Month: July 2020

Moral Hazard

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July 26, 2020

by Steve Stofka

This week additional unemployment benefits will cease but Senate Republicans and the White House announced that they could not agree among themselves about the appropriate course of action for a second stimulus bill. What is the problem? Many Republicans think that an extra $600 a week in unemployment benefits rewards people for not working. The issue is a familiar one to policymakers and economists: moral hazard.

Moral hazard arises when party A has no incentive to do X because party B will pay the cost. In this example, Party A = a taxpayer. X = go to work. Party B = the federal government. An insurance policy illustrates the problem of moral hazard. If an insurance company – called the principal – provided comprehensive insurance for a house, the homeowner – the agent – would have less incentive to maintain the property because the owner bears little of the cost of repair. Comprehensive is the key word. There must be some cost to the insured. Moral hazard was evident during the financial crisis over a decade ago. Financial traders made a lot of money by taking risks. When those risks blew up, taxpayers picked up the bill for the loss.

Another key ingredient of moral hazard is asymmetry of information. In a purchase transaction, the seller – the one receiving the money – knows more about the item being sold than the buyer – the one paying out the money. Laws and regulations attempt to minimize the asymmetry, but it is an inherent feature of a transaction. In a principal-agent model, the agent – a babysitter or the CEO of a public company – knows more than the principal – the parents or the stockholders. The principal must trust the agent to some degree and monitor the agent to some degree.

With that bit of background, let’s return to the issue of extended unemployment benefits. Who is the agent and who is the principal? Republican leaders think of themselves as the principal, as though it was their money that they are paying out. In their thinking, we, the taxpayers, are the agents who cannot be fully trusted. If Republicans pay people unemployment benefits, how do they know that people will look for a job?

This concern demonstrates the patriarchy that is the core ideology of the Republican Party. Lawmakers are not the parents, or the principals. In a democratic republic, lawmakers are the agents of the citizens. We worry about the moral character of our representatives, not the other way around. We, the citizens, are the principals.

Senator McConnell says that he is acting on behalf of taxpayers. Which taxpayers is he referring to? The ones who will be unable to pay their mortgage or their rent next month? The taxpayers of the future? He wasn’t concerned about them when Republicans passed their tax bill a few years ago. That tax bill was meant to appease the stakeholders, the big moneyed interests that are the real principals in this country. In effect, we, the citizens, are but their agents.

230 years ago, American colonialists rebelled against the aristocracy that controlled the economy and politics of Britain and its colonies. Here we are again. Senator McConnell is one of the most powerful men in this country because he is an agent for the American aristocracy. For one day a year, citizens act as principals by voting. Sensing that the tide of sentiment is going against Republicans in this election, Republican lawmakers and the White House are trying every legal maneuver to deny the vote to as many people as possible.

The moral hazard is when the agent takes effective control from the principal. That is the government of Venezuela under Nicolás Maduro. The Republican party proclaims that they are the champions of “small government.” What those two words mean is government by a small elite. If you prefer an impotent and passive role as a citizen, vote Republican this fall. If you want a more robust government which acts like an agent of the people, make another choice.

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Photo by Esteban Lopez on Unsplash

Pandemic Detour

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July 19, 2020

by Steve Stofka

World War 1 and the flu epidemic that followed was the death knell for the 19th century. Previous epidemics ended the Middle Ages in the 14th century and the Renaissance in the 17th century. Pandemics are permanent detours onto an alternative route through time. Will historians regard the Covid pandemic as the close of the 20th century? Depends on what happens in the next hundred years. History travels slow as a tortoise. The present is as fast as Achilles and eventually overtakes the past.

Pandemics cleanse the politics of the age. Both political parties have fractured in the past two decades. Will this pandemic close the coffin on one or both parties? In name, no. Both parties have a duopoly on voting in each state so sub-groups within each party try to take over the party apparatus. The 2016 election was a takeover of the Republican Party by conservative media, legal and political interests that have been fighting for control of the party since the 1980s.

President Trump is the poster boy of that effort. Conservative groups needed someone to sign off on judicial appointments and other legislation. They preferred someone with little experience, who was impressionable and a bit dim for the rigors of the office. They got more buffoon than they bargained for. If he becomes a one-term President, the people, organizations and money that put him in power will fight their long game – to gut or eliminate most of the federal bureaucracy. The few Federal government institutions left will be the military, a slim State department, domestic policing agencies like the DEA and the Border Patrol, the Treasury, IRS and the courts. In a strict conservative view, defense, enforcement, monetary authority and justice are the only legitimate functions of a federal government.

Each pandemic is a challenge to competing visions of the future. Conservative groups have patience, resolve, and money. If they have their way, the 20th century will have been a political experiment in American socialism that began when progressives gained political power at the start of the last century. The 21st century will return the country to its founding principles.

Liberals envision a more expansive role for a central government. Should there be a limit to the role of government in our daily lives and where should it be set? Without a limiting principle, liberal groups struggle to develop a concise and cohesive philosophy. Perhaps that is the strength of a liberal viewpoint.

Americans have been fighting each other for far longer than they have fought with the rest of the world. In a country with diverse cultural backgrounds, social and political tension is inevitable. The 1918 epidemic helped reshape the country but did not end this grand experiment in republican democracy. Let’s hope that the 2020 pandemic doesn’t change the chemistry of this country so drastically that the experiment ends.

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Notes:

Photo by 35mm on Unsplash

Public and Private Law

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July 11, 2020

by Steve Stofka

A recent Tik-Tok video shows a woman berating some unseen worker at a dental office. The problem? The woman is not wearing a mask and is not allowed past the reception desk for her appointment. She claims to know the law and is going to sue them. She does have intimate knowledge of a private law that she carries around in her head. She is Queen of her own private island. Public law and the courts disagree with her, but many of us live by two laws – the public and the private.

This is a good jumping off point for a discussion on the freedoms of private businesses. In 1960, in Greensboro North Carolina, four black university students staged a sit-in at a Woolworth’s 5&10c store which would not serve them at the lunch counter. Woolworth was well within their rights at this time. It was the southern way.

Over the next few weeks, the number of people grew and attracted national attention, including President Eisenhower. White residents staged a counter protest which turned violent. Boycotts of other stores began and caused substantial sales losses to Woolworth. A few months later, Woolworth desegregated their lunch counters. Discrimination in places that served the public was made illegal with the passage of the Civil Rights Act four years later.

Generally, a business has the freedom to screen their customers based on a criteria that applies to everyone. Restaurants often post “No shoes, no shirt, no service,” and may add “no mask” to that list. Inebriated customers at beach communities sometimes protest about the “no shirt” provision. This is America, man. I have my rights! The bouncer ushers the customer out the door or the proprietor calls the police.

We understand that religious communities have a set of laws different from civil law. People who object to a woman’s right to an abortion may do so based on a 19th century papal proclamation that life began at conception (McGarry, 2013). That papal bull overturned centuries of Catholic teaching.

At a campsite near Lake City, Florida, I was first introduced to an alternate interpretation of civil law, but one based on a historical, not religious, foundation. Following the Civil War, the 13th, 14th and 15th amendments were passed over the objections of many southerners who felt that the North was an occupier in their land (Foner, 2020). These amendments had been forced on the southern states. Within a decade, southern states passed Jim Crow laws that undid much of the three amendments.

Under this interpretation, I was informed, Supreme Court decisions based on these coercive amendments were “illegal and void” under the exclusionary rule. This included the court’s 1954 ruling that desegregated public schools and the Roe v. Wade decision that invalidated state laws that prohibited abortion. Crazy talk? The exclusionary rule relates to the admissibility of evidence, not the validity of court decisions (Web Solutions, n.d.). That private interpretation of the law certainly guides the actions and attitudes of too many.

The 1968 Fair Housing Act hoped to end many decades of housing discrimination in state and federal law. Instead, it pushed the discrimination underground (McGhee, 2018). A real estate agent might be hesitant to show a house to a black couple in a white neighborhood. She wants to get referrals from neighbors or other agents, who might wonder: Can she not navigate the subtle dynamics of filtering out less optimum clients? Keep silent. Two laws – public and private.

As discussed last week, all states require people to wear seat belts. The NHTSA reports that almost half of those killed a few years ago were not wearing seat belts (NHTSA, n.d.). But what about the law of personal freedom? It is written in the Constitution, man! I have my rights! Life, liberty and the pursuit of happiness. The phrase is a declaration of intent and sentiment found in the Declaration of Independence, not the Constitution. It has no force of public law but is the cornerstone of private law.

There are laws against dumping but many contractors will dispose of remodel trash in dumpsters to save the time and expense of driving to the city dump. According to a contractor’s private interpretation of the law, it’s not really dumping because the debris is going into a container. Private law vs. public law.

Let’s now revisit the woman in the video who yelled at the worker in the dentist’s office. Under contract law or maybe it is appointment law, she made an appointment with the dentist and she showed up on time so the dentist has to see her. Those are the only facts that matter. Aren’t we all angry when other people do not recognize the same private laws that we carry around in our heads? Does someone else have the same personal freedom that I do – to form a private interpretation of the Constitution? Well, of course. But if they are wrong, then no they don’t, man. That’s in my private Constitution.

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Notes:

Photo by Thomas Kelley on Unsplash

Foner, E. (2020, April 03). Reconstruction. Retrieved July 11, 2020, from https://www.britannica.com/event/Reconstruction-United-States-history

McGarry, P. (2013, July 01). Catholic Church teaching on abortion dates from 1869. Irish Times. Retrieved July 11, 2020, from https://www.irishtimes.com/news/social-affairs/religion-and-beliefs/catholic-church-teaching-on-abortion-dates-from-1869-1.1449517

McGhee, F. (2018, December 04). The Most Important Housing Law Passed in 1968 Wasn’t the Fair Housing Act. Retrieved July 11, 2020, from https://shelterforce.org/2018/09/05/the-most-important-housing-law-passed-in-1968-wasnt-the-fair-housing-act/

NHTSA. (2020, January 15). Seat Belts. Retrieved July 11, 2020, from https://www.nhtsa.gov/risky-driving/seat-belts

Web Solutions. (n.d.). Search and Seizure – The Exclusionary Rule And The Fruit Of The Poisonous Tree Doctrine. Retrieved July 11, 2020, from https://law.jrank.org/pages/10054/Search-Seizure-Exclusionary-Rule-Fruit-Poisonous-Tree-Doctrine.html.

Wikipedia. (2020, June 15). Greensboro sit-ins. Retrieved July 12, 2020, from https://en.wikipedia.org/wiki/Greensboro_sit-ins

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The Social Contract

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July 5, 2020

by Steve Stofka

Am I my brother’s – or sister’s – keeper? If I am, what is the extent of that care and concern? We’ve been discussing this issue for a few thousand years, and this pandemic brings several issues to a sharp focus. On this Independence weekend, how independent are we? How do we view the social contract?

Writing in the 1840s, Ralph Waldo Emerson distinguished between “direct” and “reflex” recognition of duties (Emerson, 1841). A direct type is one based on principles that we respect and embrace. A reflex type is one we recognize simply because others hold it as a duty. The second type is like wearing an uncomfortable style of shoe because it is a popular style. Who decides what my duties are?

There was a video of Florida protesters chanting, “My body, my choice.” Sound familiar? No, it wasn’t a pro-choice rally. It was a protest of the governor’s requirement that people wear masks. Is my freedom more important that your health? Let’s say that it is. It’s a soccer match and the team “My Freedom” with green uniforms beats the team “Your Health” in blue uniforms. Should choices about priorities be a dualistic – win or lose – debate? We are often forced to make such choices when we vote.

This past week two women in their twenties walked out of a clothing store. One hurriedly took off her mask and said, “God, I can’t stand these things.” Her friend was calm and kept her mask on as they walked to their car. Some people may protest “My Freedom” when it’s just a matter of being uncomfortable. Chanting “My Freedom” sounds like a principle. It’s noble. Chanting “My Comfort” sounds like an 18-year old who wants to wear sandals and surfer shorts to a job interview.

Most hospital employees who have contact with patients must wear masks or they are fired. Businesses serving the public may require that their employees wear masks as well. So why the objection to being told to wear a mask at the park or beach? Several decades ago, many people had this same debate about seat belts and being forced to wear helmets while operating a motorcycle. Does the government have a right to require people to wear safety equipment?

NO) It’s my body and I have a right to not wear a seat belt or a helmet.
YES) We don’t have a constitutional right to drive. It is a state-issued license.

In 1972, the Supreme Court settled the legal question, concurring with many state Supreme Courts that people did not have a constitutional right to drive a vehicle (Jones & Bayer, 2007). The case was about helmet laws for motorcycle drivers but the decision threatened car manufacturers who did not want to be forced to install seat belts in cars. Federal legislation was passed that exempted states who wanted to repeal helmet laws. Three states still don’t have helmet laws. Despite more than a decade of legal battles and lobbying, Congress passed legislation that required seat belts to be installed in new vehicles (Wolinsky, 1985).

What is a license and what is a right guaranteed by the Constitution? In 2012, the Supreme Court heard a legal challenge to the ACA, or Obamacare. Does the government have a right to require a person to buy health insurance?

YES) The government requires that people buy auto insurance. Same thing.
NO) Health insurance is our health, the act of simply being alive. That is a right protected by the Constitution. The government cannot require you to buy health insurance.

In 2012, the Supreme Court agreed with the No argument. “The federal government does not have the power to order people to buy health insurance,” Chief Justice Roberts wrote (Norman, 2012). However, the government can charge a person a tax for not buying health insurance. The penalty was a tax. With that understanding, Obamacare was allowed to stand.

Wearing a seat belt or motorcycle helmet protects us. Wearing a mask protects others. Don’t we have a duty to others in our community? Isn’t that part of the implied social contract? This debate is similar to the one about vaccines, especially those given for childhood diseases. Getting a vaccine helps protect others. Can a public school require my child to be vaccinated?

The Yang Gang is a group of supporters named after former Presidential candidate Andrew Yang. He proposed a Universal Basic Income program that would send money to most households every month. The program recognizes human dignity and provides a minimum threshold of financial support. Members of the Yang Gang recognize a broad social contract that includes a duty to help support others. Their motto is “not left or right, but forward.”

Some recognize two forms of the social contract. The first is an involuntary participation in society that is regulated by a coercive government. This is the reflexive form of duty that Emerson wrote about. We accept the rules, duties and principles even if we don’t agree with them. We make a bargain to ensure some security of our freedom and property. The second type of social contract is voluntary, or at least non-coercive, akin to what Emerson called a direct duty. This includes our family, our church, civic groups and the people we mingle with.

We feel strongly about our opinions, and weigh the various aspects of an issue differently. Emerson thought each person’s synthesis of experience was unique and that each of us formed “a new classification” of the world. A democracy requires consensus. In a nation that prides itself on its independence, we have chosen a form of government that makes us dependent on each other to create the rules for our society. On July 4th , we declared our independence from Britain, and our in-dependence on each other.

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Photo by Scott Graham on Unsplash

Emerson, R. W. (1841). On Self-Reliance. American Transcendentalism Web. Retrieved July 04, 2020, from https://archive.vcu.edu/english/engweb/transcendentalism/authors/emerson/essays/selfreliance.html

Jones, M., & Bayer, R. (2007, February). Paternalism and its discontents: Motorcycle helmet laws, libertarian values, and public health. Retrieved July 04, 2020, from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1781413/

Norman, J. (2012). Supreme Court Upholds Health Care Law in 5-4 Decision. Retrieved July 04, 2020, from https://www.commonwealthfund.org/publications/newsletter-article/supreme-court-upholds-health-care-law-5-4-decision

Wolinsky, L. (1985, February 19). Big Lobbies Clash in Fight on Seat Belts : Hearings Open Today as California Joins Auto Safety Debate. Los Angeles Times. Retrieved July 04, 2020, from https://www.latimes.com/archives/la-xpm-1985-02-19-mn-546-story.html.