Less, Not More, Government is The Solution

Finance Reform Bill Ignores Big Gov't's Involvement

by Michael Avari (more by this author)

Posted 04/27/2010 ET

In the 1,336 pages of the proposed Senate financial reform bill, the words “government sponsored enterprise” (GSE), “Fannie Mae,” “Freddie Mac,” and “subprime mortgage” appear a grand total of … not once.

Peter Wallison, general counsel of the Treasury Department under President Reagan, reminds us in his article “Fannie and Freddie Amnesia” in The Wall Street Journal of the $400 billion cost to taxpayers of putting those two GSEs into conservatorship.

The bill under consideration makes the assumptions that the markets failed, the financial services industry ran roughshod over the public in an unregulated environment, and that heavy federal regulation is the panacea. But it ignores the federal government’s extensive participation in the industry.

It was the Department of Housing and Urban Development that pushed Fannie and Freddie for “significantly increasing the GSEs’ affordable housing goals for the post-2000 period,” according to the Office of Policy Development and Research.

Receiving a favorable line of government credit and avoiding SEC scrutiny, these depression era vestiges (Fannie was launched in 1938) leveraged their balance sheets to as high as 75-to-1 while escaping market discipline.

They became the toxic-waste dump for subprime mortgages and the primary issuers of assets once considered so toxic that TARP was required: mortgage-backed securities that Wall Street sliced, diced, and spliced into derivatives with names out of a science fiction novel—“synthetic collateralized debt obligations hedged by credit default swaps.”

As investment banks disappeared in the crisis -- with Goldman Sachs and Morgan Stanley fleeing to the protection of bank regulators and Fed supervision, and Bear Stearns and Merrill Lynch forced into absorption by commercial banks under the heavy hand of the Treasury Department and the Fed -- industrial planning reached its ugliest. Every large bank now has a trading operation—internal hedge funds—that they view as more profitable than helping build American industry and communities.

Trading becomes easy, and too seductive, when banks can borrow at zero interest. It becomes incestuous when some banks, 19 to be specific, have a special relationship with the Fed as “Primary Dealers.” During the crisis, they were offered the exclusive Primary Dealer Credit Facility (that has since ended).

That these activities are not the intention of good monetary policy has escaped those politicians who at once rely on Wall Street money for campaign funds whilst they ironically bemoan Wall Street greed.

As reported in The Wall Street Journal, beneficiaries of these influence-buying contributions include lawmakers presently considering the proposed bill and the President, who received close to $1 million from employees of Goldman Sachs.

The “moral hazard” that the bill is purported to allay is made even more hazardous when there is a revolving door between big business and government. Thus there is an air of favoritism when Goldman is compensated fully for bad deals it made with state-run AIG. Such intercourse is vexatious not only because taxpayer funds are misallocated, but because the market—the best antidote to bad business decisions—is short-circuited by government.

Therein lays the counterpoint to the assumptions of financial reform bill. Let us therefore posit that less—far less—regulation is needed.

Let us then propose to keep the preamble to the bill: “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes; Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled …” but replace the balance of the pages with “… the Federal government shall hereby divest itself of all activity in and control of the financial services industry and shall allow markets to work freely.”

Because, in the words of Nobel laureate F.A. Hayek, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Mr. Avari is a management consultant with over 30 years of business experience from start-ups to Global 50 companies, in the aerospace, technology, and financial services industries, and has extensive international experience. Avari earned an MBA in Finance from Columbia University and a BS in Mechanical Engineering from Cornell University. Contact him at michael.avari@americancivility.us.

Crony Capitalism - More Regulation Not Solution

An Economy of Liars

When government and business collude, it's called crony capitalism. Expect more of this from the financial reforms contemplated in Washington.

By GERALD P. O'DRISCOLL JR.

Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism.

Thomas Carlyle, the 19th century Victorian essayist, unflatteringly described classical liberalism as "anarchy plus a constable." As a romanticist, Carlyle hated the system—but described it accurately.

Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. That conception of government and its duties was articulated by the Declaration of Independence and embodied in the U.S. Constitution.

Modern liberals have greatly expanded the list of government functions, but, aside from totalitarian regimes, I know of no modern political movement that has shortened it. While protecting citizens against force, both at home and abroad, is the government's most basic function, protecting them against fraud is closely allied. By the use of force, a thief takes by arms what is not rightfully his; he who commits fraud takes secretly what is not rightfully his. It is the difference between a robber stealing brazenly on the street and a burglar stealing by stealth at night. The result is the same: the loss of property by its owner and the disordering of civil society. And government has failed miserably to perform this basic function.

Why has this happened? Financial services regulators failed to enforce laws and regulations against fraud. Bernie Madoff is the paradigmatic case and the Securities and Exchange Commission the paradigmatic failed regulator. Fraud is famously difficult to uncover, but as we now know, not Madoff's. The SEC chose to ignore the evidence brought to its attention. Banking regulators allowed a kind of mortgage dubbed "liar loans" to flourish. And so on.

We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105. The Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner, a former federal prosecutor, last month.

Are we to believe that regulators were unaware? Last week Goldman Sachs was accused in a civil fraud suit of deceiving many clients for the benefit of another, hedge-fund operator John Paulson.

The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately—not withstanding what any rule might otherwise allow. And financial institutions should have a duty of care to their customers. Lawyers tell me that would get us closer to the common law approach to fraud and bad dealing.

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve's Jackson Hole Conference in 2008, economist Willem Buiter described "cognitive capture," by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in "Staffer One Day, Opponent the Next."

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.

Nobel laureate Friedrich Hayek described the price system as an information-transmission mechanism. The interplay of producers and consumers establishes prices that reflect relative valuations of goods and services. Subsidies distort prices and lead to misallocation of resources (judged by the preferences of consumers and the opportunity costs of producers). Prices no longer convey true values but distorted ones.

Hayek's mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct.

In the U.S today, we are moving away from reliance on honest pricing. The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time. Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates.

Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.

If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.

Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.

Mr. O'Driscoll is a senior fellow at the Cato Institute. He has been a vice president at Citigroup and a vice president at the Federal Reserve Bank of Dallas. Copyright 2009 Dow Jones & Company, Inc.

Is the 2010 Census Constitutional?

This is not James

Madison's census

By Rob Schwarzwalder

Karl Rove is appearing on Census Bureau ads

assuring us that "If you've not yet mailed back your

2010 Census form, it's not too late. Please answer

the 10 easy questions," Rove adds. "They're almost

the same ones that Madison helped write for the first

census back in 1790."

Well, not quite. The 1790 Census was a bit more

succinct than the interpersonal inquisition of the

current form. Specifically, it asked the following: the

name of the "head of household," the number of

"free white males 16 years and upward" and "under

16 years," the number of "free white females," the

"number of all other free persons (by sex and color)"

and "the number of slaves."

That's it. And when Mr. Madison, the "Father of the

Constitution," designed the survey, he did so with

the Constitution itself as his guide.

The Constitution (Article 1, Section 2, Clause 3, to

be exact) specifies that every 10 years, America's

population is to be "enumerated" for purposes of

allocating congressional representation.

This is quite straightforward. Over the centuries,

however, the Census form has become a means of

collecting all manner of intrusive and irrelevant data

on American citizens, from birthdates to phone

numbers. The 1830 Census wanted to know

information about occupations. The 1860 Census

requested information about the value of one's "real

estate" (property) and "personal estate" (cash on

hand, possessions, etc.) and even wanted to know if

anyone listed on the form was "deaf and dumb,

blind, insane, idiotic, pauper, or convict."

Today's America has changed. We supposedly are a

colorblind society and one in which "rights" now

include "broad penumbras," let alone those listed in

the Declaration of Independence.

An anachronism

Yet the 2010 Census is a sociological anachronism.

According to the Census website, "people from many

walks of life use Census data to advocate for causes,

rescue disaster victims, prevent diseases, research

markets, locate pools of skilled workers and more.

When you do the math, it's easy to see what an

accurate count of residents can do for your

community. Better infrastructure. More services. A

brighter tomorrow for everyone."

Wow — a "brighter future for everyone." And just for

filling out a form.

Apart from its embarrassing language, however, the

questions asked in the Census form are unrelated to

the constitutional basis for the form itself:

apportionment of representation in Congress. And

since when — at least, under a serious reading of

the Constitution itself — did the Census Bureau

become a national snoop, an insistent invader of

one's identity?

While the courts (curiously) have upheld Congress's

right to ask the kinds of questions the current form

contains, they are clearly extra-constitutional. The

Constitution requires that Congress count the

population every decade to determine the allocation

of congressional seats. Nothing more. The Census

is not a sociological experiment, nor an aid to

businesses to find workers or help combat floods or

find the cure for cancer, the common cold or

pernicious addictions to caffeinated beverages.

Most disturbing is the current Census form's racially

obsessive questions. The Census Bureau tacitly

acknowledges this by attempting to rationalize the

invasive precision of its questions. For example, in

explaining why the form asks, "Is Person One of

Hispanic, Latino or Spanish origin," the Census

homepage answers:

Asked since 1970. The data collected in this

question are needed by federal agencies to monitor

compliance with anti-discrimination provisions,

such as under the Voting Rights Act and the Civil

Rights Act. State and local governments may use the

data to help plan and administer bilingual programs

for people of Hispanic origin.

This is an almost hilarious study in obfuscation and

evasion. First, if a person is subject to racial or

ethnic discrimination, his identity will be obvious,

thereby making census data irrelevant. Second, the

questions about Hispanic and Asian origin are far

more exhaustive than the Census Bureau, in its

explanatory statement about "Questions on the

Form," wishes to acknowledge. Here is the totality of

the categories listed:

Under Asian and Pacific Islander: Indian, Chinese,

Filipino, Hmong, Laotian, Thai, Pakistani,

Cambodian, Japanese, Korean, Vietnamese, Native

Hawaiian, Guamanian, Chamorro, and "other Pacific

Islander." However, in case this listing is

insufficiently replete, there is a space for the filer to

input another Asian or Pacific Islander "race."

Fascinating: I hitherto had not known that

Hawaiians, Hmong, et al, were separate "races."

But wait — there's more. Hispanics can also be

"Latinos and Spanish" and are asked to inform us

whether they are Mexican, Mexican American,

Chicano, Puerto Rican, Cuban, Argentinean,

Colombian, Dominican, Nicaraguan, Salvadoran,

Spaniard, "and so on."

My limited choices

By the way: what am I, chopped Caucasian liver? My

ancestry is German, Dutch, French and who knows

what else thrown in. But all I get to claim is "white,"

even though my two "German" grandfathers came

from regions of their country so disparate (far

western Germany and its geographic opposite,

Danzig — now Gdansk in Poland) that they were

probably about as bio-ethnically related as a

Neapolitan and a Bulgarian.

My point is that none of this matters. Ethnicity and

race are, aside from possible endemic medical

conditions, genealogical parlor games. They define

neither humanness nor citizenship, character nor

value.

America's charter text affirms that "all men are

created equal." The Constitution is premised on this

assertion, in that it assumes human dignity and the

right of representative self-government. Thus, the

census is needed to assure that such self-

government can be expressed accurately within the

context of the U.S. Congress.

Instead, the Census form categorizes people not by

citizenship and place of residence, but

fundamentally by race and ethnicity. This is un-

American.

Human beings are made in the likeness of their

Creator. This, with their citizenship and home

address, is really all the Census Bureau needs to

know.

Rob Schwarzwalder is senior vice president of the

Family Research Council, a Christian organization

promoting traditional conservative values.

Perverting The Constitution

Will the Individual Mandate Hold up in Court?

By Ryan Lirette Thursday, April 8, 2010

The healthcare insurance mandate is unconstitutional. But don’t expect the Supreme Court to rule it so.

At least 18 states have sued to challenge the healthcare legislation’s mandate provision, which requires each individual to purchase health insurance or pay a financial penalty. The mandate is an unprecedented form of federal regulation that, the states argue, Congress has no constitutional authority to pass. With repeal unlikely, legal challenge may be the best chance for opponents to prevent the contested changes to American healthcare. Will the individual mandate hold up in court?

The text of the Constitution and the vision of the framers suggest that the constitutional challenges have merit. However, the majority of constitutional experts are betting that the courts will uphold the mandate. Their prediction is based on a simple observation: the mandate is consistent with the past 73 years of broad constitutional interpretation, which has granted Congress the authority to regulate nearly anything.

Those who hope to overturn the bill observe that the founders had a very different vision. They divided governing authority by granting Congress only limited and specific powers. Having just fought a bloody revolution against a distant and unresponsive power, the founders reserved most authority to the states, where it would be closer to the people.

During the first 150 years of our history, the mandate’s unconstitutionality would have been apparent because the authority to decide whether individuals should purchase insurance does not fit within any of Congress’s powers. Any judge would have recognized that a federal mandate, whether structured as a tax or regulation, transgresses the constitutional line separating what is local and what is national.

To understand why the courts today are likely to take a different view, we need to go back to 1937. Frustrated that his policies were being overturned by the Supreme Court because they exceeded the scope of federal powers, President Franklin Roosevelt threatened to “pack the court” with six additional justices of his own. While his proposal was rejected, later that year the Court made its famous “switch in time to save nine.” In that switch, the Court greatly expanded its interpretation of the commerce clause, which grants Congress the power to regulate interstate commerce. In a dissenting opinion, Justice James Clark McReynolds warned that the Court’s about-face could lead to the federal regulation of “almost anything,” including “marriage, birth, [and] death.”

Since that key turning point, the original meaning of commerce as trade or exchange has been cast aside for a far more expansive meaning. Soon after 1937, the Court began allowing Congress to regulate any activity that it reasonably believed would affect commerce. In the famous case Wickard v. Filburn, the Court held that Congress could even prohibit a farmer from growing wheat to use on his own family farm if it exceeded the federal government’s predetermined quota. In sum, the power to regulate commerce became the power to regulate anything tangentially related to the economy.

The health insurance mandate fits within this framework because the decision not to buy insurance is an economic decision that affects commerce. But, the mandate also invades an area of individual autonomy that—until now—has been free from the commerce power’s grasp. Even the broadest interpretations of the commerce clause, like Wickard, only give Congress the authority to regulate economic activity. By regulating non-activity, however, the mandate goes further. Instead of regulating commercial activity, Congress is compelling an activity and then pointing to its commercial implications to justify regulation.

We should not deceive ourselves as to where this path leads. Once an insurance mandate is constitutional, there is no legal distinction preventing the mandated purchase of other goods. Nothing prevents a struggling industry, particularly one with political favor, from requesting mandates to purchase its products. If Congress can force you to purchase insurance, it can force you to buy a GM car.

For years, Americans have been content to watch the federal government expand far beyond its constitutional moorings. And one must admit that many of these expansions have benefited society. Many problems have required federal authority, such as the ugliness of Jim Crow–era discrimination.

But the constant expansion of the commerce power is troubling. The Constitution limits federal power not only for the benefit of states, but also for individuals. The founders understood that the accumulation of too much power in one place threatens the liberty of everyone. As the Supreme Court cautioned in United States v. Lopez, “a healthy balance of power between the States and the Federal Government will reduce the risk of tyranny and abuse from either front."

It may be unrealistic to return to the original meaning of “commerce.” But this may be the perfect opportunity to pull back from the most extreme reaches of the modern view. Eighteen states have sued the federal government and, for the first time in a long while, people are pondering the proper size of the federal government. After watching Congress pass a bill a majority of Americans oppose, that distant and unresponsive government the founders feared may have started to look all too familiar.

Ryan Lirette is a lawyer and research associate at the American Enterprise Institute.

Starving the Horse

Out of Control

By Dick Armey from the April 2010 issue

Back when I was an economics professor, I was always amazed to hear faculty members complain that the United States was not more like Europe. They were enamored with the cradle-to-grave entitlements of the European welfare state.

Every society tries to find a balance between liberty and security. Europe has chosen to put more weight in security and subjects the individual to the needs of the collective. America is different. We value liberty highest, and this commitment to the individual is what makes America unique.

Our Founding Fathers designed a constitutional system based on the rule of law to protect the individual from an overbearing federal government. The government was to do only that which was both right and necessary; the rest was to be left up to the states and individuals.

An American's freedom is based on individual, God-given rights guaranteed by the Constitution, and also on economic liberties that allow us to provision our families and pursue our own happiness.
For more than 200 years, American citizens have used their personal and economic liberties to pursue their dreams and provide for their families. Along the way we built a prosperous nation. American wealth was not an accident but a direct result of our freedoms.

The relationship between the private sector and the government is similar to that of a jockey and horse. The winning combination is a strong and fast horse with a nimble and light jockey. In this case the horse is the private sector and the jockey is the government. When the jockey grows too large, and the horse is starved, eventually the horse will collapse under the weight of the jockey.

Advocates of big government do not understand this. They take our freedom and prosperity for granted. We now find this commitment to personal and economic liberty being challenged by the size of government. President Obama and Congress are looking to "Europeanize" the United States through a legislative stampede of government control: the nationalizing of our health care system, cap and trade energy taxes, and aggressive unionization. How can it be that the United States government now owns banks and auto companies?

Milton Friedman warned us that the true rate of taxation is government spending. With trillion-dollar deficits projected for years to come, I fear the greatest threat to our freedom and way of life will come from our out-of-control deficits. Eventually you must pay the piper, and the government will either deflate our currency or impose catastrophically high taxes and institute a national sales tax. Or, even worse, it will pursue a combination of both bad ideas.

Higher taxes degrade our standard of living, leaving citizens with fewer choices and fewer dreams. Taxes and a bloated public sector rob the private sector of much-needed capital investment. Capital is like fertilizer: when it's spread on the private sector it grows the economy; when it's fed to the government it grows more government. This is the challenge handed to the new crop of freedom-loving patriots: government is growing too big and too costly, and it needs to be reined in.

The Greek debt crisis should be the canary in the coal mine. Greece is the first Western country in recent memory to experience a sovereign debt crisis. In 2009 the Greek budget deficit was 13 percent of GDP, and investors do not believe the Greeks can credibly get the budget under control. The Congressional Budget Office reported that our 2009 budget deficit was 10 percent of GDP. Clearly the United States is on an unsustainable path. In less than 10 years the interest on the debt alone will approach $500 billion. How long before the market loses its faith in our ability to pay?

Fortunately a new generation of citizen activists has stood up to demand political courage to get the budget under control. Commonly known as the Tea Party movement, these defenders of freedom have emerged in the last year to ask politicians to do what families do across the country: prioritize spending and live within a budget. Like the Reagan revolution and the Contract with America once were, the Tea Party movement is the next great conservative revolution in my lifetime.

Dick Armey, the former House majority leader (R-TX), is the chairman of Freedom Works and a leader in the Tea Party movement.

Waiting for The Courts - "Unconstitutional"

ObamaCare and the Constitution

If Congress can force you to buy insurance, Article I limits on federal power are a dead letter.

The constitutional challenges to ObamaCare have come quickly, and the media are portraying them mostly as hopeless gestures—the political equivalent of Civil War re-enactors. Discussion over: You lost, deal with it.

The press corps never dismissed the legal challenges to the war on terror so easily, but then liberals have long treated property rights and any limits on federal power to regulate commerce as 18th-century anachronisms. In fact, the legal challenges to ObamaCare are serious and carry enormous implications for the future of American liberty.

***
The most important legal challenge turns on the "individual mandate"—the new requirement that almost every U.S. citizen must buy government-approved health insurance. Failure to comply will be punished by an annual tax penalty that by 2016 will rise to $750 or 2% of income, whichever is higher. President Obama opposed this kind of coercion as a candidate but has become a convert. He even argued in a September interview that "I absolutely reject that notion" that this tax is a tax, because it is supposedly for your own good.

Florida Attorney General Bill McCollum and 13 other state AGs—including Louisiana Democrat Buddy Caldwell—claim this is an unprecedented exercise of state power. Never before has Congress required people to buy a private product to qualify as a law-abiding citizen.

As the Congressional Budget Office noted in 1994, "Federal mandates typically apply to people as parties to economic transactions, rather than as members of society." The only law in the same league is conscription, though in that case the Constitution gives Congress the explicit power to raise a standing army.

Democrats claim the mandate is justified under the Commerce Clause, because health care and health insurance are a form of interstate commerce. They also claim the mandate is constitutional because it is structured as a tax, which is legal under the 16th Amendment. And it is true that the Supreme Court has ruled as recently as 2005, in the homegrown marijuana case Gonzales v. Raich, that Congress can regulate essentially economic activities that "taken in the aggregate, substantially affect interstate commerce."

But even in Raich the High Court did not say that the Commerce Clause can justify any federal regulation, and in other modern cases the Court has rebuked Congress for overreaching. In U.S. v. Lopez(1995), the High Court ruled that carrying a gun near a school zone was not economically significant enough to qualify as interstate commerce, while in Morrison (2000) it overturned a law about violence against women on the same grounds.

All human activity arguably has some economic footprint. So if Congress can force Americans to buy a product, the question is what remains of the government of limited and enumerated powers, as provided in Article I. The only remaining restraint on federal power would be the Bill of Rights, though the Founders considered those 10 amendments to be an affirmation of the rights inherent in the rest of the Constitution, not the only restraint on government. If the insurance mandate stands, then why can't Congress insist that Americans buy GM cars, or that obese Americans eat their vegetables or pay a fat tax penalty?

The mandate did not pose the same constitutional problems when Mitt Romney succeeded in passing one in Massachusetts, because state governments have police powers and often wider plenary authority under their constitutions than does the federal government. Florida's constitution also has a privacy clause that underscores the strong state interest in opposing Congress's health-care intrusion.

As for the assertion that the mandate is really a tax, this is an attempt at legal finesse. The mandate is the legal requirement to buy a certain product, while the tax is the means of enforcement. This is not a true income or even excise tax. Congress cannot, merely by invoking a tax, blow up the Framers' attempt to restrain government under Article I.

The states also have a strong case with their claim that ObamaCare upsets the Constitution's federalist framework by converting the states into arms of the federal government. The bill requires states to spend billions of dollars to rearrange their health-care markets and vastly expands who can enroll in Medicaid, whether or not states can afford it.

Florida already spends a little over a quarter of its budget on Medicaid, and under ObamaCare that will expand by at least 50% as some 1.3 million new people enroll. Those benefits, and the burden of setting up the new exchanges, will cost Florida $149 million in 2014 and $1.05 billion annually by 2018. The state will either have to cut other priorities or raise taxes. In legal essence, ObamaCare infringes on state sovereignty and unconstitutionally conscripts state officials.

Less potent, at least to our reading, is the challenge on behalf of state laws that bar or exempt their citizens from the mandate. Virginia passed such a law earlier this year, and Attorney General Ken Cuccinelli is suing on those grounds. But while such efforts serve as healthy political protest, federal laws that are constitutional are supreme under the 10th Amendment, and states can't "nullify" a Congressional action.

***
Judicial and media liberals are trying to dismiss these challenges as a revanchist attempt to repeal the New Deal, or, worse, as a way to restore the states's rights of Jim Crow. Modern liberals genuinely believe the federal government can order the states and individuals to do anything as long as it is in pursuit of their larger social agenda. They also want to deter more state Attorneys General from joining these lawsuits.

The AGs should not be deterred, because the truth is that ObamaCare breaks new constitutional ground. Neither the House nor Senate Judiciary Committees held hearings on the law's constitutionality, and we are not aware of any Justice Department opinion on the matter. Judges have an obligation not to be so cavalier in dismissing claims on behalf of political liberty. Under the Constitution, American courts don't give advisory opinions. They rule on specific cases, and the states have a good one to make. Democrats may have been able to trample the rules of the Senate to pass their unpopular bill on a narrow partisan vote, but they shouldn't be able to trample the Constitution as well.

Copyright 2009 Dow Jones & Company, Inc.

No Longer "We the People.."

Slaves to Government: Constitutional Gnosticism

Will Destroy a Free Republic

Posted by Erick Erickson (Profile)

Wednesday, March 31st

Article 1, Section 8, Clause 3 of the Constitution states, “Congress shall have the power to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”

Insurance contracts are not within the stream of interstate commerce. That’s why when you buy insurance for your house, your car, or your health you deal with state insurance commissioners, not a federal insurance czar.

Congress does not really regulate insurance contracts. They are contractual obligations at the state level, not goods and services in the stream of commerce. So can Congress then force you to buy a product not in interstate commerce to regulate interstate commerce, when insurance regulations are clearly within the purview of the states?

As Leon Wolf noted the other day, “Just to speak the concept aloud is to be struck dumb by the breathtaking arrogance of Congress in passing this bill, and the disregard for the Constitutional limits on their power. Of course, States (being entities of general powers as opposed to enumerated powers) might certainly decide to do this, if that is their prerogative, but there is absolutely no justification to be found within the Constitution for the breadth and scope of this action.”

Think about that. This is part of the problem we have these days as we keep talking past each other on issues. The left seems to think that Congress can do whatever the heck it wants to do on any issue. What they forget is that Congress actually only has 18 things it is allowed to do under the constitution. That’s it. It is not so general as to give Congress plenary power to do anything it wants. It never has. I’m willing to say that a lot of things Congress does it should not be doing under the Constitution, but the Supreme Court has let them slide. We have let them slide. It has been a bipartisan affair.

When we have a Constitution that says Congress can do only 18 specific things and we decide instead that Congress can do anything it wants to, we have a problem. Why? Because we also have 50 states — 57 if you voted for Obama — and the states can do virtually anything they want to you or for you because the federal government is a limited government of limited powers, but the states have plenary powers outside those 18 things set aside for Congress.

Over time though, we have evolved legally without amending the constitution according and we have flipped around this notion and now Congress can do everything and states can do very little, except when they can do a great deal from crime to education to fixing roads to general welfare issues. That goes against our constitutional set up. Consequently, we have gone beyond a point where you can sit down and read the constitution and really understand what the heck Congress can and cannot do. And this is coupled with burgeoning statism at the local, state, and federal level with little restraint — elections being nearly irrelevant given gerrymandering, campaign finance laws, and the extremely high re-election rates even when 89% of the country says we should throw the bums out.

We have reached a point where we have to rely on men and women in black robes and lawyers to tell us what we can and cannot do. A society begins to breakdown when the average citizen can no longer understand what his government can and cannot do without relying on men and women in black robes and lawyers all of whom have as many opinions to that question as there are opinions.

Then you cross into the territory where we have already arrived. A Congress can pass a 2,700 page piece of legislation to do something Congress arguably cannot do by making states do it, which is arguably unconstitutional. The legislators who voted on this 2,700 page piece of legislation, when asked, have no clue what is in the legislation.

You cannot sustain a free republic when the citizens who are expected to comply with the law have no understanding of what the law is or how their government works without paying the gnostics to enlighten them and the people who write the law do not know what is in the law.

We have, because reasonable societies in order to maintain their society have to have it, a doctrine in our courts that says “ignorance of the law is no defense.” That means, simply put, that you cannot go into court and say “I did not know it was against the law” when you breach the law.

Well, when those who are writing the law are ignorant of what the law is, how then can we expect the citizens to know what the law is? And if we cannot expect the Congress to know what the law is that they are writing and we cannot expect the citizens to know what the law is they are following, how then can we have law itself? The legal costs of doing business become the legal costs merely of living, but while we may get universal health care coverage, we will not get universal free legal representation to help us navigate our lives — at least not until we are arrested for running afoul of the laws, rules, and regulations neither the Congress nor we know exist nor understand in any meaningful way.

How then can we have a constitutional structure that we all agree on when none of us can sit down and read it and understand it? We have reached a level of constitutional gnosticism where we have to have special knowledge to understand the way the world works and liberty is consequently in jeopardy. One must go to law school to acquire the knowledge to understand the way the world works and even after acquiring that knowledge, it is still up for debate based on ideology shifting with the whims of a majority where rights become more about action and less about restraint.

This is not sustainable for a free society. A free society cannot work if its citizens cannot understand or work under society’s laws without hiring lawyers to live their lives for them.

That leads to Obamacare. When Nancy Pelosi was asked where in the constitution the power was for Congress to enact Obamacare, her response was, “You’ve got to be kidding me.”

Well, we are not kidding. We want to know where Congress gets its power. Article 1, Section 8 — which one of those 18 things gives Congress the right to force us to buy insurance that is outside the stream of interstate commerce? And if Congress can force us to buy products outside the stream of interstate commerce, why then can’t Congress force us to buy products inside the stream of commerce?

Here now we arrive at the troubling conclusion. If Congress can force us to do things outside of its powers, then it very clearly can force us to do things inside its powers. And if Congress can compel us to do things, why then do we have a thirteenth amendment prohibiting slavery?

Isn’t the logical conclusion of all of this, however radical some might suggest it is, that we then become slaves to the government? If Congress can compel us to do things we do not want to do merely because Congress says we must in the name of the national interest regardless of those 18 clauses in Article 1, Section 8, then are not we slaves to Congress — or more simply put, slaves to a tyrannical majority?

And Congress is not compelling us to do things such as avoiding the commission of crimes or filing and paying taxes. Congress is ordering us to buy a product Congress says you must have if you want to live. There is very literally no opt out other than death. A Congressional majority says I must take an action — not just refrain from acting, but actually act in a way Congress demands. It is “you go buy insurance. You go buy this type of light bulb. You go buy this type of food. You go get this type of job, whether you want it or not. You work in a certain way. You don’t get to choose.” Congress makes a determination of what benefits interstate commerce and compels you to act accordingly.

I don’t buy slippery slope arguments generally, though a lot of conservatives do. But I can at least see where the slippery slope ends should we slip down it. If Congress can compel us to take actions for our own good, whether or not we agree and that are outside the jurisdictional powers of Congress, then Congress can compel us clearly to buy things inside interstate commerce that we do not want to buy. And if Congress can compel our actions in that way, then Congress can compel our actions ad infinitum.

At some point the thirteenth amendment becomes meaningless because we do become slaves to government. Instead of government working for us, government becomes our master. And once the buck is passed to unelected bureaucrats who stay long after we have voted out the politicians who imposed this legal regime on us, even the basic right to control our destiny is removed from our hands.

It no longer is “We the People” in the preamble to the Constitution, it becomes “We the Congress” or “We the Majority.” And our free society dies by that dreaded tyranny of the majority the left so long decried and now embraces to advance its own agenda in ignorance and defiance of the rights of men and women to understand how their world works without paying the Gnostic Gospel’s price for that special, fundamental, very basic right to know.