Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • How LIBOR Impacts Financial Models and Why the Scandal Matters

    Jul 9, 2012Mike Konczal

    If we can't rely on the accuracy of basic measurements used to set loan prices, we can't respond effectively to brewing financial crises.

    If we can't rely on the accuracy of basic measurements used to set loan prices, we can't respond effectively to brewing financial crises.

    Matt Taibbi asks why nobody is freaking out about the LIBOR scandal, Robert Reich calls it the scandal of all scandals, and Dylan Matthews has a great explainer of the whole thing here. Abigail Field has more at Reality Check.

    This can be confusing stuff, so I want to go through a very simple example of how this impacts the markets. Here's a basic equation for the price of a loan:

    The rate of a loan consists of adding the "risk-free" rate to a risk-premium. If either the risk-free rate or risk-premium goes up, then the price of a loan goes up. If you are a particularly risky borrower, you will pay more for a loan. This is because your risk-premium, compared to other borrowers, is higher, and that is added into your loan rate. If the risk-free rate is 3 percent and your risk of not paying back a mortgage requires a 2 percent premium, then your mortgage rate is 5 percent. If your risk of not paying back unsecured debt on a credit card requires an 8 percent premium, then your interest rate on your credit card is 11 percent.

    More complicated models include more types of risk-premia and other things, but this basic approach is how financial markets work. They all need a measure of what money costs independent of the risks associated with any specific loan. As a result, all the most complicated models have this "risk-free" rate at their core.

    Now think of some of the scandals and controversies over recent loan pricing. Here's a great Washington Post piece by Ylan Mui on African American homeowners scarred by the subprime implosion. There are cases where people with the same risk profiles were given different interest rates. Here's a report from EPI by Algernon Austin arguing that African Americans and Latinos with the same credit risks as whites were charged a higher total interest rate for mortgages even though the risk-free rate and their risk-premium rate should have been the same. The data implies that an additional, illegitimate "+ race" was added to the equation above.

    There's also debates about what is appropriate to add to the risk-premium equation. The FTC alleged that credit card companies were using charges for marriage counseling or massage parlors to increase the risk-premium, and thus the total rate. Some would argue that, from the credit risk modeling point-of-view, these are appropriate measures to hedge against divorce; others would say that it looks like a cheap excuse to jack up the total rate using the risk-premium part of the equation as an excuse.

    But those issues focus on how to price risk and what the total rate should look like. Running underneath all of these loans is what the "risk-free" rate should be. And by manipulating that rate, which forms the core of any financial model of how to price a loan, you manipulate every loan. Digging through some old financial engineering textbooks, it's amusing how many mathematical cartwheels are done to try and get an edge on the movement of LIBOR. Sadly. one can't model the dynamic of making an internal phone call and asking to please manipulate the numbers.

    Now let's build out from a very simple model of a financial instrument to one of the more complicated ones -- the Black-Scholes PDE for pricing options and derivatives:

    There's a lot of stuff going on in this equation which you can learn about here. But there's one variable you should catch. That "r" in the equation is the risk-free rate, which is usually LIBOR. One of the things Black-Scholes does is create a framework for understanding options and derivatives as owning pieces of the underlying object along with some cash, and getting the price of a derivative by understanding what it would mean to manipulate those two items. The cash in this framework, a crucial part, has its value determined by LIBOR. Which, as many are pointing out, implicates the gigantic derivatives market in this scandal.

    Implicating the derivatives market makes it clear why this matters to the market. But what about the role this scandal played in the financial crisis? This brings me to part of Karl Smith's argument for why this scandal doesn't matter much. On Up with Chris Hayes he argued that both parts of the allegations shouldn't get us too upset, and in particular that the second allegation, that Barclays systemically manipulated its LIBOR rates downward (perhaps with the approval of regulators) to make it seem like it was healthier than it was, is a good thing. Why? Because it made the financial system seem healthier than it was, which was important to prevent a collapse.

    In two follow-up posts (I, II) Smith clarifies his response. Smith argues that since the central banks were facing a financial crisis of epic proportions, one that would hurt many people, banks manipulating LIBOR helped keep that crisis at bay, which is a great thing. I think Smith has a theory I'm not following in which the only problem the banks had in 2008 was insufficient monetary policy, and not the fact that these banks were sitting on hundreds of billions of dollars in toxic loans that were causing a repo market bank run combined with an opaque over-the-counter derivatives system designed to induce counterparty risk in a crisis.

    But the reason it matters is because that tactic can't work forever. You can manipulate prices and juke government stress tests and otherwise lie to make people believe your bank's balance-sheet is healthier than it is, but eventually that system is going to collapse. And, crucially, if the primary objective is "delay," then when the crisis actually hits, it hits in an overwhelming way with no plausible way to fairly allocate losses or take other actions.

    As a side-note, if Smith agrees with manipulating LIBOR to look healthier, then he must really support the actions the Federal Reserve Bank of New York was taking in March 2008 to juke Lehman Brother's stress tests: "The FRBNY developed two new stress scenarios: 'Bear Stearns' and 'Bear Stearns Light.' Lehman failed both tests. The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed. However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed." Thank god that prevented an out-of-nowhere collapse that totally surprised the entire market!

    The "TED Spread" is the difference between LIBOR and U.S. Government debt, and many used it in 2008 to track the financial crisis in real time (here's Krugman with "My Friend TED" from the time). Pushing LIBOR down makes the TED Spread look better. This looking healthier than it should meant that there was less pressure by regulators and legislators to find ways to allow these firms to fail, and that the most obvious way of dealing with the crisis was with a mass bailout. If you really want to deal with the crisis, you should affect either end of it that the price is reflecting, by either making the banks healthier or making sure we can deal with the failure.

    The possibility that the regulators were in on it further clarifies the "protect the health of the largest banks at all costs" approach, one that squeezes every last bit of blood out of our turnip housing market and creates mass unemployment through a balance-sheet recession. And even if they weren't, that means that future measures to adeqately monitor the health of the banks through disclosures and market information might also be manipulated without (or even with) serious jail time or penalties.

    This, by Smith, is wrong: "To my knowledge no one takes out an adjustable rate mortgage saying, 'what I really want is for my mortgage rate to reflect the level of panic in the global financial system should there by a once in 75 year crisis.' No, what everyone thinks is that they are getting the rate set by Federal Reserve and the Bank of England."

    No, if that was the case there would be no use for LIBOR, and people would just use those rates. As Nemo summarizes in a great post on LIBOR from his bond series from years ago, the people pricing any loans at LIBOR want the pricing of a systemic credit crisis in their model. As Nemo says, "It is impossible to overstate how fundamental LIBOR is to the bond market." These prices are supposed to mean something, and the ability to add that information is a crucial reason it has shown up in so many pricing models. It would be a better world if those numbers weren't being manipulated to the advantage of inside traders.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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    Interest rate image via Shutterstock.com.

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  • 38 Million Missing Quits, the Battle to Quit and Replacing Government with a UBI: Three Points on Workplace Coercion

    Jul 7, 2012Mike Konczal

    There's a lot of discussion on the workplace as a site for private coercion building out of the epic Crooked Timber post Let It Bleed: Libertarianism and the Workplace, by Chris Bertram, Corey Robin and Alex Gourevitch (BRG). They are responding to the worldview of the Bleeding Heart Libertarians (BHL).

    There's a lot of discussion on the workplace as a site for private coercion building out of the epic Crooked Timber post Let It Bleed: Libertarianism and the Workplace, by Chris Bertram, Corey Robin and Alex Gourevitch (BRG). They are responding to the worldview of the Bleeding Heart Libertarians (BHL). Corey has two posts (I, II) collecting a wide variety of great responses. I'd like to make three quick points I haven't seen others mention.

    I - Over 38 Million Quits Missing

    If we view individuals quitting their job as a check on private coercion, which I believe the BHL crew thinks, then there's been a massive increase in private forms of coercion in the past several years. Here's JOLTS data from the Bureau of Labor Statistics on the number of quits that are happening in the labor force:

    There are, roughly, 38.4 million quits that should have occurred that didn't since the economy went into recession. I'm assuming nobody believes that employers decided to become very nice all of a sudden in December 2007, but that instead the economy went into a deep recession. As a result of this recession, where the number of unemployed versus job openings has skyrocketed (because both the unemployed have increased and job openings shrunk), it is very difficult to find a job. This translates into declining labor share of income, as workers are left with little bargaining power in the Great Recession. If one assumes that labor management techniques are sticky, or that hysteresis creates the conditions where people who have lived through bad economic times have weaker bargaining power, this coercion is likely to cement and be long-lasting.

    The academic unemployment literature goes far beyond the Economics 101 idea that wages are simply equal to contribution (marginal product). That literature now looks to bargaining over surpluses/rents that come out of the labor contract as the crucial issue for how wages are determined. If you look to Chris Pissarides' Equilibrium Unemployment Theory (a textbook summarizing the work that just won him the Nobel Prize), you see arguments such as, "We assume that the monopoly rent is shared according to the Nash solution to a bargaining problem...The way that market tightness enters the wage equation in our model is through the bargaining power that each party has...The worker's bargaining strength is then higher and the firm's lower, and this leads to a higher wage rate." Tight labor markets mean more of the surplus is captured by labor through wages. If you view workplace conditions as an extension of the wage equation, then full employment makes a giant difference even under neoclassical economic assumptions.

    BHL is not an economics blog, but I find it weird that they aren't ringing the alarm as much as possible on this. They should be willing to go to some great lengths to keep the labor market at full employment as a "free market" way of mitigating abuses, which would involve accepting mass job creation programs, larger government deficits, unorthodox monetary policy, putting losses on creditors instead of debtors, and so on. For many libertarians these solutions are the real "abuses."

    Macroeconomic stability, everyone having a right to employment, and labor capturing their fair share of the pie aren't the passive results of "economic liberty" or of economic contracting. They are the result of an interventionist government focused on managing the macroeconomy, one whose political compass is set by groups organized to protect the interests of workers, of which organized labor are the leaders.

    II - Freedom to Quit Was Forged in Political Battle, Not Markets

    Alex Tabarrok at Marginal Revolutions wrote this: "If you think that the freedom to quit is without value bear in mind that under feudalism and into the early 19th century in the U.S. and a bit later in Britain employers and even potential employers could prevent workers from quitting and from moving. The freedom to quit was hard won. We should not disparage the liberation brought by a free market in labor."

    Early 19th century? British Master and Servant law made employee contract breach a criminal offense until 1875. Anti-enticement laws, where employers would be fined if they hired someone who was currently under contract, were popular in the sharecropping American south into the early 20th century, and upheld in courts as late as 1923.

    Tabarrok draws on Robert Steinfeld's excellent work in that link, but a crucial thing to draw from that literature is that laissez-faire "economic liberty" and "freedom of contract" movements were the enemies to building the modern freedom to quit one's job. Employees faced criminal penalties for quitting and the loss of back pay if they did quit, and the common law of the time made it impossible for workers to end this. Laissez-faire advocates fought for this and against organized labor's efforts to dismantle it.

    It seems like people are discussing the right to quit as if was something that just emerged out of our rich society, and something that "naturally" came out of extensive, individual, economic bargaining, when that couldn't be further from the truth. Only through the concentrated efforts of organized labor, a bloody, ugly fight, was this modern freedom able to be built. Karen Orren's book Belated Feudalism places the end of this old regime Tabarrok alludes to at the New Deal's 1935 Wagner Act, which comes after decades of union organizing and battling. Who will build the next set of contractual labor frameworks we'll take for granted, given that the freedom to quit was a political battle that never emerged from the labor market on its own?

    III - How Much Does a UBI Cost, and Should We Replace the Government With Cash?

    There's also a question of how much a Universal Basic Income (UBI) would cost. BRG suggested it would be 20 percent of GDP, added to the roughly 20 percent baseline of taxation that already exists to provide current government services, for a total of 40 percent. This is correct. Our GDP per capita is roughly $50,000. If you want to give everyone $10,000, that will require taxing 20 percent of GDP.

    A lot of people suggested that was too high. Those people are usually, almost by definition, doing one of a few things. They are excluding some populations from the UBI (such as giving children nothing or much less), they are really discussing a negative income tax (a means-tested UBI done through the tax code), they are also removing current government services (such as unemployment insurance, or food stamps), or they are redefining "cost" to just focus on the redistribution element (associated with the negative income tax). Changing those numbers would change the final result.

    Some means-test the UBI as a negative income tax, which would have significantly less cost. This has the normal "submerged state" problems any tax code program has, where people wouldn't see it as a government program. The means-tested part makes it not universal in basic sense. The negative income tax wouldn't avoid stigmatization as not everyone would receive it, and could still create poverty traps, two issues the UBI is meant to overcome. Indeed a negative income tax with a work requirement, the EITC, is ground zero for the accusation that too many people pay nothing in taxes but receive government services.

    Charles Murray essentially dismantles the welfare state and the government and replaces it with a UBI in his argument. He segments 30 percent or so of the UBI to be mandated (!) for purchasing catastrophic health insurance though.

    If one is going to dismantle the government to provide a UBI what parts will be left should be discussed. As many have pointed out (Anderson, Scanlon), just because you would prefer X over something Y that we believe everyone should have doesn't obligate us to provide X. If you are a rational person who would prefer to trade in your right to a fair trial for $100 to buy a fancy hat, that doesn't mean society owes you the hat over the trial, even if that right to a fair trial costs society over $100.

    There are also goods where the needs are disproportionately varied and we actually need the insurance component of social insurance for risk-sharing (e.g. health care). And there are also a variety of functions through which the government can make sure a baseline of demand is met for all who need them, if the private market is unable to provide or will insufficiently allocate them (e.g. education). It's not clear that disbanding these functions and giving away a coupon is a smart idea.

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  • The IMF Goes All-Out on Balance-Sheet Recessions, Providing Sanity on Economic Policy

    Jul 3, 2012Mike Konczal

    The literature summary I just put out on balance-sheet recessions examines the recent April 2012 World Economic Report by the IMF. It is remarkable how important this report is. The relevant part is Chapter 3, Dealing with Household Debt.

    The literature summary I just put out on balance-sheet recessions examines the recent April 2012 World Economic Report by the IMF. It is remarkable how important this report is. The relevant part is Chapter 3, Dealing with Household Debt. This IMF report is well to the Keynesian side of almost all major US debate, and its recommedations and observations are incredibly sensible. You should read it all, but I want to point out five few high-level arguments they make:

    1. A run-up in household debt and leverage explains the economic collapse across countries.

    Here's a graph they include, comparing increases in household debt-to-income ratios from 2002-2006 against consumption collapses in 2010.

    Implicit here is that the problems aren't labor "inflexiblity" or whatever the latest faddish argument is. It's household leverage.

    You see the same exact relationship across the states in the United States, where the biggest increases in household leverage ratios (i.e. the places with the biggest housing collapses) have the worst unemployment and consumption collapses. In the United States monetary policy and transfers help mitigate this. We send checks to Arizona and Florida, where housing is a disaster. As Paul Krugman and others have pointed out, there are no equivalent transfers across these countries, especially in the Euro.

    2. Financial crises are not a driver of prolongued recessions. If anything they are a symptom.

    There's a common wisdom among many elites that prolongued recessions are just what happens in the aftermath of a financial crisis. Most people who argue this derive it from Kenneth Rogoff and Carmen Reinhart's This Time It's Different. These arguments have always been a bit difficult to justify. Usually people who invoke them call for inaction, as if there isn't anything to be done but let the recession run its course.

    The IMF report looks at OECD data on housing busts over the past 30 years and compares housing busts with large household leverage ratios with those with low ratios. Busts with large household leverage ratios have much bigger drops in consumptions years out, just like what we see in our recession. What is important is that this holds with or without financial crises:

    They don't discuss it, but this implies that the causation runs the other way; countries that have giant drops in housing values and/or increases in debt-to-income ratios probably create financial crises. But this means that having a financial crisis, like we did, doesn't change the game; it just amplifies the case for normal demand-side stimulus.

    III. HAMP is a failed program.

    I remember when saying that HAMP was a failed program that was making the situation worse was a controversial opinion. At the recent Netroots Nation I was chatting with David Dayen and we talked about his portrait of HAMP series from fall 2010, which included the title that HAMP "makes your financial situation worse." That was an argument that had to be built, one data dump and one blog post at a time, over Treasury trying hard to convince people otherwise.

    We bloggers ringing the bell about HAMP also argued two additional points: that Treasury wasn't actually spending the money Congress told it to spend on homeowners. This was at a point where trying to find additional funding for stimulating the economy was the highest priority. And it was also well after the second round of TARP funding went out based on promises by Larry Summers of spending that allocated money on homeowners. And, secondly, that these problems weren't going away, because they were fundamental to how HAMP was designed.

    Here's the IMF: "HAMP had significant ambitions but has thus far achieved far fewer modifications than envisaged....By the same token, the amount disbursed under MHA as of December 2011 was only $2.3 billion, well below the allocation of $30 billion (0.2 percent of GDP). Issues with HAMP’s design help explain this disappointing performance." All three points, taken for granted in the report.

    IV. Foreclosures are a problem.

    It's never been clear whether Treasury views mass foreclosures as a macroeconomic problem. Well, the IMF does:
    A further negative effect on economic activity of high household debt in the presence of a shock, postulated by numerous models, comes from the forced sale of durable goods (Shleifer and Vishny, 1992; Mayer, 1995; Krishnamurthy, 2010; Lorenzoni, 2008)...The associated negative price effects in turn reduce economic activity through a number of self-reinforcing contractionary spirals.
     
    The IMF staff notes that “distress sales are the main driving force behind the recent declines in house prices—in fact, excluding distress sales, house prices had stopped falling” and that “there is a risk of house price undershooting” (IMF, 2011b, p. 20)...Overall, debt overhang and the deadweight losses of foreclosures can further depress the recovery of housing prices and economic activity. These problems make a case for government involvement to lower the cost of restructuring debt, facilitate the writing down of household debt, and help prevent foreclosures (Philippon, 2009).
    Couldn't put it better myself. Ironically I had first heard the theoretical financial-macroeconomic arguments about preventing the fireselling of assets into a depressed market from Shleifer/Vishny's 1992 paper that the IMF cites. Shleifer is a protégé of Larry Summers, so I assumed Summers might have gone a bit harder about preventing the mass fireselling of the largest consumer asset, an asset which just has a gigantic collapse in value, into the largest economic downturn since the Great Depression. Alas.
     
    V. Demand demand-side stimulus. Across the board. Now.
     
    One has good reason to dread hearing the policies the IMF recommends for a country in a crisis. Maximal labor "flexiblity"? Cat food for old people? Picking government functions out of a hat to privatize? What does the IMF recommend here? Ok, brace yourself:

    Temporary macroeconomic policy stimulus...simulations of policy models developed at six policy institutions suggest that, in the current environment, a temporary (two-year) transfer of 1 percent of GDP to financially constrained households would raise GDP by 1.3 percent and 1.1 percent in the United States and the European Union, respectively...Monetary stimulus can also provide relief to indebted households by easing the debt service burden...A social safety net can automatically provide targeted transfers to households with distressed balance sheets and a high marginal propensity to consume, without the need for additional policy deliberation...

    Support for household debt restructuring: Finally, the government may choose to tackle the problem of household debt directly by setting up frameworks for voluntary out-of-court household debt restructuring—including write-downs—or by initiating government-sponsored debt restructuring programs. Such programs can help restore the ability of borrowers to service their debt, thus preventing the contractionary effects of unnecessary foreclosures and excessive asset price declines.

    There's then a major discussion about what went right in the United State's Great Depression and Iceland's recent collapse on comphrensive housing policy.

    Huh. That's actually an amazing set of polices. When can we start? And can we get the IMF advising US economic policy if this is what they are suggesting?

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  • New Report: A Literature Summary on New Balance-Sheet Recession Research

    Jul 3, 2012Mike Konczal

    In the last 8 months there's been a ton of research validating the theory and arguments of the "balance-sheet recession." I wrote up a literature summary of this research as a Roosevelt Institute white paper: "How Mortgage Debt is Holding Back the Recover

    In the last 8 months there's been a ton of research validating the theory and arguments of the "balance-sheet recession." I wrote up a literature summary of this research as a Roosevelt Institute white paper: "How Mortgage Debt is Holding Back the Recovery." You can download a PowerPoint presentation on the paper as well.

    This paper was designed to give some background for those interested in understanding this powerful theory, backed by the latest empirical research, and needed to be caught up. I noticed that the latest Economic Report of the President and the latest IMF World Economic report were backing this theory and these researchers. It is important for activists to understand that elite opinion is moving on the conneciton of the housing bubble collapse and slow growth and mass unemployment, and this will have implications for those arguing against foreclosures and for debtor relief.

    The key of the report is the following graph, which summarizes the four papers I dig into:

    I'll be discussing the individual reports in the future. I had previously interviewed Amir Sufi on the first two papers last fall.

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  • O Christmas Tree: Why Scalia's Dissent is More Activist Than the Roberts Decision

    Jul 3, 2012Mike Konczal

    Roberts's decision to uphold the individual mandate as a tax was based on solid and established legal arguments, but the dissent's justification for throwing the whole law out was pure radicalism.

    CHIEF JUSTICE ROBERTS: You're telling me they thought of it as a tax, they defended it on the tax power. Why didn't they say it was a tax?

    Roberts's decision to uphold the individual mandate as a tax was based on solid and established legal arguments, but the dissent's justification for throwing the whole law out was pure radicalism.

    CHIEF JUSTICE ROBERTS: You're telling me they thought of it as a tax, they defended it on the tax power. Why didn't they say it was a tax?

    GENERAL VERRILLI: They might have thought, Your Honor, that calling it a penalty as they did would make it more effective in accomplishing its objective. But it is — in the Internal Revenue Code it is collected by the IRS on April 15th. I don't think this is a situation in which you can say -
     
    CHIEF JUSTICE ROBERTS: Well, that's the reason. They thought it might be more effective if they called it a penalty.
     
    -Supreme Court arguments, March 27th, 2012 (transcript)

    Last week, the Supreme Court found in a 5-4 vote that the individual mandate survives under the taxing power instead of the Commerce Clause. Here is the decision, authored by Chief Justice Roberts. I've noticed two responses from conservatives:

    The first is that Roberts, by looking to the taxing power in the Constitution, found something liberals had never argued. Related is the argument that liberals took the constitutionality of the mandate for granted and never built out the framework necessary to argue for it, especially in the form of a tax.

    I haven't followed health care closely, but I do try to keep up with Jack Balkin's work, and he's been on the taxing power since forever ago. Here's two amicus briefs (h/t Incidental Economist for the actual brief links, who also gives them "most influential" status) that come from the team of Jack Balkin at Yale Law School and Gillian Metzger and Trevor Morrison at Columbia Law School. Their Fourth Circuit brief covers this (Argument 1: "The minimum coverage free provision is a permissible exercise of Congress's taxing power"), as does the Supreme Court brief (Argument 1: "The minimum coverage provision falls within Congress's expansive tax power and is not an impermissible direct tax").

    In "The Lawfulness of Health-Care Reform," Akhil Amar writes that Obamacare "is proper under at least six different theories, each one of which has deep roots in constitutional text and common sense." The very first one? "It is outlandish to think that [Obamacare's] provisions exceed the sweeping power that the Constitution confers upon Congress to 'lay and collect Taxes, Duties, Imposts, and Excises.'" And Andrew Koppelman, in "Bad News for Mail Robbers: The Obvious Constitutionality of Health Care Reform," noted that "Even if you somehow suppose that the health care mandate exceeds the commerce power, it would be valid anyway as an exercise of the power to tax," which is now the law of the land. These thinkers are at the forefront of elite liberal legal scholarship, and they all made this argument. It showed up in the oral arguments as well, with Roberts paying particular attention to it, as Brian Beutler of TPM caught at the time.

    The second response conservatives have is that Roberts found something Congress never intended. National Review's editors, immediately after the decision, argued that one "distinguishes, though, between construing a law charitably and rewriting it. The latter is what Chief Justice John Roberts has done." The dissent itself argues that "to say that the Individual Mandate merely imposes a tax is not to interpret the statute but to rewrite it."

    But in terms of rewriting a bill and judicial activism, I haven't seem any conservatives deal with the "Christmas Tree" doctrine. Given that the dissenting judges found the mandate and related major parts of the bill unconstitutional, what should they do with the rest of the bill? For instance, what should be done about the student loan reform, a major and obviously constitutional provision that was included with the ACA?

    The dissenting judges would overturn it. They'd overturn the entire bill, including the student loan provisions. But why? Here is their logic, from the dissent (my bold):

    Such [minor] provisions validate the Senate Majority Leader’s statement, “‘I don’t know if there is a senator that doesn’t have something in this bill that was important to them. . . . [And] if they don’t have something in it important to them, then it doesn’t speak well of them.  That’s what this legislation is all about: It’s the art of compromise.’ ” [Quote from New York Times article.] Often, a minor provision will be the price paid for support of a major provision.  So, if the major provision were unconstitutional, Congress would not have passed the minor one.
     
    The Court has not previously had occasion to consider severability in the context of an omnibus enactment like the ACA, which includes not only many provisions that are ancillary to its central provisions but also many that are entirely unrelated—hitched on because it was a quick way to get them passed despite opposition, or because their proponents could exact their enactment as the quid pro quo for their needed support. 
     
    When we are confronted with such a so called “Christmas tree,” a law to which many nongermane ornaments have been attached, we think the proper rule must be that when the tree no longer exists the ornaments are superfluous. We have no reliable basis for knowing which pieces of the Act would have passed on their own.

    Notice how this dissent comes up with an elaborate theory of how and why Congress passed the pieces of the bill they did, rewriting the history of how and why health care reform passed. With no previous case law, they turn to a quote from a New York Times article, of all things, to determine the constitutionality of things like student loan reform.

    And this history strikes me as ideologically predicated on a third-rate "Public Choice" criticism, which is that all the minor provisions were "quid pro quo" bribes needed to secure passage. It reads like when Scalia brought up the Cornhusker Kickback during legal arguments. So it isn't derived from case law, or a theory of the courts or the law, but on an ideological, right-wing vision of how political actors behave.

    Which is to say that the dissent took a maximal course of rewriting and assuming not only the intent but the counterfactual of congressional action and the ACA, including what it does, why it does it, and how it came to be, in their Christmas Tree doctrine. This is the very definition of judicial activism.

    If Roberts was interested in minimizing his activism and rewriting of congressional action, as well as maintaining a baseline of presuming the legitmacy and constitutionality of congressional action, wouldn't he have gone with the liberals instead of the conservative dissent?

    Now that CBS News has revealed that Roberts changed his vote from siding with the conservatives to siding with the liberals, everyone is trying to figure out why. I wonder if it is because the dissenters wouldn't back down from their Christmas Tree doctrine and Roberts called foul on its absurdity.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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