David R. Henderson  

Krugman on Supreme Court Reasoning About Health Insurance

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In his column today, "Broccoli and Bad Faith," Paul Krugman goes after the conservative judges on the Supreme Court for their lack of understanding of health insurance and their "self-evidently absurd" claim about coercion.

First, the analogy between health insurance and broccoli:

Let's start with the already famous exchange in which Justice Antonin Scalia compared the purchase of health insurance to the purchase of broccoli, with the implication that if the government can compel you to do the former, it can also compel you to do the latter. That comparison horrified health care experts all across America because health insurance is nothing like broccoli.

Why? When people choose not to buy broccoli, they don't make broccoli unavailable to those who want it. But when people don't buy health insurance until they get sick -- which is what happens in the absence of a mandate -- the resulting worsening of the risk pool makes insurance more expensive, and often unaffordable, for those who remain. As a result, unregulated health insurance basically doesn't work, and never has.


Well, guess what? I'm a health-care expert. In fact, I was employed as one for two years by the same boss who employed Paul Krugman, namely, Martin Feldstein. From 1982 to 1984, I was the senior economist for health policy with the Council of Economic Advisers. I don't find the comparison horrifying at all.

Here's why. If you don't buy health insurance until you're sick, then when you get sick, you drive up the price of health insurance for others. If you don't eat broccoli, and your not doing so makes you sick, you drive up the price of health insurance for others.

Now, there is a way around both conclusions: allow health insurance companies to sell insurance, as that term is generally understood. Let them price according to risk. Then, when people don't buy health insurance until they are sick, the price will be quite high and they will not be subsidized by others. Similarly with broccoli. If eating broccoli makes you healthier, and if that health can be measured, your insurance rates, all else equal, will be lower. Those who refuse to eat broccoli will have worse health and will pay higher rates.

Which gets to the other part of his quote above:

unregulated health insurance basically doesn't work, and never has.

Wrong! It's regulation that makes insurance not work. If health insurance companies are allowed to set rates based on risk, as they do in the market for most other forms of insurance, the market works well.

And notice that the regulation that makes it impossible for health insurance companies to price for risk is the very regulation that's in the health care bill that Krugman defends.

Finally, note this other claim of Krugman's:

I was struck, in particular, by the argument over whether requiring that state governments participate in an expansion of Medicaid -- an expansion, by the way, for which they would foot only a small fraction of the bill -- constituted unacceptable "coercion." One would have thought that this claim was self-evidently absurd. After all, states are free to opt out of Medicaid if they choose; Medicaid's "coercive" power comes only from the fact that the federal government provides aid to states that are willing to follow the program's guidelines. If you offer to give me a lot of money, but only if I perform certain tasks, is that servitude? [Italics added.]

I'm not sure who introduced the concept of "servitude." The discussion is about "coercion." If you offer to give me a lot of your own money but only if I perform certain tasks, Krugman is right: that's not coercion. But that's distinctly not what's going on here. The federal government first taxes the money and the only way the people in a particular state can get the money back is by doing what the feds want. So the analogy is: You take money from me by force and give it back only if I do want what you want me to do. That is coercion.


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COMMENTS (40 to date)
Marcus writes:

Forgive me, but regarding your last paragraph, is that not a rationale for rendering unconstitutional *all* government programs funded by taxation? Is that what the issue is? "Coercion" is unconstitutional?

I think there is a subtle distinction you're missing by simplifying. The people are taxed, the states are the ones getting the Medicaid funding. If the states turn down the money, they are risking angering their constituents, but it is not the states' money that is being taken away and then offered in return.

Paul writes:

"Now, there is a way around both conclusions: allow health insurance companies to sell insurance, as that term is generally understood. Let them price according to risk. Then, when people don't buy health insurance until they are sick, the price will be quite high and they will not be subsidized by others."

Except you forgot about the part where they can't afford it or because of pre existing conditions could never buy insurance and then they die without medical treatment. If that is an outcome that is okay for you so be it (I would wager it is not for many Americans), but to not spell out the implication of your argument is disingenuous.

Al writes:

"That is coercion."

...Specifically, in this case, the fed's threats amount to "extortion".

Others might be more familiar with the term "protection racket".

Ken B writes:

I think Krugman also misses Scalia's main point. He isn't really comparing health insurance to broccoli. He is comparing the power to compel people to buy health insurance to the power to compel people to buy broccoli. And he is comparing the proffered justification for the first to a hypothetical justification for the second, and finding them much alike: the government's argument seems to grant both powers. He is making a constitutional argument not an economic one.

Randy writes:

"Wrong! It's regulation that makes insurance not work."

Exactly. First the politicians created a problem for the industry, and now they demand to be allowed to fix it by taking over the industry.

JAH writes:

I honestly don't get the issue with broccoli. Who came up with that? Wouldn't a more appropriate analogy be housing or even toilet paper?

Everybody eventually needs some form of shelter to remain healthy. But most Americans don't think it is the gov't's job to provide it.

Everybody uses toilet paper. And those who don't use it tend to spread disease and cause harm to others. But again, we don't think the gov't should arrange for a monthly toilet paper stipend.

Randy writes:

@Paul,

People in need should by taken care of by direct assistance programs - not by taking over an industry.

Bill Nichols writes:

My favorite government argument as summarized by the Economist, http://www.economist.com/blogs/democracyinamerica/2012/03/obamacare-and-supreme-court

Not buying insurance is an economic decision to pay for your own health care. Given that millions of Americans buy more health care than they can pay for, the decision to self-insure has a substantive effect on interstate commerce.

I presume this means government is entitled to require all Americans to purchase bankruptcy insurance because many Americans acquire goods and services they cannot pay for. More pointedly, the typical out of pocket costs that are "more than they can pay for" are somewhat lower than the north of $10,000 required to pay for a comprehensive policy. That policy, BTW, can no longer be a low cost high deductible plan because government is placing first dollar requirements on coverage. Nor can a wealthy individual (quite able to pay) self-insure without paying a penalty.

As for necessary, why not forbid discharge of medical debt in bankruptcy. One cannot discharge tax liability? Or perhaps we should be required to purchase tax insurance too?

Let's be honest, this is not insurance, but a required bundled pre-paid plan with insurance.

Costard writes:

"If you don't eat broccoli, and your not doing so makes you sick, you drive up the price of health insurance for others."

This is the practical point. To the extent that universal insurance forces the costs of poor health onto the public, personal decisions affecting health will increasingly fall under government scope. If there is no Constitutional limitation on the PPACA, then there can be none on regulations that make it workable (or "Affordable"); these too will be necessary and proper.

The Constitutional argument is different. Healthcare is unique because legislation has made it so. If Congress were to introduce insurance schemes to cover broccoli or any other product or service - I don't see anyone seriously arguing that the commerce clause would prevent this - then using the administration's (and Krugman's) logic, this product/service would also be unique, and a mandate for it equally Constitutional. Which begs the question: where is the limiting principle?

Justin Parker writes:

@Paul

Who exactly is dying from a lack of insurance? No hospital can deny treatment based on a patient having or not having insurance. Mr. Henderson wasn't disingenuous in not spelling out the implication because it's false.

I think you're making his point for him. By not allowing the insurance companies to price different people for differing levels of risk (i.e. preexisting conditions), you force the companies to simply deny coverage rather than price them accordingly.

Richie writes:

Paul said:


Except you forgot about the part where they can't afford it or because of pre existing conditions could never buy insurance

In this case, insurance ceases to be insurance. A person purchases insurance to protect themselves against the risk of a high-cost, low probability event. You can't provide insurance for something that has already happened. Seems to me you want sick-care assurance.

Floccina writes:
Now, there is a way around both conclusions: allow health insurance companies to sell insurance, as that term is generally understood. Let them price according to risk. Then, when people don't buy health insurance until they are sick, the price will be quite high and they will not be subsidized by others.

As for affordability

1. More than 50% of people pay more in lifetime insurance premiums than is paid out on their behalf for care.
2. Most people tend to build up assets as they age.
3. It has been my experience that when I tell doctors that I am paying because I have a $10,000/person/year deductible they offer much cheaper options.
4. Americans typically amortize loans in excess of $200,000 (home loans).

So, how much more affordable is health insurance than a plan to amortize any medical debt after it is incurred? (If we paid after, it might make the medical establishment consider how likely a procedure is to get one back to work before recommending it. Perhaps all that is needed is some type of buyer's club to do the negotiation the insurers do now and maybe some insurance for lifetime costs that exceed average lifetime coast by some margin.

Ken B writes:

I'm always a little skeptical when I hear about adverse selection in this market. Certainly there can be cases, which is why there are often 90 periods of restricted coverage etc. But most of the time I am not at all convinced I know more about my prospective health and healthcare (and its costs especially) than insurers do. They do a lot of data mining. They know a lot. They know my age, weight, height, ethnicity, if I smoke, my job, my address, much of my medical history ...
Who really has the information advantage here? Especially information about costs? Sometimes the prospective purchaser, sometimes the prospective insurer, but is there a clear systematic bias one way or the other? Not so clear.

Collin writes:

How get allowing the insurance companies use genetic testing (all that stuff Alex loves) with pricing risk? I know Congress except Ron Paul voted against but why not let the insurance companies price/risk on that? Then they will really know the risk of person and probably do better economic preventative medicine.

On the other hand a more knowledge consumer would say screw it and not buy insurance.

Lastly, without a lot of health insurnace controlling the out-of-pocket expenses of the births, would less insured young people avoid pregancies? The most (developed) out-of-pocket health system, Singapore, has a birth rate below the ferility rate Mendoza line (Japan).

Chris writes:

@JAH (& David as well):
Scalia wasn't making an analogy - he was challenging the government to define a limiting principle. If it is OK for the government to force someone to buy insurance at what point is it not OK for the government to force someone to buy something that it feels is important?

Scalia may have well have asked - if Congress thinks that forcing citizens to purchase yo-yos because Congress believes that every citizen owning yo-yos will prevent an invasion by little purple men from Alpha Centauri would that be Constitutional? If it is not Constitutional what is the distinguishing difference between the two cases?

In other words - at what point is Congress prohibited from telling someone that they must buy something? "Health care is special" is not a limiting principle because it opens the courts to infinite justifications around 'this market is special because:' type of arguments. For example, yo-yos are special because of their unique place in prohibiting invasion by little-purple men from Alpha Centauri.

Saturos writes:
...you forgot about the part where they can't afford it or because of pre existing conditions could never buy insurance and then they die without medical treatment.

The real point here of course is that health "insurance" isn't really insurance at all when you ask to be covered for a condition you already have. Now you're just asking for care. As John Cochrane points out, the pre-existing conditions crisis is largely a figment of tax law (encouraging un-portable employer-based policies). But regardless, anyone who marches up to an insurance company and demands to be covered for all the treatment they require, regardless of ability to pay or any probability of not falling ill, isn't really asking for insurance - in truth they, much like a certain Sandra Fluke, are calling for redistribution.

As Tim Harford wrote in the Bryan-endorsed Undercover Economist, "The curious conclusion, which is obvious in retrospect, is that an insurance policy depends on mutual ignorance. An insurance company can only insure me against an event ... if neither of us have any idea whether it will happen. If we could predict the future, insurance would be meaningless. If my insurance company could predict fires much better than I could, it would sell me insurance only if I didn't need it. And if I knew that my house would burn down, the insurance should be calling the police rather than selling me fire insurance." Now make the application yourself.

Well if it's redistribution you want, then why not just call for it directly (cash-transfer)? Apart from being more politically honest, it is also vastly more efficient, both on the supply side, as it is clear that there is no need to supersede the private market, and on the demand side, for Klingian "insulation" reasons.

@Chris,
Not sure, but I think the Supreme Court is allowed to dismiss the Congress' justification as unreasonable, perhaps as part of a rational basis review.

Tony N writes:

Ken B has it right. Scalia's argument is of a legal nature, not an economic one. As it should be.

And that is Krugman's (and the government's) problem. They don't get that you can't use an economic argument to win a legal battle.

At least the government attempts to turn their argument into a legal one; Krugman just doesn't seem to understand what the judicial branch is supposed to do. Essentially, the government is using the temporary characteristics of one market to link it to another. It argues that because of the tremendous expense of treating serious illness, which we will all face someday, the health care and health insurance markets are one in the same since everyone will need health care that can only be paid for via health insurance. And since the need for serious health care is inevitable for all, forcing people to buy insurance is not the same compelling people to engage in commerce, it is merely regulating in advance their participation in commerce that they can’t avoid.

But, even if this were true, it would only be true for now. There is no reason to believe it would always be. However unlikely, markets can change tomorrow with either market-based reforms, uncontroversial regulation, major developments in techniques, etc. And it is likely, maybe certain, that there will be a day when most necessary medical procedures can be done affordably, which would then turn the tables on the mandate. You would then be able to say that most people will not require medical treatment that they can’t afford. So then, the claim that everyone will eventually need health insurance will be invalid, because insurance may be necessary to cover only the rarest of illnesses. So then what? Does the mandate become unconstitutional since you can’t assume everyone will need insurance at some point? Well, in my view, yes. The government can no longer argue that is only forcing you to buy something you will eventually need—because you probably won’t.

And then what are you left with? A really bad precedent that says that congress can compel a person to enter into commerce so long as it has enough reason to believe that that person will have to enter into said commerce at some point in his life.

Major precedent (permanent) justified by market conditions (temporary). How problematic is that?

Anonzmous writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

TB writes:

If you don't eat broccoli, and your not doing so makes you sick, you drive up the price of health insurance for others.

Excuse me, Mr. Henderson, Scalia wasn't using the broccoli analogy in your context, and neither was Krugman. So your comparison is pretty silly. The whole idea of comparing a market mandate for broccoli with healthcare insurance is pretty silly.

Tom West writes:

No hospital can deny treatment based on a patient having or not having insurance.

The vastly more common case is not needing acute care, but having something like cancer. Can you walk into a hospital and demand a course of chemotherapy?

As an aside, what all of this comes down to is that people want insulation from health-care costs, which I fully understand and approve of. However, if the system isn't going to be rationed by cost to the customer, then it has to be rationed by supply. Personally, as a Canadian, I'm fine with that - the trade-off of wait times is easily worth it, especially when I compare it to the mental stress it seems to cause many Americans I've met (most self-employed).

I do think the debate should be framed for what it really is, rather than by words like "insurance" that are essentially meaningless.

Bob Murphy writes:

Great post, David. Now I don't have to respond to Krugman; I can just link to this.

blink writes:

Huffing and puffing aside, Krugman's implicit assumption is about adverse selection. Asymmetric information is a real concern that may lead to under-provision of insurance by the market. To counter his claim, you at least have to take seriously his strongest economic points.

As for "unacceptable coercion," I agree with you morally. Nevertheless, to make this as a *legal* argument is silly. After all, our current state of the world is such that the federal government can make highway funds contingent on speed limits or the local drinking age.

David R. Henderson writes:

@Marcus,
Forgive me, but regarding your last paragraph, is that not a rationale for rendering unconstitutional *all* government programs funded by taxation? Is that what the issue is? “Coercion" is unconstitutional?
You make a good point. I, frankly, don’t know what the coercion issue is. It’s pretty clearly coercion but so, as you say, are the vast majority of government programs. In fact, I would like to know what either side, plaintiffs or defendants, and, indeed, the judges themselves, think coercion is.
@Ken B, Tony N,
I agree with Tony N that Ken B has it right: Scalia was making a (good) legal point, not an economic one. It is true that I was responding on the economics.
@Bob Murphy, Thanks.
@blink,
No, that’s really not the point Krugman was making. Krugman wants insurance companies to be handicapped in using information. This is, as I have written at other times on this blog, adverse selection by law. So Krugman wants adverse selection.
@Ken B,
Your other comment is quite good too: we can’t even be sure which way the asymmetric information goes. I’ll blog my own story about that sometime soon.

Patrick R. Sullivan writes:
I, frankly, don’t know what the coercion issue is. It’s pretty clearly coercion but so, as you say, are the vast majority of government programs

Seems to me you'd check to see what enumerated powers the Constitution gives to congress.

Murphy B writes:

Krugman: "But when people don't buy health insurance until they get sick -- which is what happens in the absence of a mandate -- the resulting worsening of the risk pool makes insurance more expensive, and often unaffordable, for those who remain. As a result, unregulated health insurance basically doesn't work, and never has."

This shows a gross ignorance of insurance. People who get sick without insurance are not part of the risk pool. Krugman seems to view everyone to be in the risk pool by default with the only differentiation being those who have paid premium and those who have not.

Hana Noca writes:

David you are dead on regarding risk valuations. In addition to other false insurance attributes, the health insurance law was designed to TAX one particular constituency, Young Males. Every aspect of the law is designed to exploit them in this scheme.

The coverage by the parent's insurance until age 26 obligates the addition of expense with a very low likelihood of usage by young males. Since I assume the marriage rates of young women are higher than young men (based on the anecdotal notion that the man in a marriage is older than the woman), this aspect of the law is obligating the parent's company through it's insurance company to cover the adult child. While the rates for the adult child should be fairly low, the impact of course will be to lower the wages of the parent. Since most parents accumulate most of their lifetime wealth after the nest becomes empty, this is an additional burden on their ability to build post-child raising retirement funds.

The mandate itself is directed at the young male worker. They are most likely to work in companies or situations that do not provide health care. And even in companies that do provide insurance under an opt-in situation, they are the most likely to turn coverage down for incremental income. The young single male believes himself to be both invulnerable and eternal. And to some extent he is correct. Other than rare circumstances, they are healthier and more durable than the population as a whole. (As an aside, I have employed numerous young people over the years. Young men take more sick leave than young women. Young women with children are admirably reliable for their work ethic. Young men view the sick leave as extra spontaneous days off).

It is interesting to observe that young males are obligated to pay the highest automobile insurance rates and the government isn't stepping up to demand higher rates from other demographic groups to subsidize them. Of equal interest is the lack of awareness by young males that the health care law is specifically targeting them for the extra funds to pay for the system. (Evidently you don't vote with your pocket book until you get older).

shecky writes:
People who get sick without insurance are not part of the risk pool.

It would seem, as pointed out earlier (No hospital can deny treatment based on a patient having or not having insurance), that people who get sick without insurance end up influencing the risk pool rather insidiously.

Garrett writes:
Except you forgot about the part where they can't afford it or because of pre existing conditions could never buy insurance and then they die without medical treatment. If that is an outcome that is okay for you so be it (I would wager it is not for many Americans), but to not spell out the implication of your argument is disingenuous.

Except that is a red herring. The implications are not relevant, and an appeal to an invented morality is a logical fallacy. If all desired goods were available at prices that were convenient for all who wanted them, we wouldn't have a science that analyzes the phenomenon of unlimited potential human wants restrained by limited resources to meet those needs.

Furthermore, coercing people in order to achieve subjective ends is most certainly not in the spirit of classical liberalism or Federalism that established the Constitution. It assumed only that positive law was justified only to serve protection against infringements of natural law. Truly just means justify the ends, regardless of what those ends may be. A reason is not a justification. And if you cannot understand that, you are unqualified to discuss this.

Saturos writes:
RTF writes:

PK is obviously not a stupid man. If many of his arguments are not pure sophism, than he is very clearly blinded by his ideology.

Thomas Sewell writes:
@Marcus, Forgive me, but regarding your last paragraph, is that not a rationale for rendering unconstitutional *all* government programs funded by taxation? Is that what the issue is? “Coercion" is unconstitutional? You make a good point. I, frankly, don’t know what the coercion issue is. It’s pretty clearly coercion but so, as you say, are the vast majority of government programs. In fact, I would like to know what either side, plaintiffs or defendants, and, indeed, the judges themselves, think coercion is.

This is a legal argument. We have a system of federalism and a couple of constitutional amendments related to who has what power.

It's not apparent from most of the commentary, which may be why you missed it if you don't follow this sort of thing closely, but it's clearly unconstitutional under current USSC precedent for Congress to do the Medicaid program on it's own. There isn't an enumerated power in the constitution for it.

Instead, Congress created it as giving a bunch of money to states (which they can do under the spending power) if the state was willing to pass laws implementing Medicaid under their own general police power. It's similar to 55 mph speed limits, helmet laws, etc... that Congress doesn't have the power to make the law, but has in the past encouraged State's to do so with road cash.

However, there is also USSC precedent that Congress can't do this sort of thing in a way that coerces states to do what they want, making it indistinguishable from Congress itself exercising a power it doesn't have. That's why the big discussion about where to draw the line between Congress is just helping pay for something the state is doing and Congress is making the state an offer "too good to refuse".

So a few million here and there for passing a helmet law is considered something the states can take or leave, but 40% of the state budget being on the line for opting into this new medicaid expansion or not might be considered crossing the line between rewarding behavior and coercing it.

Especially when you look at the "people in the state can only get their federal taxes back to the state by submitting to the demands of Congress" angle.

In this context, other national government programs funded by taxation that are part of the government's actual powers granted by the Constitution don't really apply to the whole state power vs national power considerations, hence why the argument is irrelevant for them.

Ken B writes:

Tony N:

And that is Krugman's (and the government's) problem. They don't get that you can't use an economic argument to win a legal battle.

You have neatly characterized near all of the comments on Landsburg's site, including alas, Landsburg's.

David R. Henderson writes:

@Thomas Sewell,
Thanks for that clarification.
That raises a related question: If the Congress can’t constitutionally do the Medicaid program on its own, how can it constitutionally do the Medicare program on its own? I’m positive that Medicare is not an enumerated power.

Theodore Sternberg writes:

Here's the correct analogy between broccoli and the "insurance mandate": one group of people must be overcharged for their broccoli so that another group can be offered "affordable" broccoli..

Wallace Forman writes:

"Thomas Sewell" is wrong about the federal government not being able to do Medicaid. Under current SC doctrine, disputed by virtually no one, Congress can run whatever sort of program it wants under the so-called spending power, "to... collect taxes... to... provide for the... general welfare of the United States". (Article I Section 8 Clause 1.)

Congressional subsidies for state action are an exercise of the "spending power". Sewell gets SC precedent right on this point. A lot of funding is "coercive", a little bit is ok. Supposedly the magnitude of funding is supposed to be limited by the legitimate federal interest being pursued (like "protecting interstate commerce" from underage drunk drivers).

The federal government doesn't have to pursue a constitutionally enumerated power with these funds, but it can't pursue prohibited goals (like co-opting the exercise of state police powers). Of course, the federal interests pursued are usually well within the scope of the state police power (protecting health, morals, and safety of the people), so don't look for too much principle here.

SPoikner writes:

re: "If you don't buy health insurance until you're sick, then when you get sick, you drive up the price of health insurance for others."

I would take issue with both yours and Mr. Krugman's characterization as "insurance" any product you purchase after the unfortunate eventuality has occurred. By definition, "insurance" is a product one purchases as a hedge against a contingent risk. By this characterization, there is no risk and therefore no insurance.

Since it isn't insurance, what is it? It certainly is not a risk management tool.

Mandating coverage, aside from being clearly unconstitutional (except, apparently, to the four liberal justices), is the wrong approach to the problem.

One can easily design a system in which individuals are responsible for their own health care to a significant extent (which removes the genesis of the problem -- a lack of skin in the game) while protecting providers against large losses. All without any mandate.

The real problem, of course, is in the politics. The Left promotes a persistent push toward socialized care, while the Right wants more individual responsibility. These two "special interests" can never come to terms.

The ACA is a product of a one-party approach -- in which the Left locked themselves in a room a crafted the most extreme legislation they thought they could get away with. Now, look at the mess that was created.

Tony N writes:

Ken B:

Haven't read his blog, but it seems I should. Thanks for the tip.

Ken B writes:

Tony N: Please join us. It's a fun place. Commenting is more of a contact sport than here, and we have a goodly number of talking-points parrots [Just today I answered this question, from a man who claims the bill is obviously constitutional, and calls the rest of us fools: "I mean, what exactly is the argument for its unconstitutionality?" ] but the discussions are lively. Could use your help! :)

Tony N writes:

Ken B:

I'll be sure to! Sounds like fun. Thanks again.

Tom West writes:

Garrett:

and an appeal to an invented morality is a logical fallacy.

Um, defining the term 'morality' (and what is 'invented' and that 'invented' is bad) and then using the term "logical fallacy" is arguing from authority, namely yours.

"I decide what's moral and since I didn't choose that morality, it's invented."

Tony N:

And that is Krugman's (and the government's) problem. They don't get that you can't use an economic argument to win a legal battle.

May I strongly indicate my disagreement. Every nation on earth has redefined legality when it felt a strong enough pressure to do so. It may well not do so here, but pretending economics has no say over law is ignoring reality.

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