Results matching “affordable care act”

By Richard A. Epstein

Today, the momentum is growing for fundamentally restructuring the national residential mortgage market in the wake of the earlier collapse of the Federal National Mortgage Association (FNMA, or "Fannie Mae") and Federal Home Loan Mortgage Corporation (FHLMC, or "Freddie Mac). These two government-sponsored enterprises (GSEs)--so-called in recognition of their hybrid public/private nature--have long written large chunks of the residential home mortgage market, to the tune of trillions of dollars. The current legislative fixes now on the table include a bipartisan proposal from Tim Johnson and Mike Crapo, coupled with an earlier entry by Maxine Waters. The Johnson-Crapo proposal follows on earlier entries from Jeb Hensarling on the House side and Bob Corker on the Senate side. Each of these proposals seeks simultaneously to unwind the past and to redefine the future. To evaluate them requires understanding the historical linkage between past events and future prospects.

To begin, some background. In response to the brewing subprime mortgage crisis in 2008, Congress in late July of that year passed the Housing and Economic Recovery Act (HERA). That legislation, inter alia, created a new Federal Housing Finance Agency (FHFA), which on September 7, 2008 placed into a conservatorship both GSEs. These conservatorships were intended to keep both entities alive in order to facilitate their return to the private market. They were not receiverships whose object is the orderly liquidation of the two businesses. The basic plan called for an infusion of up to $200 billion in fresh cash into Fannie Mae and Freddie Mac under a Senior Preferred Stock Purchase Agreement (SPSPA) that gave the government warrants, exercisable at a nominal price, to acquire a 79.9 percent ownership stake in each enterprise. In exchange for that advance the senior preferred stock carried a 10 percent annual dividend payment, which went up to 12 percent if the GSEs delayed their dividend payments on the senior preferred.

The terms of that deal were radically altered in August 2012, when the United States, acting through the Treasury Department, imposed, through the Third Amendment to the 2008 SPSPA, a "net worth sweep" that entitled the government to 100 percent dividends on future earnings. That one bold stroke effectively made it impossible for the GSEs to repay their loans and rebuild their capital stock. Both the junior preferred stockholders and the common shareholders could under this agreement never receive a dime from either GSE, even after the entities returned to profitability. Assessing this gambit requires understanding two things: first, the relationship between the Third Amendment and the original 2008 SPSPA; and second, the relationship between the Third Amendment and efforts to revitalize the housing market. Both relationships are widely misunderstood today.

Prior Writings In July, 2013, I attacked the Third Amendment for its refusal to allow for any pay down of the $188 billion in advances made under the 2008 SPSPA. The government did so on the dubious ground that it could repudiate its obligations in the name of "taxpayer protection." At that time, the Third Amendment meant that some $59 billion in designated dividends should have been recharacterized first as a payment of accrued interest, and afterwards as a return of capital, which necessarily would reduce the interest payments going forward, and speed the path toward reprivatizing Fannie and Freddie. As I wrote then, "even if the 2008 transaction stands, the 2012 transaction should be nullified, and the private and common shares restored."

Thereafter in November, 2013, I attacked the position that the government took in its litigation with Washington Federal, where it sought by a variety of procedural devices to prevent the case from being heard. There is no question that many legal and factual obstacles stand in the path of any suit under the 2008 SPSPA, especially in comparison with the Third Amendment. But it hardly follows that those plaintiffs do not deserve their day in court, as the government has claimed by insisting that they do not have standing to bring this lawsuit.

Finally, in March of this year, I attacked the government position in the strongest possible terms in light of the recent revelations by Gretchen Morgenson's New York Times article, "The Untouchable Profits of Fannie Mae and Freddie Mac." As Morgenson revealed, the Treasury and FHFA had decided as early as December 2010 to block Fannie and Freddie shareholders from sharing in the profits of the newly revived entities.

The current attacks on the Fannie and Freddie shareholders have not in my view come to grips with the key implications of the 2008 SPSPA and its August 2012 Third Amendment. Hence this further commentary on the topic.

The 2008 SPSPA In 2008, the government explicitly decided to keep both Fannie and Freddie alive in a conservatorship, which it was allowed to do under HERA. That decision may well have made sense for a whole variety of reasons. Forcing both companies into premature liquidation could have further roiled the financial markets. Even if it did not, there was an ongoing dispute--a dispute that remains, and on which I take no position--as to whether the stock of Fannie and Freddie was totally worthless or whether the liquid assets of both companies would have allowed them to ride out the storm without going bankrupt. Indeed, even in liquidation, shareholders have the right to claim their residual equity in their shares, thus opening the door to extensive evidence on valuation--evidence that could be highly sensitive to the time that is chosen for liquidation.

Avoiding these issues made perfectly good sense, but the conservatorship itself presented a new round of issues on just how to value the contribution to equity made under the SPSPA. On this point, Senator Bob Corker thinks that Fannie and Freddie and their shareholders have no beef at all stating, "While I'm always glad when taxpayers see a return on investment, we can't forget that Fannie and Freddie wouldn't be earning one penny today without the government guaranteeing their transactions."

To this argument there are two replies. The first is that Fannie and Freddie may never had gotten into the mess if the United States had not insisted that it make high-risk loans to low- and moderate-income housing, first under the Housing and Community Development Act of 1992 (HCDA), as amended in 2007. In 1992, 30 percent of GSE loans were devoted to these programs. By 2007, that target had been raised to 55 percent. The conditions attached to the 1992 Act could be satisfied only in some financial Nirvana, for the legislation announced that Freddie and Freddie "have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return . . . ." No one can do both simultaneously. It is a financial impossibility to increase the number of high-risk loans, without courting disaster in the event of a market downturn. Yet nothing in the Corker calculations takes this heavy obligation into account. Instead, he focuses exclusively on the government's implicit guarantee of Fannie and Freddie, later made explicit, which kept them afloat.

The deep danger in his approach is that it makes it impossible to determine the relationship between the heavy costs under the HCDA against the implicit government guarantee. But it is assuredly a wrong answer to count the implicit guarantee while ignoring the correlative duties that Congress imposed. In my view, a first-best world removes both of these requirements so that market-based housing becomes the norm. It might be said in response that without government intervention, the number of Americans that will own their own homes will decline. But that proposition is not the same as saying that the number of Americans with a roof over their head will decline. Instead it will lead to an increase in rental housing, which reduces radically the risk of major financial dislocations. Landlords run businesses and in general will not engage in the kind of borrowing and leasing that are likely to cause a financial disaster.

The second response in this instance is that the 2008 agreement is water over the dam. Before that agreement was entered into, the government had the option under HERA for the FHFA to close down Fannie and Freddie. But legal consequences follow once it takes the decision to go the other route. It is critical to remember that the shares of both companies traded in the market after the 2008 date marking the onset of the conservatorship, and the share prices in those transactions rested on the assumption that the Fannie and Freddie could not be stripped of future profits by government fiat. One cannot defend the Third Amendment in 2012 by announcing after the fact--and following and in the midst of active trading--that the 2008 SPSPA was, well, a mistake. That brazen approach gives the government two bites at the apple, and a free option to switch from one system to another with the benefit of hindsight after events have played themselves out. One might as well let gamblers place their bets in a horse race after the race has been run, and not before.

The Third Amendment The previous discussion sets up the analysis of the Third Amendment. In dealing with this issue, the government in its briefing in a shareholder lawsuit challenging the government's move took the strong position that the value of the government commitment in 2008 was "incalculably large," so that Fannie and Freddie shareholders had no expectation of being repaid. In and of itself, that statement is odd because in a financial situation it should always be possible to calculate the size of a bet, whether it be large or small.

In response, I wrote, "the level of the Treasury commitment was not 'incalculably large': it was $188 billion, all of which will shortly be repaid." A detailed criticism of this statement was prepared by Larry Wall, of the Center for Financial Innovation and Stability of the Federal Reserve Bank of Atlanta. He graciously amended his account in response to some comments that I sent to him, so I shall examine the criticisms of my position only in his revised version.

Wall's first argument is that the $188 billion was not the only financial commitment; there was also the interest. I agree of course with that point, and thought that it was too obvious to say in that context. As should be evident from the discussion above, the government is entitled to recover that interest in full. The government surely took a larger risk at the earlier date. But by the time of the Third Amendment, which was the focus of my writing, the principal was on the road to being repaid, and all interest obligations were current.

Wall's second and more serious point relates to the obligations, if any, to absorb further losses in the portfolio, which could be a large sum, albeit one that was limited by the ability of the government not to make further advances if it chose not to. But however these residual risks of 2008 are calculated, they are not beyond calculation. Indeed, the applicable limits on how much the Treasury had to commit to this venture were twice raised. By the time the Third Amendment came about, no additional commitments would be needed, so that these contingent liabilities were not a serious factor in figuring out whether the Third Amendment was fair to the shareholders--which given its wholly one-sided nature it was not.

(Correction 4/21: Initially, it was stated that the applicable limits on how much the Federal Reserve had to commit were twice raised. It was in fact the U.S. Treasury not the Federal Reserve that guaranteed the obligations)

Wall's third point relates to the decision of the Treasury to take for nominal consideration an option to purchase 79.9 percent of the common stock. That option today would be worth billions of dollars if the Third Amendment had not been adopted. At this point two questions arise. The first is how we value that particular option as of 2008. Wall assigns to it a modest value, which is again disputable. To be sure, the odds that it would come into the money may have been low, but if the housing market did recover, as it did, chances are that it would be worth a substantial sum. The high rate of return is thus in tension with the low probability of its occurrence. Working out these numbers does not lead to the conclusion that the warrants should have been ignored in calculating the value of the government's stake.

More critically, once it is settled that the action is over the Third Amendment, all of Wall's calculations, as noted, are irrelevant. The proper time to evaluate the fairness of the Third Amendment is when it is made, not sooner. Indeed, ironically, the Third Amendment, if allowed to stand, wipes out the value of the government option to buy 79.9 of the common because Fannie and Freddie shareholders will never receive any payments either by way of dividend or liquidation ever. No analysis of the 2008 deal gives any insight into the Third Amendment.

Going Forward My last point is brief, but critical. There are all sorts of ways in which to reform the housing market, in order to avoid the mistakes of earlier periods. To do that, any workable reform, critically, would involve removing the deadly combination of an implicit government guarantee coupled with a mandate to make high-risk loans with small down-payments to low- and middle-income individuals who lack sufficient capacity to repay.

Unfortunately, the major reform proposals advanced to date, including most recently the Johnson-Crapo proposal, essentially double down on the old, failed model. The Johnson-Crapo bill is, I think, highly flawed. Its dangerous willingness to have the federal government guarantee about $5.2 trillion of mortgage debt is well-exposed in a recent Cato Institute Working Paper by Ike Brannon. Its dangerous similarity to recent health care reform is the centerpiece of James Glassman's pieces in the Weekly Standard, which characterizes the bill as the Obamacare of real estate. Here is not the place to go examine the Johnson-Crapo bill's complex structure and perverse incentives. Quite simply, the new bill repeats most of the old mistakes with Fannie and Freddie in the form of a new Federal Mortgage Insurance Corporation that has the same cross-subsidy to high-risk borrowers, now called "equitable access." Because the political pressures to service low- and middle-income groups will be as great now as they have ever been, it is an open question, at best, whether the new reforms will be able to prevent a slow decline in underwriting standards under the proposed new regime.

Complicating the uncertain prospects for Crapo-Johnson, and all future proposals, is the aftermath of the government's extraordinary actions under the Third Amendment. There is a tight connection between the past obligations to Fannie and Freddie and the creation of any new facility in which private parties are asked to risk capital, given the very real risk that private capital will stay away from facilities that are empowered to make foolish loans under federal oversight that will, almost inevitably, cave with time. The short answer is that if the Third Amendment holds up in court, private parties will in fact stay away in the future. There are just too many possibilities to wipe out private investment if the government has the power that it claims here and everywhere else. (If the executive branch can rewrite the ObamaCare legislation repeatedly, it can rewrite any legislation including regulation for the residential mortgage market.) Indeed, the situation is worse: even if the shareholder suits against the various government agencies prevail, private investors would rightly perceive an ongoing risk that they could be tied up for years in litigation brought to enforce their contractual rights. That grim prospect will certainly deter private participation in any new mortgage-loan facilities being contemplated.

What is clear is that the "protection of taxpayers" motif is bipartisan. Both parties see every reason to ignore contractual and constitutional obligations to Fannie and Freddie shareholders. What reason is there in this political climate to think that the Congressional leopard will lose its spots anytime soon? On all these issues, any defense of the Third Amendment, such as that offered by Larry Wall, only makes matters going forward worse.

Richard A. Epstein is the Laurence A. Tisch Professor of Law at the New York University School of Law the Peter and Kirsten Bedford Senior Fellow at Stanford University's Hoover Institution, and a Visiting Scholar with the Manhattan Institute's Center for Legal Policy. Professor Epstein works as an advisor to several hedge funds that have financial interests in the issues covered in this essay.

O'Neill on Roberts and NFIB v. Sebelius - PointOfLaw Forum

Timothy P. O'Neill has an interesting piece on the "Thayerism" school of heavy deference to legislative judgments that may have motivated Justice Roberts's opinion in NFIB v. Sebelius. One can disagree with it, but it is a fundamentally conservative form of jurisprudence; as I argued in June, you can be unhappy that Roberts takes judicial restraint to such levels, but you can't accuse him of being a Souter.

While O'Neill focuses on Justice Harlan, Justice Roberts's own jurisprudence already gave hints of this approach: Free Enterprise Fund, NAMUDNO, and Wisconsin Right to Life, in hindsight, show the same tendency to err on the side of deference to the legislature. (See also Adler @ Volokh.)

(Apologies to Professor O'Neill for originally misspelling his name.)

Supreme Court Preview - October Term 2012 - PointOfLaw Forum

The Supreme Court kicked off the October Term on Monday - the first Monday of October. Here's a quick roundup of the big issues up before the Court.

Affirmative action: The court will revisit its 2003 ruling (Grutter v. Bollinger) which upheld certain affirmative-action programs at universities. In the new case, Fisher v. University of Texas, the Court will consider a white student's challenge to the admissions policy at UT Austin that allows race to trump other merit-based factors. As John Yoo recently argued, the Court should overturn Grutter as a "blemish" on our constitutional law.

Gay Marriage: It's considered likely that the Court will address gay marriage, although the Justices have not made an announcement yet. Actually, there are two distinct issues: (1) can Congress define "marriage" for federal law purposes? and (2) can states define marriage as the union of one man and one woman?

The first issue relates to the Defense of Marriage Act (DOMA). There is at least a decent Tenth Amendment argument that DOMA is unconstitutional. If the federal government wants to make certain benefits contingent on being married, so be it, but the feds have to defer to the states to supply the definition of marriage.

The second issue, which relates to California's Proposition 8, presents a much greater threat to our constitutional order. The liberal argument is that the Constitution requires state recognition of same-sex marriage and, therefore, divests states of their historic power over the definition of marriage. According to the liberal spin, as the Washington Post's Robert Barnes reports in typically unbiased fashion, the question is "whether society's growing acceptance of same-sex unions warrants constitutional protection." I guess society's "growing acceptance" is somehow reflected by the 37 states that have passed laws defining marriage as limited to a union between one man and one woman. As I have said before, the liberal argument here is pure judicial activism.

ObamaCare, Part II? There is at least a possibility that the Affordable Care Act will come back to the Court this term. The Court is considering a petition by Liberty University to reconsider the university's challenge to ACA's employer mandate on religious freedom grounds, but also as exceeding Congress's power. Although the Court often summarily rejects such petitions, it has kept this one under advisement all summer, and now has asked the Obama administration to respond - raising the likelihood that the Court will agree to revisit this law.

Takings. The case is Arkansas Game and Fish Comm. v. United States. The issue is whether government regulations that impose recurring flood invasions constitute a "taking" within the meaning of the Takings Clause, even if the flooding isn't permanent.

Voting rights. Overlapping with the recent Voter ID controversies are a series of cases challenging Section 5 of the Civil Rights Act, which requires states and localities with a history of discrimination to get federal approval of any changes in their voting laws. In a 2009 ruling, the Supreme Court expressed concern about "serious constitutional questions raised by Section 5's intrusion on state sovereignty." Clearly this is the case for state and local elections. But even for federal elections, the Constitution gives states the power to define "the times, places, and manner" of choosing congressmen. Granted, Congress has the power to amend such regulations, but that's very different from forcing states to ask Congress's permission before changing their voting laws.

Alien Torts. On Monday, the Court heard argument on the scope of the Alien Tort Statute (ATS), a venerable 1798 law that allows aliens to bring lawsuits in federal court for violations "of the law of nations or a treaty of the United States." As far as we know, it was enacted to cover very minor gaps in the law, like the assault of a diplomat in the U.S., or piracy committed by Americans in international waters. The law was virtually unused until the 1980s, when it was revived as a nifty way to use American courts to pursue alleged human rights abusers.

In the new frontier, the international rights bar is arguing that the ATS gives courts jurisdiction over suits that have no connection to the US; that is, cases in which foreign plaintiffs sue foreign defendants over conduct that occurred outside of the U.S. The case is Kiobel v. Royal Dutch Petroleum.

In Monday's argument, the Justices showed skepticism of the expansion of the ATS and their questions sought some principle to limit ATS. Justice Sotomayor seemed inclined to endorse an interpretation put forth by the European Union in an amicus brief, which argues that US courts should allow ATS lawsuits with no connection to the US, provided the parties have exhausted all other remedies. As a matter of policy, that might or might not be sensible, but it is disturbing that even one Supreme Court Justice believes that a 214-year-old American law should be interpreted according to a policy formula dreamed up in Brussels.

More on vice-presidential vetting - PointOfLaw Forum

The GQ story on vice-presidential vetting has a sidebar where I'm quoted about various hypothetical 2012 vice presidential candidates. What was published was a much shorter version of what I submitted to the magazine. As speculation increases (including my speaking on KPCC about the issue yesterday), I thought I might as well make the whole memo to GQ public, after the jump:

Nadine Strossen
Professor of Law, New York Law School
President, American Civil Liberties Union (ACLU), 1991-2008

The Court's decision is hard to summarize in a simple headline because of its multiple holdings, which were supported by majority votes comprised of differing subsets of the Justices. To be sure, the bottom-line result of the Court's central holding was to sustain Congressional power to enact the Affordable Care Act's minimum coverage requirement. However, the Court's overall analysis and multiple subsidiary holdings, viewed as a whole, actually endorse a notable reining-in of the federal government's power in several respects. This was underscored by the partial dissent that Justice Ginsburg authored on behalf of the Court's four more "liberal" Justices, objecting to these holdings.

The decision's cutbacks on federal power were reflected in the following holdings, which were supported by the Court's more "conservative" Justices:

  • The Court rejected the central rationale of the U.S. and other proponents of the Act -- that Congress had the power to pass it under the Commerce Clause and/or the Necessary and Proper Clause.

  • For only the third time since 1937, the Court held that Congress had exceeded its Commerce Clause power.

  • The Court substantially cut back on the very broad construction it has consistently given to the Necessary and Proper Clause, including in recent rulings.

  • The Court partially invalidated the "Medicaid expansion" provision - which grants additional federal funds to states to expand Medicaid coverage, on the condition that the states comply with certain federal requirements for such coverage - holding that this provision exceeded Congress's power under the Taxing and Spending Clause. The Court has repeatedly held that Congress may condition its financial grants to states on a range of requirements. While the Court has in the past nodded to the possibility that some conditions might hypothetically be so onerous as to overstep Congress's power and unduly constrain states' autonomy, this was the first time the Court has ever struck down any federal funding program on that basis.

In sum, the above holdings explicitly reined in Congress's powers under three separate power-granting constitutional clauses: the Commerce Clause, the Necessary and Proper Clause, and the Taxing and Spending Clause.

Nor are these power-restricting holdings likely to be offset, in terms of federal power in future contexts, by the Court's holding that the minimum coverage provision was authorized by Congress's taxing power. That's because the Court framed this holding extremely narrowly in several ways, including by anchoring it to the specific facts of this unique case.

In short, while the Court did uphold federal power in this case, its specific rationales may well have a net impact of limiting federal power in future contexts.

Nadine Strossen
Professor of Law, New York Law School
President, American Civil Liberties Union (ACLU), 1991-2008

The Court's decision is hard to summarize in a simple headline because of its multiple holdings, which were supported by majority votes comprised of differing subsets of the Justices. To be sure, the bottom-line result of the Court's central holding was to sustain Congressional power to enact the Affordable Care Act's minimum coverage requirement. However, the Court's overall analysis and multiple subsidiary holdings, viewed as a whole, actually endorse a notable reining-in of the federal government's power in several respects. This was underscored by the partial dissent that Justice Ginsburg authored on behalf of the Court's four more "liberal" Justices, objecting to these holdings.

The decision's cutbacks on federal power were reflected in the following holdings, which were supported by the Court's more "conservative" Justices:

  • The Court rejected the central rationale of the U.S. and other proponents of the Act -- that Congress had the power to pass it under the Commerce Clause and/or the Necessary and Proper Clause.

  • For only the third time since 1937, the Court held that Congress had exceeded its Commerce Clause power.

  • The Court substantially cut back on the very broad construction it has consistently given to the Necessary and Proper Clause, including in recent rulings.

  • The Court partially invalidated the "Medicaid expansion" provision - which grants additional federal funds to states to expand Medicaid coverage, on the condition that the states comply with certain federal requirements for such coverage - holding that this provision exceeded Congress's power under the Taxing and Spending Clause. The Court has repeatedly held that Congress may condition its financial grants to states on a range of requirements. While the Court has in the past nodded to the possibility that some conditions might hypothetically be so onerous as to overstep Congress's power and unduly constrain states' autonomy, this was the first time the Court has ever struck down any federal funding program on that basis.

In sum, the above holdings explicitly reined in Congress's powers under three separate power-granting constitutional clauses: the Commerce Clause, the Necessary and Proper Clause, and the Taxing and Spending Clause.

Nor are these power-restricting holdings likely to be offset, in terms of federal power in future contexts, by the Court's holding that the minimum coverage provision was authorized by Congress's taxing power. That's because the Court framed this holding extremely narrowly in several ways, including by anchoring it to the specific facts of this unique case.

In short, while the Court did uphold federal power in this case, its specific rationales may well have a net impact of limiting federal power in future contexts.

James R. Copland

While everyone has understandably been focused on the Supreme Court's decision on the constitutionality of the 2010 Patient Protection and Affordable Care Act, as well as its decision overturning in part and upholding in part Arizona's controversial immigration law, SB 1070, it's worth drawing attention to the Court's short per curium decision in American Tradition Partnership v. Bullock overturning the Montana Supreme Court's decision upholding a state-law ban on independent political expenditures by corporations. In essence, the Court said, "We meant what we said in Citizens United."

Of course, most companies won't be making direct independent political expenditures but rather participating in the political process the way they have historically, i.e., through lobbying, PAC donations, and trade associations. These historic mechanisms, as demonstrated powerfully in Rob Shapiro and Doug Dowson's new Manhattan Institute report, Corporate Political Speech: Why the New Critics Are Wrong, have generally increased share value, the claims of certain shareholder activists notwithstanding. That's doubtless why, despite the efforts of those like Bruce Freed at the Center for Political Accountability, shareholders on the whole have been rejecting shareholder proposals seeking limits or greater disclosure of corporate political spending or lobbying.

As of today, among the Fortune 200 companies in our Proxy Monitor database, shareholder proposals concerning corporate political spending or lobbying have received the support of only 17.8 percent of shareholders in 2012, down from 23.0 percent in 2011. Looking solely at the political spending proposal being pushed by Freed and the CPA, only 22.7 percent of Fortune 200 shareholders have backed the proposal in 2012, down from 26.6 percent in 2011.

A mixed bag, but ultimately an activist decision - PointOfLaw Forum

I'm not quite glass-half-full on the ObamaCare decision, but it does have its silver linings. I agree with the dissenters on all points, including the point that Roberts' re-characterization of the "penalty" provision as a tax is essentially an activist decision, for reasons I'll get to below.

On the good news front, the Court struck down (for the first time) a scheme of conditional federal grants as being unduly coercive against the states -- that would be ACA's Medicaid expansion which threatened to pull the plug on all Medicaid dollars for states that don't march in lockstep with the feds.

Also good -- very good -- is the fact that the Court rejected the administrations two primary arguments: that the individual mandate is justified under the Commerce Clause and the Necessary and Proper Clause. So now we know: Congress cannot use its regulatory power to compel activity. There must be some pre-existing activity (and it has to be of an "economic" nature) for Congress to be able to regulate.

But then the bad -- very bad -- news: Roberts accepted the validity of the mandate as a "tax" imposed to promote the "general welfare." As a matter of original meaning, this conclusion is incoherent. Everything we know about the original understanding of the text tells us that it was not meant to authorize Congress to use its taxing power to achieve ends that it could not do under its enumerated powers. Unfortunately, however, that conclusion is supported by precedent going back to the 1937 Helvering v. Davis. It is the Hamiltonian view of "general welfare." I don't buy it, but it was not likely that the Court was going to revive the Madisonian (correct) view of general welfare at this date.

So, Congress cannot compel you to enter into commerce, but it can tax you if you refuse to enter into commerce. What are the limits to this doctrine? As far as I can tell they are:

  • The tax cannot be so high that people have no choice but to purchase health insurance [or whatever product or service Congress decides to mandate next];
  • Congress cannot attach any other "negative legal consequences" to the failure to engage in commerce; e.g., Congress cannot impose criminal or civil penalties for failing to buy health insurance.
  • The tax must be imposed regardless of intent, thus, Congress can't impose a tax only on those who "intentionally refuse to buy health insurance."
  • The tax must be collected in the same manner as other taxes, ie, via the IRS.

The dangerous part of his decision is not that he expanded the scope of the "taxing power" (as I explain above, existing precedents already did that) but he greatly expanded the Court's power to reclassify a regulatory measure as a "tax." Roberts relies on the principle that if courts are faced with differing interpretations of a law, they should choose the interpretation that upholds the law. But that assumes that the competing interpretations are plausible. Here, Congress was absolutely crystal clear in categorizing the "shared responsibility payment" as a "penalty," i.e., a means to enforce a regulatory command, and not a tax. The President who signed the law emphatically denied it was a tax.

A Court re-writing a statute to achieve a certain result is the very definition of judicial acitivism. For the Court to rewrite a law so as to impose a tax is doubly disturbing. As the dissenters say: "Imposing a tax through judicial legislation inverts the constitutional scheme, and places the power to tax in the branch of government least accountable to the citizenry."

Obamacare Decision: Reactions - PointOfLaw Forum

by James Copland

In March, concurrent with the historic three-day oral argument before the Supreme Court considering the constitutionality of the 2010 Patient Protection and Affordable Care Act, we hosted a discussion of the issues in play, including Erwin Chemerinsky, Richard Epstein, Orin Kerr, Gillian Metzger, Michael Rosman, and Nadine Strossen. With the Court announcing its decision today, we've invited these guests back to share their opinions, if they wish, alongside those of the Manhattan Institute's own scholars.

James Copland

In March, concurrent with the historic three-day oral argument before the Supreme Court considering the constitutionality of the 2010 Patient Protection and Affordable Care Act, we hosted a discussion of the issues in play, including Erwin Chemerinsky, Richard Epstein, Orin Kerr, Gillian Metzger, Michael Rosman, and Nadine Strossen. With the Court announcing its decision today, we've invited these guests back to share their opinions, if they wish, alongside those of the Manhattan Institute's own scholars.

Ed Whelan demolishes the self-parodic sputtering of E.J. Dionne calling for Justice Scalia's resignation, which in turn is no doubt a preview of the Left's planned attack on the Court should they decide that the Commerce Clause means something and strike down the Affordable Care Act.

To Whelan's fine points, one might note that Dionne wasn't calling for Justice Ginsburg's resignation when she used the occasion of the Ledbetter decision to attack the majority and call for Congressional action in a vituperative and misguided attack.

Jonathan Adler and Michael Cannon remind us that the administration has other legal problems with the poorly-drafted Affordable Care Act, even if it survives Supreme Court scrutiny this week. Earlier.

The ABA Journal's historical revisionism - PointOfLaw Forum

Solicitor General Donald Verrilli had a tough round of questioning when he argued for the government defending PPACA in the healthcare litigation, and liberals were infuriated that the case turned out not to be the slam-dunk the Obama administration said it was, and made Verrilli a scapegoat for the administration's indefensible litigation position. Adam Serwer at the left-wing Mother Jones called his argument "one of the most spectacular flameouts in the history of the court." Liberal law professor Barry Friedman told the New York Times that Verrilli's performance was "disappointing." Liberal Jeffrey Toobin called it a train wreck on CNN and was otherwise harsh in a Politico story.

In contrast, conservatives were sympathetic to Verrilli. Miguel Estrada in the same NY Times story said that the criticism of Verrilli was "uninformed and unjustified." I defended Verrilli on Twitter.

Somehow, however, when the ABA Journal does a profile of Donald Verrilli, here's how they characterized the kerfuffle over the March oral argument:

It's customary for the solicitor general to show up on opinion days, and Verrilli appeared perfectly upbeat despite all the attention in March to what some perceived as his subpar performance arguing the Affordable Care Act cases. (Some of the criticism was ideologically motivated by critics of the health care law.)

What media bias?

Richard A. Epstein
Laurence A. Tisch Professor of Law, New York University School of Law

The excellent posts by Gillian Metzger and Erwin Chemerinsky go beyond the particulars of the Affordable Care Act to address more general considerations of federalism. Stated in a nutshell, their view of the subject is that broad conceptions of political accountability afford the one key check that is needed on adventuresome legislation by which the federal government is respectful of the role that the states play in the structure of the political system. To Gillian Metzger, for example, the Medicaid expansion program should be approved because the states have to take political accountability for their decisions. She writes:

Political pressure from their citizens is a major reason that the states feel compelled to participate in Medicaid; turning down the substantial federal funds offered to subsidize healthcare for poor state residents is not a popular political choice.

This argument misses the force of the case against the Medicaid expansion. Why not divide the states into two classes? Those states that want to accept the program should, in my view, be entitled to participate even if key portions of the Medicaid expansions are cut. By the same token, the states that don't want to accept the program should be free to turn it down without having to sacrifice all the funds that are now contributed by the federal government to allow the states to run their programs for persons whose income is below poverty levels.

Put otherwise, the only objection here is to the unprecedented--to use everyone's favorite term--conditions that the federal government uses to bully states into the program. They are not allowed to reorganize the delivery of their services for the below-poverty line populations. And they must incur the very heavy administrative costs of running the expanded Medicaid program for new individuals.

In addition, Metzger's argument has to do work not only for this particular iteration of the Medicaid expansion, but also has to carry the day if the federal government added new burdens or new conditions to the Medicaid expansion. A state like California receives some $25 billion in Medicaid money for its current recipients. It will, as a moral certainty, be driven into the new program so long as its conditions cost it less than the money it forfeits.

We should, moreover, reject the reply that the loss of funds goes to the individual recipients and not to the state. But so what? This is not a condition wherein the federal government says to California that if you do not play along, then we shall take the money from Medicaid recipients in Oregon. Clearly the target was to drive the state which has all sorts of special obligations to its own citizens. One might as well say that there is no coercion involved when the gun man says give me your wallet or I will kill your mother.

None of these dire conclusions are softened by the political accountability doctrine.Taken to its limits, the doctrine means that the Constitution imposes no limits whatsoever on what the federal government can do in its relationships with the state by taxation, regulation and spending. Indeed, it goes so far that the terrible decision in South Dakota v. Dole is needlessly protective of the state because there is no such thing as coercion in the use of any of its powers. Yet if the doctrine does not go that far, then just how far does it go? Neither Metzger, nor any other defender of the doctrine explain its limits.

Indeed the situation is worse than this, because Metzger offers no explanation as to why there is not tremendous political exposure to those states that wish to reject the funds, just as there is to those states that want to accept them. This is one of the major decisions that state governments have to make, and if they make the wrong one, they will pay a price. Put otherwise, there is always political accountability. The key question therefore, is to get the federalism arrangements correct. It is not to use this doctrine as a trump that obviates the need to make a closer review of the overall situation.

Space does not permit a full examination of the Chemerinsky post that engages in too much name-calling and not enough analysis. There are many uses and abuses of federalism in dealing with federal state relationships. There are also many explicit limitations that the Constitution places on the states through the Fourteenth Amendment that it authorizes the Congress to enforce against the states by appropriate legislation. John Calhoun no longer walks the halls of Congress, and indeed the great sin of the Reconstruction period was its narrow construction of the Privileges or Immunities Clause, which allowed southern states exclusive and abusive control over the criminal justice system.

What that has to do with the current issue is anyone's guess. For different, the invocation of competitive federalism in connection with the child labor laws raises other issues, only here competitive federalism worked far better than a national standard. Chemerinsky is so committed to progressive causes that he is blind to the way in which his own brand of politics is used to sanctify the New Deal transformation of a Constitution of limited federal powers into one that allows federal force to control markets where it ought not to enter. It is, alas, too late to turn back the clock on Wickard v. Filburn. It is high time to recognize its massive errors by refusing to extend its logic one inch further.

Let us hope that the Supreme Court will exorcize the political accountability doctrine, and strike down both Title I and Title II of the ACA.

Ideologies of Federalism - PointOfLaw Featured Discussion

Erwin Chemerinsky
Dean and Distinguished Professor of Law,
University of California, Irvine School of Law

Since the country's earliest days, federalism has been used as a political argument primarily in support of conservative causes. During the early 19th century, John Calhoun argued that states had independent sovereignty and could interpose their authority between the federal government and the people to nullify federal actions restricting slavery.

In the early 20th century, federalism was successfully used as the basis for challenging federal laws regulating child labor, imposing the minimum wage, and protecting consumers. During the depression, conservatives objected to President Franklin Roosevelt's proposals, such as Social Security, on the ground that they usurped functions properly left to state governments.

During the 1950s and the 1960s, objections to federal civil rights efforts were phrased primarily in terms of federalism. Southerners challenged Supreme Court decisions mandating desegregation and objected to proposed federal civil rights legislation by resurrecting the arguments of John Calhoun. Segregation and discrimination were defended not on the grounds that they were desirable practices, and more in terms of the states' rights to choose their own laws concerning race relations.

In the 1980s, President Ronald Reagan proclaimed a "new federalism" as the basis for attempting to dismantle federal social welfare programs. In his first presidential inaugural address, President Reagan said that he sought to "restore the balance between levels of government." Federalism was thus employed as the basis for cutting back on countless federal programs.

Hindsight reveals that federalism has been primarily a conservative argument used to resist progressive federal efforts, especially in the areas of civil rights and social welfare. It is no surprise, then, that in their questioning of the lawyers, the conservative justices expressed great skepticism about the constitutionality of key aspects of the Affordable Care Act.

But after reading the transcripts of the oral arguments (and listening to much of them), I remain convinced that this should be an easy case for the Court. The individual mandate is no different from social security tax that allows an exemption for those with their own retirement account. It is hard to imagine how Congress cannot regulate under its commerce power a segment of the economy that is $2.6 trillion, especially as Justices Scalia and Kennedy acknowledged because those who do not purchase insurance directly affect the rates of those who do. If Congress, under its commerce power, can regulate Angela Raich growing marijuana for her own personal use, surely it can regulate health insurance.

Nor should the constitutionality of the increased burden on the states to participate in the Medicaid program be a difficult question. No state is required to participate in the Medicaid program. If it chooses to do so, it must meet certain conditions. This is true of countless federal programs. Under the current Medicaid law, the federal government pays between 50 and 80% of a state's costs. But under the Affordable Care Act, the federal government initially pays 100% and in 2021 it becomes 90%. If the burden on the states under the Affordable Care Act violates the Tenth Amendment, then why doesn't the current law? There is a difference between forcing the states to do something and given them a strong financial inducement.

The oral arguments gave no clear sense of what the Court will do, except perhaps that there does not seem to be a majority to dismiss the case based on the Anti-Injunction Act. The justices asked hard questions of both sides and pundits offering predictions are just picking the ones that most support their views.

Every lower federal court judge appointed by a Republican President, with two exceptions, voted to strike down the law. Every lower federal court judge appointed by a Democratic President, with one exception, voted to uphold the law. The crucial question is whether the Supreme Court justices will see it any other way. Will the historic liberal and conservative divide over states' rights determine the outcome of this case? We'll know in June.

Gillian Metzger
Vice Dean and Stanley H. Fuld Professor of Law, Columbia Law School

One well-established federalism argument was notably absent for most of the oral argument last week: the role that political accountability plays in checking Congress. Political accountability repeatedly appears in congressional power decisions, going back to Chief Justice Marshall's decisions in McCulloch v. Maryland and Gibbons v. Ogden. In more recent years, the Court famously invoked political accountability as a reason for the Court to not exempt the states from generally applicable legislation in Garcia v. San Antonio Metropolitan Transit Authority, and then subsequently as a justification for the Court to protect states from federal commandeering in New York v. United States and Printz v. United States.

But political accountability barely surfaced in the argument on the individual mandate, raised primarily by Justice Breyer who described political accountability as "the greatest limiting principle of all" on Congress, but one "which not too many accept." (Tr. 76). It was not until midway through the last ACA argument, on the Medicaid expansion, that the topic of political accountability was more fully engaged. Political accountability was Paul Clement's answer when Justice Kennedy asked "[h]ow are the interests of federalism concerned if ... there are huge Federal bureaucracies doing what this bill allows the state bureaucracies to do?" (Tr. 37). Justice Kennedy then pushed Solicitor General Verrilli on the subject, asking "do you agree that there still is ... necessary for the idea of federalism, that there be a clear line of accountability so the citizen knows that it's the Federal or the State government who should be held responsible for their program?"(Tr. 65-66).

This largely one-sided invocation of political accountability on behalf of the ACA's challengers should be surprising. To begin with, political accountability would seem to count in favor of the Medicaid expansion. Political pressure from their citizens is a major reason that the states feel compelled to participate in Medicaid; turning down the substantial federal funds offered to subsidize healthcare for poor state residents is not a popular political choice. Thus, what the states are seeking is to be freed from political accountability for such a decision, rather than to have their accountability enhanced. Nor does the claim that state voters are confused about which government to blame for features of federally-funded state programs fit recent experience. States have had no difficulty pointing the finger at the feds for the impact Medicaid requirements have on state budgets, or for the testing and accountability measures mandated by No Child Left Behind's conditions on federal educational funds.

As important, this one-sided approach obscures the extent to which the ACA is a product of longstanding political debate over how to assure individuals and families in this nation affordable access to healthcare.The rejection of the "public option" in favor of a model based on private insurance reflected, in part, the judgment of Congress that the former would constitute too dramatic and intrusive move on the part of the federal government. Political pressure is also responsible for the central role accorded to the states in key reforms, such as the reliance on state health exchanges and state insurance regulators. Recognizing that the political safeguards of federalism still have potency does not mean that the Court should stay out and leave federalism enforcement to Congress. But it underscores that Congress is not simply out to expand its own powers, and that its legislative judgments about how best to balance federal and state functions need to be taken seriously.

Finally, in response to my earlier post on facial challenges, Michael Rosman argues that sustaining a facial challenge to the mandate is consistent with the Court's commerce clause precedent in United States v. Lopez and United States v. Morrison. In fact, the opposite conclusion follows. Rosman is correct that in those cases the Court sustained facial challenges. But it did so after concluding that the class of activities regulated by the legislation at issue in those cases was noneconomic activity that fell outside of the scope of the commerce power. The point I was highlighting is that a similar conclusion is hard to justify here, given the seeming agreement that a broad swath of the activity regulated by the mandate would indeed fall within Congress's power. Put differently, as a regulation of the class of activity of accessing and financing healthcare, the mandate is facially constitutional. If the Court views Lopez and Morrison as limiting it to facial resolution in the commerce power context, then it should stop there; the tests for facial invalidation simply are not met. Moreover, the Roberts Court has repeatedly emphasized that facial challenges should be viewed with disfavor, which should counsel heavily against suddenly switching to a more lenient approach to facial challenges.

Many thanks for the chance to participate in this engaged debate.

Nadine Strossen
Professor of Law, New York Law School
President, American Civil Liberties Union (ACLU), 1991-2008

At the conclusion of his argument in the Court's final session last Wednesday afternoon, U.S. Solicitor General Donald Verilli moved beyond the specific Medicaid expansion issue then on the Court's agenda, to argue more broadly that the Medicaid expansion, as well as the minimum coverage provision and other core aspects of the new law, will promote the equal "opportunity to enjoy the blessings of liberty." As Verilli urged, "it's important that we not lose sight of" the important ways in which the law advances liberty and equality, especially because its detractors have demonized the minimum coverage provision as violating both core constitutional concerns.

Three major national civil liberties and civil rights organizations - the American Civil Liberties Union, the NAACP Legal Defense & Educational Fund, and the Leadership Conference on Civil and Human Rights -- filed a friend of the court brief in the Supreme Court precisely to make the case that the minimum coverage provision has an overall positive impact on the intertwined constitutional guarantee of individual liberty and equal opportunity. For example, the ACLU summarized its "substantial interest in" this issue as being due to "its potential impact on the ability of millions of uninsured Americans to participate more fully in the economic, political, and social life of the Nation." This important perspective hasn't received as much attention as it deserves.

Numerous studies have documented that the uninsured are less likely to obtain adequate health care, thereby suffering many lost opportunities, which decreases both the quality and length of their lives. For example, children with untreated health problems are less likely to attend and to perform well in school. Being uninsured also correlates with other adverse educational outcomes, including failing to graduate from high school or to attend college.

The burdens of costly health care, and of being uninsured, are imposed disproportionately on members of our society who are relatively disempowered within the political system, including people of color, people with disabilities, low-income families, women, and senior citizens. Individuals in these groups inordinately experience unemployment, jobs that do not offer health insurance, and lower incomes that make insurance premiums unaffordable. The United Nations Committee that oversees compliance with the international Convention on the Elimination of all Forms of Racial Discrimination - to which the U.S. is a party -- recently noted its concern that in our country, "a large number of persons belonging to racial, ethnic, and national minorities still remain without health insurance and face numerous obstacles to access to adequate health care."

In sum, by lowering the cost of health insurance, the minimum coverage provision will make health care more affordable and accessible, thus enhancing liberty and equality for the millions of uninsured Americans. In contrast, this provision imposes only minimal burdens on individual liberty.

First, although its detractors refer to the minimum coverage provision as a "mandate," it does not in fact require anyone to purchase insurance. Rather, anyone may opt instead to pay a financial penalty, which is enforced through an offset of any tax refund that the government would otherwise have to pay. This arrangement certainly does not constitute direct government compulsion, and in many situations may well exert only limited influence on an individual's choice whether to buy insurance.

More fundamentally, this provision doesn't implicate any liberty interest that the Court has deemed constitutionally protected. For example, it doesn't force anyone to undergo any medical treatment or to receive any health services - which would infringe on fundamental freedoms of bodily integrity and medical decision-making. Instead, because the minimum coverage provision is an economic regulation, the asserted right to resist it is akin to the long-repudiated "liberty of contract" that the pre-1937 Supreme Court had read into the Constitution, substituting its own laissez-faire economic philosophy for our elected officials' policy choices.

Such judicial invalidation of economic regulations designed to promote equal access to health and welfare for the most vulnerable groups in our society, in the service of a judge-created "freedom of contract," has long been discredited as inappropriate judicial activism. If the Roberts Court resuscitated this approach, it would be promoting not individual liberty, but rather, judicial hegemony.

What Might Change if the ACA is Struck Down? - PointOfLaw Featured Discussion

Orin S. Kerr
Professor of Law, George Washington Law School

Based on this week's oral arguments, there is a very real chance that the Supreme Court might strike down the Affordable Care Act in whole or in part. What might change if that happens, beyond the obvious difference that the invalidated parts of the law would no longer be in effect?

Many have speculated about how such a decision might impact the 2012 race. I don't think there's an easy answer. On the Democratic side, such a decision might help because it lets Obama run against the Supreme Court; it might hurt because it denies Obama his most significant legislative accomplishment. On the Republican side, such a decision might help because it helps sell the narrative that Obama has gone too far; it might hurt because it takes away an unpopular law that Republicans could run against. Which of these possibilities are strongest? I just don't know.

The decision might also help reorient the basic constitutional narratives of the two parties. Since the Nixon Era, politicians from the two parties have each generally sounded a simple theme. Democrats generally endorse some form of a living Constitution and an active Supreme Court; Republicans generally endorse some form of strict construction and not legislating from the bench. There have been many variations from this theme over time. But, for the most part, that basic narrative has held its rhetorical force. If the Supreme Court strikes down the ACA on a 5-4 vote, however, those two sides just might flip. We may see Democrats come to extol judicial restraint and Republicans come to celebrate judicial power.

Finally, a decision striking down the ACA would inject the Supreme Court into the political arena in a way we haven't seen in many years. Remember the timing. The basic theory for why the ACA might be unconstitutional wasn't articulated until around the time the legislation was enacted. That theory quickly became an article of faith on one side of the aisle and the object of derision on the other side. If the Court uses those theories to knock down the legislation on a party line vote of 5 Republican nominees to 4 Democratic nominees, many will view the decision as politics masquerading as constitutional law - sort of a Bush v. Gore but with more lasting impact on constitutional law.

It's the Kennedy Court - PointOfLaw Featured Discussion

Erwin Chemerinsky
Dean and Distinguished Professor of Law,
University of California, Irvine School of Law

Two hours of oral arguments on Tuesday about the constitutionality of the individual mandate leave little doubt of what everyone expected all along: the outcome almost surely depends on Justice Anthony Kennedy. Justice Kennedy asked tough questions of both sides that allow either to be optimistic or pessimistic.

At one point, Justice Kennedy asked Paul Clement, the attorney for the states challenging the law, why the individual mandate was beyond the scope of Congress's power since it clearly could create a national health care system, tax people to fund it, and exempt those with health insurance. Justice Sotomayor expressed this forcefully when she said to Clement: "Could we have an exemption? Could the government say everybody pays a shared health care responsibility payment to offset all the money that we're forced to spend on health care, we the government; but anybody who has an insurance policy is exempt from that tax? Could the government do that?"

The Individual Mandate and the Tax Power - PointOfLaw Featured Discussion

Gillian Metzger
Vice Dean and Stanley H. Fuld Professor of Law, Columbia Law School

Erwin Chemerinsky's post well-states the argument for the constitutionality of the individual mandate---the requirement that individuals purchase health insurance or pay a penalty---under the Commerce Clause. I agree that the mandate falls well within the existing scope of Congress's commerce power: It is a regulation of quintessential economic activity, specifically individuals' actions in accessing and paying for health care. As Judge Sutton put it, "No one is inactive when deciding to pay for health care, as self-insurance and private insurance are two forms of action for addressing the same risk. Each requires affirmative choices; one is no less active than the other; and both affect commerce." Thomas More Law Center v. Obama, 651 F.3d 529, 561 (6th Cir. 2011). And while Michael Rosman argues that requiring insurance is not the same thing as regulating how people pay for health care, I think the link between the two is plainly sufficient to fall within the broad deference given to Congress when it is addressing economic activity that substantially affects interstate commerce.

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