Monthly Archives: March 2012

Judicial Restraint

Yesterday, the Supreme Court deliberated on whether the Affordable Care Act could still stand if they were to rule that the “individual mandate” is unconstitutional.  For the record, Jeremiah supports the individual mandate.  Congress could easily have avoided the constitutional challenge by making it a tax instead of a fine.  The Court, though, seems likely to strike it down.  So, what happens to the rest of the Act?

Everybody, including Chief Justice Roberts, seems to endorse the concept of judicial “restraint.”  As opposed to “activism,” this means making narrow rulings and not reaching beyond the Court’s proper role.  Roberts famously quipped that, “if it is not necessary to decide more, then it is necessary not to decide more.”

Restraint, unfortunately, can argue both ways.  Justice Scalia has said that if the mandate goes, then the whole Act must go.  Supporters of the Act describe the mandate as its “core.”  On the other hand, Justice Ginsburg has called for “salvaging” what’s left of the Act.  That sounds like restraint, because it reduces the impact of a ruling against the mandate – but it would mean the Supreme Court rewriting the Act, and that’s not their job.

The likeliest outcome, and the most restrained, is that the Court will rule narrowly against the mandate, and let Congress decide what to do next.  They can then write the mandate into the tax code.

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That Depression Feeling

Jeremiah has defended Chairman Bernanke before.  Sure, everybody likes to poke fun at this comical figure, feverishly printing dollars.  Is he doing it just to get Obama reelected, or is the economy in some real danger?

The economy is in some real danger.

America and Europe are both struggling with a once-in-a-lifetime debt crisis, known as “deleveraging.”  The last time America went through this process, we had mass unemployment, a banking collapse, and widespread poverty – the Great Depression.

People commonly believe that a depression is the same as a recession, only worse.  In fact, they are two different animals.  If you are out of a job, you may not care about this distinction, but it matters to the policy makers – like Bearded Ben – who have to fix it.

The chart below shows how the debt cycle looks over the long term.  Readers will recall the fifties and sixties as a period of increasing prosperity, which led to lower debt – and inflation.  High interest rates were the Fed’s response to inflation.  Low rates in the thirties, and again in this century, show the Fed trying to stave off deflation.

You can see that the Fed Funds trajectory has been one long rise and fall over a seventy-year period, coinciding with the long-term debt cycle.  The blips along this trajectory are the Fed’s responses to individual recessions.

Deleveraging, as the name implies, means that this level of debt is no longer sustainable and something has to give.  What “gives” is the financial system, in the form of a bank run, a stock market crash, a liquidity crunch, and so on.  For a study of deleveraging events throughout history, read Ray Dalio.

Various solutions have been tried over the years, and economists pretty much know which ones will work.  Here they are, in descending order of effectiveness:

  • Monetary Stimulus
  • Restructuring
  • Fiscal Stimulus
  • Wealth Transfer
  • Austerity

Monetary stimulus is like a shot of cortisone.  It gets the economy back up and onto the field.  It also allows you to screw your creditors by paying them back with inflated dollars.  The European Central Bank was slow to use monetary stimulus.  Greece, Ireland, and other countries suffered because they have the Euro and so can’t control their currency.

America and England were quicker on the draw.  Bernanke, of course, had studied our last Depression.  Monetary stimulus is less effective if other central banks are diluting their own currencies at the same time.  Also, among the people screwed by inflation are any Americans who happen to have money in the bank.

Restructuring means a workout plan with the nation’s creditors, whereby they get paid less than they’re owed, but at least they get something. Imagine Greece’s Papademos calling 1-800 Credit Counselors.  His creditors took a 70% haircut. America is not in this position, although our credit rating is down a notch.

Fiscal stimulus is not in the Dalio framework, and “growth” is anyway a better word.  Government spending is one way to stimulate growth.  The other way is via the private sector.  Obviously, the downside to government spending is that it creates even more debt.  The Recovery Act of 2009 added $750B to our debt – roughly a 7% increase.

Wealth transfer and austerity are both widely discredited.  Ironically, these are the first tactics that politicians – on left and right, respectively – will attempt.  Austerity actually works against economic growth.  Any businessman will tell you that you can’t cut your way to profitability.  On the other side, while mugging the rich might make everyone feel good, the rich do not have enough money to make a dent in the national debt.

So, Chairman Ben is doing all he can with the one and only tool at his disposal.  The rest of the work is up to Congress and the President.  Will we put our faith in America’s system of free enterprise, or the Federal government?  This is the central debate for November.

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Drug Market Intervention

Congratulations to the community of Newport News, their police, and a new strategy from criminologist David Kennedy.  Drug-war tactics have pitted police against the community, often in a racial context.  As The Economist puts it,

Police come to be seen as people who take sons, brothers and fathers away while the neighbourhood remains unchanged.

This new approach targets the retail drug trade directly, removing the money and the corruption it brings into our communities.  Working together, we can break the cycle of violence caused by drugs, gangs, and desperation.

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War on Women

Women’s rights be damned!  We have religious intolerance on our side, and a cadre of black-robed clerics to back us up.  Is this campaign advice from Iran?  No!  It’s the Republican Party’s master plan to become completely unelectable.

Having already alienated gays, the poor, and “minorities” of all colors, they are now going after the women.  If you’re a paleoconservative, it’s easy to mistake women for another minority – even though they’re 52% of the vote.

This year’s election should be about the economy.  America needs to debate the role of free enterprise versus the state, and – as a practical matter – we need more jobs.  We need the debate, and we can’t have it unless the Republicans stay relevant.

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