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Will Economy Grow? Courts Could Decide

Irwin M. Stelzer

If you want to get some sense of where the American economy is heading, don’t ignore what the courts are doing.

Let’s start with healthcare. The Supreme Court’s decision to uphold the constitutionality of the Patient Protection and Affordable Care Act, aka Obamacare, will have a big impact on the healthcare sector, a sector that accounts for 17% of the American economy. Insurance companies will get as many as 30m more generally healthy customers who will have to buy cover or pay a tax imposed on those without insurance.

This huge new market comes at a cost: insurers’ profits are to be limited by regulators, and they cannot turn away people with pre-existing conditions.

Hospitals will see the bad debts imposed on them by uninsured patients drop. Manufacturers of medical devices will face a 2.3% tax on their gross sales, which will come to as much as 40% of the net profits of smaller “med tech” companies, an example of how tax policy is often crafted by a coalition of government and big business to the disadvantage of smaller competitors. Small businesses will see their healthcare costs rise and two-thirds of affected small firms are finding the system that is supposed to provide them with some tax-credit relief so confusing as to be unusable.

Pharmaceutical companies cut a deal that protects them from some of the competition they face from generic drugs and the re-importation of drugs that can be bought more cheaply from Canada and other countries, another example of crony capitalism; the administration bought Big Pharma’s support by allowing those companies to maintain higher drug prices than would otherwise prevail. And some trends will continue, among them hospital mergers, and increases in healthcare costs that Obamacare does not address.

Nor is the important energy sector free from judicial impact. The use and prices of the various fuels are determined in markets importantly influenced by what judges think of the regulations pouring out of the Obama administration

Last week the US District Court for Columbia ruled that the Environmental Protection Agency was “unambiguously correct” to tighten rules limiting greenhouse gas emissions.

Fred Upton, chairman of the House Energy and Commerce Committee, says—allow something for politicians’ hyperbole—the regulation that the court upheld “threatens to drive energy prices higher, destroy jobs and hamstring economic recovery.”

Coal-fired generation of electricity is at an all-time low as the industry mothballs dozens of plants. Many electricity utilities are substituting natural gas for coal because it produces half as much carbon dioxide, and a supply glut has driven down prices. Barring reversal on appeal—not likely—the court has driven another nail into the coffin of the coal industry, a coffin the Obama administration has been eager to shut.

Anyone who invests in the energy sector has to worry as much about the courts’ preferences as about consumers’ preferences. And followers of the car industry’s fortunes will know that the court’s decision favours fuel-efficient and electric vehicles over greenhouse-gas emitting vehicles, seen as a plus for Ford’s line-up of new models.

Then there is the high-tech sector, on which the economy depends for its long-term growth. A steady flow of innovations is needed if productivity is to advance. And a steady flow of new consumer products is needed if consumers are to be persuaded to part with their increasingly hard-earned dollars—doubt that and look at the pictures of people queuing in pouring rain to be the first into Apple stores around the world when a new product is announced.

That sector has been the scene of patent wars, with all the players suing each other for violating patent rights in an attempt to gain advantage, not by innovating, but by preventing rivals from bringing competing products to market. All the participants in these legal battles profess distaste for the other guy’s decision to move rivalry from the marketplace to the court room, and profess disgust at the fees they have to pay the lawyers.

Along comes one of America’s most distinguished and brilliant jurists and scholars (also a senior lecturer at the prestigious University of Chicago Law School and author of some 40 books), Judge Richard Posner, sitting as a trial court judge in a patent infringement suit between Apple and Motorola Mobility, the latter owned by Google. The competition between those companies has heated up: sales of smartphones using Google’s Android operating system are overwhelming sales of iPhones around the world, and Apple plans to kick Google Maps off its iPhones in favour of its own product.

Instead of allowing the case to proceed to a jury trial, Posner called halt. Even if Apple’s patents were infringed, said Posner, it is “wild conjecture” that Motorola can damage Apple, and he declined to allow Apple’s lawyers to “turn the case into an Apple versus Motorola popularity contest.” So why bother having a long trial to determine whether there is infringement, when no money will change hands if there is?

There are other cases wending their way through the courts, so Posner’s decision might not end the patent wars. But because of the esteem in which he is held, this decision might, only might, persuade other courts to follow, and the combatants to settle their differences and transfer funds from their lawyers to their labs.

These are only some of the examples of the way in which the courts play an important part in shaping the American economy. These courts, of course, deal with the laws handed to them. But because laws are often vague, courts have considerable discretion. In the past weeks alone they have rendered decisions that affect key sectors of the American economy, in my view most of them in ways that will make achieving job-creating growth a bit more difficult.

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