Joel McDurmon’s American Vision article entitled “Highway to Hell: The Progressive Tyranny Over Interstate Commerce” offers a wealth of insight into the Constitution’s Commerce Clause. Using prominent Supreme Court decisions, McDurmon shows how the Commerce Clause has been stretched throughout American history. Starting with an 1824 Supreme Court decision, Congress was given the green light to aggressively regulate interstate commerce. This early expansion accelerated greatly with Supreme Court decisions after 1935 and brings us to today where many now believe that the federal government possessed nearly unlimited power over everything — because virtually anything Congress wants to do can be put in economic terms and justified as “interstate commerce.”

The Constitution’s Commerce Clause, sometimes called the Interstate Commerce Clause, is found in Article 1, Section 8, Clause 3′s enumerated (or listed) powers to Congress: “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes”. As McDurmon points out, the most significant abuse of the Commerce Clause has been in regard to the regulation of commerce “among the several States,” the scope of which has been dramatically expanded through the Supreme Court’s “progressive” interpretation of the Constitution. As noted above, the result is that Congress and the federal government now regulate (and control) virtually every aspect of American life.

McDurmon points out that the precedent-establishing 1824 Supreme Court decision of Gibbons v. Ogden firmly placed authority over the regulation of interstate commerce with Congress. He also points out that while this early decision expanded federal power, it also clearly recognized that there were limits on Congress’ power — specifically because the very existence of the Constitution’s enumerated powers “presupposes something not enumerated.” Stated another way, McDurmon explains: “the very fact that the Constitution designates a particular power to Congress, means automatically that the Constitution intended specifically to forbid what it does not designate.” This limited power perspective is key for properly interpreting the Founder’s intent regarding the federal regulation of commerce among the states — if anyone doubts this limited federal power standard then they need look no further than the Tenth Amendment for an explicit statement acknowledging that the states and the people retain extensive power.

In his article, McDurmon argues that the Supreme Court’s vast expansion of the Commerce Clause has created what amounts to federal tyranny. However, McDurmon offers hope for a return to a limited interpretation of the Commerce Clause and cites a recent Supreme Court decision as evidence. In fact, this 1995 decision, United States v. Lopez, has become what McDurmon calls an exit ramp from the abusive highway created by those favoring an expansive federal government.

Within the Lopez decision, the Supreme Court provides a history of their changing interpretation of the Commerce Clause spanning nearly two centuries. This history shows that embedded within many Court decisions expanding Congress’ Commerce Clause powers, the Court repeatedly acknowledged that there are also limits on these powers. In fact, such a viewpoint was the prevailing opinion until FDR’s New Deal.

Even in 1935 the Supreme Court limited Congress’ power by striking down part of the New Deal as unconstitutional. FDR responded by trying to expand the size of, or “pack,” the Supreme Court with new, sympathetic Justices. This move, however, was unsuccessful but provided significant pressure on the Court to be less critical of FDR’s expansive federal policies. The result of this influence became so noticeable that in 1937 the Supreme Court reversed itself and began to uphold New Deal legislation. The result was a huge expansion of the federal government’s role in all levels of American life.

However, the 1995 Lopez decision was different and departed significantly from the post-New Deal federal expansion trend. According to McDurmon, the significance of Lopez is this: it reaffirms that “despite all of this increase of tyranny in the area of Interstate Commerce, there still must remain a line drawn somewhere between the power enumerated to Congress and those forbidden to it and thus reserved for the states.” It clearly notes that while the federal government argued otherwise, real Constitutional limits on Congress’ Commerce Clause regulatory powers do in fact exist. The Lopez decision is very explicit in this regard:

To uphold the Government’s contentions here, we would have to pile inference upon inference in a manner that would bid fair to convert congressional authority under the Commerce Clause to a general police power of the sort retained by the States. Admittedly, some of our prior cases have taken long steps down that road, giving great deference to congressional action. The broad language in these opinions has suggested the possibility of additional expansion, but we decline here to proceed any further. To do so would require us to conclude that the Constitution’s enumeration of powers does not presuppose something not enumerated, and that there never will be a distinction between what is truly national and what is truly local. This we are unwilling to do.

In conclusion, upcoming Supreme Court decisions related to the Commerce Clause must now consider the impact of the Lopez decision — remember, Lopez essentially reaffirmed the pre-1937 understanding of the  Commerce Clause. With massive federal policy expansions like the “Obamacare individual mandate” very likely to be settled by the Supreme Court, McDurmon argues that in light of Lopez, this federal prescription could already be doomed. Since Lopez ruled against the government and its economic argument espousing even more federal powers, similar decisions in the future could reverse the tide of federal expansion. Such a shift would amount to a significant victory for the states and for personal liberty and would give advocates of limited government reason to cheer.

Image credit: Francesco Marino

In the above video, Dr. Mark Thornton presents an informal lecture entitled “350 Years of Economic Theory in 50 Minutes” to a group home school students and parents. Dr. Thornton, Senior Fellow at the Ludwig von Mises Institute, is the Book Review Editor of the Quarterly Journal of Austrian Economics. Dr. Thornton also served as the editor of the Austrian Economics Newsletter and as a member of the Editorial Board of the Journal of Libertarian Studies.

In much of the first 5 minutes, Dr. Thornton provides a quick overview to the topics that he will cover and introduces the Austrian  School of Economics (free market economy) vs. what he calls the statists (including Marxists, socialists, communists, Keynesians, fascists, mercantilists, interventionists, and so forth). He points out that the market economy is not only efficient but “a just system” that is the champion of  “individual liberty, private property, and honest money.”

Using the Biblical David and Goliath analogy, Dr. Thornton compares Austrian economists to David and statists economists to Goliath in the amount of control they have within American society. Dr. Thornton then spends a few minutes sharing his “personal journey through Austrian economics” and how he ended up at Auburn University in 1982 for a graduate program. He recounts a year of discouragement when it seemed that Austrian economics was a “thing of the past.” He then learned that the Ludwig von Mises Institute was coming to Auburn University and he was offered a fellowship to continue his studies in Austrian economics.

After almost 12 and a half minutes, Dr. Thornton begins his formal part of the lecture. Some of the subjects covered include the following:

• How behavior changes due to public policy decisions.
• The impact of higher taxes.
• Indirect and long-run effects of the “minimum wage” — especially job losses for the most needy.
• “Everything the government attempts to do ultimately backfires” — examples are provided.
• The purchasing power difference between “honest money” backed by gold and silver and our current monetary system.
• How “fiat” paper currency can become worthless due to monetary inflation.
• Prices for market-driven goods tends to go down while highly-regulated and taxed items tend to increase.
• Paper money inflation has been institutionalized since the Federal Reserve (the Fed) was created.
• Our highly-leveraged banking system — the fractional reserve banking system — means there is “basically no money in the bank.” Most reserves are in electronic format with the Federal Reserve itself.
• The modern form of inflation is an electronic form of inflation. The Fed buys government bonds from banks and then tell the bank they have reserves for them at the Fed. That is how the Fed electronically creates money and writes it into existence.
• “Monetary inflation at the Fed causes price inflation.”
• “Inflation secretly redistributes money from some groups of people to other groups of people.” Some people are hurt and some are helped by inflation. If you are the first to receive the newly inflated money you benefit before prices increase but if you are on the late end you are stuck with less purchasing power and higher prices.
• Government is the biggest beneficiary of inflation because the trillions in government debt are easier to pay off with inflated dollars.
• “Monetary inflation causes the booms and busts of the business cycle.” Fed-lowered interest rates (i.e. increased money supply) cause a boom which misallocates a lot of things in the economy that have to be adjusted — during the bust — through bankruptcies and unemployment caused by bad investments.

After about 40 minutes Dr. Thornton takes some questions (most are difficult to hear). One interesting historic reference Dr. Thornton makes is that the Federal Reserve tripled the money supply between 1914 to 1929. This period of increase was well before the Great Depression. This massive change did not represent a market economy move for the United States but was instead part of the “Progressive Era” leading to the Great Depression.

There was also a question about changes to the tax code. Dr. Thornton suggests that taxes should be pushed downward and some eliminated outright. He argues that people should never let the government institute a new tax. He also believes that the free market economy, while not perfect, is a superior way to continually improve what human beings can do in the absence of government intervention.

In conclusion, this informal presentation by Dr. Mark Thornton, while light on economic theory, provides a wealth of insight into inflation and other problems caused by government economic interventions. It builds a strong case for replacing our federally regulated economy and fiat money supply with free market solutions.

The federal government is often lobbied to address a variety of pressing social issues not authorized by the Constitution. While such pressure is common among those arguing for widespread federal intervention to create fairness, safety, and other desired outcomes, it is strangely also common among many self-proclaimed proponents of small government. How can this competing juxtaposition of political principles exist within one who claims to support the Constitution’s limits on federal power?

There are a few possible reasons for this rather common occurrence. For starters, it could be because most people tend to take advantage of something that favors them even if it means “bending the rules” a bit. Given this scenario, they might support federal intervention when the outcome leads to something they benefit from or personally like. However, if that be the case, then maybe such individuals should reexamine their values and see if they really believe in the Constitution and its limited government requirements. Regrettably, after such an evaluation, some will find that they actually are not interested in expanding personal liberty but are instead seeking to govern outcomes and behavior.

Others, though, will evaluate their inconsistencies and see the folly of their ways. They now realize they had taken the path of least resistance toward a flawed outcome, the result of which was another step down the slippery slope of big government. Reforming themselves, they will do the heavy lifting necessary to correct their thinking and align their viewpoints with the Constitution. In diagnosing their mistake, they realize they failed to ask the right constitutional questions before seeking a government solution.

So what are the right constitutional questions to ask when evaluating the government’s role in addressing social problems? To explore this issue, let us look at a real problem that divides many on the limited-government side of the equation — drunk driving.

Few people of any political persuasion would argue that driving while drunk is a good thing. Period. In fact, most people can share personal horror stories about death and destruction caused by a drunk driver. That negative being the case, is it not then a good thing for government to severely crack down on such drivers? If so, would it not be easier to lobby one government — the federal government — to pass a law that would address this issue once and for all? Would not a single federal standard makes sense compared to the alternative of having to lobby all 50 legislatures across the country for the same thing?

These are reasonable questions that make logical sense to most people. Due to public awareness and outcry over the problems of drunk driving, enough people acted on these sentiments to do just that in 2000. The result was a new federal law signed by President Clinton that prodded the States to adopt a 0.08% and above blood-alcohol level standard for defining drunk driving. The States, faced with losing federal highway funds if they did not comply with this new standard, quickly enacted their own laws establishing this standard.

Sounds good so far, right? Well, that depends on how well one knows the Constitution. Three constitutional questions immediately come to mind regarding this touchy issue:

1. Is drunk driving a state or a federal issue?

2. Where does the Constitution empower the federal government to create national standards to penalize drunk driving?

3. Where does the Constitution authorize the federal government to mandate the States to adopt any drunk driving standard?

While legitimate constitutional questions should also be asked about the very existence of “federal highway funds” and the withholding of them as punishment, that is left for another article.  The important question within this context has to do with whether drunk driving is a state or a federal issue. If it is a state issue, then the federal government is not authorized to act and should remain silent — no matter how good or heartwarming the outcome would be for them to intervene. Unconstitutional federal intervention, even when done under the best of intentions, is simply wrong. Not only does it establish a bad precedent, but it leads to additional abuse as federal power is amassed at the expense of individual liberty and State sovereignty.

The Tenth Amendment allows the States great latitude and flexibility. This means they can act on many social problems that the federal government is prohibited from addressing. Since the Constitution prohibits federal intervention on many fronts, problems like drunk driving can and should only be addressed at state and/or local levels.

Ludwig von Mises Institute President Lew Rockwell explored this issue in his November 3, 2000 article entitled “Legalize Drunk Driving.” While Rockwell points out many legal problems with drunk driving laws in general and this federal one in particular, he concludes his article with a final point against the 2000 federal drunk driving law:

It is a violation of states rights. Not only is there is no warrant in the Constitution for the federal government to legislate blood-alcohol content – the 10th amendment should prevent it from doing so. The question of drunk driving should first be returned to the states . . .

So, as readers, your challenge is to ask the right constitutional questions about everything the federal government has done, is doing, or even considers doing. Is the matter in question a State or a federal issue? If a State issue then why is the federal government involved at all?

The answers to these questions can sometimes mean more short-run work for you as you are forced to lobby multiple state legislatures to produce national change; however, in the long-run it is a good thing. This process not only preserves the Founders’ constitutional balance of power, but many find that after asking the right constitutional questions a better and more effective solution emerges — one that both addresses the problem and preserves liberty.

Image Credit: Rob Wiltshire

Nearly two years ago former Panamanian Securities and Exchange commissioner David Saied penned an article that challenged many core beliefs held by the economic elite within the United States. This article, published by the Ludwig von Mises Institute on September 10, 2008 and entitled “America’s Economic Myths,” addresses six false assumptions  that have become accepted as fact by many whom Saied identifies as “mainstream economists and so-called experts.” Let us examine these six economic myths in light of the truth.

The first three myths addressed by Saied involve inflation and energy. (Regarding inflation, Saied clarified that he employed the popular notion of inflation as “the general rise in prices” instead of the correct “expansion of the money supply” definition.) The final three myths cover consumption and were created by the attempts of Keynesian economists to influence public policy.

Myth #1: “High oil prices are due to America’s dependence on foreign oil.”

Saeid argues that the country of origin does not determine the price of oil but economic factors — like supply, demand, labor, and production costs — are what drive the price of oil.

The high price of oil has nothing to do with its origin; the price of oil is determined in international markets. Even if the United States were to produce 100% of the oil it consumes, the price would be the same if the worldwide supply and demand of oil were to remain the same. Oil is a commodity, so the price of a barrel produced in the United States is basically the same as the price of a barrel of oil produced in any other country, but the costs of labor, land, and regulatory compliance are usually higher in the United States than in third-world countries. Lowering these costs would help increase supply. Increasing supply, whether in the United States or elsewhere, will push prices lower.

Regarding dependence, Saied points out that importing something doesn’t mean you depend on it and he uses a local supermarket analogy to explain. In a sense, we import food from our local supermarket for our own consumption. That transaction makes the supermarket an exporter to us. That being the case, Saied argues that the exporter depends on the customer more than the other way around. In short, the overarching reason why we import something is because we can purchase it for less than we can produce it ourselves.

Regarding the high price of oil, Saied concludes that the central bank’s financial policies are to blame:

Most, if not all, of the higher price of oil can be explained by the expansion of the money supply or the debasement of the dollar. The foreign producers are not at fault; our national central bank is the culprit.

Myth #2: “Inflation is caused by rising oil prices.”

This statement is simply false, Saied argues. Again he lays the blame on the central bank’s policies:

If the money supply were to remain constant, then an increase in the price of one good, such as oil, would cause a decrease in the price of other goods. If more money is spent on oil, then less money will be available to spend on other goods. This will in turn cause a drop in the demand for other goods, which will subsequently cause a drop in the prices of these goods. The reality is that inflation is always a monetary matter, caused by the increase in the money supply due to the interest-rate-easing policies of central banks.

Myth #3: “Current inflation is being caused by the increased demand of millions of new consumers in China and India.”

At first glance this myth appears to be true because the demand for oil has increased significantly with the industrialization of India and China. However, Saied correctly points out that these new consumers are also new producers which means that they generally produce more than they consume “because most workers have to produce more than what they earn in wages (if not, they lose their jobs).” So India and China’s increased production has increased the supply of goods worldwide which has lowered prices for many items, particularly items produced in China. In aggregate, this increased production offsets their increased consumption so, while oil prices may rise, other prices fall by an even greater amount. Saied notes, though, that there is one factor that can alter this scenario temporarily:

[T]he only way these new workers can increase their consumption beyond what they produce is through credit. Thus we return to the real culprit behind inflation: credit expansion due to central banks’ intervention in the financial markets.

Myth #4: “Consumption is the most important element of the economy.”

Again this myth is not true. Investment is key to the long term success of the economy. Saied explains:

Consumption is indeed important in a free economy: particularly the freedom of consumers to buy their goods in unhampered markets. However, key to long-term economic growth is investment (savings), which is the opposite of consumption. Public policies that promote consumption — such as low interest rates — do so at the expense of savings. Less savings means less investments; an economy that does not save or invest will consume all of its resources and eventually end up bankrupt.

Myth #5: “Excess consumption is a feature of the free-market capitalist system.”

This myth is simply not true. Excess consumption is caused by a disincentive to save. Again, Saied points largely to the central bank as creating an environment in which excess consumption is encouraged.

Excess consumption is mostly caused by central bank’s artificially low interest rates, which promote lower savings and higher consumption than would naturally occur. Currently, the real interest rates of savings accounts are negative. Thus it makes no economic sense to save. Since these same policies cause price increases, it makes sense to consume as much as you can immediately, before prices rise. Therefore we see that excess consumption is being caused by government policies and not by the capitalist free-market system.

What does the phrase “real interest rates of savings accounts are negative” actually mean? It means that the low levels of interest earned on one’s savings or investments (the dividends paid) are less than the rate of inflation. Put another way, the purchasing power of money sitting in a savings account is reduced over time as the dollar, in this case, becomes worth less in real terms — in effect, the low rate of interest paid on one’s savings fails to offset the inflation loss thus he cannot even reach “break even” status with his savings and/or investments. When this happens, the act of putting money into “savings” becomes a costly activity and so, in an effort to preserve their purchasing power, consumers buy more than they need before prices increase due to their money losing more value.

Myth #6: “Federal Reserve interest-rate policy can help the economy.”

Saied points out that to keep target interest rates low the Federal Reserve (“the Fed”) must, in reality, create money “out of thin air.” A fancy way of describing this intervention is to say that the Fed is “adding liquidity to the money supply.” Fancy term or not, though, the result is the same: more money is created without assets to back up that new money. Saied explains:

Many believe that this artificial injection of liquidity creates economic stimuli and promotes growth. However, even though it creates an apparent bonanza, these monetary injections must eventually be “paid back.” This payback happens by means of higher prices, the so-called inflation.

This increase in prices occurs because our money is actually worth less now than it was before the Fed’s “liquidity increase.” This reduction in purchasing power causes a problem for consumers because they are now worse off than before the Fed intervention.

A second problem also is created by the Fed’s intervention. Fed-induced below-market interest rates encourage excessive debt accumulation through unwarranted borrowing. The problem is further compounded by the low savings rates explained above. Saied points out that this whole scenario encourages “people to withdraw money, lowering the market supply of funds.” The results is an “eventual credit crisis, which follows the boom period that was caused by artificially low interest rates.”

Saied concludes that the current financial crisis should have pushed interest rates higher but Fed intervention prevented a free-market correction from occurring. Fed interventions have serious costs and, as noted above, produce other problems that prolong a financial crisis. Furthermore, many libertarians and strict-constructionists point out that there is no constitutional justification for such interventions by the federal government.

Free market proponents tend to argue that Fed intervention prolongs economic suffering and endangers the American Dream. Given these outcomes and the likely unconstitutional nature of such actions, the Fed’s manipulation of our economy must be vigorously opposed. Sadly, the widespread acceptance of the above economic myths, especially when propagated by supposed defenders of the free-market system, hampers efforts to build the public support necessary for a return to free-market principles.  However, when free-market advocates effectively challenge these myths and their false assumptions, the American people will be able to see the wisdom of implementing serious economic reform — the kind that yields real free-market solutions capable of producing recovery and long-term economic prosperity.

Image Credit: Michelle Meiklejohn

Economics Professor Walter E. Williams of George Mason University provides a very simple explanation for the complex interaction of scarcity and cost and, specifically, the idea that we can get something for nothing. In his Townhall column entitled “Something for Nothing,” Dr. Williams identifies scarcity as existing “whenever human wants exceed the means to satisfy those wants.”

The concept of scarcity is complicated by many factors including the constraints of time and the laws of physics — after all, we cannot occupy two places at the same time. However complicated it may be, Dr. Williams reduces the issues down to a simple thought: “Scarcity means there’s no free lunch. Having more of one thing requires having less of another.” He explains these ramifications using an example of reading his “free” column when you could have chosen a different activity for that time slot:

You’re reading my column for a zero price but you’re not doing so at zero cost. You have to sacrifice something. There are zero-price services such as “free libraries,” “free public schools,” “free transportation” and free whatever. It doesn’t mean that costs are not being borne by somebody.

Dr. Williams continues with another example that our government has used to make taxation more palatable — the notion of an “employer portion” of payroll taxes. He continues:

A congressional hoax that’s flourished for seven decades is the Social Security hoax that half of the Social Security tax (6.2 percent) is paid by employers, the other half (6.2 percent) paid by employees. The law says that if you are self-employed, you get to pay both halves. The fact of the matter is whether you’re self-employed or not, you pay both halves of the Social Security tax that totals 12.4 percent. Let’s look at it.

Suppose you hire me and our agreed-upon weekly salary is $500. From that $500, you’re going to deduct $31 as my share of the Social Security tax and you’re going to add $31 as the so-called employer’s share, sending a total of $62 to the IRS. Here’s the question: What is the weekly cost for you to hire me? I hope you answered $531.

The next question is: In order to make hiring me profitable, what must be the minimum dollar value of my contribution to your total output? If you said $531, go to the head of the class because if the value of my contribution to total output is only our agreed-upon salary of $500, you’re making losses hiring me and you’re going to be out of business soon. Therefore, if I am producing $531 worth of value per week, it is I who’s paying the so-called employer as well as the employee share. The reason why Congress created the fiction of the employer share was to deceive us into thinking that we’re paying fewer taxes than we in fact are.

So, the next time a politician says he wants to give you something from the government, remember that what he is “giving” you costs someone else. Put another way, “government has nothing to give anyone except what it first takes from someone else.” The same can be said whenever the government wants to levy more taxes on businesses or corporations. In order for these entities to remain profitable (and remember, they are in business to make a profit) they must ultimately shift these costs onto the consumer in the form of higher prices. It’s that simple.

For additional insight from Dr. Walter E. Williams, see his book entitled More Liberty Means Less Government: Our Founders Knew This Well.  On the “something for nothing” issue, though, Dr. Williams sums up his column with the following warning:

The bottom line lesson is that if you think you’re getting something for nothing, or somebody else is paying for something you receive, you’d better give it another look.

As Americans, we would be wise to heed Dr. Williams’ warning. Either way a tax still costs us personally whether it comes directly out of our pocket or from what would have been in our pocket if the government had not intervened. We cannot get something for nothing, therefore, let us reject government bribes that herd us into the high-tax slaughterhouse of the American Dream.