmatic about it.

Food prices may feed monetary angst

Posted on Reuters’ Global Investing blog

Be it too much sun in the American Midwest, or too much water in the Russian Caucasus, food supply lines are being threatened, and food prices are surging again just as the world economy slips into the doldrums.

This week, Chicago corn prices rose for a second straight day, bringing its rise over the month to 45%, and floods on Russia’s Black Sea coast disrupted their grain exports.  Having trended lower for about nine-months to June, the surge in July means corn prices are now up about 14% year-on-year. And all of this after too little rain over the spring and winterkill meant Russia, Ukraine and Kazakhstan’s combined wheat crop would fall 22 percent to 78.9 million tonnes this year from 2011.

But as damaging as these disasters have been for local populations, their effects could be much more widely felt.

The problem is that not only do rising food prices raise the cost of living, squeezing incomes further during a downturn, but by raising inflation they severely restrict the government’s flexibility in setting monetary policy. Just as Mike argued previously on this blog that the falling oil price amounted to a green light for the cutting of interest rates, rising food prices will force many central banks to think again about the pace of monetary easing.  And the problem is most acute in developing countries where the proportion of food in consumer price baskets is far higher than in the richer western economies. For example, according to the US Department of Agriculture, an additional $1 added to income sees 56 cents more spent on food, beverages and tobacco in Burundi, compared to 5 cents more in the United States.

The Russian central bank is a timely case in point when it comes to restrictions on monetary policy. On Friday they announced that they were keeping interest rates the same; as much as growth is struggling and could do with some monetary stimulus, high inflation, fuelled by food prices, is tying the bank’s hands.

Why has this happened? According to the traditional Phillips curve, there is usually a tradeoff to be made between unemployment and inflation; they are inversely related, as prices and wages will rise when unemployment is low, and vice versa.

continue reading on Reuters

SCOTUS and the ACA Ruling, Context and Analysis: Part 3 – Conclusion: a Pyrrhic Victory?

The coverage of the PPACA ruling has tended to run as follows: “Dramatically, Chief Justice Roberts upheld Obamacare, giving a big victory to liberals. The one qualification on their victory was that moot opinion on Medicaid, which may in practice protect states’ rights, but on the individual mandate, their needs were met. Even though the commerce clause was not found as a constitutional basis for the individual mandate, a constitutional basis was found, and cited, by Roberts, who delivered victory to Obama and the Democrats.” Hence in this excellent analysis of why Roberts voted as he did (which I haven’t really touched on), Reuters label the commerce clause ruling as a “pyrrhic victory” for conservatives, inconsequential when the costs of upholding the law are counted.

This way of looking at the ruling is myopic. It is appropriate when considering the policy alone; it is true that Obama’s biggest victories in the upholding of the PPACA followed from the protection of the individual mandate and his biggest defeat was the qualification of the use of Medicaid provision to coerce states to comply. However, as follows from my previous posts, constitutionally, the invalidity of the justification of regulation under the commerce clause is a much bigger event than the retention of the principles in federal transfers to states that have been practiced since 1923. Far from a pyrrhic victory, Roberts’ reasoning used a justification for the individual mandate – that it was a tax – that had been publicly disowned by the Obama administration during the arguments, and further restricted the clause in the constitution that, when expansively read, had justified the New Deal.

And so while today Obama may well toast the Chief Justice for a policy triumph, it is possible that in a year’s time, Romney will be in office, Obamacare will be repealed through legislative action and a restrictive reading of the commerce clause will be more firmly established as judicial precedent. At that point, liberals may wonder for whom this victory was pyrrhic.

SCOTUS and the ACA Ruling, Context and Analysis: Part 2 – the Medicaid expansion

The second key argument concerned whether or not the expansion of Medicaid provision, and its denial to states who don’t comply, puts an onerous burden on states, impinging on their sovereignty. The debate about “fiscal federalism” and the use of federal grants is an old one, and has traditionally been seen as one of the biggest threats to states’ autonomy.

That three of the majority (Kagan, Roberts and Breyer) held that withdrawal of existing Medicaid funds would be an unacceptable infringement of states’ rights seemed to be the most consequential reservation placed on Obama’s bill. However, in constitutional terms it is not much of a revolution. Ever since Massachusetts vs Mellon (1923), it has been ruled that federal grants have not been seen as an impingement of states rights, for so long as they are “inducement” and “not foisted upon States, no violation of sovereignty occurred. States had to choose between accepting Federal conditions and having no Federal support at all” (Bowles 1993). The Garcia vs SAMTA case referred to in the last post seemed to uphold Federal government’s ability to interfere in state’s affairs like any other employer when it comes to invasive mandates, but, as the arguments had hinted at, the Rehnquist court’s later rulings may have overtaken this, providing “enforceable limits on Congress’ ability to interfere with state sovereignty.”

As it happened, the PPACA ruling was very consistent with the ruling of Massachusetts. New Medicaid funds extended to the states may only be given if the states’ accept their conditions, which aren’t onerous so long as they’re voluntary, in line with the precedent in fiscal transfers. However, pre-existing funds may not be removed, as such moving of goalposts after initial conditions have been accepted would be an infringement of state sovereignty. This too is entirely consistent with precedent.

SCOTUS and the ACA Ruling, Context and Analysis: Part 1 – the Commerce Clause

So SCOTUS has ruled, Roberts has switched wings and Obamacare has been upheld (for the most part). Hands up all of those who predicted that.

The arguments were heard in March, and the tone taken by many of the Justices, Roberts chief among them, was one of hostility, which was taken by many observers as a bad omen for Obama’s bill. There were four points debated at those arguments. Two of these are irrelevant for today’s ruling; firstly, they decided that it wasn’t too early for the case to be heard (evidently) and secondly, they had discussed whether the individual mandate was separable from the rest of the bill if it was invalidated, which in the event it wasn’t.

The two remaining parts concerned a) the use of the commerce clause to justify the individual mandate to compel individuals to purchase insurance and b) whether the strings attached to Medicaid provision was an onerous burden under the 10th Amendment. In this post, I shall focus on part a).

The interstate commerce clause is the Article I power, under the constitution, for Congress to regulate commerce between states. Given that, under the 10th Amendment, all powers not explicitly reserved for the Federal government are delegated to the states, it has been a historically significant clause in the history of Federal intervention into the economy, and appeared to be the strongest constitutional grounds on which the individual mandate was likely to be upheld. Thus, the blunder by CNN and Fox in declaring that the ACA was unconstitutional because the commerce clause did not apply to it was understandable, even if avoidable/hilarious.

The sources of worry for the the Obama administration were clear enough. The Roberts court had not ruled many cases on the commerce clause, but seemed to be sympathetic to the Rehnquist court’s “partial” revolution in federalism, where use of the commerce clause was being reconsidered. The constitutional context in which the Roberts’ Court operated in was complex. Since United States vs Carolene Products Company (1938), there had been a precedent that regulation of commerce, as Justice Stone wrote, would be presumed constitutional unless it was clearly not. Thus for any federal law that attempted to justify intervention under the constitutional right of the national government to regulate interstate commerce, the burden of proof was shifted so that regulation was unconstitutional only if demonstrably not to do with interstate commerce, rather than presumed unconstitutional unless proven to concern interstate commerce. So we get cases such as Wickard vs Filburn (1942), where quotas for wheat production may be set federally even if none of the wheat is traded across state borders, because of the (marginal) effect that the wheat production will have on the price of wheat nationally.

In this post-New Deal context, the individual mandate would appear to have been quite a clear cut case of federal intervention that was constitutionally justifiable under the commerce clause. Entry or non-entry into a health insurance market has large effects on other consumers in the market. The much mooted “broccoli market” analogy  (that if you compel people to buy health insurance, why not compel them to buy broccoli?) falls short, because the market for broccoli doesn’t impose negative externalities on other broccoli consumers. If an individual chooses not to enter the broccoli market, then there may be a minute price fall, as demand falls. But if relatively healthy individuals don’t buy health insurance, as the average insurance price is (by definition, as an average) above their expected costs of illness, then this drives the price of insurance up for the most needy. Higher premiums mean more people find insurance not worth their while, further driving up premiums if they are the new “relatively healthy” contingent (as is likely) and also leaving more of the populations uninsured. This is an instance, as I’m sure many of you know, of Akerlof’s Market for Lemons. It is not applicable, however, to the market for broccoli.

However, the constitutional interpretation of the commerce clause has shifted since Carolene Products. While the Burger court found in Usery (1976) that the Fair Labour Standards Act injured state sovereignty (more on this in the next post), Garcia vs SAMTA (1984) overturned this. It took the Rehnquist court to seriously challenge the permissive readings of the commerce clause that had become the status quo. In Lopez (1995), Board of Regents (2000), Morrison (2000) and Garrett (2001), the Supreme Court held that regulating firearm possession in schools, age discrimination in employment, violence against women and discrimination against the disabled respectively were not covered by the commerce clause. In the words of Chief Justice Rehnquist, delivering the opinion of the court in Morrison, “gender motivated crimes of violence are not, in any sense of the phrase, economic activity.”

However, Gonzalez vs Raich (2005) held that the regulation of homegrown medical marijuana was constitutional, in line with Wickard vs Filburn. This raises a question of whether a conservative leaning court chooses to invoke the interstate commerce clause to regulate things it doesn’t like (for instance, marijuana) while holding that it cannot regulate things it likes (eg guns) or causes it is unsympathetic to (eg violence against women).

A crudely attitudinalist* approach to the Rehnquist era federalism cases may be misguided however, and is certainly misguided in analysing the ACA ruling. For one thing, Roberts decided that the health market was not regulable under the interstate commerce clause, despite its interstate repercussions, but still held that the law itself was constitutional as a tax (the other four justices on the majority distanced themselves from this restrictive reading of the commerce clause). As Matthew Dickinson has tweeted, it seems unlikely that Roberts was acting attitudinally here, even though his decision is conservative in its interpretation of the commerce clause. What is puzzling is why the Chief Justice subscribed to the tenets of the Rehnquist court, and a more restrictive reading of commerce clause than is afforded by Carolene, when he wanted to uphold the law in general. He certainly set a precedent yesterday that the interstate commerce clause may not be read as liberally as it has been done for the last 70 years, and in constitutional terms if not policy ones, yesterday’s ruling may turn out to be an incredibly significant victory for conservatives. However, in policy terms it was not, and it is unclear why Roberts, if he was prepared to find the individual mandate as not constitutional under the commerce clause, was prepared to uphold it on a relative technicality.

* in brief, attitudinalism states that justices vote according to policy preferences, not precedent, and justify these preferences in legalistic language while being unconstrained by “legal” considerations (Segal and Spaeth, 1993)

Tanker Politics and Technical Recessions

As is repeated to the point of banality, a week is a long time in politics. Last week, the OECD said that Britain would fall back into a technical recession. This week, the BCC said it will avoid one. What’s changed in the interim? Well, the exogenous consumption shock of a manufactured crisis that hugely increased demand for an expensive product during the last few days of Q1, that’s what.

Whenever the performance of the economy has been below par, there’s always been an excuse. The royal wedding.  Cold weather. Warm weather. But now we have a mightily impressive growth rate of 0.3%, it’s not the result of chaos and panic induced by the government, but rather is “encouraging”, and proof of business “confidence”. Much like the reaction to the budget was meant to be. How dim do they think we are? “Oh, GlaxoSmithKline read the budget and overnight decided to create a thousand jobs! What a good budget that must be. And when George Osborne gets asked questions about things like the 50% tax rate, he can legitimately cite GSK (despite its lack of relevance) and I will be satisfied.” (See 1.20-2.10ish).

You have to hand it to the government, it’s all fairly ingenious. Want a good way to boost consumption without giving anyone a job or more income to fund it? We’ve just been shown a masterclass. And it’s not even as if  all the petrol will go to waste! We just all bought it a few days early, and can keep it in those trusty jerrycans in the interim.