The Individual Mandate, The Coase Theorem, and the Takings Clause

There is nothing improper in the means that Obamacare deploys. Laws may properly regulate both actions and inactions...

If Congress can tax me, and can use my tax dollars to buy a health insurance policy for me, why can't it tell me to get a policy myself (or pay extra taxes)?

These are two quotes from Prof. Akhil Amar's opinion piece in the LA Times, "Constitutional Showdown."

Is there really no substantive, principle-based distinction between regulating action vs. inaction? Or similarly, is it really the same to tax me and use the proceeds to buy insurance for me vs. telling me to buy a policy or pay a tax (penalty)?

I think there are very large differences, substantive differences based on very important principles, that would seem to have constitutional implications as well.

The differences relate to a famous theorem in economics, the Coase Theorem, and they also relate to the Takings Clause of the Constitution ("nor shall private property be taken for public use, without just compensation").

The Coase Theorem states that the final allocation of property rights is independent of the initial allocation, in the absence of transaction costs and income effects. It is a remarkable yet simple theorem (the best kind). I like to illustrate it with pollution. If firms have the legal right to pollute the air, one might think that we will get a lot of pollution. Yet in such a world, those affected by pollution could pay the firms to stop. Whether the bargain works will depend on the cost of stopping the pollution versus the costs of the pollution. Another legal regime would give the citizens the right to clean air. In that case, we might think that we would get perfectly clean air, but of course that is wrong: firms may buy the right to pollute from the ciitzens. Indeed, they will do so if the cost of not polluting exceeds the cost of the pollution to the citizens, hence the Coase Theorem: pollution levels will be the same, no matter the initial allocation of legal/property rights.

Of course, in a world with transaction costs and income effects, the initial allocation of rights does matter. If citizens have to buy the right to clean air, they will likely buy less than the amount they would keep in a regime where they had the right to clean air to begin with -- the main reason being an income effect. Having to buy the right to clean air reduces citizens' wealth, and that in turn affects how much clean air they want. Transaction costs reinforce this: such costs make trading of rights difficult, so the initial allocation of rights is sticky.

If polluters have the initial right to pollute, it is reasonable to believe that we will have more pollution than if citizens initially have the right to clean air.

Of course, the Coase Theorem does not deny that the allocation of wealth is (strongly) affected by the initial allocation of rights. Citizens are better off if they start with the rights.

The individual mandate can be seen as an initial allocation of rights in favor of the government -- I don't have the right to decide whether to buy or not, the government can mandate it. The transaction costs of buying that right back are low, however, as all I need to do to buy my freedom of choice back is pay the penalty.

Without a mandate, citizens have the legal right to choose insurance or not, and if the government wanted them to buy insurance, they would have to pay them to do so (subsidize the insurance). This means that the government will have to raise tax revenue, and the transaction costs of that are large.

Following Coasian logic, I conclude that there will be less insurance purchased in a regime without the individual mandate. My main rationale is that the government will find it hard to raise sufficient tax revenue to get to the same outcome they would achieve with the individual mandate. This is indeed the heart of the mandate: it is a cheap (to the government) way to get everyone insured.

Now let's think about the takings clause in the Constitution. I have not seen anyone raise it in light of the individual mandate, yet it seems to me to hold some relevance. What is more "private property" than one's own wealth/money? Isn't the government essentially "taking" our money and using it for public purpose when they say that we must buy insurance?

The takings clause is very important in our society. It restricts how much public policy the government can implement, by giving citizens the initial right to their property. In Coasian terms, the takings clause forces the government to buy our property if they want to use it for public purpose. The takings clause forces government to go to taxpayers to finance policy, and that is a difficult task. Following my Coasian arguments above, the takings clause results in less public policy. Think of how much environmental policy could be implemented if only government could appropriate any private land, without just compensation, to hold in its natural state for conservation reasons!

Many commentators are arguing that the individual mandate is constitutional because it is a "necessary and proper" way to implement a constitutionally acceptable regulation of interstate (health care) commerce.

"Proper" in this sense has always been interpreted to mean not inconsistent with any part of the Constitution. In the words of Justice Marshall, "let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the constitution, are constitutional."

The individual mandate seems to me to be inconsistent with the takings clause, at least in spirit. The takings clause makes the government bear the cost of its good intentions, in the sense that it must raise taxes on the citizenry. Doing good by taking private property is not allowed. I ask again: what is more private than my own wealth? Isn't it a "taking" for the government to tell me what I have to spend my money on? Doesn't the individual mandate represent the clearest taking of all?

PS. I could entertain the idea that just compensation is given, in that the individual receives insurance. But this is a hard story to tell, given the main reason for the mandate: to force a whole class of individuals into a transaction that a rational individual would not undertake.