The Distribution of National Income (part 2)

February 21, 2017

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We have been looking at a report on the distribution of national income from the Washington Center for Equitable Growth, authored by Thomas Piketty, Emmanuel Saez and Gabriel Zucman. What makes it special is its attempt to account for all forms of income, not just those most often reported in surveys and tax returns. Based on this more complete accounting, the authors conclude that between 1980 and 2014, the top tenth of the adult population increased their share of the pre-tax national income from 34.2% to 47.0%. The share going to the next two-fifths of the population declined from 45.9% to 40.5%, and the share going to the bottom half of the population declined from 19.9% to 12.5%. During this period, economic growth was sluggish compared to the postwar era (1946-1980), but average real income more than doubled for the top tenth, while remaining essentially unchanged for the bottom half.

These figures are only for pre-tax income, however. They leave open the question of what role taxes and government spending play in the distribution of national income. Does post-tax income tell a different story?

Post-tax income

By considering the distribution of the entire national income, the report challenges the way we normally think about after-tax income. In our everyday experience, it’s what’s left after the taxes are taken out. That makes it always less than gross income. But in the national income accounting, total post-tax income and pre-tax income are the same! That’s because the national income does not go down just because some of it is taxed. The tax dollars are spent directly or indirectly on someone’s behalf, and so they can be counted as somebody’s income. Post-tax income is not a reduction in national income, but just a redistribution of national income.

The calculation of post-tax income from pre-tax income requires two steps: the subtraction of taxes paid, and the addition of government benefits received. Taxes include all levels (federal, state, local) and all types (income, sales, payroll, property). Government benefits include both monetary transfers (earned income tax credit, cash assistance payments, food stamps) and in-kind transfers (mainly health benefits through Medicare and Medicaid). Some cash income is already included in pretax income, such as Social Security payments.

The trickiest type of government benefit to account for is “collective consumption expenditures.” This is government spending on behalf of society in general. One might apportion it equally, on the assumption that each citizen gets the same benefit from it. But the researchers distribute it in proportion to other income, reasoning that higher-income people usually get more benefits from general public spending. For example, wealthier people are more likely to live in communities where the taxes support higher spending per student in the public schools. They are also more likely to be shareholders who benefit from the profits earned by defense contractors. The authors acknowledge that “our treatment of public goods could easily be improved as we learn more about who benefits from them.”

What if the government spends more than it receives in tax revenue? Then the deficit has to be allocated to individuals too, as a kind of negative benefit. Otherwise, total benefits received would be larger than total taxes paid, making post-tax income larger than total national income, upsetting the logic of the entire analysis.

The distribution of taxes and benefits

In general, the distribution of taxes and benefits is mildly progressive, but not markedly so. With all forms of taxation considered, higher incomes are a little more heavily taxed. The effective tax rates are 33.9% for the top tenth of adults, 28.6% for the next two-fifths, and 24.4% for the bottom half. The effective tax rate for the adult population as a whole is 30.5%.

Each group’s share of all taxes paid depends on how much income they have to begin with, as well as the rate at which it is taxed. In 2014, the top tenth got 47.0% of the pre-tax income and paid 52.2% of the taxes (hardly an unreasonable burden in my humble opinion). The next two-fifths got 40.5% of the income and paid 38% of the taxes. The bottom half of the population got 12.5% of the income and paid 10% of the taxes.

On the government benefits side, the top tenth got the smallest share–26.0%–which is lower than their share of income and taxes, but still much higher than their share of population. Although they didn’t qualify for means-tested assistance programs like Medicaid and food stamps, they got a lot of the general benefits of government spending. The next two-fifths, however, got the largest share–41.6%–roughly proportional to their share of the population. What they pay in taxes they get back in benefits such as good schools. The lower half of the population got 32.6% of the benefits, which is much more than their tax burden but much less than their 50% share of the population.

The redistribution of national income

The result of government taxation and spending is that a modest portion of national income is redistributed, primarily from the top tenth of the population to the bottom half.  A simple comparison of pre- and post-tax income shows this clearly.

Because the top tenth paid more in taxes than they received in benefits, their post-tax share of national income was 8 percentage points lower than their pre-tax share in 2014 (39.0% vs. 47.0%).

For the next two-fifths of the population, pre- and post-tax income came out about the same. They started out with 40.5% of the pre-tax income, paid 38% of the taxes, got 41.6% of the government benefits, and wound up with 41.6% of the after-tax national income. All the figures are roughly proportional to their 40% population size, so this group didn’t win or lose much from income redistribution.

The bottom half of the population gained more in benefits than they paid in taxes, so their post-tax share of national income was 6.9 points greater than their pre-tax share (19.4% vs. 12.5%). That difference consists mainly of non-cash benefits. That’s because their meager pretax incomes–averaging $16,200–were taxed at 24.4%, and that more than offset any cash benefits they received. The net benefits they got were primarily from health insurance programs.

To summarize, in 2014 the US transferred 8% of the national income by taxing the top tenth of the population, with 7 points of that going to the bottom half and 1 point to the other two-fifths. The transfer reduced the top tenth’s sizeable after-tax income by 17%. But the transferred income loomed much larger in the lives of the people at the bottom who received it in one form or another. Since they had so much less to begin with, it boosted their income by 54%. In dollar terms, it meant an increase in average income from $16,200 to $25,000, a significant improvement, but still leaving them far behind everyone else.

Redistribution and the trend toward inequality

Has the redistribution of income through taxes and government spending helped to offset the trend toward greater inequality? One would expect that as the rich got richer, they would be forced into higher tax brackets, increasing the tax revenue available for redistribution. One might also expect that as incomes at the bottom stagnated, political pressure would build to increase spending to augment them.

The point about tax revenue has some truth to it. Between 1980 and 2014, the top tenth increased their share of pre-tax national income from 34.2% to 47.0%, but some of that gain was offset by taxes. Still, their after-tax share of national income went from 29.5% to 39.0%. The increase in post-tax income was about three-quarters of the increase in pre-tax income. In other words, they got to keep three-fourths of their gains.

For the other nine-tenths of the population, tax offsets worked to reduce losses instead of gains. For the bottom half, the decline in their share of post-tax income was 85% as large as the decline in their share of pre-tax income. For the two-fifths of the population in between, the decline in their share of post-tax income was only  59% as large as the decline in their share of pre-tax income. To put it another way, the government absorbed 15% of the losses for the bottom half and 41% of the losses for the two-fifths in the upper middle of the distribution.

What the country did not do in those years was increase the overall rate of taxation or make the tax rates more progressive. The average tax rate considering all taxes went down slightly from 30.8% to 30.5%. Moreover, the effective rate of taxation went down for the upper half of the population (due mainly to income tax cuts), but went up for the lower half (due mainly to increases in payroll taxes). That’s why the government absorbed more losses for the upper-middle class than for the bottom half. Redistribution from top to bottom could still go up a little, because the rich had more money that could be taxed. But non-progressive tax policies left most of the increase in inequality untouched.

As for the second point, about political pressure to increase spending on the poor, that was outweighed by pressure to cut tax rates for the middle and upper classes. Between 1980 and 2014, the percentage of national income going to finance government benefits for the bottom half remained stuck around 10%, while benefits for the upper half remained around 20%. The upper middle class played a crucial political role here. With their own share of the national income shrinking, a majority of them sided with the rich in supporting low taxes, rather than with the poor in supporting policies to reduce inequality. I will have more to say about the political implications of the income distribution in my next post.


The Distribution of National Income

February 20, 2017

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The Washington Center for Equitable Growth has issued a new, very informative report on income inequality. Its authors, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, are trying to improve on the way economists have measured inequality in the past:

One major problem is the disconnect between maceoeconomics and the study of economic inequality. Macroeconomics relies on national accounts data to study the growth of national income while the study of inequality relies on individual or household income, survey and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60 percent of the national income recorded in the national accounts, with this gap increasing over the past several decades.

Why is there such a discrepancy between the national income accounting and the personal reporting? The main reason is that when people report their income on a survey or a tax return, they are thinking of income actually received in cash. But some forms of national income accrue to individuals whether they see cash from them or not. Employers contribute to workers’ pension plans or subsidize their health insurance. Corporations make money on behalf of shareholders that they retain for investment rather than distribute as dividends. This report aims to apportion the entire national income among individuals. It tries to account for all forms of compensation for workers and all returns on capital assets, whether taken in cash or not.

For purposes of analysis and discussion, the researchers divided the US population into three broad groups, the top tenth, the next two-fifths, and the bottom half. The unit of analysis was the adult individual 20 or older. Most of the analysis split marital income equally between spouses, for example assigning each of them $40,000 if one earned $50,000 and the other $30,000. That makes sense if couples are sharing their purchasing power. The authors also did a separate analysis of gender inequality using individual earnings. There they found that overall, men had 1.75 times as much work income as women, without controlling for hours worked or types of jobs. That ratio has been falling steadily since the 1960s, when it was over 3.00.

Pre-tax income

To appreciate the degree of income inequality the researchers found, consider the familiar analogy of dividing a pie. Imagine that you bake a large pie for a party of ten, dividing it into ten equal slices. But the first guest to dig in takes five slices! The next four guests take one slice each, leaving only one slice to be divided among the remaining five diners. In percentage terms, one-tenth of the people got 50% of the pie, the next two-fifths got 40%, and the remaining half got only 10%.

The real numbers for 2014 (the last year reported) are not far from that. The top tenth got 47.0% of the national income; the next two-fifths got 40.5%, and the bottom half got 12.5%. The average (mean) income for the groups was $304,000 per person for the top 10%, $65,400 for the next 40%, and $16,200 for the bottom 50%. (If some of the numbers sound large, remember that income is being defined very inclusively.)

One advantage of these particular dividing points is that they clearly distinguish between one group whose share of national income is roughly proportional to its size (the two-fifths) and two groups whose share is either disproportionately large (the top tenth) or small (the bottom half).

In addition to the enormous differences in shares, the three groups differed in how much of their income they derived from returns on capital as opposed to their own labor. The top tenth got 43.0% of their income from capital, compared to 17.9% for the next two-fifths and 5.1% for the bottom half. Ironically, in a country that prides itself on its work ethic, the most meager rewards go to those who have to rely the most on their labor.

Trends in inequality

In order to study trends over time, the researchers compared two 34-year periods, 1946-1980 and 1980-2014. The first period includes the postwar economic boom. The second period begins with the year Ronald Reagan was elected president, although I don’t know how much that affected its selection as a dividing point. The authors do suggest that changes in public policy were at least partly responsible for the increase in inequality that has occurred since 1980.

The period after World War II was a time of rapid economic growth and broad-based increases in income. Pre-tax income (adjusted for inflation) increased 79% for the top tenth, 105% for the next two-fifths, and 102% for the bottom half over those 34 years. Because the increase was less for the top tenth than the other groups, the distribution became a little more egalitarian. The share of national income going to the top tenth declined from 37.2% to 34.2%.

The period since 1980 has been a time of both slower economic growth and very unevenly distributed gains. Pre-tax income increased 121% for the top tenth, 42% for the next two-fifths, and only 1% (!) for the bottom half. The rich got richer and the poor got left behind. As a result, the distribution of national income became noticeably less egalitarian. The share of the top tenth rose from 34.2% to 47.0%, but the share of the lower half dropped from 19.9% to 12.5%. That top share is similar to what rich people were getting back in the 1920s, before the Great Depression. Over the course of the past century, income inequality has gone down but then gone back up. At the highest levels of income, the return to inequality has been even more dramatic. Average income for the top 1% increased only 47% during the postwar era, lagging well behind general economic growth; but it rose 205% after 1980, far exceeding general growth. For the top 0.01%, where the average income is over $28 million, the increase has been 454%.

Although global trends such as outsourcing and automation have produced gains for capital at the expense of workers, the authors point out that not all countries have experienced the same extremes of inequality as the United States has. Although economic growth has been slower in France, the lower half of the French population has shared in the national growth as the American lower half has not. As a result, “While the bottom 50 percent of incomes were 11 percent lower in France than in the United States in 1980, they are now 16 percent higher.” America’s self-image as a unique land of opportunity is no longer secure.

Income redistribution?

Pre-tax income does not tell the whole story, however. The taxation of income provides some potential for redistribution, as those with higher incomes are taxed in order to provide some benefits to those with lower incomes. In my next post, I will discuss the report’s comparison of pre- and post-tax income to see how taxes and government benefits are distributed, and what effect they have on income inequality.


Administration Weakens Health Insurance Mandate

February 17, 2017

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One of the less popular features of the Patient Protection and Affordable Care Act (“Obamacare”) is the mandate requiring most people to obtain health insurance. Opposition comes especially from people who are too healthy to feel they need much insurance and too well-off financially to qualify for free or subsidized insurance.

However, the mandate is an integral–and many would say indispensable–part of a health insurance system that relies on private insurers. (Many progressives would prefer a single-payer, “Medicare for all” type of system, but health providers and insurance companies did a pretty good job of taking that off the table.) Without a mandate to buy insurance, insurers may not enroll enough people to generate the premiums they need to cover the people with pre-existing conditions, who are now entitled to insurance. In general, that’s how insurance works, of course. If everybody carries auto insurance or homeowners’ insurance, insurers can raise enough money to cover the people who actually have car accidents or damage to their homes. Insurers cannot make a profit if people can wait to buy insurance until they need a payout. A new system that only insures the sick is no more desirable than an old one that primarily insured the healthy.

During the transition to Obamacare, the tax penalties that apply to the uninsured have been gradually phasing in. The hope has been that as the penalties rise and more people sign up, any premium increases should turn out to be modest and temporary. After all, insurers don’t want to scare away too many of their future customers with high initial premiums. But recently, we have been hearing a lot of complaints both from customers who say their premiums are too high, and from insurers who say their revenues are too low because they don’t have enough customers. Some insurers have been dropping out, leaving consumers with fewer choices.

No one can be sure how much these problems would be alleviated as enrollment increases, or how many adjustments to the law might be needed to make it work better.

Executive action

The Trump administration is not waiting to find out. On his first day in office, the President issued an executive order announcing his intention to repeal the law, as he promised during his campaign. What would happen in the short term is not entirely clear. On the one hand, the order says, “In the meantime, pending such repeal, it is imperative for the executive branch to ensure that the law is being efficiently implemented….” On the other hand, it also said, “To the maximum extent permitted by law, the Secretary of Health and Human Services…and the heads of all other executive departments and agencies…shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.”  In other words, we’ll enforce the law, but only if it doesn’t cost anyone anything.

This week, the IRS revealed that it will not require taxpayers to report on their tax returns whether they are insured or not. They can leave that section blank, and the IRS will accept their return and impose no penalty for being uninsured. Unless their insurance status comes out in a tax audit, they are in effect released from the Obamacare mandate. This is not entirely new, since during the transition to Obamacare the IRS has been quietly accepting returns from people who failed to provide the requested information. Strict enforcement was supposed to be in effect for returns filed this year. Under the Trump administration, it won’t be in effect at all. Makers of tax preparation software such as TurboTax are now revising their programs to stop flagging users who fail to answer the health insurance questions.

Maybe this will be another executive order to be tested in court. President Obama was accused of exceeding his authority when he set immigration enforcement priorities, in effect exempting from deportation undocumented immigrants who had been brought to the US as children. Now President Trump is acting to undermine an entire law that he dislikes.

Repeal and replace, or quietly kill?

In an ideal world, the country wouldn’t abandon its existing health insurance system until it had a viable replacement. The more one understands about how the various provisions of the Affordable Care Act work together, the more one realizes how challenging it will be to devise something that works better. President Trump has promised that his improved system will cover more people at lower cost, a very tall order.

While we are waiting for Republicans to come up with such a system, the administration is hedging its bets by trying to make the present system unworkable. Then the country may have no choice but to accept the Republican alternative, whether it is really an improvement or not.

Trump Order is Bad News for Retirement Savers

February 9, 2017

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On February 3, President Trump issued a memorandum to the Secretary of Labor regarding the “Fiduciary Duty Rule” that was scheduled to go into effect this April. Suggesting that the rule “may not be consistent with the policies of my Administration,” he directed the Department of Labor to reexamine the proposed rule and consider rescinding or revising it.

The Department of Labor has been working on this rule since 2009 with the aim of improving the quality of investment advice received by investors in retirement plans. With traditional pensions on the decline and participant-directed retirement plans like 401(k)s and IRAs replacing them, more people need investing advice than ever. This has highlighted a problem described in a Department factsheet:

Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers’ interests and often create strong incentives to steer customers into particular investment products. These conflicts of interest do not always have to be disclosed and advisers have limited liability under federal pension law for any harms resulting from the advice they provide to plan sponsors and retirement investors. These harms include the loss of billions of dollars a year for retirement investors in the form of eroded plan and IRA investment results….

To put it bluntly, too many so-called advisors recommend the products that earn them big commissions, not the ones that offer the best value for the investor. When we buy a car, we understand that the dealer is just a salesperson who would love to sell us the most expensive car, whether we need it or not. When we go to a doctor, we expect the recommended treatment to be in our best interest, not what is most profitable for the doctor. The question is what is the appropriate standard of care when we depend on an advisor’s expertise for our financial health.

The proposed Fiduciary Duty Rule would require all those who provide retirement plan advice for compensation to adhere to a fiduciary standard, which requires “putting their clients’ best interest before their own profits.” This requirement would apply whenever advisors recommend an investment, if they are compensated in any way for doing so. It doesn’t matter whether the client is paying for the advice itself or whether a sales rep is earning a commission for selling a product.

Closing a loophole in the fiduciary standard

Debate over the fiduciary standard goes back a long way. I have discussed it before, especially in Section 11 of my “Sound Investment” series and in my review of Helaine Olen’s Pound Foolish, a critique of the personal finance industry.

Many people may not realize that the fiduciary standard is already well established in law. The Investment Advisers Act of 1940 required anyone giving investment advice for compensation to register as such and adhere to such a standard. So what’s the problem? The Securities and Exchange Commission made an exception for those whose primary business is trading securities, even if they also give some advice to their customers. In recent years, brokers and other sellers of financial products have expanded their financial advising functions and often receive compensation for them. Nevertheless, the SEC continued to maintain that they did not have to register as investment advisors nor adhere to a fiduciary standard because their advice was “incidental” to their job as brokers. So two types of advisors, those obligated to put their clients’ interests first and those without such obligation, have co-existed in the financial services industry, with the general public often unable to tell the difference. Brokers and insurance agents have been able to call themselves financial advisors, without being obligated to recommend the products that are best for their customers.

After the Great Recession, the Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) gave the SEC the authority to reexamine the issue and write a new regulation. After studying the matter, the SEC concluded that the loophole it previously created should now be closed: “The standard of conduct for all brokers, dealers and investment advisors, when providing personalized investment advice about securities to retail customers…shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer or investment advisor providing the advice.” The actual regulations that will implement this principle continue to be hotly contested. Meanwhile, the Department of Labor has finalized a fiduciary rule based on a different statutory authority, its authority to regulate retirement plans under the Employee Retirement Income Security Act of 1974 (ERISA). The DOL’s rule would apply only to financial advice relating to retirement plans, not to investments more generally. This is the rule whose implementation the President is now blocking.

Last month, the Consumer Federation of America issued a report, “Financial Advisor or Investment Salesperson?: Brokers and Insurers Want to Have it Both Ways.” The report documented the two-faced way that “transaction-based financial professionals” describe themselves:

When they are marketing their services to the investing public and enticing clients into handing over their hard-earned savings, these sales-based financial professionals present themselves as “trusted advisors” whose only concern is their clients’ best interest. But try to hold them legally accountable for meeting that standard, and those same “advisors” quickly change their tune. Because they are salespeople who are “merely selling” investment products, they claim, no fiduciary standard ought to apply.

In their marketing materials, brokers and insurance companies use terms like “financial advisor,” “financial consultant,” or “retirement counselor” to describe themselves. They characterize their services as “a comprehensive approach to total wealth management delivered by your most trusted advisor,” and claim to be “safeguarding the money of others as if it were our own,” to quote some of their websites. Surveys show that this kind of marketing is successful in getting the general public to confuse sales reps with the registered investment advisors who actually are held to a fiduciary standard. But when they are fighting that standard in legislative hearings or in court, they are quick to claim that they are just salespersons. They deny having the special relationship of trust that would justify classifying them as fiduciaries under existing or proposed law.

The high financial stakes

The Consumer Federation described how savers are being hurt by this situation:

Investors who unknowingly rely on biased salespeople as if they were trusted advisors can suffer real financial harm as a result. It is estimated, for example, that retirement savers lose $17 billion a year or more as the result of the excess costs associated just with conflicted retirement advice. The cost on an individual basis, in the form of lost retirement savings, can amount to tens or even hundreds of thousands of dollars over a lifetime of investing, money that retirees struggling to make ends meet can ill afford to do without.

Here’s a hypothetical example. Suppose you save $500 a month for 20 years in a tax-deferred retirement plan holding mutual funds, for a total investment of $120,000. With a 7% annual return after expenses, you would accumulate $260,463 over the 20 years. However, if you lost $25 of each $500 invested because of unnecessary commissions or fees, and then received only a 6% return because of higher annual mutual fund expenses, you would accumulate only $219,469, a shortfall of about $40,000. Multiply this by millions of savers and you begin to see the size of the problem.

Of course, every company that charges high fees, commissions or expense ratios will try to justify them as fair compensation for value provided. So the question is whether investors who are being charged more are receiving any added value. Although investment returns can be all over the map, most of the evidence does not support the contention that the investment products pushed by brokers and insurance reps outperform investments that are available less expensively elsewhere. In particular, index funds that you can buy directly from companies like Vanguard and Fidelity with no sales commissions and rock-bottom expense ratios outperform the majority of high-cost actively managed mutual funds. For more explanation of why so many aggressively marketed investments have such disappointing returns, see Section 6 of my “Sound Investing” series.

When I worked as a registered investment adviser (the kind who was legally bound by the fiduciary standard), many clients came to me for a portfolio review. Using standard measures of costs and risk-adjusted performance, I routinely found overpriced, underperforming, and often unnecessarily confusing products that had been recommended to them by brokers or insurance agents. In most cases, they would have accumulated more if they had gotten simpler and better advice.

What we see here is a massive and unearned transfer of wealth from middle-class savers to financial service companies that too often serve themselves at the expense of their customers. This is one reason why the era of self-directed retirement accounts has also been an era of increasing inequality in the distribution of wealth. The new regulations are intended to give middle-class savers a fighting chance.

Alleged adverse effects of the fiduciary rule

Businesses that oppose consumer protection initiatives rarely admit what really concerns them, that a new rule may interfere with a profitable business model. They almost always claim that it will hurt consumers in some way that consumer advocates and regulators fail to see.  President Trump’s order takes a pro-consumer stance by asking the Department of Labor to examine whether the fiduciary rule would “adversely affect the ability of Americans to gain access to retirement information and financial advice.” The implication is that retirement savers may be losing something if they cannot get the “free” advice offered by brokers and insurance agents, even if that advice is flawed by conflicts of interest that work against investors’ best interests.

Investors of modest means do need financial advice that doesn’t cost them much, and accepting the recommendations of sales reps is one way to get it. Investment advisors who do not make their money from sales commissions derive their income from flat fees for advising sessions or for writing financial plans, as I did, or from asset management fees based on a percentage of assets under management. Making a living while keeping these charges affordable for small investors is not easy. It is one thing to set a fiduciary standard, but another thing to make fiduciaries available at a price most savers can afford.

However, the fiduciary rule need not leave most retirement savers with no affordable advice at all. The kind of basic advice that small investors need to handle their retirement plans is already pretty widely available, and could be even more available if employers and schools made more of an effort to provide it. Most savers will do fine putting the bulk of their retirement savings in a single “target retirement fund,” or in a small number of index funds covering domestic and foreign stocks and bonds. (Of course, they need to follow other basic advice like getting an early start and saving 10-15% of income.) Financial professionals can still make a good living selling advice to people of means who are interested in playing riskier or more sophisticated investment games. But for the average worker, the present system relies too heavily on a business model that institutionalizes conflicts of interest and needlessly skims off too large a portion of the savings that people need for their retirement.

President Trump’s order is an anti-consumer measure shrouded in pro-consumer rhetoric. It purports to protect American savers, while really protecting businesses that charge them too much and deliver too little. It ignores years of research by the federal government’s own agencies as well as by professional financial planners, academics and consumer groups. It shows that the people who have Trump’s ear are the billionaires and bankers he has brought into his administration, not advocates for the general public. It is one more piece of evidence that–populist rhetoric notwithstanding– he intends to serve the economic elites rather than the people.



The Fallacy of “Originalism”

February 6, 2017

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In my last post, I listed a number of the opinions that placed Justice Antonin Scalia on the far right of the judicial spectrum. That is the same territory where we find President Trump’s Supreme Court nominee, Judge Neil Gorsuch. I suggested that Trump could have helped bring the country together by nominating a more moderate justice, like Merrick Garland, but he chose not to do so.

Conservatives may reasonably argue that where a judge falls on some spectrum of opinion is less important than the constitutional correctness of his or her positions. We often hear the claim that conservative justices just follow the constitution, while liberal justices exceed their authority by trying to make new law to carry out some liberal agenda. Justice Scalia was the main proponent of the position called “originalism,” which holds that the articles of the Constitution have an original meaning that never changes and can be applied consistently. Less conservative judges and legal scholars say that this approach treats the Constitution as a lifeless document, instead of as a living document subject to evolving interpretation.

An original fixed meaning?

The notion that any set of words has a fixed meaning and requires no interpretive process goes against most of what I have learned as a sociologist. I believe that meaning always depends to some degree on context, and context is inherently broad and flexible. This is true even for terms in the physical sciences. Think of how quantum physics has provided a new context for understanding what an electron is (particle? wave of possibility?).

Few legal scholars would argue that the words of a law have one meaning that is obvious to anyone who reads them, or even to everyone who did read them at the time of their adoption. For one thing, getting enough votes for passage often requires using language that is vague enough to satisfy people with different views. Then of course, the courts have to figure out what the words mean in practice–that is, in the application to real situations and cases. That is the inescapable challenge of interpretation.

The First Amendment guarantees freedom of speech, but the devil is in the details. Does it mean that I am free to yell “Fire!” in a crowded theater (Justice Oliver Wendell Holmes’s famous example)? To give political speeches with a bullhorn on a residential street at 2:00 in the morning? To slander someone by telling deliberate lies about them? To trick customers into buying worthless securities with fraudulent claims? To spend millions of dollars of corporate profits to help elect candidates who promise to vote against environmental regulations?

The idea that every reasonable application was anticipated and agreed upon when a law was passed is difficult to defend. The more realistic position is that the meaning of a law becomes clearer as judges apply it to cases, but that occurs over time. When does the meaning become entirely clear–after ten years, fifty years, a hundred years? Once we admit that the meaning of a law evolved over time, we must also admit that it continues to evolve in the present era. Legal interpretation will always be a balancing act that respects original intentions and precedents, but remains open to new interpretations and applications.

When the Fourteenth Amendment was adopted after the Civil War, it was not at all obvious that the equal protection clause required racial integration. Until the Brown v. Board of Education decision in 1954, courts saw legally mandated racial segregation as compatible with the equal protection of the laws. That was the doctrine of “separate but equal” enshrined in Plessy v. Ferguson in 1896. By the mid-twentieth century, more people understood and acknowledged how segregation deprived racial minorities of equal educational, employment and housing opportunity. The legal requirements of “equal protection” changed accordingly. As Laurence Tribe and Joshua Matz say in Uncertain Justice, “Most scholars doubt that originalism, faithfully applied, can justify race and sex equality doctrines…that have become central to our national self-understanding.” I like that way of putting it: The meaning of our Constitution evolves along with our national self-understanding.

Still another example is our conception of liberty, which is explicit or implicit in many Constitutional articles. Everyone agrees that the Constitution places limits on government in order to protect the liberties of the people. In early America, those liberties were understood to include considerable freedom in economic matters, within the “laissez-faire” free market. On the other hand, strict regulation of personal sexual behavior was permissible. Maybe that made sense in a sparsely populated, predominantly rural society with a high birth rate, a high demand for labor, a strong association between sex and reproduction, and a strong expectation that women would marry and bear children. In urban industrial America on the other hand, the need for more business regulation became apparent, while the state’s need to favor marital and reproductive sex through strict sexual regulation became less clear. Along with the sexual revolution and the emancipation of women came Supreme Court cases that struck down old legal taboos–on contraception in Griswold v. Connecticut (1965), on abortion in Roe v. Wade (1972) on homosexual behavior in Lawrence v. Texas (2003). Scalia was not amused by this trend, and he challenged his fellow justices to explain how laws that were once constitutional could now be unconstitutional. But inevitably the specific rights implied by the Constitution are redefined from time to time, even as the abstract words of the Bill of Rights remain the same.

When liberal justices strike down a law they find unconstitutional, conservatives complain that they are usurping the role of the lawmakers. Just apply the law; don’t make it, judges like Neil Gorsuch say. If taken too far, that turns the judicial branch of government into a rubber stamp for the legislative branch. Interpretation and evaluation of law in the light of the Constitution is exactly what the judiciary is supposed to do. And conservatives are hardly passive in the face of laws they dislike. They are perfectly willing to strike down laws that infringe on the liberties they recognize, even if they have to engage in their own creative interpretation of the Constitution to do so.

Scalia on the right to bear arms

As a case in point, consider Justice Scalia’s opinion representing the conservative majority in District of Columbia v. Heller (2008). That decision struck down the D.C. ban on handguns as a violation of the Second Amendment.

The Second Amendment states, “A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.” Before Heller, the Supreme Court had limited the right to bear arms to participation in an organized militia, which does seem to be the most obvious interpretation. The court had never before struck down a law limiting private ownership of guns, and in 1939 it upheld a law banning the ownership of sawed-off-shotguns.

By 2008, however, a stronger conservative movement was promoting a broader and more individualistic interpretation of gun rights. Public support was growing for gun ownership, not just for hunting, but for self-defense in response to high crime rates, and also (on the far right) for potential resistance to federal government tyranny.  As a conservative gun owner himself, Scalia had some sympathies with this interpretation.

In order to break with many years of judicial precedent, Scalia had to “discover” the new more individualistic right to bear arms in the Constitution. He accomplished this through historical research purporting to show that the individualistic meaning was actually the original meaning. From the beginning, people understood the Second Amendment to be conferring a personal right to own guns, whether participating in a militia or not. They knew what it meant when it was passed, even if the courts were apparently misled by the wording and wrongly narrowed it to a militia! In Scalia’s words, “Constitutional rights are enshrined with the scope that they were understood to have when the people adopted them, whether or not future legislatures or (yes) even future judges think that scope too broad.”

While many conservatives accept Scalia’s claim that he is just reading the Constitution as it was originally intended to be read, constitutional scholars like Tribe and Matz are skeptical. They point out that in order to assert what the amendment meant in 1791, Scalia actually draws on sources from the 1600s to the 1900s, as if there were a single unchanging opinion that prevailed throughout the entire country over several centuries. Other judges and scholars can find historical materials with contrary positions. Scalia also supports exceptions to an absolute right to bear arms that were hardly obvious to all in the eighteenth century, such as the disqualification of felons (not recognized in federal law until 1938) and the mentally ill (1968). Tribe and Matz say, “It is unclear how an exception for laws born in the twentieth century could possibly accord with Heller’s claim that Second Amendment rights were forever defined in 1791.” It is also hard to see how originalism can settle questions that have only arisen recently, such as the legality of computerized background checks. Tribe and Matz conclude, “Ultimately, a close look at Heller reveals an opinion that mixes original meaning with broad national traditions and distinctly modern understandings.”

Originalism and conservatism

We shouldn’t be surprised that conservatives are fond of legal originalism, since conservatism and originalism amount to very much the same thing. Originalists like Scalia and Gorsuch go as far as they can to find the law in “national traditions” rather than “modern understandings, although they cannot quite pull it off. Essentially they are traditionalists rather than modernists. But that doesn’t mean they aren’t judicial activists at times. They are quite willing to overturn existing laws and legal precedents in order to defend tradition.

In Scalia’s case, his cultural traditionalism was so extreme that it endangered our emerging recognition of the rights of racial minorities, women, consumers, the LGBT community, and perhaps the thousands of Americans killed with firearms each year. Extending this conservative court into the future will not serve our country very well.