Tag Archives: political economy

Yes, Virginia

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…the law applies to the Federal government, too.  At least to the SEC, as the Supreme Court has ruled.  In a case involving alleged special treatment for a mutual fund advisor—the fund supposedly allowed one investor to engage in frequent trading of the fund in violation of a rule that applied to all of the fund’s other investors—the SEC claimed it could alter, on its own recognizance, the statute of limitations for bringing an action against the trader.

As The Wall Street Journal described the matter,

The SEC faced a five-year statute of limitations on bringing a case.  The agency alleged the market timing took place between 1999 and 2002, but it didn’t bring a complaint until 2008.  The defendants, Marc J Gabelli and Bruce Alpert, argued the agency’s five-year clock ran from the time of the alleged offense, but the SEC said the clock should have started later, in late 2003, when it says it discovered the conduct.

The Supremes waved the BS flag at that claim.  Chief Justice John Roberts, writing for a unanimous Court, said

This Court, how­ever, has never applied the discovery rule in this context, where the plaintiff is not a defrauded victim seeking recompense, but is instead the Government bringing an enforcement action for civil penalties.

Roberts expanded on his statement:

There are good reasons why the fraud discovery rule has not been extended to Government civil penalty enforcement actions.  The dis­covery rule exists in part to preserve the claims of parties who have no reason to suspect fraud.  The Government is a different kind of plaintiff.  The SEC’s very purpose, for example, is to root out fraud, and it has many legal tools at hand to aid in that pursuit. The Gov­ernment in these types of cases also seeks a different type of relief.  The discovery rule helps to ensure that the injured receive recom­pense, but civil penalties go beyond compensation, are intended to punish, and label defendants wrongdoers.  Emphasizing the im­portance of time limits on penalty actions, Chief Justice Marshall admonished that it “would be utterly repugnant to the genius of our laws” if actions for penalties could “be brought at any distance of time.”

The opinion can be read here.

A Progressive Sequester

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On the difficulty of even the trivial reduction in the rate of growth of spending that is the sequester, Senator Barbara Mikulski (D, MD) had this to say:

Can’t we just cut 2 percent just like American families?  American families don’t run prisons.  They don’t build their own roads.  They don’t have to put out their own local police department.

And so with this red herring, Mikulski identifies a central problem for our government: she’s utterly unable to find 2¢ out of every dollar in her purse that she can choose not to spend.  She’s unable even to conceive the idea of not spending those 2¢.

How very Progressive of her.

Obamacare, Again

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Here’s another reason why the fight to repeal Obamacare must be continued and driven to a successful conclusion.

The GAO’s report, at the link, opens with this abstract and graph [emphasis added]:

The effect of the Patient Protection and Affordable Care Act (PPACA), enacted in March 2010, on the long-term fiscal outlook depends largely on whether elements in PPACA designed to control cost growth are sustained.  As shown in the figure below, there was notable improvement in the longer-term outlook after the enactment of PPACA under GAO’s Fall 2010 Baseline Extended simulation, which assumes both the expansion of health care coverage and the full implementation and effectiveness of the cost-containment provisions over the entire 75-year simulation period.  However, the federal budget remains on an unsustainable path.  Further, questions about the implementation and sustainability of these provisions have been raised by the Centers for Medicare & Medicaid Services’ Office of the Actuary and others, due in part to challenges in sustaining increased health care productivity.  The Fall 2010 Alternative simulation assumed cost containment mechanisms specified in PPACA were phased out over time while the additional costs associated with expanding federal health care coverage remained.  Under these assumptions, the long-term outlook worsened slightly compared to the pre-PPACA January 2010 simulation.

Those “challenges” to sustaining productivity include keeping doctors, hospitals, et al., in the field under the draconian controls Obamacare imposes on them.  The “phase-out” of cost controls will have been driven by the need to…relax…those controls in order to sustain even a level of performance commensurate with the British failed NHS.  Absent those controls, national debt growth is no better than without Obamacare.

At best, Obamacare does nothing to our finances.  However, the GAO also provides this:

Under the Fall 2012 Alternative simulation, spending for Medicare, Medicaid, CHIP, and federal exchange subsidies almost doubles as a share of GDP by 2035.

That 2012 Alternative is from Senator Jeff Sessions’ (R, AL) request that GAO  re-do their simulations without the administration’s artificial assumptions, eliminating, for instance, the administration’s cynical assumption requirement that the GAO’s original simulation use Obamacare’s initial 10 years—which included only 6 years of costs—as their start point.

The GAO report also has this:

[A]s [the] figure shows, the primary deficit under our Alternative simulation [Sessions’ removed artificial assumptions] increased by 0.7 percent of GDP during this time period [the 75 years of the simulation], due largely to increased spending on Medicaid, CHIP, and exchange subsidies.

That increase works out to over $6 trillion more down the sewer, courtesy of Obamacare.

A Thought on Defined Benefits vs Defined Contributions

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The Wall Street Journal described some of the problems with defined benefit plans—pensions.

When United Parcel Service Inc said last month that it was taking a noncash charge of $3 billion tied to its pension plan, the package-delivery giant blamed what might seem like an unrelated event: the downgrade last summer of several big banks by Moody’s Investors Service.

But the connection between the two incidents illustrates the complexities of calculating pension liabilities—and how little power companies have in keeping them under control.

UPS is typical, though, not at all unusual, in the problems they’re encountering with their pension plan:

Across America’s business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012.  That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to JP Morgan Asset Management.
…
A big source of the problem: persistently low interest rates, set largely by the Federal Reserve.

I’ve written about the impact of those artificially low rates here and here.

There are additional major factors in arming this defined benefit bomb.

Putting a value on a pension liability is tricky business. Benefits for individual workers typically are based on their pay and years of service.  A company must also take into account how long retirees are likely to live.

And

Pension liabilities change over time as employees enter and leave a pension plan [including]…the fact that people are living longer.

And

For financial-reporting purposes, companies use a so-called discount rate to calculate the present value of payments they expect to make over the life of their plan.

The discount rate serves as a proxy for the hypothetical interest rate that an insurance company would expect on a bond today to fund a company’s future pension payments.  The lower the discount rate, the greater the company’s pension liabilities.

Boeing’s discount rate, for example, fell to 3.8% last year from 6.2% in 2007.  The aircraft manufacturer said in a securities filing that a 0.25-percentage-point decrease in its discount rate would add $3.1 billion to its projected pension obligations.

That discount rate falls out of those artificially depressed interest rates the Federal Reserve Bank is imposing on our economy.  And that, at the indicated drop in the discount rate works out to a nearly $30 billion increase in Boeing’s defined benefit—pension—liability over those intervening half-dozen years.

Here’s how Moody’s (entirely appropriate) bank downgrade enters into all of this:

Moody’s decision last summer to lower the credit rating of big banks hurt UPS and other companies by booting those banks out of the calculation [because those banks no longer were “safe” enough to have their rates included in the suite of rates used to estimate a discount rate].   And because bonds issued by some of those banks carried higher yields than other bonds used in the calculation, UPS’s discount rate fell 1.20 percentage points.

On the bright side, though, the WSJ article at the link suggests that

…just as falling interest rates have created a massive hole in pension funding, pension plans could quickly recover if interest rates started to climb.

This is a chimera, however.  When the Fed’s already long-term artificially suppressed interest rates are coupled with its massive money printing operation of the last few years, those interest rates will rise, but sharply, in an environment of explosive inflation.  All those dollars that will be paid out to (fixed income) retirees from their nominally recovered defined benefit plans will be worthless as prices those retirees pay with their dollars rise dramatically from that inflation.

Converting to defined contribution plans, like 401(k)s, removes all of these uncertainties from the companies’ liabilities—strengthening them, making them stronger competitors in the market, more stable employers, and so on.  In addition to this, a company’s failure to plan accurately, to fund appropriately its defined benefit plan given that planning, or just to avoid bad luck severely impacts all of its employees (its future retirees) and all of its current retirees.

In contrast, placing these retirement plans into defined contribution plans will let each employee make his own decisions about funding what is now his plan (rather than his employer’s catchall plan), how he wants to accumulate retirement savings, and all in accordance with his own goals and imperatives.  He can tailor his plan to his needs and desires, rather than being dependent on a plan that his employer must drive from a company liability perspective more than from a good for the employee perspective.

Also, should an individual employee fail to plan accurately, to fund appropriately his retirement plan given that planning, or just to avoid bad luck, he only impacts himself and a very few others.  The damage from failure of an individual’s defined contribution plan is enormously circumscribed compared to the damage from failure of a defined benefit plan.

Moreover, an American citizen isn’t as mind-numbingly stupid as our Progressive objectors to defined contribution plans make him out to be.  He’s at least as capable as a company—or a government—in making his own decisions about his future.

Who’s Responsible?

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The company who made and sold the product, or the company that bought the product from a third party which actually did the development?

That’s a somewhat convoluted statement of the question, isn’t it?  Maybe that’s what confused the Alabama Supreme Court.

This body of judges has decided that brand-name drug makers can be held liable for injuries caused by the generic versions of their products.  The particular case has a plaintiff buying a generic drug—a copy of a patented drug—developed and originally manufactured by Wyeth.  Pfizer Inc later acquired Wyeth, and Schwarz Pharma Inc also acquired rights to the drug.  The plaintiff sued, among others, Pfizer and Schwarz Pharma, and the Alabama Supremes let the suit against these two go forward.

Imagine that.  They didn’t make the product, but they’re responsible for anything that goes wrong.

As Pfizer notes,

Alabama’s decision would allow generic-drug makers “to reap the profits of drug sales while leaving brand manufacturers with the liability” and violate the basic legal tenet that a manufacturer is liable only for its products[.]

Chris Hood, plaintiff’s lawyer said, without a particle of irony,

The Alabama Supreme Court is the first and only supreme court of any state to adopt the theory of liability we advocate.  It correctly identified and applied basic tort principles overlooked by numerous lower courts which rejected similar theories.