and you know, no rules were broken, no harm, no foul. and john, as he has throughout his service, both as deputy and now as parliamentarian, didn't pick sides. he called the game right down the line. he told us what he thought based upon the rules and precedence of the house and i will tell you, you knew it was a good decision because neither of us liked it. the republicans didn't like what he had to say and the democrats didn't like what he had to say. that, to me is the mark of a fair ruling because he called it as he saw it. . the last thing i want to say about his service. i got here in 1994 and 1995, first time the republicans were in the majority of the house of representatives. and speakers would get up and say to mr. gingrich, we aren't going to keep the speaker's

parliamentarian, are we? i didn't know what they were talking about. i imagine there were discussions about that in the democratic caucus when things changed in 2007 and i know there were discussions about that when it changed in 2011. the parliamentarian's office and john is the embodyyment. he is the parliamentarian of the house of representatives and that's what makes his service unique and unique to all of our parliamentarians. in closing, i don't know what john's going to do, but, mr. speaker, if john writes a book and i have to pay $147 on amazon.com, i'm going to be honked. i hope when you do write, that you let it come out in paperback

so all of us can enjoy it and make it a good read and not so dry. but, to john and dear family, listen, i really appreciate your friendship and your service. you've got me out of a lot of messes, not into too many and for your friendship and guidance to this house over your career, i'm very grateful and i wish you well in whatever you decide to do. mr. speaker, i thank you for your patience and i yield back. the speaker pro tempore: the gentleman yields back the balance of his time.

the speaker pro tempore: under the speaker's announced policy of january 5, 2011, the chair recognizes the gentleman from arizona, mr. schweikert, for 30 minutes.

mr. schweikert: mr. speaker, this is something we try to do out of my office every few months where we try to update a number of the budget numbers we're seeing coming from particularly the president and try to put them in some perspective. and i thought this would be one of those opportunities because we are about to work on the budget the rest of this week, to stand here and help everyone understand some really some scary things that are out there in the numbers and some things we have been talking about in the last year and the fact they are going worse. and mr. speaker, you also being my friend from arizona, you heard me tell the story. a year ago, we stood here and did this presentation and on my way back, got back to the office and the phone was ringing. reached down and picked it up and it was a gentleman from my district, who was nice enough but kept telling me over and over that he didn't believe me that the numbers didn't feel

right. and after half an hour of discussing with him, i said i don't know where the feeling is on my calculator and at that point, he hung up on me. look, the numbers are real. it doesn't feel warm and fuzzy, but it's real. i'm not sure i'm going to break one of the congressional rules in communication when we are supposed to talk about at a 30,000 foot level but will drive down into the weeds here. it is important. this is the future of our country. this is our destiny unless we make some substantial changes. the first slide up here and all these are up on our web site within the next week, congressional web site, is just trying to demonstrate how unrealistic many of these numbers coming from the white house are. 2008 was the peak of revenue into the federal government. we'll give you an idea, the president is saying, in five

years, revenues are going to be up 50% from where they are today. actually from that peak in 2008. and if you think of that, so we're go to go have that dramatic rise in revenues over the next five years and that's where their deficit projections are coming from. guess what? on the slide we are showing you, we use the president's numbers, but they are based on, i think substantial fantasy when you start to understand the white house's use of what they are predicting as revenue and g.d.p. growth. the next two slides are the easiest to understand and hopefully tell the greatest part of the story. this is 2011. 63% of all of our spending is medicare, medicaid, social security, interest on the debt, veterans' benefits. we'll call those mandatory spending.

many people call it entitlements. this year, 37% of our spending is what we'll call discretionary, military, and the line of alphabet agencies that we all think of. foreign aid, veterans, all discretionary over here. 37% of the spending. this is this year. so you see, 63%, 37%. what happens a year from now? so in 2017, basically five budget years from now, do you notice a little difference? we went from 63% to 75% is now in medicare, medicaid, social security, interest on the debt, veterans' benefits. five years from now, 75% of our budget is in mandatory entitlement spending and the discretionary keeps getting smaller and smaller and smaller.

in real dollars. and i'm going to show you some slides in a little bit that even military goes down in real dollars. no more of this discussion, well you guys are pulling down the growth. no, it actually goes down in real dollars. this is our future. and understand, the mandatory, the entitlement side is growing so fast in about 10, 11 years, if you held everything even, it would consume every dollar of the budget. there's no more military, no more discretionary. everything is medicare, medicaid, social security, debt, veterans' benefits. this is our future and we need to tell the truth. look, washington, d.c., has had a bad habit of avoiding these decisions and almost like they forgot people were going to be baby boomers. we knew people were going to be

turning 65 years. we are now day one. at the end of the next 17 years, at the end of 18 years, about 36%, 37% of our population will be on social security. you have to understand that's about 76 million, 78 million of our friends and neighbors will be over age 65. this should have been decades of planning for that retirement and washington, d.c., did not do it. so now members of this house and i'm one of the freshmen need to step up and tell the truth to the american people and if we don't deal with it today, we will deal with devastating consequences a couple of years from now. the next couple of slides, i'm going to try to demonstrate what are the numbers and how they break down.

and i'm sorry, i know i'm throwing lots of slides. this is important. this is our future. this is the 2011. everything you see in the blue is the mandatory spending we were just talking about, so you get a sense of what it is. here's social security. here's what we'll call the welfare program. medicare, medicaid, interest on the debt. we are one of the luckiest people to ever live when you think about this year. we expect to spend only about $229 billion on interest on our debt. well, understand our debt now is $15.5 trillion, about $11 trillion-plus is what we call publicly-held debt. a big chunk of our debt we borrow. social security, but the $11

trillion-plus that we have to go out in open markets and sell because we are beholden what the market is willing to buy it. this year, a 10-year bond today is 2.25? we are only going to spend $229 billion is our projection for that $11 trillion of publicly-held debt. what happens when we go to normal interest rates and at the same time, just like this last year we borrowed $1.4 trillion. got to understand, here it becomes one of our akill yees heel. in 2011, $229 billion in interest to 2017, we expect interest to be $565 billion. understand, that's basically in

2017 what defense is. our interest on the debt will equal what defense is. and as we walk through these numbers, please understand it's medicare, medicaid, social security, interest on the debt, veterans' benefits that are exploding because of the demographic issues. it's math. and this is our future. and you'll notice as we were showing in the previous chart discretionary now is down to 25% of all spending. 75% is those mandatory. what we like to call entitlements. and this is our future. and as i was just trying to share -- and this is important because i got this question at a town hall this last saturday, well, when you say that defense is going to be taking cuts, you mean just cuts in the growth. no, i mean in real dollars. if we expect the way the budgets are being laid out right now,

the way the president's numbersr by 2017, actual actual real dollars, not adjusted for inflation not a portion of growth, real dollars, are going to be substantially less than they are today. our projection in the 2012 budget about $709 billion. in 2017, $582 billion. one of the -- what is the federal government's constitutional obligation? protection of the country? defense? and you'll notice in real dollars it's going down. what will even be the purchasing power of that money five years from now? you'll start to understand the reality of what's going on. and please understand, it's being driven, why? because the mandatory spending, the entitlements, are continuing to explode so everything else in

government will shrink and be crushed. we thought we would try to pry a little more detail. these are brand new slides for us and these will be up on our web site hopefully sometime this week in sort of helping put percentages on the numbers. you saw the big graph that hey, in five years, 75% of all of our spending is social security, medicare, medicaid, interest on the debt and veterans' benefits and here are the percentages so you can see what is going on there. 2011, defense, 18.8. in five years, defense will be 12.4% of the budget. department of health and human services, which is substantially medicare and medicaid, this year is 24.7% of the spending. in five years, it's 26.8%.

but where else is the explosion? department of treasury, which is substantially debt, paying interest on our debt, will go from 14.9% of the total budget in five years, it will be 20.5%. what i'm trying to demonstrate here is we're being consumed by our own interests having to finance our own debt. we are being consumed by the basic demographics of our nation because washington, d.c., did not tell us the truth and did not tell us the resources to deal with the baby boom population and we will have 76 million brothers and sisters in this cycle. remember it's 36% of the population on social security. i'm fearful unless we step up

and make the policy changes that are absolutely necessary and thank heaven for paul ryan and many of the hard-working budget members here in the house, they are laying out the truth and laying out what is absolutely necessary to keep this republic operating and to tell the truth about the budget and the numbers. so one of the things we got this last weekend back home, i had a couple come up to me and say, if you would do things like the buffett rule, then it would be ok. so one of the things i like to do -- let's face it, when i talk about $15.5 trillion in debt, it's overwhelming, number wise. we came up with the idea of a clock. and we've done this for a number of different things. here's the good news. and the bad news.

we're borrowing a lot less money right now than we were borrowing a year ago. that's the good news. the bad news is, we're still borrowing $3.5 billion every single day and we project for the next 365 days, $3.5 billion, every single day. but when you hear the president and my friends on the left saying, if we just had a buffett rule where rich people had to pay taxes because they're escaping what does it actually pay? what does it actually mean? if you use the president's own model and don't pretend that there's going to be certain tax avoidance and smart lawyers finding ways arn it an it doesn't slow down the economy or all the other things that happen when you raise the tax, is every dime comes into the budget, what does it buy us? it would pay for 3:30 -- three

minutes and 30 seconds of the daily borrowing. when you see members walk up to the microphones an talk about things like, if we just had the buffett rule, we would be fine, they're not tell you the truth. or it's back to the story before, they found a feelings button on their calculator an it makes them feel better but it's not real math. the entire buffett rule would pay for three minutes and 30 seconds of borrowing a day at the current rate of borrowing, which is $3,500 million a day. i know this is a lot of math. i know this is a lot of numbers to throw out. but it's our future. when you see what's happening in europe, when you realize people in greece and so many other countries lived in a fantasy and a lot of it was perpetuated by their own

government not telling them the truth. i'm telling you the truth an i'm using the president's own numbers to get there. it's why the decision -- decisions that are going to be made here this week as we start to set out our budget documents, it's why we desperately need the senate to step up an tell the truth to the american people that if you want to save this republic, we've got to deal with the retall -- reality of our math because our math is the single most dangerous thing to this republic right now. mr. speaker, i yield back. thank you. the speaker pro tempore: does the gentleman have a motion to adjourn? mr. schweikert: forgive my tezztans -- hesitance, i didn't know if we ha another member. i would like to make a motion toed adjourp.

the speaker pro tempore: the question is on the motion to adjourn. those in favor say aye. those opposed, no. the ayes have it, the motion is dopped.

next, the oral argument over whether the government can require people to have health insurance. in two hours, reaction from capitol hill with a group of democratic senators. senate republicans and state attorneys general on today's supreme court case. >> follow c-span abroad local content vehicles throughout the weekend looked to be in american history tv. saturday at noon eastern on book to be on c-span -- booktv on c- span2. on american sharecroppers.

>> you have calls going up and down saying that blacks were in revolt. the next morning, between 601,000 -- 6000 -- 601,000 men -- 600 and 1000 men began shooting down blacks. and bruce lindsay ion immigration. >> we do not know what is going to happen. we do not realize what is going to happen. they seem to because the crowd is with us now. the momentum is behind us. there are pushing us up the stairs. >> these stories and others from the local content vehicle in little rock this weekend on c-span2 and 3.

>> the budget would increase pentagon spending, create two tax rates, 10% and 25%, and give seniors a set amount of money to buy health insurance from medicare or private insurer. the debate gets underway at noon eastern and you can watch it live here. today was day two of the supreme court or all of -- arguments in the constitutional challenge to the president's health care law. the justices consider the constitutionality of the requirement that american's purchase law insurance -- health insurance or pay a penalty. the oral argument was two hours. >> we will continue argument this morning in case 11398, the

department of health and human services vs. florida. >> mr. chief justice and it may please the court. the affordable care act addresses a fundamental and enduring problem in our health- care system and our economy. insurance has become the predominant means of paying for health care in this country. insurance has become the predominant means of paying for health care in this country. for most americans, for more than 80% of americans, the insurance system does provide effective access. but for more than 40 million americans who do not have access to health insurance through their employer or government programs such as medicare or medicaid, the system does not work. those individuals must resort to

the individual market and that market does not provide affordable health insurance. it does not do so because the multibillion-dollar subsidies that are available for the employer market are not available in the individual market. it does not do so because of hippa regulations that preclude discrimination against people based on their medical history do not apply in the individual market. that is an economic problem and it gets another -- >> those are problems that can be addressed directly. >> they are through this act, regulating the means by which health care is purchased. that is the way this act works. under the commerce clause, what

congress has done is to enact reforms of the insurance market directed at the insurance market that preclude discrimination based on pre-existing conditions that require guaranteed issue community rates and a uses -- it uses, the minimum coverage provision is necessary to carry into production those reforms. >> [unintelligible] >> that is not what is going on here, justice kennedy. we're not seeking to defend the law on this basis. what is being regulated is the method of financing the purchase of health care. that in itself is economic activity with substantial effect on interstate commerce. >> any self purchasing -- if i am in any market at all, my failure to purchase something in

that market subjects me to regulation. >> no. that is not our position at all. the health-care market is characterized by the fact that aside from the few groups that congress chose to exempt from the minimum coverage requirements, those who for religious reasons -- reasons do not want to participate, those who are incarcerated, indian tribes, virtually everyone else is in that market which will be in that market. the distinguishing feature is they cannot -- people cannot generally control when they enter that market or what they need. >> the same it seems to me would be true for the market in emergency services. police, fire, ambulance, roadside assistance, whatever. you do not know when you are going to need it. i am not sure that you will but bush -- the same is true for health care. he did not know if you need a transplant or if you ever will. to extend -- there is a market.

can the market require you to buy cell phone? that would facilitate responding when you need emergency services? you could just dialed 911 no matter where you are? >> no, i think that is different. i do not think we think of that as a market. this is a market. this is regulation. you have a situation in this market not only where people enter in voluntarily as to when they enter and will not be able to control when they enter. >> that is in the same as my hypothetical. you do not know when you will need police assistance. you cannot predict the extent of emergency response you will need. but when you do and the government provides it. that was an important part of your argument. when you need health care, the government will make sure you get it. >> when you need police or fire assistance or ambulance assistance, the government is going to make sure to the best extent it can that you get it. >> the fundamental difference,

mr. chief justice, that is not an issue of market regulation. this is an issue of market regulation and that is how congress look at this problem. there is a market, insurance is provided through a market system. >> do you think there is a market for burial services? >> for burial services? >> yes. >> suppose you and i walked around downtown washington and we found a couple of healthy young people and we stop the man said, "do you know what you are doing? you are financing your burial services because eventually you will die and someone will have to pay for it and if you do not have burial insurance or you have not said money, you will shift the cost to somebody else ?" isn't that an artificial way of talking about what someone is doing? is it not equally artificial to say that no one is doing anything -- was doing anything

about health care is financing health care services? >> is different. the reason is the burial example is -- the difference here, while regulating the method by which you are paying for something else, health care and the insurance requirement -- the key thing here is my friends on the other side acknowledge is that it is under the congress's power to guarantee the waiting to end, to impose the minimum coverage position. their argument in -- is it has to occur at the point of sale. >> i do not see the difference. most people will need health care. everybody is going to be buried or cremated at some point. >> one big difference, just as alito, you do not have the cost shifting to other market participants. >> if you do not have money, the

state will pay for. >> that is a significant difference. in this situation, one of the economic effects congress is addressing is the many billions of dollars of uncompensated costs are transferred to other market participants. because health care providers charge higher rates to cover the cost of uncompensated care and insurance companies reflect those rates in higher premiums, translating to $1,000 per family. >> is that not a small part of what the mandate is doing? you can correct me if these figures are wrong. it appears to me that the cbo has estimated the average premium in the market will be $5,800 in 2016. respondents estimate that young, healthy individual targeted by

the mandate on average consumes $854 in health services each year. the mandate is forcing these people to provide a huge subsidy to the insurance companies. for other purposes that the acted serbs. if those figures are right, what this mandate is doing is not requiring the the people who are subject to it to pay for the services they are going to consume. it is requiring them to subsidize services that will be received by somebody else. >> i think that is what the respondents argue. it gets to a fundamental problem. >> if they have insurance -- >> it is how how insurance works. they do not have the effect of forcing insurance companies to

take on lots of additional people who they cannot afford to cover because they tend to be the sec. that it -- the sick. the issue -- and you do so in the absence of a provision, it is not that insurance companies take on more people and need a subsidy coverage. fewer people and put insurance because their rates are not regulated. insurance companies when they have to offer guaranteed rating, they are entitled to make a profit. they charge rates sufficient to cover only the sick population. >> tell me what this. assume for the moment, you may disagree. assume for the moment that this is unprecedented. this is the case beyond what our cases have allowed. if that is so, do not have a heavy burden of justification?

i understand that we must presume laws are constitutional. even so, when you are changing the relation of the individual to the government, we can stipulate what it is, a unique way. do not have the heavy burden of justification to show authorization under the constitution? >> two things about that. we think this is regulation of people's participation in the health-care market. all this minimum coverage provision does is that inquiry -- instead of requiring insurance at the point of -- congress has the authority, the necessary -- necessary proper power to insure people have insurance in advance of the point of sale because of the unique nature of this market. this is a market in which -- although most of the population is in the market most of the

time, 83% visit a physician every year. 96% over a five-year period, virtually everyone in society is in this market. you have to pay for the health care you get. the predominant way is -- in which it is paid for its insurance and the respondents agreed that congress could require that you have insurance in order to -- that pro -- forbids health care from being provided. >> it may well be that everyone needs health care but not everyone needs a heart transplant. not everyone needs a liver transplant. >> that is correct. >> you could -- could you define the market? everyone has to buy food trade you can define the market as food. you can make people like broccoli. -- by broccoli. >> no.

it is not a market in which participation is often unpredictable and often involuntary. it is not a market in which too often do not know before you go in what you need and it is not a market in which if you go in and seek to obtain a product or service -- >> is that the basis for distinguishing this from other situations? you could say the person who needs this has blue eyes. that is -- can distinguish it from other situations. >> is the basis that explains why the government is doing this but is it a basis which shows this is not going beyond what the system of enumerated powers allows the government to do? >> yes, for two reasons. this is the test, this court has

articulated it. is congress regulating economic activity with a substantial effect on interstate commerce? the way in which the statute satisfies the test is on the basis of the factors that i have identified. >> i thought your main point is that unlike food or any other market, when you make the choice, not to buy insurance, even though you have every intent in the world to self insured, to save for it, when disaster strikes, it may not have the money. and the tangible results of that we were told, there was one brief, one maryland hospital bills 7% more because of these zero uncompensated costs. families pay $1,000 more. what was unique about this is it

is not my choice whether a want to buy a product to keep me healthy but that -- the choice i am foisting on others if i do not buy the product sooner rather than later. >> that is definitely a difference that distinguishes this market and justifies -- >> if that is or difference, i am uncertain about your answers to justice kennedy, can you under the commerce clause, congress create commerce were previously none existed. >> i thought the answer to that was since mccullough v. maryland, -- which did not previously exist. the job -- the answer has been yes. i would have thought that your answer, can the government

require you to buy so funds or buy cereals, if we propose comparable situations, if we have, for example uniform united states system of paying for burial such as medicare burial, medicaid burial, chip, emergency burial beside the side of the road, and if congress wanted to rationalize that, the answer would be yes. the same with computers. the same with cell phones if you are driving by the side of the highway and there is a federal emergency service just as you say you have to buy certain mufflers for your car that do not hurt the environment. you can -- does not depend on the situation? >> it does and if congress were to enact laws like that, i would

defend them on a rational like that. i think we are advancing and there were -- the question is whether or not there are any limits on the clause. can you identify for us some limits on the clause? >> the rationale currently under the commerce clause that we're advocating here would not justify forced purchases of commodities for the purpose of stimulating demand. it would not justify purchases of insurance for the purposes -- to situations in which insurance does not serve as the method. >> why not? if congress says the interstate commerce is affected, is that not the end of the analysis? >> no. we think the difference between

the situations and the situation is that in those situations, your honor, congress would be moving to create commerce. hear, congress is regulating existing commerce, economic activity that is already going on. people's participation in the health-care market and regulating to deal with existing facts. >> that is a passage in your reply brief i did not quite grasp. you say health insurance is not purchased for its own sake like a car or broccoli. it is a means of financing health care consumption in care of -- covering universal risk. a car or broccoli is not purchased for their own sake. there purchased for transportation or covering the need for food. >> health insurance is the means of payment for health care. broccoli is not the means of

payment for anything else. >> it is satisfying a basic human need. insurance is a need -- a means. >> that is the difference between existing commerce activity in the market already occurring. people in the health-care market purchasing, obtaining health care services and the creation of commerce and the principle we are advocating here under the clause does not take the step of justifying. >> when we go back to -- the justice asked a question and interrupted your answer to my question. tell me if i am wrong about this. i thought a major point of your argument was that the people who do not participate in this market are making it much more expensive for the people who do. that is, they will -- a goodly

number will get services they cannot afford at the point when they need them. the result is everyone else's premiums get raised. it is not your free choice to do something for yourself. what you do is owned -- going to affect others, affect them in a major way. >> that absolutely is a justification for congress's action. existing economic activity that congress is regulating. >> you could say that about buying a car. if people do not buy cars, the price that those who do buy cars pay will have to be higher. so you can say in order to bring the price down, you are hurting these other people by not buying a car. >> that is not what we're saying. >> i thought it was. >> other people will have to pay more for insurance because you're not buying it. >> it is because you are going in the health-care market, you

are going into the market without the ability to pay for what you get to my getting the health care service anyway as a result of the social norms that allow -- to which we have obligated ourselves. >> did not obligate yourself to that. >> i cannot imagine but if the congress clause would forbid them taking into account, you can do it. does that expand your ability to issue mandates to the people? >> this is not a purchase mandate. this is all law that regulates a method of paying for a service that a class of people -- [unintelligible] or will consume. >> i see or have seen 3 stanek -- strands of arguments in your brakes. one of them is echoed today. the first strand that i have seen is congress can pass any

necessary laws to affect those powers within its rights. because it made a decision to affect mandatory issuance of insurance, that it could also obligate the mandatory purchase of it. the second strand icy self insurance affects the market. and so, the government can regulate those who self-insure. the third argument, i see all of them as different. what the government is doing and i think it is the argument you're making today, what the government is saying is if you pay for -- if you use health services, you have to pay with insurance. because only insurance will guarantee that whenever means

for health care that you have will be covered. because virtually no one, perhaps with the exception of 40% of the population can afford the massive cost if the unexpected happens. this third argument seems to be saying, what we're regulating is health care. when you go for health services, you have to pay for insurance. and since insurance will not issued at the moment you have consumed the project, we can reasonably, necessarily tell you to buy it ahead of time. because you cannot buy it at the moment that you need it. which of these three is your arguments? are all of them your argument? i'm not sure. >> let me state it this way. congress enacted reforms of the

insurance market. began issuing community rating reforms. to do with the very serious problem that exists in 40 million people not be able to get insurance and not access to the health-care market. everybody agrees in this case that those are within the congress's article 1 powers. the minimal coverage provision is necessary to carry those provisions into execution because without them, without those provisions, without minimum coverage, guaranteed and issued community reing will -- rating will make things better. >> you are answering affirmatively to my colleague. can the government force you into congress? there is no limit to that. >> no. that is the first part or argument. the second part is the means here that congress has chosen. the minimum coverage position is

a means that regulates economic activity, namely, your transaction in the health-care market with substantial effects. interstate commerce and it is the conjunction of those that provides a particularly secure foundation for this statute under the congress's power. >> you talked about alternatives congress might have had, other alternatives that the respondents suggest to do with this problem and in particular, your report of mandating insurance at the point at which someone goes to a hospital or an emergency room and asks for care. in congress consider those alternatives? why do it to reject them? how should we think about alternative ways of dealing with these problems? >> the point of difference is about one of timing. they have agreed that congress

has authority to impose an insurance requirement or other penalty at the point of sale and they have agreed that congress has the authority to do that to achieve the same rejections [unintelligible] congress gets substantial differences in the choice of means. if one thinks about the difference between the means, they say congress should have chosen and that means congress did choose. white -- we can see why it was eminently more sensible for congress to choose the means it chose. >> i am not sure which way it cuts if -- let's assume it could use the tax power. to raise revenue and disseminate single payer health service. how does that factor into our analysis? in one sense, it can be argued that this is what the government is doing. it out to be honest about the power is using and use the correct power. on the other hand, it means that the court can -- congress can do

it anyway. i am not sure which way the argument goes. >> i will try to answer the question and get back to the question u.s. -- you asked earlier. i do think one striking feature of the argument that this was a novel exercise of power, is what congress chose to do is rely on market mechanisms and efficiency and a method it has more choice than with the traditional medicare or medicaid type model. it seems ironic to suggest that counts against it. beyond that, in the sense that it is novel, this provision is novel in the same way or unprecedented in the same way that the sherman act was unprecedented when the court upheld it in the northern securities case. the packers in stockyards act was unprecedented. the national labor relations act was unprecedented. or the dairy price supports.

>> that all involved commerce. there was no doubt that what was being regulated was commerce. here you are regulating somebody who is not commerce. i do not agree with you that the relevant market here is health care. you're not regulating health care. your regulating insurance. it is the insurance market you are addressing. you are saying some people who are not in it must be in it. that is different from regulating in any manner. >> commerce that exists out there. >> to the extent we are looking at the scheme, it is regulating that exists out there and the means in which the regulation is made effective here, the minimum coverage provision is a regulation of the way in which people and -- can participate in the method of their payment in the market of health care. that is what it is. i do not think, justice kennedy, getting back to your question.

what matters here is whether congress is choosing a tool to use on the problem congress is confronting. that may mean the tool is different from the tool congress has chosen to use in the past. that is not something that counts against the provision in the commerce clause. >> it is both necessary and proper, what you just said addresses what is necessary. >> yes. >> it has to be fully adapted, necessary does not mean essential. just recently adapted. in addition, it has to be proper. cases thatd in twolcas \ something was not proper because it violated the sovereignty of the states. the argument here is that this also is may be necessary but it is not proper because it violates an equally evident principle. the federal government is not supposed to be a government that

has all powers. it is supposed to be a government of limited powers and that is what all this questioning is about. what is left if the government can do this? what else can not do? >> this does not violate the norm as this court articulated it as it does not interfere with the state as sovereigns. this is a regulation -- >> that was my point. that is not the only constitutional principle that exists. this is the principle that the federal government is a government of enumerated powers and the vast majority of powers remain in the states and did not belong to the federal government. do you acknowledged that? >> of course we do. >> and the way in which this court and its cases has policed the boundary, what is the

national sphere and what is in the locals fear, to ask if congress is regulating economic activity? it is impossible in view of our history to say that congress is invading the state spear. this is a market in which 50% of the people in this country get their health care through their lawyer. there is a massive federal tax subsidy of $250 billion a year that makes that more affordable. regulations insure the kinds of bans on pre-existing condition discrimination and pricing practices that occur in the individual market do not occur. whatever the states have chosen not to do, the federal government can do. >> no. not at all. the power is not given to the federal government, that is for the states. the argument here is the people were left to decide whether they wanted to buy insurance or not.

>> this brought -- what the court has said it will be a substantial departure from what the court has said, when congress is regulating economic activity with a substantial effect on interstate commerce, that will be upheld. that is what is going on here. and to embark on, i would submit with all due respect, to embark on the kind of analysis that my friends on the other side suggest the court ought to embark on is to import due process. they key in lochner is we were talking about regulation of the states, right? the states are not limited to enumerated powers. the federal government is. it seems to me it is a different question when you ask yourself whether or not they're going to be limits on the federal power as opposed to the states which was the issue in lochner. > >> i agree except the way in

which the federal government stays in its sphere is by policing the boundary. is the government economic -- regulating economic activity? >> the reason this is concerning is because it requires the individual to do an affirmative act. our law has been you do not have the duty to rescue someone if that person is in danger. you do not have a duty to stop a man walking in from the car. absent some sort of relationship. there is severe moral criticism of that role but that is generally the rule. here the government is saying the federal government has the duty to tell the individual citizen it must act and that is different from what we have in previous phases. it changes the relationship of

the federal government to the individual in a fundamental way. >> i do not think so, justice kennedy. it is predicated on the participation of these individuals in the market for health care services. it happens to be that this is a market in which aside from the group's the statutes excludes, virtually everybody participates. it is a regulation of their participation in that market. >> is critical how you define the market. if i understand the law, the policies you are requiring people to purchase involve must contain a provision for maternity and newborn care, pediatric services, a substance used treatment. it seems to me that you cannot say that everybody is going to need substance-abuse treatment. substance used treatment for pediatric services and yet, that is part of what you require them to purchase. >> is part of what the statute requires insurers to offer and the reason is is big -- it is trying to define minimal and

essential coverage. there is a market in which everyone participates because everyone might need a certain range of health-care services. and yet, you are requiring people who are never going to need pediatric or maternity services to participate in that market. with respect to what insurance has to cover, your honor, congress isn't tired -- entitled to its attitude of making judgments about what the appropriate tsk -- scope of coverage is. you might think you are healthy and you might think that you are being forced to subsidize every -- someone else. this is not a market in which you can say there is an immutable class of healthy people who are being forced to subsidize the and healthy. this is a market in which you may be healthy one day and you may be a very unhealthy participant in the market the next day and that is a fundamental difference. >> that does not apply to a lot

of what you are requiring people to purchase. pediatric services, maternity services, you cannot say that everybody is going to participate in this substance use treatment market. and yet you require people to purchase insurance coverage for that. >> congress is enacting economic regulation here, it has latitude to define essential, the attributes of essential coverage. that does not seem to me implicating the question whether congress is engaging in economic regulation and solving an economic problem. >> are you denying this? if you took the group of people who are subject in the mandate and you calculated the amount of health care services this whole group would consume, and figured out the cost of the insurance policy to cover the services that group would consume, the cost of the policy would be much, much less than the kind of policy these people

are now going to be required to purchase. under the affordable care act. >> well, while they are young and healthy, you do not know what among them is the person that will be hit by the bus are get this definitive diagnosis. >> some people will be hit by a bus. some will unexpectedly contracted or be diagnosed with a disease that is very expensive to treat. if you take their lost any calculate it, it is a lot less than the amount they will be required. >> to cannot just sit on their shifting their cause. >> they give the benefit they

would not otherwise have. i do not think it would be unusual to say it is and a legitimate exercise of the car myers power. telephone rates for a century were said to be the exercise of the commerce power in the way that some people paid rates higher than their cost to subsidize it. >> it is a live in the modern world. everyone needs a telephone. and it is the same thing where they support the court upheld this. the economic get those as advantageous contracts. it is sure they can raise the month of milk. and the commerce power -as a result of the exercise of the

subsidizing somebody else - >> and this is especially true, isn't it, general - >> -- because that's the judgment congress has made. >> -- verrilli, because in this context, the subsidizers eventually become the subsidized? >> well, that was the point i was trying to make, justice kagan, that you're young and healthy one day, but you don't stay that way. and the -- the system works over time. and so i just don't think it's a fair characterization of it. and it does get back to, i think -- a problem i think is important to understand - >> we're not stupid. they're going to buy insurance later. they're young and -- and need the money now. >> but that's - >> when -- when they think they have a substantial risk of incurring high medical bills, they'll buy insurance, like the rest of us. >> that's the problem, justice scalia. that's -- and that's exactly the experience that the states had

that made the imposition of guaranteed-issue and community rating not only be ineffectual but be highly counterproductive. rates, for example, in new jersey doubled or tripled, went from 180,000 people covered in this market down to 80,000 people covered in this market. in kentucky, virtually every insurer left the market. and the reason for that is because when people have that guarantee of -- that they can get insurance, they're going to make that calculation that they won't get it until they're sick and they need it, and so the pool of people in the insurance market gets smaller and smaller. the rates you have to charge to cover them get higher and higher. it helps fewer and fewer -- insurance covers fewer and fewer people until the system ends. this is not a situation in which you're conscripting -- you're forcing insurance companies to cover very large numbers of unhealthy people - >> you could solve that problem by simply not requiring the insurance company to sell it to somebody who has a -- a condition that is going to require medical treatment, or at least not -not require them to sell it to him at -- at a rate that he sells it to healthy people.

but you don't want to do that. >> but that seems to me to say, justice scalia, that congress -- that's the problem here. and that seems to be - >> that seems to me a self- created problem. >> congress cannot solve the problem through standard economic regulation, and that -- and -- and i do not think that can be the premise of our understanding of the commerce clause - >> whatever - >> -- this is an economic problem - >> -- whatever problems congress's economic regulation produces, whatever they are, i think congress can do something to counteract them. here, requiring somebody to enter -- to enter the insurance market. >> this is not a -- it's not a problem of congress's creation. the problem is that you have 40 million people who cannot get affordable insurance through the means that the rest of us get affordable insurance. congress, after a long study and careful deliberation, and viewing the experiences of the states and the way they tried to handle this problem, adopted a package of reforms.

guaranteed-issue and community rating, and -- and subsidies and the minimum coverage provision are a package of reforms that solve that problem. i don't -- i think it's highly artificial to view this as a problem of congress's own creation. >> is your argument limited to insurance or means of paying for health care? >> yes. it's limited to insurance. >> well, now why is that? congress could -- once you -- once you establish that you have a market for health care, i would suppose congress's power under the commerce clause meant they had a broad scope in terms of how they regulate that market. and it would be -- it would be going back to lochner if we were put in the position of saying no, you can use your commerce power to regulate insurance, but you can't use your commerce power to regulate this market in other ways. i think that would be a very significant intrusion by the court into congress's power. so i don't see how we can accept your -it's good for you in this case to say oh, it's just insurance. but once we say that there is a market and congress can require people to participate in it, as some would say -- or as you would say, that people are already participating in it -- it seems to me that we can't say there are limitations on what congress can do under its commerce power, just like in any other area, all -- given

significant deference that we accord to congress in this area, all bets are off, and you could regulate that market in any rational way. >> but this is insurance as a method of payment for health care services -- >> exactly. >> and that -- and that is -- >> and you're worried -- that's the area that congress has chosen to regulate. there's this health care market. everybody's in it. so we can regulate it, and we're going to look at a particular serious problem, which is how people pay for it. but next year, they can decide everybody's in this market, we're going to look at a different problem now, and this is how we're going to regulate it. and we can compel people to do things -- purchase insurance, in this case. something else in the next case, because you've -- we've accepted the argument that this is a market in which everybody participates. >> mr. chief justice, let me answer that, and then if i may, i'd like to move to the tax power argument. >> can -- can i tell you what

the something else is so -- while you're answering it? the something else is everybody has to exercise, because there's no doubt that lack of exercise cause -- causes illness, and that causes health care costs to go up. so the federal government says everybody has to -- to join a -- an exercise club. that's -- that's the something else. >> no. the -- the position we're taking here would not justify that rule, justice scalia, because health club membership is not a means of payment for -- for consumption of anything in -- in a market. >> right. right. that's -- that's exactly right, but it doesn't seem responsive to my concern that there's no reason -- once we say this is within congress's commerce power, there's no reason other than our own arbitrary judgment to say all they can regulate is the method of payment. they can regulate other things that affect this now-conceded interstate market in health care in which everybody participates. commoni think it's ground between us and the respondents that this is an interstate market in which everybody participates. and they agree that -- that congress could impose the insurance requirement at the point of sale.

and this is just a question of timing, and whether congress's - whether the necessary and proper authority gives congress, because of the particular features of this market, the ability to impose the -- the insurance, the need for insurance, the maintenance of insurance before you show up to get health care rather than at the moment you get up to show -- >> right. no, i think -- >> -- show up to get health care. and that -- >> -- unless i'm missing something, i think you're just repeating the idea that this is the regulation of the method of payment. and i understand that argument. and it may be -- it may be a good one. but what i'm concerned about is, once we accept the principle that everybody is in this market, i don't see why congress's power is limited to regulating the method of payment and doesn't include as it does in any other area. what other area have we said congress can regulate this market but only with respect to prices, but only with respect to means of travel? no. once you're -- once you're in the interstate commerce and can regulate it, pretty much all bets are off. >> but we agree congress can regulate this market.

erisa regulates this market. hipaa regulates this market. the -- the market is regulated at the federal level in very significant ways already. so i don't think that's the question, mr. chief justice. the question is, is there a limit to the authority that we're advocating here under the commerce power, and the answer is yes, because we are not advocating for a power that would allow congress to compel purchases -- >> could you just -- before you move on, could you express your limiting principle as succinctly as you possibly can? congress can force people to purchase a product where the failure to purchase the product has a substantial effect on interstate commerce -- if what? if this is part of a larger regulatory scheme? was that it? was there anything more? >> we got two and they are -- they are different. let me state them. first with respect to the comprehensive scheme. when congress is regulating -- is enacting a comprehensive scheme that it has the authority to enact that the necessary and proper clause gives it the authority to include regulation, including a regulation of this kind, if it is necessary to counteract risks attributable to the scheme itself that people engage in economic activity that would undercut the scheme.

it's like -- it's very much like wickard in that respect, very much like raich in that respect. with respect to the -- with respect to the -- considering the commerce clause alone and not embedded in the comprehensive scheme, our position is that congress can regulate the method of payment by imposing an insurance requirement in advance of the time in which the -- the service is consumed when the class to which that requirement applies either is or virtually is most certain to be in that market when the timing of one's entry into that market and what you will need when you enter that market is uncertain and when -- when you will get the care in that market, whether you

can afford to pay for it or not and shift costs to other market participants. so those -- those are our views as to -those are the principles we are advocating for and it's, in fact, the conjunction of the two of them here that makes this, we think, a strong case under the commerce clause. >> general, could you turn to the tax clause? >> yes. >> i have to look for a case that involves the issue of whether something denominated by congress as a penalty was nevertheless treated as a tax, except in those situations where the code itself or the statute itself said treat the penalty as a tax. do you know of any case where we've done that? >> well, i think i would point the court to the license tax case, where it was -was denominated a fee and nontax, and the court upheld it as an exercise of the taxing power, in a situation in which the structure of the law was very much the structure of this law, in that there was a separate stand-alone provision that set the predicate and then a separate provision in closing -- >> but fees, you know, license

fees, fees for a hunting license, everybody knows those are taxes. i mean, i don't think there is as much of a difference between a fee and a tax as there is between a penalty and a tax. >> and that, and -- and i think in terms of the tax part, i think it's useful to separate this into two questions. one is a question of characterization. can this be characterized as a tax; and second, is it a constitutional exercise of the power? with respect to the question of characterization, the -- this is -- in the internal revenue code, it is administered by the irs, it is paid on your form 1040 on april 15th, i think -- >> but yesterday you told me -- you listed a number of penalties that are enforced through the tax code that are not taxes and they are not penalties related to taxes. >> they may still be exercise of the tax -- exercises of the taxing power, justice ginsburg, as -- as this is, and i think there isn't a case in which the

court has, to my mind, suggested anything that bears this many indicia of a tax can't be considered as an exercise of the taxing power. in fact, it seems to me the license tax cases point you in the opposite direction. and beyond that your -the -- it seems to me the right way to think about this question is whether it is capable of being understood as an exercise of the tax. >> the president said it wasn't a tax, didn't he? >> well, justice scalia, what the -- two things about that, first, as it seems to me, what matters is what power congress was exercising. and they were -- and i think it's clear that -- that the -- the -- they were exercising the tax power as well as -- >> you're making two arguments. number one, it's a tax; and number two, even if it isn't a tax, it's within the taxing power. i'm just addressing the first. >> if the president said -- >> is it a tax or not a tax? the president didn't think it was. >> the president said it wasn't a tax increase because it ought to be understood as an incentive to get people to have insurance. i don't think it's fair to infer from that anything about whether

that is an exercise of the tax power or not. >> a tax is to raise revenue, tax is a revenue-raising device, and the purpose of this exaction is to get people into the health care risk -- risk pool before they need medical care, and so it will be successful. if it doesn't raise any revenue, if it gets people to buy the insurance, that's -- that's what this penalty is -- this penalty is designed to affect conduct. the conduct is buy health protection, buy health insurance before you have a need for medical care. ist's what the penalty designed to do, not to raise revenue. >> that -- that is true, justice ginsburg. this is also true of the marijuana tax that was withheld in sanchez. that's commonly true of penalties under the code. they do -- if they raise revenue, they are exercises of the taxing power, but their

purpose is not to raise revenue. their purpose is to discourage behavior. i mean, the -- the mortgage deduction works that way. when the mortgage deduction is -- it's clearly an exercise of the taxing power. when it's successful it raises less revenue for the federal government. it's still an exercise of the taxing power. so, i don't -- >> i suppose, though, general, one question is whether the determined efforts of congress not to refer to this as a tax make a difference. i mean, you're suggesting we should just look to the practical operation. we shouldn't look at labels.

and that seems right, except that here we have a case in which congress determinedly said this is not a tax, and the question is why should that be irrelevant? >> i don't think that that's a fair characterization of the actions of congress here, justice kagan. on the -- december 23rd, a point of constitutional order was called to, in fact, with respect to this law. the floor sponsor, senator baucus, defended it as an exercise of the taxing power. in his response to the point of order, the senate voted 60 to39 on that proposition. the legislative history is replete with members of congress explaining that this law is constitutional as an exercise of the taxing power. it was attacked as a tax by its opponents. so i don't think this is a situation where you can say that congress was avoiding any mention of the tax power. it would be one thing if congress explicitly disavowed an exercise of the tax power.

but given that it hasn't done so, it seems to me that it's -- not only is it fair to read this as an exercise of the tax power, but this court has got an obligation to construe it as an exercise of the tax power, if it can be upheld on that basis. >> why didn't congress call it a tax, then? >> well -- >> you're telling me they thought of it as a tax, they defended it on the tax power. why didn't they say it was a tax? >> they might have thought, your honor, that calling it a penalty as they did would make it more effective in accomplishing its objective. but it is -- in the internal revenue code it is collected by the irs on april 15th. i don't think this is a situation in which you can say -- >> well, that's the reason. they thought it might be more effective if they called it a penalty. >> well, i -- you know, i don't -- there is nothing that i know of that -- that illuminates that, but certainly -- >> general, the problem goes back to the limiting principle. is this simply anything that raises revenue that congress can do? >> no. there are certain limiting principles under the -- >> so there has to be a limiting principle -- >> -- taxing power, and they -- and i think, of course, the constitution imposes some, got to be uniform, can't be taxed on exports, if it's a direct tax, it's got to be apportioned. beyond that, the limiting principle, as the court has identified from drexel furniture to kurth ranch, is that it can't be punishment, punitive in the guise of a tax. and there are three factors of court has identified to look at that. the first is the sanction and

how disproportionate it is to the conduct; the second is whether there is scienter; and the third is whether there is an -- an -- an administrative apparatus out there to enforce the tax. now in -- in bailey v. drexel furniture, for example, the tax was 10 percent of the company's profits, even if they had only one child laborer for one day. there was a scienter requirement, and it was enforced by the department of labor. it wasn't just collected by the internal revenue service. here you don't have any of those things. this -- the -- the penalty is calculated to be no more than, at most, the equivalent of what one would have paid for insurance if you forgone. there is no scienter requirement, there is no enforcement apparatus out there. so, certain -- >> can the -- can the mandate be viewed as tax if it does impose a requirement on people who are not subject to the penalty or the tax? >> i think it could, for the reasons i -- i discussed yesterday. i don't think it can or should be read that way.

but if there is any doubt about that, your honor, if there is -- if -- if it is the view of the court that it can't be, then i think the -- the right way to handle this case is by analogy to new york v. united states, in which the -- the court read the shall provision, shall handle the level of radioactive waste as setting the predicate, and then the other provisions were merely incentives to get the predicate met, and >> you're saying that all the discussion we had earlier about how this is one big uniform scheme and the commerce clause blah, blah, blah, it really doesn't matter. this is a tax and the federal government could simply have said, without all of the rest of this legislation, could simply have said everybody who doesn't buy health insurance at a certain age will be taxed so much money, right?

>> it -- it used its powers together to solve the problem of the market not -- >> yes, but you didn't need that. >> you didn't need that. if it's a tax, it's only -- raising money is enough. >> it's justifiable under its tax power. >> extraordinary. >> if i may reserve the balance of my time. >> thank you, gentlemen. we'll take a pause for a minute or so, mr. clement. >> why don't we get started again. >> mr. chief justice and may it please the court. the mandate represents an unprecedented effort by congress to compel individuals to enter commerce in order to better regulate commerce. the commerce clause gives congress the power to regulate existing commerce. it does not give congress the far greater power to compel people to enter commerce to create commerce essentially in the first place.

now, congress when it passed the statute did make findings about why it thought it could regulate the commerce here, and it justified the mandate as a regulation of the economic decision to forego the purchase of health insurance. that is a theory without any limiting principle. >> do you accept your -the general's position that you have conceded that congress could say, if you're going to consume health services, you have to pay by way of insurance? >> that's right, justice sotomayor. we say, consistent with 220 years of this court's jurisprudence, that if you regulate the point of sale, you regulate commerce, that's within congress' commerce power. >> all right. so what do you do with the impossibility of buying insurance at the point of consumption. virtually, you force insurance companies to sell it to you? >> well, justice, i think there is two points to make on that.

one is, a lot of the discussion this morning so far has proceeded on the assumption that the only thing that is at issue here is emergency room visits, and the only thing that's being imposed is catastrophic care coverage; but, as the chief justice indicated earlier, a lot of the insurance that's being covered is for ordinary preventive care, ordinary office visits, and those are the kinds of things that one can predict. so there is a big part of the market that's regulated here that wouldn't pose the problem that you're suggesting; but, even as to emergency room visits, it certainly would be possible to regulate at that point. you could simply say, through some sort of mandate on the insurance companies, you have to provide people that come in -- this will be a high-risk pool, and maybe you will have to share it amongst yourself or something, but people simply have to sign up at that point, and that would be regulating at the point of sale. >> well, mr. clement, now it seems as though you're just talking about a matter of timing; that congress can regulate the transaction, and the question is when does it make best sense to regulate that transaction? and congress surely has within its authority to decide, rather than at the point of sale, given an insurance-based mechanism, it makes sense to regulate it earlier.

it's just a matter of timing. >> well, justice kagan, we don't think it's a matter of timing alone, and we think it has very substantive effects. because if congress tried to regulate at the point of sale, the one group that it wouldn't capture at all are the people who don't want to purchase health insurance and also have no plans of using health care services in the near term. and congress very much wanted to capture those people. i mean, those people are essentially the golden geese that pay for the entire lowering of the premium. >> was the government's argument this -- and maybe i won't state it accurately -- it is true that the noninsured young adult is, in fact, an actuarial reality insofar as our allocation of health services, insofar as the way health insurance companies figure risks? that person who is sitting at

home in his or her living room doing nothing is an actuarial reality that can and must be measured for health service purposes; is that their argument? >> well, i don't know, justice kennedy, but, if it is, i think there is at least two problems with it. one is, as justice alito's question suggested earlier, i mean, somebody who is not in the insurance market is sort of irrelevant as an actuarial risk. i mean, we could look at the people not in the insurance market, and what we'd find is that they're relatively young, relatively healthy, and they would have a certain pool of actuarial risks that would actually lead to lower premiums. the people that would be captured by guaranteed rating and community issue -- guaranteed issue and community rating would presumably have a higher risk profile, and there would be higher premiums. and one of the things, one of the things congress sought to accomplish here, was to force individuals into the insurance market to subsidize those that are already in it to lower the rates.

and that's just not my speculation, that's finding i at 43a of the government's brief that -- it has the statute. and that's one of the clear findings. >> mr. clement, doesn't that work -- that work the way social security does? let me put it this way. congress, in the '30s, saw a real problem of people needing to have old age and survivor's insurance. and yes, they did it through a tax, but they said everybody has got to be in it because if we don't have the healthy in it, there's not going to be the money to pay for the ones who become old or disabled or widowed. so they required everyone to contribute. it was a big fuss about that in the beginning because a lot of people said -- maybe some people still do today -- i could do much better if the government left me alone. i'd go into the private market, i'd buy an annuity, i'd make a great investment, and they're forcing me to paying for this social security that i don't want; but, that's constitutional.

so if congress could see this as a problem when we need to have a group that will subsidize the ones who are going to get the benefits, it seems to me you are saying the only way that could be done is if the government does it itself; it can't involve the private market, it can't involve the private insurers. if it wants to do this, social security is its model. the government has to do -- has to be government takeover. we can't have the insurance industry in it. is that your position? >> no. i don't think it is, justice ginsburg. i think there are other options that are available. the most straightforward one would be to figure out what amount of subsidy to the insurance industry is necessary to pay for guaranteed issue and community rating. and once we calculate the amount of that subsidy, we could have a tax that's spread generally through everybody to raise the revenue to pay for that subsidy. that's the way we pay for most subsidies. >> could we have an exemption? could the government say,

everybody pays a shared health care responsibility payment to offset all the money that we are forced to spend on health care, we the government; but, anybody who has an insurance policy is exempt from that tax? could the government do that? >> the government might be able to do that. i think it might raise some issues about whether or not that would be a valid exercise of the taxing power. >> under what theory wouldn't it be? >> well, i do think that -- >> we get tax credits for having solar-powered homes. we get tax credits for using fuel efficient cars. why couldn't we get a tax credit for having health insurance and saving the government from caring for us. >> well, i think it would depend

a little bit on how it was formulated; but, my concern would be -- the constitutional concern would be that it would just be a disguised impermissible direct tax. and i do think -- i mean, i don't want to suggest we get to the taxing power to soon, but i do think it's worth realizing that the taxing power is limited in the ability to impose direct taxes. and the one thing i think the framers would have clearly identified as a direct tax is a tax on not having something. i mean, the framing generation was divided over whether a tax on carriages was a direct tax or not. hamilton thought that was a indirect tax; madison thought it was a direct tax. i have little doubt that both of them would have agreed that a tax on not having a carriage would have clearly been a direct tax. i also think they would have thought it clearly wasn't a valid regulation of the market in carriages. and, you know, i mean, if you look at hilton against the united states, that's this court's first direct tax -- >> let me ask -- can i go back for a step, because i don't want to get into a discussion of whether this is a good bill or not. some people think it's going to save a lot of money. some people think it won't. so i'm focusing just on the commerce clause; not on the due process clause, the commerce clause.

and i look back into history, and i think if we look back into history we see sometimes congress can create commerce out of nothing. that's the national bank, which was created out of nothing to create other commerce out of nothing. i look back into history, and i see it seems pretty clear that if there are substantial effects on interstate commerce, congress can act. and i look at the person who's growing marijuana in her house, or i look at the farmer who is growing the wheat for home consumption. this seems to have more substantial effects. is this commerce? well, it seems to me more commerce than marijuana. i mean, is it, in fact, a regulation? well, why not? if creating a bank is, why isn't this? and then you say, ah, but one thing here out of all those things is different, and that is you're making somebody do

something. i say, hey, can't congress make people drive faster than 45 -- 40 miles an hour on a road? didn't they make that man growing his own wheat go into the market and buy other wheat for his -- for his cows? didn't they make mrs. -- if she married somebody who had marijuana in her basement, wouldn't she have to go and get rid of it? affirmative action? i mean, where does this distinction come from? it sounds like sometimes you can, and sometimes you can't. so what is argued here is there is a large group of -- what about a person that we discover that there are -- a disease is sweeping the united states, and 40 million people are susceptible, of whom 10 million will die; can't the federal government say all 40 million get inoculation? so here, we have a group of 40 million, and 57 percent of those people visit emergency care or other care, which we are

paying for. and 22 percent of those pay more than $100,000 for that. and congress says they are in the midst of this big thing. we just want to rationalize this system they are already in. so, there, you got the whole argument, and i would like you to tell me -- >> we'll get to those questions in inverse order. >> well, no, it's one question. it's looking back at that -- looking back at that history. the thing i can see that you say to some people, go buy; why does that make a difference in terms of the commerce clause? >> well, justice breyer, let me start at the beginning of your question with mcculloch. mcculloch was not a commerce power case. >> it was both? >> no, the bank was not justified and the corporation was not justified as an

exercise of commerce power. so that is not a case that says that it's okay to conjure up the bank as an exercise of the commerce power. what, of course, the court didn't say, and i think the court would have had a very different reaction to, is, you know, we are not just going to have the bank, because that wouldn't be necessary and proper, we are going to force the citizenry to put all of their money in the bank, because, if we do that, then we know the bank of the united states will be secure. i think the framers would have identified the difference between those two scenarios, and i don't think that the great chief justice would have said that forcing people to put their deposits in the bank of the united states was necessary and proper. now, if you look through all the cases you mentioned, i do not think you will find a case like this. and i think it's telling that

you won't. i mean, the regulation of the wheat market in wickard against filburn, all this effort to address the supply side and what producers could do, what congress was trying to do was support the price of wheat. it would have been much more efficient to just make everybody in america buy 10 loaves of bread. that would have had a much more direct effect on the price of wheat in the prevailing market. but we didn't do that. we didn't say when we had problems in the automobile industry that we are not just going to give you incentives, not just cash for clunkers, we are going to actually have ever everybody over 100,000 has to buy a new car -- >> well, mr. clement, the key to the government's argument to the contrary is that everybody is in this market. it's all right to regulate wickard -- again, in wickard against filburn, because that's a particular market in which the farmer had been participating. everybody is in this market, so that makes it very different than the market for cars or the other hypotheticals that you came up with, and all they're regulating is how you pay for it. >> well, with respect, mr. chief justice, i suppose the first thing you have to say is what market are we talking about? because the government -- this statute undeniably operates in the health insurance market. and the government can't say that everybody is in that

market. the whole problem is that everybody is not in that market, and they want to make everybody get into that market. >> well, doesn't that seem a little bit, mr. clement, cutting the bologna thin? mean, health insurance exists only for the purpose of financing health care. the two are inextricably interlinked. we don't get insurance so that we can stare at our insurance certificate. we get it so that we can go and access health care. >> well, justice kagan, i'm not sure that's right. i think what health insurance does and what all insurance does is it allows you to diversify risk. and so it's not just a matter of i'm paying now instead i'm paying later. that's credit. insurance is different than credit. insurance guarantees you an upfront, locked-in payment, and you won't have to pay any more than that even if you incur much great expenses. and in every other market that i know of for insurance, we let people basically make the decision whether they are relatively risk averse, whether they are relatively non-risk averse, and they can make the judgment based on -- >> but we don't in car insurance, meaning we tell people, buy car -- not we, the

states do, although you're going to -- i'll ask you the question, do you think that if some states decided not to impose an insurance requirement, that the federal government would be without power to legislate and require every individual to buy car insurance? >> well, justice sotomayor, let me say this, which is to say -- you're right in the first point to say that it's the states that do it, which makes it different right there. but it's also -- >> well, that goes back to the substantive due process question. is this a lochner era argument that only the states can do this, even though it affects commerce? cars indisputably affect commerce. so are you arguing that because the states have done it all along, the federal government is no longer permitted to legislate in this area? >> no. i think you might make a different argument about cars than you would make about health insurance, unless you tried to say -- but, you know, we're -- >> health insurance -- i mean, i've never gotten into an accident, thankfully, and i hope never. the vast majority of people have never gotten into an accident where they have injured others; yet, we pay for it dutifully every year on the possibility that at some point we might get into that accident.

>> but, justice sotomayor, what i think is different is there is lots of people in manhattan, for example, that don't have car insurance because they don't have cars. and so they have the option of withdrawing from that market. it's not a direct imposition from the government. so even the car market is difference from this market, where there is no way to get outside of the regulatory web. and that's, i think, one of the real problems with this because, i mean, we take as a given -- >> but you're -- but the given is that virtually everyone, absent some intervention from above, meaning that someone's life will be cut short in a fatal way, virtually everyone will use health care. >> at some point, that's right, but all sorts of people will not, say, use health care in the next year, which is the relevant period for the insurance. >> but do you think you can, better than the actuaries or

better than the members of congress who worked on it, look at the 40 million people who are not insured and say which ones next year will or will not use, say, emergency care? can you do that any better than if we knew that 40 million people were suffering, about to suffer a contagious disease, and only 10 million would get sick -- >> of course not -- >> -- and we don't know which? >> of course not, justice breyer, but the point is that once congress decides it's going to regulate extant commerce, it is going to get all sorts of latitude to make the right judgments about actuarial predictions, which actuarial to rely on, which one not to rely on. the question that's a proper question for this court, though, is whether or not, for the first time ever in our history, congress also has the power to compel people into commerce, because, it turns out, that would be a very efficient things for purposes of congress' optimal regulation of that market.

>> but, mr. clement, this goes back to the chief justice's question. but, of course, the theory behind, not just the government's case, but the theory behind this law is that people are in this market right now, and they are in this market because people do get sick, and because when people get sick, we provide them with care without making them pay. and it that would be different, you know, if you were up here saying, i represent a class of christian scientists. then you might be able to say, look, you know, why are they bothering me. but absent that, you're in this market. you're an economic actor. >> well, justice kagan, once again, it depends on which market we're talking about. if we're talking about the health care insurance market -- >> well, we are talking about the health insurance market, which is designed to access the health care market. >> and with respect to the health insurance market that's designed to have payment in the health care market, everybody is not in the market. and that's the premise of the

statute, and that's the problem congress is trying to solve. and if it tried to solve it through incentives, we wouldn't be here; but, it's trying to solve it in a way that nobody has ever tried to solve an economic problem before, which is saying, you know, it would be so much more efficient if you were just in this market -- >> but they are in the market in the sense that they are creating a risk that the market must account for. >> well, justice kennedy, i don't think that's right, certainly in any way that distinguishes this from any other context. when i'm sitting in my house deciding i'm not to buy a car, i am causing the labor market in detroit to go south. i am causing maybe somebody to lose their job, and for everybody to have to pay for it under welfare. so the cost shifting that the government tries to uniquely to associate with this market, it is everywhere. and even more to the point, the rationale that they think ultimately supports this legislation, that look, it's an economic decision, once you make the economic decision, we aggregate the decision, there is a substantial effect on commerce. that argument works here. it works in every single industry. >> of course we do know that there are a few people, more in

new york city than there are in wyoming, who never will buy a car. but we also know here, and we don't like to admit it, that because we are human beings we all suffer from the risk of getting sick. and we also all know that we'll get seriously sick. and we also know that we can't predict when. and we also know that when we do, there will be our fellow taxpayers through the federal government who will pay for this. if we do not buy insurance, we will pay nothing. and that happens with a large number of people in this group of 40 million, none of whom can be picked out in advance. now, that's quite different from a car situation, and it's different in only this respect. it shows there is a national problem, and it shows there is a national problem that involves money, cost insurance. so if congress could do this, should there be a disease that strikes the united states and they want every one inoculated even though ten million will be hurt, it's hard for me to decide

why that isn't interstate commerce, even more so where we know it affects everybody. >> well, justice breyer, there are other markets that affect every one: transportation, food, burial services, though we don't like to talk about that either. there also are situations where there are many economic effects from somebody's failure to purchase a product. and if i could, if i could talk about the difference between the health insurance market and the health care market, i mean, ultimately i don't want you to leave here with the impression that anything turns on that. because if the government decided tomorrow that they would come up with a great -- some of these -- some private companies

come up with a great new wonder drug that would be great for everybody to take, would have huge health benefits for everybody; and by the way, also if everybody had to buy it, it would facilitate economies of scale, and the production would be great, and the price would be cheaper and force everybody in the health care market, the actual health care market to buy the wonder drug, i'd be up here making the same argument. i would be saying that's not a power that's within the commerce power of the federal government. it is something much greater. and it would have been much more controversial. that's why the important things. in federalist 45, madison says the commerce power. not's a new power, but it's one anyone has any apprehension about. the reason they didn't have any apprehension about it is because it's a power that only operated once people were already in commerce. you see that from the text of the clause. the first kind of commerce congress gets to regulate is commerce with foreign nations. did anybody think the fledgling republic had the power to compel some other nation into commerce with us? of course not. and in the same way, i think if the framers had understood the commerce power to include the power to compel people to engage in commerce -- >> well, once again though, who's in commerce and what are they in commerce? if the effect of all these uninsured people is to raise everybody's premiums, not just when they get sick, if they get

sick, but right now in the aggregate, and wickard and raich tell us we should look at the aggregate, and the aggregate of all these uninsured people are increasing the normal family premium, congress says, by a thousand dollars a year. those people are in commerce. they are making decisions that are affecting the price that everybody pays for this service. >> justice kagan, again, with all due respect, i don't think that's a limiting principle. my unwillingness to buy an electric car is forcing up the price of an electric car. if only more people demanded an electric car there would be economies of scale, and the price would go down. >> not necessarily, mr. clement. and it's different because of the nature of the health care service, that you are entitled to health care when you go to an emergency room, when you go to a doctor, even if you can't pay for it. so the difference between your

hypotheticals and the real case is the problem of uncompensated care which -- >> justice kagan, first of all, i do think there -- this is not the only place where there's uncompensated care. if some -- if i don't buy a car and somebody goes on welfare, i'm going to end up paying for that as well. but let me also say that there is a real disconnect then between that focus on what makes this different and statute that congresses passed. if all we were concerned about is the cost sharing that took place because of uncompensated care in emergency rooms, presumably we have before us a statute that only addressed emergency care and catastrophic insurance coverage. but it covers everything, soup to nuts, and all sorts of other things. and that gets at the idea that there is two kinds of cost shifting that are going on here. one is the concern about emergency care and that somehow somebody who gets sick is going to shift costs back to other policy areas -- holders. but there is a much bigger cost shifting going on here, and that's the cost shifting that goes on when you force healthy people into an insurance market precisely because they are healthy, precisely because they are not likely to go to the emergency room, precisely because they are not likely to use the insurance they are

forced to buy in the health care insurance. that creates a huge windfall. it lowers the price of premiums. and again, this is not just some lawyer up here telling you that's what it does and trying to second-guess the congressional economic decisions. this is congress's findings, findings i on page 43 a of the appendix to the government's -- >> all that sounds like you're debating the merits of the bill. you ask really for limiting principles so we don't get into a matter that i think has nothing to do with this case: broccoli, okay? and the limiting principles, you've heard three. first, the solicitor general came up with a couple joined, very narrow ones. you've seen in lopez this court say that we cannot, congress cannot get into purely local affairs, particularly where they are noncommercial. and, of course, the greatest limiting principle of all, which not too many accept, so i'm not going to emphasize that, is the

limiting principle derived from the fact that members of congress are elected from states and that 95 percent of the law of the united states is state law. that is a principle though enforced by the legislature. the other two are principles, one written into lopez and one you just heard. it seems to me all of those eliminate the broccoli possibility, and none of them eliminates the possibility that we are trying to take the 40 million people who do have the medical cost, who do affect interstate commerce and provide a system that you may like or not like. limitingere we are in principles. >> well, justice breyer, let me take them in turn. i would encourage this court not to garcia-ize the commerce clause and just simply say it's up to congress to police the commerce clause. so i don't think that is a limiting principle. second of all -- >> yes, but that's exactly what justice marshall said in gibbons. he said that it is the power to

regulate, the power like all others vested in congress is complete in itself, may be exercised to its utmost extent, and acknowledges no limitations other than those prescribed in the constitution. but there is no conscription in the, set forth in the constitution with respect to regulating commerce. >> i agree 100 percent, and i think that was the chief justice's point which was once you open the door to compelling people into commerce based on the narrow rationales that exist in this industry, you are not going to be able to stop that process. >> i would like hear you address justice breyer's other, other two principles. >> well, the other two principles are lopez -- and this case really is not -- i mean, you know, lopez is a limit on the affirmative exercise of people who are already in commerce. the question is, is there any other limit to people who aren't in commerce? and so i think this is the case

that really asks that question. and then the first point which was i take it to be the solicitor general's point is, with all due respect, simply a description of the insurance market. it's not a limiting principle, because the justification for why this is a valid regulation of commerce is in no way limited to this market. it simply says, these are economic decisions, they have effect on other people, my failure to purchase in this market has a direct effect on others who are already in the market. that's true of virtually every other market under the sun. >> and now maybe return to justice sotomayor's question. >> i'd be delighted to, which is -- i mean, i -- you are absolutely right. once you're in the commerce power, there is not -- this court is not going to police that subject maybe to the lopez limit. and that's exactly why i think it's very important for this court to think seriously about taking an unprecedented step of saying that the commerce power not only includes the power to regulate, prescribe the rule by which commerce is governed, the rule of gibbons v. ogden.

but to go further and say it's not just prescribing the rule for commerce that exists but is the power to compel people to enter into commerce in the first place. i would like to say two very brief things about the taxing power, if i could. there are lots of reasons why this isn't a tax. it wasn't denominated a tax. it's not structured as a tax. if it's any tax at all, though, it is a direct tax. article i, section 9, clause 4, the framers would have had no doubt that a tax on not having something is not an excise tax but a forbidden direct tax. that's one more reason why this is not proper legislation because it violates that. the second thing is i would urge you to read the license tax case which the solicitor general says is his best case for why you ignore the fact that a tax is denominated into something other. because that is a case where the argument was that because the federal government had passed a license not a tax, that somehow that allowed people to take

actions that would have been unlawful under state law, that this was some special federal license to do something that was forbidden by state law. this court looked beyond the label in order to preserve federalism there. what the solicitor general and the government ask you to do here is exactly the opposite, which is to look past labels in order to up-end our basic federalist system. in this -- >> would you tell me, do you think the states could pass this mandate. >> i represent 26 states. i do think the states could pass this mandate, but i -- >> is there any other area of commerce, business, where we have held that there is a concurrent power between the state and the federal government to protect the welfare of commerce? >> well, justice sotomayor, i have to resist your premise, because i didn't answer yes, the states can do it because it would be a valid regulation of intrastate commerce. i said yes, the states can do it because they have a police power, and that is the fundamental difference between the states on the one hand and the limited, enumerated federal government on the other. >> thank you, mr. clement. mr. carvin.

>> thank you, mr. chief justice, may it please the court: i'd like to begin with the solicitor general's main premise, which is that they can compel the purchase of health insurance in order to promote commerce in the health market because it will reduce uncompensated care. if you accept that argument, you have to fundamentally alter the text of the constitution and give congress plenary power. it simply doesn't matter whether or not this regulation will promote health care commerce by reducing uncompensated care; all that matters is whether the activity actually being regulated by the act negatively affects congress or negatively affects commerce regulation, so that it's within the commerce power. if you agree with us that this is -- exceeds commerce power, the law doesn't somehow become redeemed because it has beneficial policy effects in the health care market. in other words, congress does not have the power to promote commerce.

congress has -- congress has the power to regulate commerce. and if the power exceeds their permissible regulatory authority, then the law is invalid. >> well, surely -- >> i'm sorry. >> well, surely regulation includes the power to promote. since the new deal we've said that regulation in -- there is a market agricultural products; congress has the power to subsidize, to limit production, all sorts of things. >> absolutely, chief justice, and that's the distinction i'm trying to draw. when they are acting within their enumerated power then obviously they are promoting commerce, but the solicitor general wants to turn it into a different power. he wants to say we have the power to promote commerce, to regulate anything to promote commerce, and if they have the power to promote commerce then they have the power to regulate everything, right? because -- >> i don't -- i don't think you're addressing their main point, which is that they are not creating commerce in -- in health care. it's already there, and we are all going to need some kind of health care; most of us will at some point. >> i'd -- i'd like to address that in two ways, if i could, mr. chief justice.

in the first place they keep playing mix and match with the statistics. they say 95 percent of us are in the health care market, okay? but that's not the relevant statistic, even from -- as the government frames the issue. no one in congress and the solicitor general is arguing that going to the doctor and fully paying him creates a problem. the problem is uncompensated care, and they say the uncompensated care arises if you have some kind of catastrophe -- hit by a bus, have some prolonged illness. well, what is the percentage of the uninsured that have those sorts of catastrophes? we know it has got to be a relative small fraction. so in other words, the relevant -- >> yet we don't know who they are. >> we don't. no, and we don't know in advance, and -- and --but that doesn't change the basic principle, that you are nonetheless forcing people for

paternalistic reasons to go into the insurance market to ensure against risk that they have made the voluntary decision that they are not -- have decided not to. but even -- >> but the problem is -- the problem is this they are making the reinvent of us pay for it, because as much as they say, well, we are not in the market, we don't know when the -- the timing when they will be. >> which is -- >> and the -- the figures that how much more families are paying for insurance because people get sick, they may have intended to self-insure, they haven't been able to meet the bill for -- for cancer, and the rest of us end up paying because these people are getting cost-free health care, and the only way to prevent that is to have them pay sooner rather than later, pay up front. >> yes, but my point is this. that, with respect, justice ginsburg, conflicts the people who do result in uncompensated care, the free riders. those are people who default on their health care payments. that is an entirely different group of people, an entirely different activity than being uninsured. so the question is whether or not you can regulate activity because it has a statistical

connection to an activity that harms congress. and my basic point to you is this: the constitution only gives congress the power to regulate things that negatively affect commerce or commerce regulation. it doesn't give them the power to regulate things that are statistically connected to things that negatively affect the commerce -- >> well, mr. carvin -- >> because -- i'm sorry. >> please. >> i was just going to say, because if they have that power, then they obviously have the power to regulate everything because everything in the aggregate is statistically connected to something that negatively affects commerce, and every compelled purchase promotes commerce. >> in your view, right there -- in your view right there -- >> justice breyer -- >> can i just -- >> i'm sorry. >> i'm just picking on something. i'd like to just -- if it turned out there was some terrible epidemic sweeping the united states, and we couldn't say that more than 40 or 50 percent -- i can make the number as high as i want -- but the -- the -- you'd say the federal government doesn't have the power to get people inoculated, to require them to be inoculated, because that's just statistical.

>> well, in all candor, i think morrison must have decided that issue, right? because people who commit violence against -- >> is your answer to that yes or no? >> oh, i'm sorry; my answer is no, they couldn't do it, because morrison >> no, they could not do it. >> yes. >> they cannot require people even if this disease is sweeping the country to be inoculated. the federal government has no power, and if there's -- okay, fine. go ahead. >> may >> please turn to justice kagan. >> may i just please explain why? >> yes. >> violence against women obviously creates the same negative impression on fellow citizens as this communicable disease, but the --and it has huge effects on the health care of our country. congress found that it increased health care costs by -- >> i agree with you that >> well, but >> -- that it had huge negative effects but the majority thought that was a local matter. >> i think that's his point. >> i -- i don't know why having a disease is any more local than -- that beating up a woman. but -- but -- my basic point is, is that notwithstanding its very profound effect on the health care market, this court said the activity being regulated, i. e. , violence against women, is outside the commerce clause

power. so regardless of whether it has beneficial downstream effects, we must say no, congress doesn't have that power. why not? because everything has downstream effects on commerce and every compelled purchase promotes commerce. it by definition helps the sellers of existing -- >> mr. carvin, isn't there this difference between justice breyer's hypothetical and the law that we have before us here? in his hypothetical harm to other people from the communicable disease is the result of the disease. it is not the result of something that the government has done, whereas here the reason why there is cost shifting is because the government has mandated that. it has required hospitals to provide emergency treatment, and instead of paying for that through a tax which would be born by everybody, it has required -- it has set up a system in which the cost is surreptitiously shifted to people who have health insurance and who pay their bills when they go to the hospital.

>> justice alito, that is exactly the government's argument. it's an extraordinarily illogical argument. >> fine. then if that's so, is -- let me just change my example under pressure -- >> -- and say that in fact it turns out that 90 percent of all automobiles driving interstate without certain equipment put up pollution, which travels interstate -- not 100 percent, maybe only 60 percent. does the epa have the power then to say you've got to have an antipollution device? it's statistical. >> what they can't do -- yes, if you have a car, they can require you to have an anti- pollution -- >> then you're not going on statistics; you're going on something else which is what i'd like to know what it is. >> it's this. they can't require you to buy a car with an anti-pollution device. once you've entered the market and made a decision they can regulate the terms and

conditions of the car that you do, and they can do it for all sorts of reasons. what they can't do it compel you to enter the market. >> now we -- now you've changed the ground of argument, which 'd the ground of argument, which i accept as -- as totally legitimate. and then the question is when you are born, and you don't have insurance, and you will in fact get sick, and you will in fact impose costs, have you perhaps involuntarily -- perhaps simply because you are a human being -- entered this particular market, which is a market for health care? >> if being born is entering the market, then i can't think of a more plenary power congress can have, because that literally means they can regulate every human activity from cradle to grave. thought that's what distinguished the plenary police power from the very limited commerce power. i don't disagree that giving the congress plenary power to mandate property transfers from a to b would be a very efficient way of helping b and of accomplishing congress's

objectives. but the framers -- >> i see the point. you can go back to, go back to justice kagan. don't forget her question. >> i've forgotten my question. [laughter] dilemma, justice kagan. >> let me -- let me ask a question i asked mr. clement. it just seems -- >> see what it means to be the junior justice? [laughter] >> it just seems very strange to me that there's no question we can have a social security system besides all the people who say: i'm being forced to pay for something i don't want. and this it seems to me, to try to get care for the ones who need it by having everyone in the pool, but is also trying to preserve a role for the private sector, for the private insurers. there's something very odd about that, that the government can take over the whole thing and we all say, oh, yes, that's fine, but if the government

wants to get -- to preserve private insurers, it can't do that. >> well i don't think the test of a law's constitutionality is whether it more adheres to the libertarian principles of the cato institute or the statist principles of someone else. i think the test of a law's constitutionality is not those policy questions, it's whether or not the law is regulating things that negatively affect commerce or don't. and since obviously the failure to purchase an item doesn't create the kind of effects on supply and demand that the market participants in wickard and raich did and doesn't in any way interfere with regulation of the insurance companies, i don't think it can pass the basic -- >> i thought -- i thought that wickard was you must buy, we are not going to let you use the home-grown wheat. you have got to go out in the market and buy that wheat that you don't want. >> oh, but let's be careful about what they were regulating in wickard, justice ginsburg. what they were regulating was

the supply of wheat. it didn't in any way imply that they could require every american to go out and buy wheat. and yes, one of the consequences of regulating local market participants is it'll affect the supply and the demand for the product. that's why you can regulate them, because those local market participants have the same effect on the interstate market that a black market has on a legal market. but none of that is true -- in other words, you can regulate local bootleggers, but that doesn't suggest you can regulate teetotalers, people who stay out of the liquor market, because they don't have any negative effect on the existing market participants or on regulation of those market participants. >> that's why i suggested, mr. carvin, that it might be different if you were raising an as-applied challenge and presenting a class of people whom you could say clearly would not be in the health care market. but you're raising a facial challenge and we can't really know which, which of the many, many, people that this law addresses in fact will not

participate in the health care market and in fact will not impose costs on all the rest of us. so the question is can congress respond to those facts, that we have no crystal ball, that we can't tell who is and isn't going to be in the health insurance market, and say most of these people will be and most of these people will thereby impose costs on the rest of us and that's a problem that we can deal with on a class-wide basis? >> no again. the people who impose the costs on the rest of us are people who engage in a different activity at a different time, which is defaulting on their health care payments. it's not the uninsured. under your theory you could regulate anybody if they have got a statistical connection to a problem. you could say, since we could regulate people who enter into the mortgage market and impose mortgage insurance on them, we can simply impose the requirement to buy private mortgage insurance on everybody before they have entered the market because we are doing it in this prophylactic way before it develops.

>> no, no, that's not -- i don't think that's fair, because not everybody is going to enter the mortgage market. the government's position is that almost everybody is going to enter the health care market. >> two points, one of which mr. clement's already made, which is the health insurance market is different than the health care market. but let me take it on full- stride. i think everybody is in the milk market. i think everybody is in the wheat product market. but that doesn't suggest that the government compel you to buy five gallons of meat or five bushels of wheat because they are not regulating commerce. whether you're a market participant or not, they are still requiring you to make a purchase that you don't want to do, and to get back to your facial example -- >> i mean, but that's true of almost every product. >> i've sorry? >> it's true of almost every product, directly or indirectly by government regulation. the government says, borrowing my colleague's example, you can't buy a car without emission control. i don't want a car with emission control.

it's less efficient in terms of the horsepower. but i'm forced to do something i don't want to do by government regulation. >> you are not forced to buy a product you don't want. and i agree with you that since the government regulates all markets there is no limiting principle on their compelled purchase. when they put these environmental controls on the -- >> they force me to buy -- >> i'm sorry. >> they forced me to buy if i need unpasteurized foods, goods that don't have certain pesticides but have others. there is government compulsion in almost every economic decision because the government regulates so much. it's a condition of life that some may rail against, but -- >> let's think about it this way. yes, when you've entered the marketplace they can impose all sorts of restrictions on you, and they can impose, for example, all kinds of restrictions on states after they have enacted laws. they can wipe out the laws. they can condition them. but what can't they do? they can't compel states to enact laws.

they can't compel states to carry out federal law. and i am arguing for precisely the same distinction, because everyone intuitively understands that regulating participants after a and b have entered into a contract is fundamentally less intrusive than requiring the contract. >> we let the government regulate the manufacturing process whether or not the goods will enter into interstate commerce, merely because they might statistically. we -- there is all sorts of government regulation of manufacturing plants, of agricultural farms, of all sorts of activity that will be purely intrastate because it might affect interstate activity. >> i fully agree with you, justice sotomayor. but i think -- >> so how is that different from saying you are self-insuring today, you're foregoing insurance? why isn't that a predecessor to

the need that you're eventually going to have? >> the cases you referred to i think effectively eliminated the distinction between participants in the intrastate market vis-à-vis participants in the interstate market. none of those cases suggest that you can regulate people who are outside of the market on both an intrastate and interstate level by compelling them to enter into the market. and that -- >> what about -- the simplest counter-example for me to suggest is you've undoubtedly read judge sutton's concurring opinion. he has about two pages, it seemed to me, of examples where everyone accepts the facts that under these kinds of regulations the government can compel people to buy things they don't otherwise want to buy. for example, he gives, even in that farm case, the farmer who was being forced to go out and buy grain to feed to his animals because he couldn't

raise it at home. you know and he goes through one example after another. so what -- what is your response to that, which you've read? >> judge sutton is wrong in each and every example. there was no -- there was no compulsion in raich for him to buy wheat. he could have gotten wheat substitutes or he could have not sold wheat, which is actually what he was doing. there is a huge difference between conditioning regulation, i. e. , conditioning access to the health care market and saying you must buy a product, and forcing you to buy a product. and that, that -- i'm sorry. >> i thought it was common ground that the requirement that the insurers -- what was it, the community-based one and they have to insure you despite your health status, they can't refuse because of preexisting conditions. the government tells us and the congress determined that those two won't work unless you have

a pool that will include the people who are now healthy. but so -- well, first, do you agree with your colleague that the community-based -- and what's the name that they give to the other? >> the guaranteed-issue. >> yes. that that is legitimate commerce clause legislation? >> oh, sure. and that's why -but we don't in any way impede that sort of regulation. these nondiscrimination regulations will apply to every insurance company just as congress intended whether or not we buy insurance. >> well then, what about the determination that they can't possibly work if people don't have to buy insurance until they are -- their health status is such that the insurance company just dealt with them on

its -- as it will? i won't insure you because you're -- you're already sick. >> it depends what you mean by "work. " it'll work just fine in ensuring that no sick people are discriminated against. what -- what -- but when you do that -- congress -- >> but the sick people, why would they insure early if they had to be protected if they get insurance late? >> yes. well, that's -- this is the government's very illogical argument. they seem to be saying look, we couldn't just force people to buy insurance to lower health insurance premiums. that would be no good. but we can do it because we've created the problem. we, congress, have driven up the health insurance premiums, and since we've created that problem, this somehow gives us authority that we wouldn't otherwise have. that can't possibly be right. that would -- >> do you think that there's -- what percentage of the american people who took their son or daughter to an emergency room and that child was turned away because the parent didn't have insurance -- do you think there's a large percentage of the american population who would stand for the death of that child --

>> one of the most -- >> they had an allergic reaction and a simple shot would have saved the child? >> one of the more pernicious, misleading impressions that the government has made is that we are somehow advocating that people be -- could get thrown out of emergency rooms, or that this alternative that they've hypothesized is going to be enforced by throwing people out of emergency rooms. this alternative, i. e. conditioned access to health care on buying health insurance, is enforced in precisely the same way that the act does. you either buy health insurance or you pay a penalty of $695. you don't have doctors throwing people out on the street. and -- and so the only -- >> i'm sorry, did you say the penalty's okay but not the mandate? i'm sorry. maybe i've misheard you. >> no. no. i was -- they create this strawman that says look, the only alternative to doing it the way we've done it, if we condition access to health care on buying health insurance, the only way you can enforce that is making sick people not get care. i'm saying no, no.

there's a perfectly legitimate way they could enforce their alternative, i. e. requiring you to buy health insurance when you access health care, which is the same penalty structure that's in the act. there is no moral dilemma between having people have insurance and denying them emergency service. congress has made a perfectly legitimate value judgment that they want to make sure that people get emergency care. since the founding, whenever congress has imposed that public responsibility on private actors, it has subsidized it from the federal treasury. it has not conscripted a subset of the citizenry and made them subsidize the actors who are being hurt, which is what they're doing here. they're making young healthy people subsidize insurance premiums for the cost that the nondiscrimination provisions have put on insurance premiums and insurance companies. >> so the -- >> -- and that -- that is the fundamental problem here. >> so the -- i -- i want to

understand the choices you're saying congress has. congress can tax everybody and set up a public health care system. >> yes. >> that would be okay. >> yes. tax power is -- >> okay. >> i would accept that. >> congress can -- you're taking the same position as your colleague, congress can't say we're going to set up a public health system, but you can get a tax credit if you have private health insurance because you won't access the public system. are you taking the same position as your colleague? >> there may have been some confusion in prior colloquy. i fully agree with my brother clement that a direct tax would be unconstitutional. i don't think he means to suggest, nor do i, that a tax credit that incentivizes you to buy insurance creates problems. congress incentivizes all kinds of activities. if they gave us a tax credit for buying insurance, then it would be our choice whether or not that makes economic sense,

even though -- >> so how is this different than this act which says if a taxpayer fails to meet the requirement of having minimum coverage, then they are responsible for paying the shared responsibility payment? >> the difference is that the taxpayer is not given a choice. it's the difference between banning cigarettes and saying i'm going to enforce that legal ban through a $5 a pack penalty, and saying look, if you want to sell cigarettes, fine. i'm going to charge you a tax of $5 a pack. and that's -- >> i think -- i think that's what's happening, isn't it? >> no. not -- >> we're paying -- i thought that everybody was paying, what is it, $10 a pack now? i don't even know the price. it's pretty high. >> right. and everyone understands -- >> i think everybody recognizes that it's all taxation for the purposes of dissuading you to buy it. >> that's precisely my point. and everyone intuitively understands that that system is dramatically different than saying cigarettes tomorrow are illegal. it is different. >> it is different. it is different. i agree with that. but you pointed out, and i agree with you on this, that

the government set up these emergency room laws. the government set up medicaid. the government set up medicare. the government set up chip, and there are 40 million people who don't have the private insurance. in that world, the government has set up commerce. it's all over the united states. and in that world, of course, the decision by the 40 million not to buy the insurance affects that commerce, and substantially so. so i thought the issue here is not whether it's a violation of some basic right or something to make people buy things they don't want, but simply whether those decisions of that group of 40 million people substantially affect the interstate commerce that has been set up in part through these other programs. so that's the part of your argument i'm not hearing. >> let me -- >> please. >> it is clear that the failure to buy health insurance doesn't

affect anyone. defaulting on your payments to your health care provider does. congress chose for whatever reason not to regulate the harmful activity of defaulting on your health care provider. they used the 20 percent or whoever among the uninsured as a leverage to regulate the 100 percent of the uninsured. >> i agree -- i agree that that's what's happening here. >> okay. >> and the government tells us that's because the insurance market is unique. and in the next case, it'll say the next market is unique. but i think it is true that if most questions in life are matters of degree, in the insurance and health care world, both markets -- stipulate two markets -- the young person who is uninsured is uniquely proximately very close to affecting the rates of insurance and the costs of providing medical care in a way that is not true in other industries. that's my concern in the case.

>> and, your -- i may be misunderstanding you, justice kennedy. i hope i'm not. sure. it would be perfectly fine if they allowed -- you do actuarial risk for young people on the basis of their risk for disease, just like you judge flood insurance on the homeowner's risk of flood. one of the issues here is not only that they're compelling us to enter into the marketplace, they're not -- they're prohibiting us from buying the only economically sensible product that we would want. catastrophic insurance. everyone agrees the only potential problem that a 30- year-old, as he goes from the healthy 70 percent of the population to the unhealthy 5 percent. and yet congress prohibits anyone over 30 from buying any kind of catastrophic health insurance. and the reason they do that is because they needed this massive subsidy. justice alito, it's not our numbers. cbo said that injecting my clients into the risk pool lowers premiums by 15 to 20

percent. so, justice kennedy, even if we were going to create exceptions for people that are outside of commerce and inside of commerce, surely we'd make congress do a closer nexus and say look, we're really addressing this problem. we want these 30-year-olds to get catastrophic health insurance. and not only did they -- they deprived them of that option. and i think that illustrates the dangers of giving congress these plenary powers, because they can always leverage them. they can always come up with some public policy rationale that converts the power to regulate commerce into the power to promote commerce, which, as i was saying before, is the one that i think is plenary. >> mr. carvin, a large part of this argument has concerned the question of whether certain kinds of people are active participants in a market or not active participants in a market. in your test, which is a test that focuses on this activity/inactivity distinction, would force one to confront that problem all the time. now, if you look over the history of the commerce clause,

what you see is that there were sort of unhappy periods when the court used tests like this -direct versus indirect, commerce versus manufacturing. i think most people would say that those things didn't really work. and the question is, why should this test, inactive versus active, work any better? >> the problem you identify is exactly the problem you would create if you bought the government's bogus limiting principles. you'd have to draw distinctions between the insurance industry and the car industry and all of that. we turn you to the commerce clause jurisprudence that bedeviled the court before the 1930s, where they were drawing all these kinds of distinctions among industries, whereas our test is really very simple. are you buying the product or is congress compelling you to buy the product? i can't think of a brighter line. and again, if congress has the power to compel you to buy this product, then obviously, they have got the power to provide you -- to compel you to buy any product, because any purchase is going to benefit commerce, and this court is never going to second-guess congress's

policy judgments on how important it is this product versus that product. >> do you think they are drawing a line between commerce and everything else that is not commerce is drawing an artificial line, drawing a line between congress and manufacturing? >> the words "inactivity" and "activity" are not in the constitution. the words "commerce" and "noncommerce" are. and again, it's a distinction that comes, justice kagan, directly from the text of the constitution. the framers consciously gave congress the ability to regulate commerce, because that's not a particularly threatening activity that deprives you of individual freedom. if you were required, if you were authorized to require a to transfer property to b, you have, as the early cases put it, a monster in legislation which is against all reason in justice, because everyone intuitively understands that regulating people who voluntarily enter into contracts in setting changing conditions does not create the possibility of congress compelling wealth transfers among the citizenry. and that is precisely why the framers denied them the power to compel commerce, and

precisely why they didn't give them plenary power. >> thank you, mr. carvin. general verrilli, you have four minutes remaining. rebuttal argument of donald b. verrilli, jr. , on behalf of the petitioners >> thank you, mr. chief justice. congress confronted a grave problem when it enacted the affordable care act. the 40 million americans who can't get health insurance and suffered often very terrible consequences. now, we agree, i think -- everyone arguing this case agrees that congress could remedy that problem by imposing the insurance requirement at the point of sale. that won't work. the reason it won't work is because people will still show up at the hospital or at their physician's office seeking care without insurance, causing the cost shifting problem. and mr. clement's suggestion that they can be signed up for a high risk pool at that point is utterly unrealistic. think about how much it would cost to get the insurance when you are at the hospital or at the doctor. it would be -- it would be unfathomably high, that will never work.

congress understood that. it chose a means that will work. the means that it saw work in the states and in the state of massachusetts and that, and that it had every reason to think would work on a national basis. that is the kind of choice of means that mcculloch says that the constitution leaves to the democratically accountable branches of government. there is no temporal limitation in the commerce clause. everyone subject to this regulation is in or will be in the health care market. they are just being regulated in advance. that's exactly the kind of thing that ought to be left to the judgment of congress and the democratically accountable branches of government. and i think this is actually a paradigm example of the kind of situation that chief justice marshall envisioned in mcculloch itself, that the provisions of the constitution needed to be interpreted in a manner that would allow them to be effective in addressing the great crises of human affairs

that the framers could not even envision. but if there is any doubt about that under the commerce clause, then i urge this court to uphold the minimum coverage provision as an exercise of the taxing power. under new york v. united states, this is precisely a parallel situation. if the court thinks there is any doubt about the ability of congress to impose the requirement in 5000a, a, it can be treated as simply the predicate to which the tax incentive of 5000a, b, seeks accomplishment. and the court -- as the court said in new york, has a solemn obligation to respect the judgments of the democratically accountable branches of government, and because this statute can be construed in a manner that allows it to be upheld in that way, i respectfully submit that it is this court's duty to do so. >> thank you, general. counsel, we'll see you tomorrow.

>> after today's supreme court oral argument, several reporters spoke outside the capital. they defended the laws to buy health insurance or pay a penalty to government. this is 20 minutes. >> i would like to begin now. the supreme court heard today arguments on what has been described as the individual mandate. so everyone is clear, i want to read a passage of the summary of the senate health care law that lays out the mandate. it "requires each citizen or lawful permanent resident to be covered under a lawful health plan, or equivalent health care program." in other words, each citizen is mandated to have health insurance. i want to make one clarification. this is, indeed, from the senate health care law, but not from

the affordable care act. it is an excerpt from the senate republicans health care proposal from 1993. the concept of an engine which will mandate to -- an individual mandate was first floated by the heritage foundation. it was first taken up by robert conservative republicans as -- by conservative republicans as an alternative to the universal health bill. senator grassley was a sponsor as was then and a majority leader bob dole. in 2009, senator grassley supported. senator dement did. other conservative senators have as well. what we are seeing now is baffling. republicans have gone from being the main champion of the individual mandate to being its

main antagonist. you have to ask why. the republicans were fathers of the individual mandate and suddenly they want to give it up for adoption on the steps of the u.s. supreme court. the flip-flop on the individual mandate is the prime example of their willingness to oppose anything this president proposes simply because he proposed it, because it was their idea. and of course, there's the issue of mitt romney, who passed romneycare in massachusetts, which is exactly the same high -- health care model we passed a few months ago. there's no question that this is the same one that president obama pass at the federal level. four years ago, mitt romney been called a law he signed in massachusetts a model for the rest of the country. he wrote an op-ed in july, 2009

while the health-care debate was raging calling on the president to follow the example he set with his law in massachusetts. and then the president when he was proposing is planned said he was basing it on mitt romney's idf in massachusetts. now that the mandate is unpopular with conservatives, romney is trying to dispel what he did in massachusetts. mitt romney can run, but he cannot hide. no matter what he tries to say now, he is a walking and talking amicus free in favor of the obamacare law. he should just admit that it was planned all along. if mitt romney is the nominee, in effect, health care will be off the table as an issue. with that of mine going to call on the chairman of our judiciary committee, who was in the

proceedings, senator leahy. the >> i found this interesting. it is interesting, too, the , the assistant general was saying this would work well just as it does in massachusetts to cover everybody. that did bring a bit of a murmur in the courtroom. if you listen to the arguments on the question of constitutionality today, it is very obvious that if this law is unconstitutional, then tomorrow, someone could come in and attack social security for the same reason. that would be unconstitutional. or people like myself who buy insurance, but also have to pay medicare, we can say well, medicare is unconstitutional because, why should i have to pay for that but i also have to pay for private insurance? you can go through all of these

examples. this is unconstitutional -- if this is unconstitutional, the argument can be made that all of them are unconstitutional. i'm not sure if that is what the american public wants. and i'm not sure if that is what the supreme court wants to unleash on americans. >> setzer mark, who was instrumental in writing of this law. >> it was clear after spending two hours listening to these arguments that the opponents are basing their arguments on politics rather than president -- precedents, on politics rather than what is best for the american people. senator leahy is right, every time we in the congress have tried to fulfill our obligation under the constitution to promote the general welfare, there have been those that have tried to undercut it by going to

the supreme court. they tried to undercut social security, the voting rights act, a civil-rights act. you name it. they have tried to undercut what we in congress have done to promote the general welfare. the arguments i heard this morning were very clear, congress doesn't have the power to regulate commerce. virtually every person in this country will at some point in his or her life to use health care. they will be in the commerce of the health care delivery system. opponents say, well, but congress can tell you to pay for it when you get it, but they cannot tell you that you have to have insurance to cover you before hand. talk about splitting hairs. that is where it now falls into the political realm. i am convinced, after listening to the two hours this morning that this court can go no other

way but to uphold the individual mandate that the congress has put into the affordable care act. >> everyone, as senator harkin pointed out, uses health care. the question is whether everyone will be required to pay their fair share for health care in a way that benefits everyone. and that is at the heart of this case before the united states supreme court. we already have a mandate in this country, and it says that if you are sick you will be treated. usually, in emergency rooms. but that mandate exists. the question is who will pay for that care, which is provided for by the public policy and the laws of the united states. as my colleague, senator schumer pointed out, this idea originated with republicans, who today are trying to vociferously deny its legitimacy. in 1989, the heritage foundation

suggests to every household should be required, mandated to have health care insurance. in 1993, my colleague john chafee, who i see as someone who not only understood the health care system, but also respect to the constitution, and in fact, defended as a marine in guadalcanal, korea, his bill included an individual mandate, and it was sponsored by many, including senator robert dole. the same year with former speaker newt gingrich. he went on "meet the press" and said he was for the government requiring individuals to buy health care. i guess times have changed. this is basically the same model as the affordable care act. and again, as my colleagues have pointed out, governor romney of massachusetts deserves credit for passing the bill. but also indicated that in his view, he, and i think he spoke at that point on behalf of

republicans, "don't think the market ever envisioned an idea that the market will be able to do something and make people pay for it." this is a national commodity. 17 percent -- 70% of our economy is developed for health care. the idea that this is an option that we are compelling people to participate in i do not think stands the test of common sense and common reason. today, i hope the court listens well. i hope that senator harkin is right, that based upon the argument here, they will uphold this lot and get on with providing efficient care and in a way that will not bankrupt our government. >> are there questions for anyone of us? >> senator leahy, you were in the court.

most prognosticators think this will come down to justice kennedy. could you describe his reaction in the court and whether he seemed to be on one side or the other? >> i never try to speculate based on the justices and the questions they ask. it was interesting, some of the things that were said. just as prior referenced one case -- justice brier referenced one case that justice scalia said iffy reference that case, he would have to uphold the the whole -- if he would reference that case, you have to uphold the whole health care legislation. today, we were arguing the constitutionality. i think it is a clear-cut case. i think you have to really stretch to say this is unconstitutional with social security or medicare been

constitutional. if you say this is unconstitutional, then you have to say social security and medicare are also unconstitutional. i'm not sure the court is prepared to do that. >> [unintelligible] >> we passed a law. and i think we have an interest in seeing what they do. i am a member of the supreme court bar. i am a member -- i wanted to hear in that capacity, as the chairman of the senate judiciary committee. i take this particular one, the argument over the constitutionality, because it affects just about everything else we do in the judiciary committee and others. i wanted to hear how they reacted to it. >> the president has been pretty quiet about this lot in the past couple of weeks. will he be doing more to defend

it? >> his focus has been on the demilitarized zone between the two koreas. it might not be the best place to talk about health care. he is focused on the things he is doing on his trip abroad. and he has spoken about this over and over again. i do not think the president wants to try to tell the court what to do. there is separation of powers. but i think the president has spoken on this many times. he will be in vermont on friday. i would not be the price if he speaks about it again. >> [unintelligible] house republicans have come out several times yesterday and today. abdiweli year from democrats later this week? >> -- will we see and hear from democrats later this week? >> i do not think they want to go to bat and say, we are going

to wipe on your ability to have your children on your policy while they are in college. i do not think they want to go and say, we are going to work this out, so tough if you have a pre-existing condition. you will not be able to get health care. the last bit of the argument, just as we proved in massachusetts, we have to insure everybody. that is the only way it works. >> health care being off the table as an issue, is that -- does that mean that you do not expect to run on that at all? >> i'm just saying that governor romney is so much involved in creating just about this exact law that his attacking in our was going to have virtually no credibility. i believe that if governor romney is the nominee, this issue will effectively be taken

off the table when anyone brings it up. >> are you surprised at the force and persistence of the negative sentiment? or did you pretty much expect that two years ago? >> one of the more prominent republicans in the senate said at a time when we were passing the health care bill that they had to defeat it and make this obama's waterloo. the minority leader of the senate, senator mcconnell, actually said he -- his number one priority was to make obama a one-term president. this has all gotten caught up in the politics of the moment. what we have to keep in mind is, if they are successful, if republicans are successful in repealing this, think about the millions of americans already, many millions of americans,

young people who are on their parents' policies until they are 26. it will take that away from them. think about the people you are covered under insurance even though they are covered under -- even though they have a pre- existing condition. they want to take that away. think about all of those who are benefiting from closing the doughnut hole. last year, i saved $600. every senior in iowa. they will take that away from them. elderly people now getting prostate cancer screenings, colonoscopy screens, mammogram screenings with no deductible. millions of americans are taking advantage of that. republicans want to take that away from them. that is what is at stake right now, whether or not we will let the republicans take away from the american people all of these hard-earned and hard-won gains in their own health care systems. >> republicans seem to have a

strategy should the court ruled against the individual mandates. repeal, what senator harkin said. they may not be successful, but they have a strategy. they are ready to pounce. to use the momentum. do you have a strategy? are you discussing what you would do if the court rules against your wishes? >> i expect the court will uphold it. >> right. >> our strategy, of course, was to pass the bill in the first place. and if they do not uphold it, then we will see -- i suspect there'll be a major issue in the elections, congressional and presidential this fall. in june or july or whatever, you will not see the ability to do the whole year's debate in congress.

the debate will be with the american people this fall. >> you have to give people these protections come july. how will you do it? >> maybe i'm just one person saying this, but the more the republicans and the candidates they have for president are out there talking are repealing our health care bill, i say, give them more rope. maybe i should buy their ads for them. the american people are now seen the benefits of this health care bill that we passed, and they do not want it taken away from them. i say to rebecca boykins, make our day. it continued to camp -- i say to republicans, make our day. continue to campaign against our health care bill. >> what is your strategy should the court not rule your way? >> i agree with pat leahy. i believe the court will uphold this. the precedents is there and the

legality is there. >> there is a lot more to the republicans' strategy then just to repeal. i do not see a single one of these people saying to repeal the go on to the floor this and say, let's do away with having your college-age kid on your insurance policy. repeal, repeal is a bumper sticker. it is not a policy. >> thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> just after democratic senators spoke with reporters, republican senators also held a news briefing. senator mcconnell called the health care law the worst legislation he has ever seen.

>> good afternoon, everyone. i happen to have been a plaintiff in the case before the supreme court about 10 years ago. we all thought it was a really big case because they gave us two hours of oral argument instead of one. three days of oral argument, i asked my staff to look at the recent past, and we believe we have to go back to brown vs. board of education to find a case in which the court has granted so much oral argument. we all understand this is a very significant lawsuit. these attorneys generals, some of whom are behind us that you will hear from later, were key in bringing this litigation. i think we all believe that if the federal government under the commerce clause can order you to buy a kind of product and what kind of product to buy, there's not much left of the commerce clause.

in listening to the questioning of the judges, it struck me that the four more liberal judges were mainly peppering the plaintiff's counsel and the other five were largely -- although not exclusively -- peppering counsel for the government. what that leads to ultimately, we do not know. but we know the suspense will be over in june. and regardless of how the supreme court rules on the constitutionality of what i believe the single worst piece of legislation that has been passed in the time i have been in congress, it is still a bad idea. if the senate republicans become the majority next year, the first item on the agenda of a new senate republican majority would be the repeal of obamacare and the replacement of it with something that makes more sense and is targeted at the problems that we actually have in american health care. with that, i would like to turn it over to my friend and

colleague, senator mike from nebraska. >> thank you, a leader. just a few impressions of what i deserve -- observed during arguments today, i think the leader was right on target. i was watching justice kennedy closely. i guess, everybody was. he came right out very click -- very quickly in argument and ask some very fundamental questions. the first thing he pointed out was, if this is going further than any other case, which i believe both sides, all sides acknowledge that it is, there is a substantial burden, a heavy burden on the part of the government to justify their action, to find the authority within the constitution to do what they are doing. that seems to be right to the

heart of what we are talking about today. the second observation that i would point out also came from justice kennedy. he said, you know, this fundamentally changes the relationship between the people and the government. and that is one of the points that we have been making all along, this notion that somehow, congress believes that it has the power under the commerce clause to force people into commerce, for whatever reason you choose not to be in commerce -- and for whatever reason, to choose not to be in commerce is a stretch beyond where our country has gone. you never know. these are on the arguments. they are asking questions to try to figure out where they will settle in in terms of trying to decide the case. but i would say, the government had a tough day. that would be my impression. with that, let me turn the microphone over to my colleague,

senator cornyn. >> the reason this case is so important, as you all know, and as the senator johanns pointed out, is because this really does grow the government in an unprecedented way in our history. as government grows, individual freedom shrinks. that is basically what this case is about, whether we as individual citizens can choose our own health care options, or whether the government is going to impose a one size fits all on all of us. and by the way, taking money from medicare, which is already on a fiscally unsustainable path, to create a new entitlement program and creating a health care plan where costs will, explode dramatically in 2014 as the individual and state insurance exchanges are created.

this insurance is not only an affordable, but makes matters worse when it comes to current -- not affordable, but makes matters worse when it comes to current insurance programs like medicaid. it will result in the shrinking of individual freedom in making health care choices. instead, a 15 member unelected board of bureaucrats will decide whether your medical health is worth it, or whether the government will choose not to pay for it because of the cost- benefit analysis of bureaucrats. it is simply not worth it. i turn it over to senator hutchison at this point. >> thank you. i think we have seen these early arguments, yesterday especially where we were arguing whether it was a tax or a mandate. i thought justice robert certainly said, well, of course,

we all know that if it is a tax, that makes congress have the capability to do it. he basically said, it looks like a duck and it walks like a duck and quacks like a duck, it is a doubt. which means, it is a mandate. it is an unconstitutional mandate and make this whole lot unconstitutional. i think when you look at what it is doing, it is telling every business in america that they have to subscribe to a government-run health care plan or they cannot offer the premiums. it is a mandate that is unsustainable in the constitution. i think the justices are beginning to get enough information that we hope they will come to the right decision. there is no question that two- thirds of the american people believe this is an encroachment on their freedom. i hope that we can change it some day by law, but i hope we

can start all over and have a good health plan for more access by americans to an insurance that they can afford and that they want. now i will turn it over to senator marker rubio from florida. -- mariko rubio from florida. >> thank you for the opportunity to talk to you. i am glad that the supreme court has taken on the challenges of the constitutionality of this law. i'm open they will see that it violates constitutional principles, particularly in the role that the government should play. we do not know what side this will turn out on, although we know it will turn out on the side of the constitution. we know that this will be a disaster for america financially. the health insurance crisis has to be confronted, but this is the wrong way to confront it. it undermines and takes away the ability of our economy to grow and prosper. there are thousands of

businesses across the country that are free to hire new people because they do not know how this lot is going to impact them. there are other americans that are beginning to lose existing health care coverage, breaking the promises made when they first pass this bill. there are others finding difficulty accessing insurance. the result is that what we do not know how the case is going to turn out, we know how obamacare is turning out. that is, it is a job killing initiative that sets us back in arriving at a solution at the health insurance problem in the united states. i hope to repeal obamacare and also replace it with initiatives that embraced the market and embrace free enterprise and a breeze individual choice, and at the same time allowing us to deal with the the issue -- the issues that we need to phase in

health care. [speaking spanish] and now it is my honor to introduce you to the attorney general from florida, who has been leading this effort, pam bundy. >> thank you, senator. and we are so blessed to have senator rubio and so many great members of congress here today to support us and continue to fight for us.

we have been in the courtroom for two days. we feel very confident. if we feel very pleased with the questions that the justices have been asking. and as we have said from day one, this is unconstitutional. this is a government over reach like we have never seen before in our history. we have got to stop it. that is why we are here this week and that is why we are in front of the united states supreme court. we feel very confident we will hear another day of argument on the severn ability issue as well as the medicaid expansion. bility issue as well as the medicaid expansion. as the justices said, this would be such an overreach. if the federal government can do this, they can force us to do anything, and that is where we are fighting this with everything we've got.

now i would like to introduce of my colleague, the attorney- general from the south dakota and the next united states senator. >> first, i want to say thank you to my colleagues from florida and texas and south carolina. we have a managing committee from six states that have managed this litigation. we started with 13 states. law professors across the country said this will never end up in the supreme court and you have no opportunity to defeat this legislation in the supreme court. here we stand before the supreme court now, and i feel a lot better after witnessing that the then when we started. all eyes were on justice kennedy. he was very skeptical of the mandate and the constitutionality of the mandate. that makes me feel better about our chances. it is hard to predict, though, when you stand outside the supreme court, as to what they are going to do.

but i can tell you that in keeping with justice kennedy's prior decision making, he is very skeptical of unlimited congressional power under the commerce clause. my colleagues and i have been managing this case day today. we feel great about the questions we heard from the justices. we feel positive that the mandate will possibly be struck down, and it is, tomorrow will be very important when -- if it is, tomorrow will be very important we talk about the issue of severability because it will matter as to the constitutionality. here is my colleague. >> the senators who spoke earlier, as well as leader mcconnell, have talked for jiabao years about repealing and replacing obamacare. after today, we will not have to worry about crossing the bridge, because we are getting closer

and closer to the court striking down obamacare all together -- we have talked for two years about replacing obamacare. we knew it was going to be about replacing individual liberty and growing government. and we knew if we could get the court to agree about focusing on obamacare with a focus on individual liberty, we had a chance of winning. it will replace to walk out of the courtroom today knowing that by of the justices on the u.s. supreme court focused their powerful questions on that very issue. that is the unprecedented encroachment that obamacare imposes on individual liberty. today, a positive step in the right direction, not just for the states to bring this lawsuit, but for all americans that cherished the verdict, believe in the constitutionality -- believe in the u.s. constitution and want to see those laws in force.

here is attorney general wilson. >> what i heard today in accord was a member of the supreme court, justice kennedy, say that if the court upholds this law, it will fundamentally change the relationship by which the government relates to the people. the government at that point, tried to make the government -- the argument that we are dealing with a health care market. chief justice roberts made the point that this can be a slippery slope, in that if we can regulate the health care market, then we cannot pick and choose in the future but, -- congress can or cannot regulate. it is a slippery slope, a pandora's box. that is of concern to me. the drafters of our constitution never intended, never gave this congress the power to create power by forcing people into contracts. it gave congress the power to coin money, to raise armies, but

never gave congress the power to create commerce. and that is what this does, it shows people into contracts that they do not want to be in and then it regulates them. that is something we have to stop. back to what justice kennedy said, this fundamentally changes the relationship between the people and their government. that is why this case is so important. i do not know if there is any time for questions. >> if we're going to be at the florida house at 2:00 p.m. for media, all of the attorneys generals who are here -- there are approximately 20 about -- and you are welcome to come over there at 2:00 p.m. and we will take questions. even if you have individual questions for individual states. we will be there at 2:00 p.m. >> thank you all. [captioning performed by national captioning institute] [captions copyright national

cable satellite corp. 2012] >> also this afternoon, senator mike lee of utah spoke to reporters about the health care law. >> do you have some legislation ready to go, some health care reforms? do you think that there needs to be health care reform? >> of course. like all americans, i perceive that there are problems associated with it. unlike those who voted to pass it, i believe that the entities who have the kind of power to enact legislation, sweeping legislation dealing with most of these issues are states. and not the federal government. s, is, after all, the state' like doctors and nurses and health insurance clinics -- and health clinics the regulate.

and of those drivers are the seeds of regulation, not federal regulation. that is where true reform needs to occur, not at the federal level. it is with the states. >> [unintelligible] >> i tend to believe i tend to believe many proposals are not appropriate for federal legislation. i did not vote before the last four that came through the senate. >> you were talking about the importance of justice kennedy's role. how do you think he did based on the questions asked? >> in the wake of the answers, i think he was leaning toward the proposition that the individual mandate is unconstitutional and that it exceeds congress' power. that becomes even more

compelling when you couple that with a review of his writing on cases addressing questions a structural federalism. >> what did he ask that made you think that? >> the as the number of questions about a limiting principle that exists. in the event that the court s were to conclude with bb on congress' power, that was significant. does it include the power to compel people not to engage in commercial activity? >> do you think there is position,bout alito's if we say he is in the conservative camp?

>> i'm not sure i understand your question. >> do you think there's anything on this case that would be unpredictable and? >> and do not want to describe that. it is not a word i typically use. based on the questions today, and he seems to me to be significantly skeptical of the argument that congress may compel people to purchase a specific type of health insurance. >> the state said he could do if it but only at the sale. the government said you cannot. >> a lot of the argument is

focused on that. many of the members were there. a lot of the justices use that point. >> he did not read it there? >> i did not think they were saying or anything about how they asked a question indicated they thought that it was a basis

for the individual mandate. i think they were trying to clarify the position. >> most americans are forced to buy car insurance as a public safety issue. people say it is no difference because taxpayers end up picking up the tab for those that do not have health insurance. how is it different? >> justice sotomayor ask something similar. it is state and not congress that requires people to buy automotive insurance. the state power is different in federal power. james madison tried to get them to modify the constitution. that deals with automotive

insurance. you do not have to buy that as part of being a breathing, a living human being. you may choose not to purchase a car or if you have one not to drive the car. if you do not drive, you do not have to buy insurance. this is an by just by virtue of existing on american soil you must purchase a specific kind of health insurance. one of the arguments made by michael that i thought was a special, if you're going to exercise the power to the government, the government opposing that power needs to have general police powers. the state have general police powers. connors does not. not.ongress does >> i have to run down here. [captioning performed by national captioning institute] [captions copyright national

cable satellite corp. 2012] >> tomorrow we will previewed the supreme court case on the constitutionality of the health- care law and we will get today's oral arguments that all americans buy health insurance. and david cole on whether the entire law will be thrown out if the justices find it unconstitutional. then a conversation on the expansion of medicaid. we are joined by kaiser health news. "washington journal" is live at 7:00 a.m. eastern. >> the supreme court tomorrow has is third and final day of oral argument in the constitutional challenge of the president's health-care law. in the morning, the justices

consider whether the law should fall of the individual mandate is found unconstitutional. their release that or argument after it has concluded. at 1:00 p.m., we will bring it to you on c-span3, c-span radio and cspan.org. >> still ahead, federal reserve chairman ben bernanke teaching a class today at george washington university. then the head of the president's council of economic advisers. after that, house republican study committees with their proposed budget for next year. later, a congressional hearing on the west of virginia coal mining disaster that killed 29 miners to years ago.

-- two years ago. >> the march 79, c-span began televising the house of representatives. this is available on television, radio and online. >> we're talking about the supreme court. they are the ones that changed this country inevitably with what we say the march toward progress. the march toward taking down the walls of discrimination that prevented the civil rights act. the 1973 act says women will be treated equally. americans disability act said the disabled will be part of the american family. all of it is a march to

progress. the one institution that protect its is the supreme court of the united states. >> c-span, accretive by america's cable companies as a public-service -- created by america's cable companies as a public service. >> ben bernanke said the fed's action prevented a global financial collapse. he called the bailout distasteful but necessary. remarks came at george washington university where he has been teaching a class on the role of the fed in economy. >> i would like to welcome everybody to a third lecture from chairman ben bernanke. in the first to lectures, we heard history and we heard the time from the post war up to

2008. those are interesting lectures. they were great of additional lecture. you forveryone for youone of watching television to see what he would do next. today we will hear about what he did next. i think this is particularly interesting. i welcome chairman ben bernanke to talk about 2000 a financial crisis. chairman bernanke? -- about the 2008 financial crisis. chairman bernanke? >> welcome back. today we want to talk about the federal reserve's response to the crisis. in the last couple of lectures, i have mentioned a key theme of the lectures, which is the two main responsibilities of central banks, financial stability and economic stability. a limit turn it around a bit to talk about the two main tools

for financial stability. it provides short-term liquidity. it can help, a financial panic. i will be focusing primarily on the lender of last resort function. i will come back to monetary policy in the final aftermath. last time, at this is just a repeat, i talked about some of the vulnerabilities in the financial system that transformed the decline in housing prices which by itself

seemed no more threatening than the decline in dot com stock prices. , perhaps because of the time of the great moderation. they can monitor their own risks. a special reliant. in a civil honorable to iran. -- that was the private sector. the public sector had its own vulnerabilities and clothing gaps in the regulatory structure. there was adequate oversight.

sometimes the supervisors and regulators in not doing a good enough job. there's not enough attention paid to enforcing its. finally, an important gap that we really have began to look at since the crisis is that with individual agencies, there is not enough attention being paid to the stability of the financial hole. fannie mae and freddie mac are nominally private corporations. they have shareholders and a board. there are established by congress in support of the industry. they're known as government sponsored enterprises.

the others are the middle man so to speak between the originator of the mortgage and the old man holder. if you are a bank any make a mortgage loan, you can take the mortgage made and sell it to fannie mae or freddie mac. they will take all the mortgages they collect, put them together into mortgage backed securities which is a combination of hundreds of thousands of underlying mortgages, and then sell that to the investors. that is a process called securitization. fannie and freddie pioneered this approach. fannie and freddie, when they failed their mortgage-backed securities, they provide guarantees against credit laws. mortgages go back, they make the

investor whole. fannie and freddie were permitted to operate with inadequate capital. they were at risk in a bad situation where there are a lot of mortgage losses. they do not have a lot capital to pay off. on many aspects were not well anticipated, this one was. going back for a decade, the fed and many other people said that the fannie and freddie did not have enough capital and they were a danger to the stability of the financial system. what made the situation worse is that fannie and freddie decides selling these are mortgage- backed securities, they also purchase large amount of mortgage backed securities of their own and some that were issued by the private sector. they made profits for

withholding the mortgages. that created an additional -- they were vulnerable to losses. without enough capital, they were at risk. an important trigger that i talked about last time, it was not just the house price boom and bust. it was the mortgage fraud and practices that went along with the movement that was particularly damaging. therefore a lot of exotic mortgages, and nonstandard mortgages, a 30 year prime. there were other mortgages being offered and often to people with a weaker credit. one feature that many of these mortgages had was that in order for them to be repaid, you had to have ongoing increases.

after years of i go up to 3% 45% and higher and higher. in order to avoid that, you had to refinance. as long as house prices were going up, creating equity for homeowners that it was possible to do that. once home prices stop rising, and by 2006 they were declining, borrowers are finding themselves under water. they cannot be financed. they found themselves stuck with these increasing payments on their mortgages. here are some examples of that mortgage practices.

they all have the characteristics. take for example the second one. greatan mortgage. most of these mortgages have the feature that they reduce monthly payments allow mortgage payments to rise over time. the other aspect was that there was very little underwriting, very little analysis, to make sure that the borrower was creditworthy to be able to make the payments. here are some advertisements that can illustrate some of the issues. i like the one on the right. we took the name of the company off. but so that the features they are offering. 1% low start rate.

that is the start rate. stated in come to mean to tell us with your income is. we write it down. no documentation. that is evident. 100% finance, and no down payment. interest only loan. you pay the interest but no printable. debt consolidation. it meant that you could go to the mortgage company and say not only does want to borrow money to buy the house, but i want to add in all my credit debt and everything into one big mortgage payments. i will pay for that. you can see that there are some very problematic practices here. the mortgage companies and banks and savings and loans made these a mortgages. where did they go? how were they financed? some of them are kept on the balance sheet of mortgage originator. many or most of these exotic or

supper i mortgages were packaged in security and sold into the market. for example, some of these securities were relatively simple. these are relatively simple securities made up of hundreds of thousands of underlying mortgages. some of the securities were very complex and hard to understand. this would often be a security that combined mortgages and other kinds. they were very complicated.

they took a lot of analysis. one reason that many investors are willing to buy the securities because they had the comfort of the rating agencies whose job it is to rate the quality of bonds and other securities, giving triple a rating is too many. they're saying they are safe and you do not have to worry about the credit risk. many securities were sold to investors including pension funds, insurance companies, foreign banks, even while the individuals. -- welalthy individuals. sometimes the retreat and off- balance sheet the call that would hold the securities and finance themselves by short-term funding. some of these went to investors.

someone with the financial institutions and sell. they were using various kinds of credit derivatives to basically say pay as a premium and if the mortgages go back, we will make you good and hold. that makes a triple a rating. these practices and made the underlying securities no better and created a situation where risks could be spread throughout the system. here's a little bit of a diagram showing how is the prime mortgage securitization might work. of the left is a mortgage company or a threat company parent their guns to sell it

anyway. they take the mortgages and they sell them -- or a threat to the company. they were going to sell it anyway. they take the mortgages and sell them and combine them into a is athere/hat isn't a dalmatia . they could see what do we do to get triple a ratings. there would be negotiations. the security would be rated aaa. they will then take the security and cut it up in different ways are sell it as it is to investors like pension fund. in addition, financial firms kept many of the securities on their own books or related investment vehicles.

finally you had credit insurers. they provided insurance if the underlying mortgages went bad. is the basic structure. i have seen some diagrams of the complete flow chart. they're incredibly complex. this is a simplified version. the basic idea is here. what is a crisis? it occurs when you have any kind of financial institution which illiquid assets.-- in a classic bank panic, they lose faith in the quality of the assets by the bank. the bank cannot pay off everybody.

they cannot change their loans into cash back. the run on the bank is self- fulfilling. it will either fail or have to dump all of the assets quickly in the market. that is what japan and basically is. 2008 was a classic panic but in a different institutional setting. in particular, as high as prices failed for the reasons i described, people who had borrowed on a separate mortgage were not able to make the payments. it was evident that there would be delinquent or default. that would impose losses on the financial firms and investment vehicles and on credit insurers like a.i.g..

the securities were so complex and the monitoring was not sufficiently strong that there was not just the losses. the very striking fact is that if you check all of these separate mortgages in the u.s. and put them together and assumed they were worthless, the total losses to the financial system of bb size of one bad predicts financial system -- the total losses of the financial system would be about the size day on the financial stock market. there's a lot of uncertainty. as a result, wherever you had short-term funding we had all types of funding that was not deposits insured. it was whole self funding that came from investors and other financial firms.

whenever there is a doubt about a firm, the investors, lenders, a counterparty would pull back their money quickly. there is a whole series of run. they were forced to sell other assets quickly. many important financial markets were badly interrupted. in the depression of the 30's, there were thousands of bank failures. almost all of the banks that failed in the 30's were small banks. there were some larger banks that failed in europe. the difference in 2008 or there in many small banks that failed and united states but also intense pressures on quite a few of the largest financial institutions.

the next two pages are just a short list of some of the ferns that came under pressure. bear stearns came under intense pressure in the short-term funding markets. it was sold to jpmorgan with that assistance in march. things calmed down a bit after that. they did not have enough capital to pay the losses on the mortgage guarantees. the federal reserve and worked with the regulator and with the treasury to determine the size of the shortfall. over the weekend, the treasury

of the obligations. if you held the fannie and freddie mortgage-backed security, the company was in a partial bankruptcy. the u.s. government now guarantees. it protected those investors. it had to be done or there's an enormous tension of the crisis. investors held hundreds of billions of those securities. famously, lehman brothers -- and i will talk more about this -- had severe losses and came under great pressure in cannot it oranybody to abidbuy provide capital. they file bankruptcy. merrill lynch was acquired by

bank of america. it saved the firm from potential collapse. on december 16, the next day, aig was the largest multi dimensional insurance company in the world. it have been selling the credit insurance and came under enormous attack from the people demanding cash either through requirements or short-term funding. they provided emergency liquidity assistance and prevent the firm from failing. i will come back to this as well. washington mutual was when the big thrift companies. it was closed by regulators. part of the company were taken off and j.p. morgan acquire this company. october 3, wachovia came under a

series of pressure. it was acquired by wells fargo. this gives you some sense of these firms that are among the top 10 are 15 firms in the united states. this is not a situation and only small banks are being affected. here we had the most complex and the national financial institutions. the lessons from the great depression going back are two. the fed did not do enough to stabilize the banking system. in a financial panic, they have to lend freely to try to stabilize the financial system. in the second lesson, and they did not do enough to prevent

inflation and contraption predict contraction of the money supply. the need to have accommodative monetary policy to help the economy avoid the depression. they did take vigorous action. they worked with other agencies. one aspect of the crisis that i think does not give enough attention is the fact that with a global crisis, in particular europe was suffering, it is an impressive example of international cooperation. there is a previously scheduled meeting in the industrial

countries. these are the seven largest industrial countries. they came and met in washington. there are these big high- profile international meetings. the much of the work is done in advance by the staff. we have a discussion it is fairly routine. this is not one of those boring meetings. we tour of the agenda. we talked about what we're going to do. it was threatening the system. in the end, we came up with a statement written from scratch.

it was circulating. there were a number of statements involved. among those were that we were going to work together to prevent the failure of any more financial institutions. we're willing to make sure that banks still have access. we are going to work to work on investor confidence. we're going to operate as much as possible to organize credit markets. this is a global agreement. to this agreement, the u.k. was the first to announce a comprehensive program stabilizing the banking system. the u.s. announced major steps to put capital into our banks and so on. a lot happened in the next couple of days. just to show you that this works, this shows you the

interest-rate on loans between banks. bank aid lent to bank be -- bank a lends to bank b. the interest rate is low, way less than 1%. banks need some place to park their money overnight. as you can see starting in 2007, banks lost confidence in each other. that is shown by the increase in the rates because to each other to make loans. in 2007, you begin to see the pressures as house prices began to fall. there are concerns about the quality of the mortgage securities and the firms. in march 2008, you can see

another. this is a pretty tough. look what happened when bear stearns happen. probably not much lending was taking place. this was indicative that there is no trust whatsoever even between the largest financial institutions. nobody knew who was going to be next. no one knew who was going to come under funding pressure. but what happens under the international announcements. he began to see a reduction in the pressure. by the end of the year, there was an enormous improvement in funding pressures. this is a great example of

international cooperation. it illustrates the point that this was not just a u.s. phenomenon or u.s. policy or the federal reserve. it was a global cooperative effort, particularly between the u.s. and europe. the fed played an important role in providing liquidity and making sure that the panic was controlled. the me talk briefly about this in general. it will illustrate some of the issues. the federal reserve has a facility called the discount window which provide short-term funding. it provides funding at the end of the day. it as collateral with the fed. they can borrow it overnight. it is a discount rate. the discount window allows the fed to lend to banks and is

always there. no extraordinary steps were needed to leave the bank. we did make some modifications in order to reassure banks about the availability of credit. we extended the maturity of the loans which are normally a over day -- overnight loans. the idea was having a fixed amount we were auctioning. the discount window was operative. we use it aggressively to make sure that banks have access to cash to try to calm the panic. our financial system as a lot more complicated than when it

was created in 1913. there are many other different kinds of financial institutions now. the crisis was appearing in all kinds of firms and context. the fed have to go beyond the discount window and create other programs that allowed us to make loans to other kinds of financial institutions. it provided liquidity to firms are suffering from loss of funding. all these loans were secured by collateral. the cash was going more broadly into the system here it gets the

credit moving again. this is these traditional lender of last resort function that has been around for hundreds of years. it took place in a different institutional context. here are some of the institutions and markets that we addressed there are special programs. they dealt in securities and derivatives. there are facing serious problems. we provided cash and short-term lending to those firms, a collateralized basis. commercial paper borrowers

received assistance. i will do a case study. then the asset backed securities market. in the modern economy, a lot of the funding that you get for mortgages and consumer credit are funded through the securitization process. banks might take all of the credit-card receivables, but of them together and then sell them in the market to investors. this is called the asset backed securities market. the fed created some new liquidity programs to help get this started again. what the bank lending was totally standard lending the the normal discount window, these other types required as to

evoke emergencies. reservea clause in the act that says that under unusual circumstances, the fed can lend to other types of entities other than just banks. in this particular case, with all these other problems, we invoke this authority and used it to help stabilize variety of different markets. let me give you a little bit of a case study to help you understand how this helps the economy. i want to talk about money market funds. money market funds are investment funds in which you can buy shares in the invested in short-term liquid assets.

the almost a starkly always contain a share price. these are used frequently by institutional investors. it pension fund probably would not put that into a bank. there is a limit to how much of deposit insurance covers. what am i do instead will be to put it into a money-market fund that promises $1 for each dollar put in. it is a great way to manage your cash. this diagram shows investors putting their money into the funds.

money market shares are not insured. they do not have deposit insurance. the investors to put their money in expect they can take their money out at any time. they tended to invest in short- term assets like commercial paper. commercial paper is a short- term instruments issued this of a play by corporations. it is 90 days or less steadily. in non-financial corporation may issue its to allow us to manage the cash flows. in may needs them to meet the payroll or cover inventories. ordinary manufacturing companies would issue commercial paper to get cash to manage

their daily operations. the financial corp's would also it should so they can use it to manage their liquidity positions and use it to make loans to the private economy. here is the picture more completely. ecb investor investing their excess cash. the money market fund buys commercial paper which is a funding source for nonfinancial businesses and for financial companies to lend it on to other borrowers. what happened to this very nice arrangement? lehman brothers created a huge shock wave. lehman brothers was an investment bank.

it is not a bank. it was not overseen by the fed. it held lots of securities. it cannot take deposits. but funded in itself in the short-term markets. lehman invested heavily in mortgage related securities and commercial real-estate. as house prices fell and delinquencies rose, neiman's financial position got worse. there were losing a lot of money in commercial real-estate. lehman was becoming insolvent. they were losing money in all of the investments. it is coming into a lot of pressure. they started withdrawing funding from lehman.

investors refuse to roll over the commercial paper and other business partners said we will not do business. we are afraid you're not going to be here. they were increasingly losing money. they tried with federal reserve help. they were unable to do this on september 15. this is an enormous shock of the global system. in particular, one failure was the money market funds. there was one particular money market funds that fell among the other assets commercial paper issued by lehman. when lehman failed, it was either worthless are completely

illiquid. they could pay off depositors at a dollar per share. if you ask for a dollar that he can get it. you know they do not have enough money to get everyone off. what would you do? the same thing in 19th century bank depositor would do. investors began to pull up their money just like the standard bank run. i will show you the data on that. we had a very innocent bank run in which investors began to pull up their money as quickly as they could. they provided a temporary

guarantee that said we guarantee you would get the money back the do not pull out right now. the fed created a backstop liquidity program under which we lent money to banks and which turned use them to buy some assets of the money market funds. this is daily data. ecb lehman bankruptcy a couple days later. -- ucb lehman bankruptcy a couple days later. the lehman bankruptcy a couple days later. you see a hundred billion

dollars a day flowing out of these funds. within two days, they announced a program that came in to support the liquidity of these funds. the run ended pretty quickly. it was a classic response, providing liquidity to help the institution being run to provide the cash to its investors. the money-market funds were holding commercial paper. as they began to face runs, and they in turn began to dump commercial paper as quickly as they could. as a result, it went into shock.

we have lehman failing. it causes them to experience a run. in turn, it is put in the commercial paper market. it was hard to get the system stable. there was sharp increase in rates in the commercial paper market. lenders were unwilling to lend for maybe one day. in turn, it affected the ability of those companies to function and the ability of the institutions to fund themselves. they responded in a way of they would have responded and establish special programs that we stood as a backstop lenders. we said we will be here ready to back stop you if there is a

problem rolling over these funds. that restore confidence in the commercial paper markets. you can see this panicked phenomenon and increase in rates, which understates this pressure. it does not include the fact that for many companies there was no way to get funding. or they got it the fed actions restore confidence. what other activities is one

want to cover. another one is working with these critical markets and providing a broad base liquidity to financial institutions to bring the panic under control. they tried to address the facilitated takeover of their storms -- of bear stearns but jpmorgan case. we were afraid the collapse would add to the stress and set off a panic. bear stearns was saw them.

in to guarantee the obligations -- -- bear stearns saw it and were able to guarantee the obligations. we are consistent that we should be making loans that will light to be paid back. we felt we were secured pinwheelin. let me talk a bit about the case. aig was a complicated company. it it was a multinational financial services company with many constituent parts. it had part of the company that was aig financial products that was involved in all types of exotic derivatives.

the loans was partly what they were selling to the owners of mortgage-backed securities. when they started going back, it became evident that a.i.g. was in big trouble. it is coming under tremendous pressure. the failure of aig would have been the end. it was interacting with so many different firms. it was so interconnected with the european financial system. we were quite concerned that if they went bankrupt we would not be able to control the crisis any further. from the perspective of the lender of last resort. comic a.i.g. had taken a lot of losses. underlying those losses was the

world's largest insurance company. they have lots of privately good assets. it had collateral to allow us to make a loan to provide liquidity is needed to stay afloat. we used it as collateral among the $85 billion. it is a fairly serious amount of money. later they provided assistance. it is legitimate in terms of lender of last resort and the fed has been fully paid back. it was a critical element in the global financial system. over time, at a i destabilized and repaid the fed with interest. the treasury still owns a majority share.

aig has been paying back the treasury as well. these are things we or on the ground to bend the system from collapsing. -- these are things we had on the ground to prevent the system from collapsing. if a company is so big that knows it is going to get bailed out, even putting aside the fairness, it is not fair to other companies and they have an incentive to take bigger risks.

it is a situation that we cannot tolerate. the problem we had in september of 2008 was we really did not have any legal tools that allow us to let lehman brothers and a.i.g. and these other firms go bankrupt in a way that would not have incredible damage and the rest of the system. that being said, we want to be sure that this never happens again. we want to be sure the system has changed so that if a large critical for mike a.i.g. comes under this kind of future, there will be a gateway said that it

can fail and the consequences can be born by management shareholders and creditors. i will talk next time more about the progress we have made collectively that will hopefully end too big to fail. let me say a couple of words about the consequences of the crisis. we did stock the meltdown. one thing that i was always sure of was that the collapse of the system would have very serious collateral consequences. people were arguing even as late

as of september 2008, when the lead the firm's collapse? -- why don't you let the firm's collaps is the whole system had collapsed, we would have serious consequences. as it was, even the were prevented the total ball down there was still a very serious collateral impact not just on the u.s. economy but the global economy as well. even though the crisis was brought under control, the u.s. economy and much of the global economy went into a recession. the united states gdp fell by 5%. there are some other statistics -- 8.5 million people lost their jobs. very consequential impact.

as i said, this was not just the united states situation. the united states recession was an average recession. many countries around the world had worst declines. those who depended on international trade. it was a global slowdown. as all this was happening, fears of the great desist -- depression were very real. nevertheless, the great depression was much worse than the recent recession. i think the view is increasingly gaining acceptance that without the policy response that stabilize the financial system in 2008 and 2009, we could have had a worse outcome in the economy. here are a couple of indicators to close with a couple of graphs.

i think this is an interesting graf. this shows the stock market. the blue line starts in august 1929, which is the peak of the stock market before the great depression. the red light is the most recent stock price. it starts in october 2007. the graph shows to the evolution of stock prices in the depression. in blue and in the most recent period in red. what is pretty striking is that for the first 15 or 16 months stock prices in the united states behaved pretty much in this crisis as they did in 1929 and 1930. about 15 or 16 months into the recent crisis that would have placed it in the early 2009 about the time the financial crisis was stabilizing, look what happened. and the depression-era the stock prices kept falling.

stock prices lost 85% of their valley. the united states, stock prices recovered and began a long recovery. they are now more than double where they were three years ago. this is industrial production, the measure of output. the red is the more recent data. the blue is the depression-era data. you can see in this case that the industrial production was not quite as severe or fast as in the depression. you get the same basic phenomenon that about 15% or 16 months into the -- about the time the financial crisis was brought into control, production bottomed out and began a period of steady recovery. where as the depression, collapse increased for several more years. that is a rapid overview of the

crisis of 2008 and 2009. we will talk about the aftermath, the recession, how did monetary policy response to the recession. why has the recovery been sluggish? what has happened to financial regulation to make sure this never happens again? what lessons has the fed taken from this experience? questions? [unintelligible]

>> there were a couple of reasons. one reason is simply the fact that firms are probably too confident about house prices. house prices are likely to keep rising. in a world where house prices are rising these are not bad products. people can afford to pay for one year, but they can refinance into something more stable. this might be a way to get people into housing. but, of course, the risk was house prices would not keep rising. the other aspect of this is -- the demand for securitized products grew very substantially after this. . in part there was a large international demand from europe and from asia for a high quality

assets. the ever clever ye of rick -- financial firms figured out they could take a variety of underlying credits weathers a prime mortgages are whatever and through the miracles of financial engineering degree from that some securities that would be high quality and rated triple a that they could sell abroad to other investors. that sometimes left them with the reminding bad pieces, which they capped or sold to other financial firms. there were trends in the financial markets including clover confidence about the ability to manage the risks. they believe house prices would probably keep rising, a sense they could -- even after they made the mortgages they could sell them off to somebody else. that other person or investor would be willing to acquire them as a big demand for safe assets.

for all of those reasons, it was a very profitable activity while and lasted. only when it began to fall did it become a loser. >> [unintelligible] >> the volcker role as a part of the dodd frnak refomr that i

will tlk about in more detail on thursday. the purpose as you said is to reduce the risk of financial institutions from preventing banks from doing proprietary trading. the law recognizes that there are legitimate exceptions to why banks might want to acquire short-term securities. those include hedging against risk. one particular exception is to make markets. to serve as intermediaries to buy themselves -- by and sell to create liquidity. that is exempted from the volcker rule. one of the challenges of implementing this role is trying to figure out how to set a set of standards that allow

legitimate activities while ruling out the proprietary trading. that is obviously very difficult. we are working on that. we have put out a row. we have thousands of commons. we are trying to figure out how to do that. the point you raise, liquidities and markets are important. during the crisis, it was much worse problem than just a little lack of trading volume. you had big financial institutions unable to find themselves unable to find a funding to support their asset positions through the assets of the held which left them with one or two possibilities. he their defaulting because they did not have enough funding, or the track that many of them took which was to sell off assets as quickly as possible which spread the panic.

if there is a huge seller's market for commercial real- estate bonds, that would drive the price down very sharply. anybody else holding bonds finds their financial position being rewarded, that creates pressure on them. i didn't use the word contagion in my discussion, contagion is an ls context is the spreading of panic and the spreading of fear from one market to one institution to another and contagion was a major problem in many financial areas. that was one of the mechanisms that lead to the funding pressures to jump from firm to farm and create such a broad based problem. >> [unintelligible]

as we some multinational corporations of the brink of failure, what pressures from the international community, [unintelligible] >> there were not any real pressures. everything was happening too fast. i think the fact that one area where collaboration must not as good as we would like was exactly dealing with some of the multinational firms. there were problems between the u.k. and u.s. over the lehman brothers thriller and inconsistencies with cause process for the predators of lehman. one of the things that we are

trying to do under the got frank financial reform legislation, which includes as i mentioned before includes provisions for allowing large financial firms to fail. one of the complexities as many of the firm's that this would be applied to our multinational firms. but the dozens of countries. collaborations with other countries means figuring out how we would work together to save for as possible as part of how we would work internationally. we try to cooperate. we were in touch with regulators in the that the kingdom and elsewhere. given the time frames and the lack of preparation, we did not do as much as we would be able to with a lot more lead time.

i think that was a weakness of international collaboration. for the most part, countries cooperated in dealing with the financial institutions based in their own countries. that used dollars and needed dollar funding as opposed to euro funding. they used it because they helped dollar assets and a dollar luntz, they made loans to support trade which is often done in dollars. they needed dollars. the european central bank cannot provide dollars. what we did was called a swap.

we give the european central bank dollars and they gave us heroes. they took the dollars and let them on their own to european banks taking off the dollar funding pressure and easing dollar funding pressures a run the world. the swaps that are still in existence that because of recent issues in europe were an important part of collaboration. also in october of 2008 ready for the crisis was intensifying, the federal reserve and five other banks announced interest-rate cuts on the same day. we coordinated our monetary policy. we did our best to coordinate. there were some areas like working on national multi -- multinational firms where a lot more preparation was needed. we are still working on those things cooperatively today.

[unintelligible] >> why they were allowed to keep that much showing in the box. >> it has to do with accounting rules, basically. he create the separate vehicle. the bank might have substantial interest in that vehicle. they might have a partial ownership. they might have some promises to provide credit support if it does better liquidity support of it needs cash. it is does not have under the rules picture that time -- of the amount of control that the bank had done this off-balance she was officially limited, according to the rules they could treat it as a separate organization, so to speak now part of its own balance sheet.

that allowed the banks to get away with somewhat less capital, for example than they would have had to carry if they had all these assets on their own balance sheet. one of the many good developments since the crisis that these rules have been reworked. many of the off balance vehicles that existed during the -- rip before the crisis would not be allowed. it would have to be consolidated or brought back to the balance sheet and have appropriate capital and so on. those practices that are not completely gone, but the accounting rules of really tough and that the situation and circumstances under which a bank and put something off its balance sheet into a separate investment vehicle. >> you mentioned several large firms and 2008, where do you

draw the line between bailing out a bank. is it arbitrary or of the -- or is there a methodology that goes into it? >> i went to resist the were doctrine a little bit. the firms prove to be too big to fail and the context of a global financial crisis. that was a judgment that we met at the time based on their size, complexity, their interconnectedness and so on. it was not something we ever saw as a good thing. one of the main goals of the financial reform is to get rid of it. it is bad for the system. it is bad for the firms. it is unfair in many ways. it is a great in accomplishment to get rid of too big to fail. it was not a thing we supported in any way. we were forced into a situation

where we had to choose the least bad of many options. it is a good question. i think in the case of the crisis we basically had to make judgments on a case by case basis. we were trying to be as conservative as possible. i think in the case there was some much doubt in our mind this was a case where action was necessary if possible. lehman brothers was an insult possibly too big to fail, is since the its failure had enormous negative impact on global financial system. if there were helpless because it was an insolvent firm. it did not have enough clabber -- collateral to borrow from the fed. we cannot but capital into a fed that is insolvent. this is before tartar anything

provided capital of the treasury could use. we did not have a legal way to do it. if we could have avoided that, we would have done so. the two cases that we intervene, i think in the case was pretty clear given that the only difference themselves but also the context and environment that was going on at the same time. interestingly, we have had to get much more into the issue since the crisis because there are a number of different rules and regulations that actually require the fed and other regulatory agencies to make a determination about how critical a firm is. the new capital requirements require the largest systemically firms to have a capital surcharge. as part of the process, the

international bank regulators have worked together to try to set up a set of criteria relating to size, complexity, derivatives, a whole bunch of criteria that helps determine how much capital rigid extra capital they have to hold. the fed when it approves the merger between two banks, they have to elaborate between whether the merger creates a systemically more dangerous situation. we have worked hard and we have put out criteria that describes some of the variety of criteria including some miracle threshold so reluctant to try to figure out if a merger creates a systemically critical firm. if it does we are not supposed to allow the merger to happen. the science of doing this is progressing.

in the crisis our actual -- principal interventions with bear stearns and aig and other firms we allowed assistance to other firms but nothing to the extent of the aig system involved. we are looking seriously at this. now that the fed has become much more focused on financial stability, we have name division of people working on various indicators and metrics. but to try to identify risk to the system and identify firms that need to be carefully supervised and hold the special capital because of their potential risk they bring to this system. >> one from our ability you mentioned is the were assigning

to play braidings to securities that had much more risk than what it might warrant. it seems like the incentives would be aligned with buyers to seek our ratings that were more accurate to take more risk. was there is systemic problem in terms of credit ratings? [unintelligible] >> there were some problems. you identify one of them. you with the consent of the seller of the security to be the one who pays the credit rating, you would think it would be in the interest of the buyers. they are the ones carrying the risks to band together somehow. to pay the credit rating to give them the best opinion that they can about what the credit quality is of the security. unfortunately that modeled as does seem to work. there were nine examples of many where it works.

the problem is what economists call a free rider problem. if five investors get together to bring a particular issue, unless the keep the completely secret, anybody else and find out what the writing was that they can basically take advantage of that without having to be -- without having to pay. there are a lot of ideas about how to restructure the payment system to create better incentives for credit raters. it is a challenging problem. the obvious solution of having the investors pay only works if the investors collectively can share the cost and somehow keep that information from being spread among other investors. 2:00, i will see you on thursday to talk about the aftermath of

the crisis. thank you. [applause] >> if we can do our usual tip questions of the discussion board so we can have a discussion on the issues next week, that would be great. ok. see you on thursday. >> coming up next, the head of the president's council on economic advisers. house republican study members with their proposed budget for next year. a congressional hearing on the west virginia coal mine disaster that killed 29 miners two years ago. >> tomorrow the house of

representatives takes up the republican budget proposal for next year. it would increase in pentagon spending, courageous two tax rates, and give seniors a set about to buy health insurance. the debate gets under way at noon eastern and you can watch a live on c-span. >> starting sunday, see the winners in the student can video documentary competition on the theme "the constitution and you." we will air the top 27 videos each morning and you will meet the students that created them during washington journal every day. for a preview, checks tooting cam -- check studentcam.org. >> he said decreased unemployment is not a statistical fluke. alan krueger is the president

of economic advisers. he spoke at the national association for business economics after a brief introduction. >> our speaker is here. jay is a board member, an important part of our leadership team. he is managing director in global economies with wells fargo. he will introduce our speaker this morning. [applause] >> thank you. it is an honor to me to introduce the keynote speaker, dr. alan krueger. he is currently on leave from princeton university where he is the professor of economics

and public policy, a position he has held since 1992. he was born and bred in the state of unit -- new jersey. he matriculated at cornell university where he graduated in 1983 with honors and move on to harvard university where he earned a ph.d. in economics. from harvard he moved back to his home state where he joined the faculty of princeton university. as a yawned professor of -- i think the word prolific as a disservice describing. if i went through his cv line by line that would be here all morning. by my count dr. krueger has 117 published papers. it is not like he is mailing it in. many of these are in quality journals.

if that is not enough, he is the author of seven books since 1995. he has been the editor or associated editor of six different academic journals including academic letters and the journal of economic perspectives. he is a research associate and princeton university's population research and sits on the board of directors of the mccarthy organization. not only is he what the consider to be of the four most of the world today, he is no stranger to economic policy-making. he has done three tours of duty in policy. first he did a stint as the chief economist of the u.s. department of labor from 1994 until 1995. he returned at the beginning of the obama administration as the chief economist of the u.s. department of treasury. he was there until november 2010

and returned a few months later. he came back at his current position as the chair of cea. confirmed by the senate in 2011. he and his wife have two children. they are students at princeton university. i am told he is an avid tennis player and fan. back in the deepest darkest days of 2009 when the economy was in free fall, he encouraged some of his colleagues including mr. timothy geithner and sommers to get out on the court often to try to bring some of the tension. it is a deep honor to introduce our speaker dr. alan krueger. [applause] >> and thank you very much for that kind and detailed

introduction. kind of a walk down memory lane for me. i forgot, livingston high school, in the class ahead of me was a jason alexander, who starred in seinfeld among other things. on the class on the other side of me was chris christie, now a governor. i -- when it comes to tennis, i tried to succeed in getting my colleagues to play. it was nice to take tennis bracelet those who work with and do something athletic. i want to begin by commenting on the importance of business economists who work in the policy arena. compared with academic economists, which is the group i know most well, business economists are much more attuned to current developments in the economy and puzzles about

economic performance. business economists see the economy of clothes from their companies or industries perspective and there are aware of the distress and limitations of our economic statistics and often have access to proprietary information that yield additional insights to how the economy is performing. business economists make a living by raising and answering questions that are critical to their companies, their industries, and for economic policy makers as well. business economists, for example, have asked why unemployment fell so much over the last year while gdp growth was close to its trend level. while others celebrated and frolicked in the good weather of the last few months, business economists have asked whether good weather has caused a spurt

as the jump in job growth. and business economists have asked whether possible quirks caused by the sharp decline in the economy at the end of 2008 and beginning of 2009 have skewed our economic indicators. the newsletters, articles, and commentaries that all of you provide often spark a research agenda for us at the council of economic advisers. for these reasons, i am delighted to carry on the tradition of having the cea chairman participate in the nabe meetings. this is my second speech at nabe. some of you may recall that in the fall of 2009, when i was the assistant secretary for economic policy at the treasury department, i spoke at the nabe meeting in st. louis about the need for better data to help us monitor trends in the economy,

to help us make better business decisions, and to help us guide economic policy. this was a theme in this year's economic report of the president as well. each chapter contains a box on our statistical indicators. how they have improved, where we need to improve them, and steps that the government and private sector can take to improve our economic indicators. in some respects, the situation has improved since 2009, when i last spoke at nabe. in others, we have learned is worse than we thought. let me highlight an important example where the data was less accurate than we appreciated at the time. back when i spoke in 2009, the latest estimate was that gdp had contracted at an annual rate of

5.4% in the fourth quarter of 2008. this was already revised down 1.6% from the initial estimate of minus 3.8%, announced earlier in the year. last summer, we learned that the economy was contracting at an even faster annual rate of 8.9%. in the fourth quarter of 2008. this was the largest downward revision to quarterly gdp growth in over 60 years. although we knew things were bad, the revised data indicates just how close we were to falling off the edge of a cliff when the end -- when the obama administration took office in january of 2009. the economic crisis that struck before the months president obama took office caused more americans to lose their jobs than in any time since the great

depression. initial claims for unemployment insurance rose to over 600,000 per week and the job opening and labor turnover survey indicated a plunge in hiring. there were many causes of the great recession and financial crisis that began in 2007. i taught a course when i was at princeton called "the great recession: causes, consequences, and remedies." i showed a slide that listed 20 possible factors that economists have identified as causes of the economic crisis. these included stagnation in middle-class incomes and rising income inequality, which caused families to borrow, maintain consumption, regulatory gaps,

and even regulation of the financial system that allowed risk to build up in the shadow banking system, easy credit and weak underwriting standards that led to an unsustainable bubble in housing and other markets, lack of transparency, and the list went on and on. while economists will debate for a long time which of the potential causes was more or less central to the crisis, there can be little debating that the u.s. economy did not perform well earlier in the 2000's. even before the recession struck at the end of 2007, the job market was signaling severe problems. for example, from the end of the 2001 recession to december 2007 was the only recovery on record in which the employment-to- population ratio fell.

we lost 3.4 million manufacturing jobs in the seven years before the recession started. in the middle class -- the middle class has been struggling for decades. in 1970, half of all households have incomes within 50% of the median household. by 2010, that share was down to 42%. these problems did not happen overnight. but the recession made them much, much worse. it will take more than a few years to meet the challenges that have been building for more than a few decades. we are making progress in meeting those challenges. i like to use the rest of my time to discuss progress and recovery to date and, while we still have a long way to go, there are reasons to be cautiously optimistic about the

economy going forward. my theme is that the unique nature of the financial crisis and recession that followed have made the pace of the recovery uneven. but with the essential help of policy actions that the obama administration has taken, the economy is making a transition to more sustainable footing. the job market, in particular, is stealing from the deep wounds inflicted by the financial crisis. although there is a long way to go, before the later -- before the labor market is restored to full health, the accumulating evidence should lay confidence to the view that the economy is on the mend. i say this in full recognition of the fact that there is a long way to go to address the severe economic problems that had been view -- that had been brewing for a long time and boiled over

in the great recession. there are still far too many americans out of work or underemployed. that is why the president has put forward a number of proposals to create jobs and speed the recovery. this includes support for state and local governments to retain teachers and first responders, investment in infrastructure and help for more homeowners to refinance their mortgages. families across the country are still struggling to make ends meet while currently dealing with high gasoline prices. the president will continue to pursue every responsible effort to expand clean energy sources and domestic energy production. the economist charles kimball burger -- kindleburger has argued the recession is associated with financial crises are typically deeper than normal

downturns and that the recoveries that follow tend to take longer. the fact that downturn's falling financial crises are deeper is evidence of how valuable financial services are to the economy and the profound impact that disrupting these services has on businesses and households. it is also a result of the painful adjustment that occurs when families work off the excess leverage that accompanies the financial crisis in the first place. it is against this backdrop that, once you look at the progress that has been made in the current recovery, i like to use the analogy of a tug of war in describing the current recovery. on one side, we have the forces of the financial disruption and the leveraging -- and deleveraging.

on the other side, the natural tendency for the u.s. economy to return to trend after a recession. even after the great depression. as in physics, a bigger drop tends to lead to a bigger rebound because there are more underutilized source is to put back to work. so we have a tug of war between curse call kndleberger's and newtons third law of economics. in the past years, aftershocks of the financial crisis, most importantly sovereign debt and banking problems in europe, have reduced risk appetite and slowed our recovery. unseemly debate about raising the debt ceiling did not help either. in spite of these headwinds, we have had 10 consecutive quarters of economic growth.

on the whole, the pace of real gdp growth so far during this recovery has been almost as fast as was the case at similar stages of the past two recoveries. if we look just at the private sector, the recovery has been faster than was the case in the recovery from the 2001 recession. the sectors which are lagging behind the most in this recovery are those that are most directly connected to the financial crisis and which are still impaired by the lingering effects of the financial crisis. most notably, residential investment is recovering more slowly than it has in previous recoveries. home prices have been soft in many parts of the country. this is a direct result of the overbuilding that took place during the boom years.

the housing market shows signs of stabilizing. thanks in part to government policies that have helped millions of families modified or refinance their mortgage at historically low interest rates. most importantly, because new home construction has been so weak for years, we should now be close to the point where we have worked off the excess home construction during the bubble years. demographic factors should lead housing demand to pick up in the near future in many regions of the country. indeed, it is significant that we are on a path to have four consecutive quarters of positive residential investment growth for the first time in over five years. homes are now more affordable than they have been in years. the recent rise in mortgage interest rates could encourage

potential buyers to get off the sidelines and enter the housing market while affordability is still near record levels. even moderate growth in residential construction and home sales will boost jobs and gdp compared to the job losses we have seen in construction in recent years. consumption has also grown at a slower pace in this recovery compared with other recoveries. this is a result of the need for many households to repair their balance sheets after borrowing at an unsustainable rate in the previous decade. if we disaggregate consumption, we see that durable-goods consumption is growing almost as strongly as the average recovery, but growth in services

consumption has been notably restrained. consumption of services includes leisure purchases like travel, memberships in clubs and sports centers, purchases that might be more discretionary, like car repair or dry cleaning and laundry services. consumer spending on services account -- on services accounts for almost half of gdp and a larger share of jobs in the u.s. economy. consumers have put off a large amount of discretionary services. the drag in housing values and consumption spending has severely constrained and cut state and local government revenues in many areas. state and local governments are dependent on sales taxes and property taxes to rid the hit to

revenues has caused state and local governments to cut back on spending. this is the final component of the gdp that is lagging behind compared to past recoveries. despite these headwinds, the recovery in the private economy is stronger than it was in the last recession and almost as strong as it was in the early- 1990's. over the 10 quarters following the end of the recession, the private components of gdp have grown at an average annualized rate of 3.4%. in the recovery from the 2001 recession, the growth rate was 2.9% over the first 10 quarters. government spending and gross investment, on the other hand,

have declined over the past year. in previous recoveries, they were still growing or declining at a much slower pace at this point. business investment and exports have been supporting growth. the corporate sector came through the recession in relatively healthy shape. as evidenced by robust profits and strong corporate balance sheets. let me next turn to employment. when we look at employment, we see similar patterns across sectors as we see for economic growth. on the whole, we are covering -- we are recovering stronger than the past two recoveries and the areas of weakness are those related to the financial crisis. private-sector job growth began

eight months after the end of the most recent recession and that is earlier than it began after the previous two recessions. private-sector jobs have now grown for 24 consecutive months. since february of 2010, the economy has added a total of 3.9 million private-sector jobs. in the corresponding 24 months in the early 1990's recovery, 3.2 million private-sector jobs were added. in the corresponding period of the recovery from the 2001 recession, only 1.2 million jobs were added. job growth, as all of you know, has risen over the previous months. over the past six months, private employment has increased by 1.3 million jobs. that is the most of any six- month period in nearly three years.

the job growth has been broad based rather than just in a small number of industries recently. this job growth has included manufacturing, which has added more jobs in the past -- than the past two recoveries. after losing another 2 million jobs during the recession, the manufacturing sector has added 429,000 jobs. the sectors of the economy that has been -- that have been slower to recover have also seen slower job growth. parallel to the situation in state and local governments, we have seen state and local government employment as a particular area of weakness. since the recovery officially began in mid-2009, we have lost nearly 600,000 state and local government jobs. a large number of these are

teachers. nonetheless, job losses in state and local governments have begun to moderate in recent months. as jay mentioned, i served as chief economist at the u.s. labor department in the mid- 1990's. i remember scrutinizing the jobs report every month. it is noteworthy that private- sector job growth is tracking rather closely to the path that it was on in the early-1990's recovery. indeed, one could argue that the job market is on a path similar to that in the mid-1990's, when slow and steady job gains eventually lead to a healthy job market. the main difference now is that the problems from earlier in the 2000's have given the job market a much deeper hole to dig out of. but we are headed in the right

direction despite the many challenges that the economy faces. some have questioned whether the job growth in this recovery is sustainable. just six months ago, when i started on my current job, predictions of a double-dip recession were common. those odds have greatly diminished. in the 2012 economic report of the president, the council of economic advisers predicted that 2 million jobs would be added to the economy in 2012. if this forecast proves to be correct, we would have the strongest job growth in six years. although my crystal ball is no clearer than anybody else's, some economists have been too quick to dismiss recent job growth as a statistical fluke. just a few months ago, many commentators were arguing that

the strong job growth in december of two dozen 11, originally reported as 200,000 jobs and later revised up to 223,000, was an aberration due to a jump in parcel delivery jobs caused by the proliferation of internet shopping during the holiday season. these fears faded when january and february showed stronger job growth. and the revisions to december's data erased the surge in the courier and messenger industry. more recently, some have talked of the faster job growth and job in unemployment insurance claims in january and february to unseasonably warm weather. we have had warmer weather in many parts of the country this year. but the evidence suggests that

the recent job gains have been more robust than would be suggested if they were merely a result of favorable weather. for example, if we look at regions of the u.s. with more temperate climates, the drop in unemployment insurance claims and the rate of job growth were about as strong or stronger than they were in the nation as a whole. for example, the western and gulf coast states have had the strongest rate of job growth from the third quarter of 2011 to january of 2012, the most recent month with state data. others have argued that inaccurate seasonal adjustment factors have been responsible for the drop in unemployment and acceleration of job growth. although it is always difficult to disentangle seasonal from cyclical factors, i am skeptical

that seasonal factors are skewing are key statistics in a major way. the bureau of labor statistics does a more sophisticated job seasonally adjusting employment data at the industry level and scanning for all liars than most people realize. -- for outliers than most people realize. if we use the seasonal factors for the unemployment rate from 2007, before the deep plunge in the economy, if we use those seasonal factors to adjust the unemployment rate over the last six months, the unemployment rate is found to drop by slightly more than what is shown in the official data, which suggests that a change is seasonal factors are not responsible for the drop in the unemployment rate in recent months. putting aside seasonal and

weather factors, the evidence suggests that the extension of the payroll tax cut and other steps that have been taken to support the economy are helping the job market to gradually healed. this is suggested by the broader-based growth in jobs across industrial sectors in recent months. and by the fact that some lagging sectors appear to be reaching bottom and turning around. it is also instructive to look at the data by firms size. although small businesses were hit especially hard by the recession and caught in the credit crunch, employment among small firms has recently begun to recover. the data permits us to look at changes in hiring, changes in laos, changes in other separations to provide a picture

of how the economy is doing a. and the data is broken down by the establishment size. the data also provides a look at job growth by firm size, as i mentioned earlier. some other improvements are in the stream. the national income and product the counts -- accounts should become more accurate as the date accumulates to allow more time for seasonal adjustment and further validation. equally important, the private sector is moving rapidly to expand the types of economic data that are available. everyone probably already knows that google trends provides a great tool for economic analysis. as we highlight sources like linkedin has the potential to

provide real-time information about the types of jobs that are in high and low demand. when they provided us information on the fastest- growing occupations, i was not aware that there were such titles as social media manager. actually, i think that is quite telling. a lot of job growth takes place in industries and occupations that are new. that our statistical measures are lagging behind measuring. but there is much more that can be done. consider the unemployment insurance data. initial claims provide the most informative and timely high- frequency data we have. but the ui data has provided the same information for decades to. should it be possible to extract

more information about job losses by industry, occupation, education, or demographic through from the ui claims. ui claims are at their lowest level in four years. wouldn't it be nice to know which sectors saw more of a decline than others? whether older or younger workers saw more of a decline? or whether the job-finding rate of ui recipients is greater for younger or older workers and out of it -- and how it has changed? in closing, i want to reiterate that the u.s. economy appears to be on the mend after suffering deep wounds from the financial crisis and subsequent recession. the obama administration is continuing to address problems that were a long time in the making and we are committed to continuing to do so. after 10 consecutive quarters of

gdp growth and increasing job growth, the recovery appears to be durable. this durability has persisted in spite of shocks of varying magnitude from the h1n1 epidemic, the bp oil spill, the turmoil in the middle east that raise oil prices, supply disruption caused by natural disasters in asia. confidence shots from the european sovereign debt and banking crisis. and the contentious congressional that limit debate. most recently, higher gas prices caused by geopolitical concerns. after reading that list, it is about time that we have some good weather to prove that not all shocks are negative. sustaining the recovery in the sustaining the recovery in the short run is critical