Brussels Gets Brexit Wrong—Again

Richard Epstein*

Richard Epstein

Richard Epstein

Theresa May, the British prime minister, recently sent a letter to Donald Tusk, president of the European Council, announcing that the UK would withdraw from the EU under the procedures set out in Article 50 of the Lisbon Treaty. Her letter noted that, even though withdrawal was irrevocable, the UK seeks to forge the closest and most cooperative arrangement possible with the EU moving forward. Although Article 50 prevents the EU from blocking Brexit, it offers little by way of guidance on how the exit negotiations should proceed.

The treaty provides that if the parties fail to reach an agreement within two years, the EU treaties “shall cease to apply” to the UK unless both sides agree to an extension. If not, all relations under the EU are severed, even if other obligations, such as those under the World Trade Organization, remain in place. Still, Article 50 of the Treaty contemplates that withdrawal from the EU need not constitute a clean break, given that in working out the terms of withdrawal, the parties may take into account “the framework for [the UK’s] future relationship with the Union.” The treaty also provides that the EU will entrust its side of the negotiations to the head of its negotiating team, who in this instance is Michel Barnier, a French politician. At this point, everything is up for grabs.

The Brexit process has now been launched, and the different attitudes taken by the two sides to the negotiations are, indeed, striking. In her well-crafted letter, Prime Minister May sought to preserve good relations with the EU after the breakup. There was of course no denying that the UK left Brexit because of its unhappiness with the dominant position that the EU Commission in Brussels held over economic and social matters in Britain; the Commission has the ability in many important areas, such as employment law, to require each member state to harmonize its laws with the EU’s directives. That direct control from the center was in stark contrast to the earlier plan of a smaller European Economic Community, which stressed four freedoms involving the movement of goods, services, capital, and people across national boundary lines. In June 2016, the UK voted to leave the EU in large measure to avoid the Union’s control on matters of economic regulation and the movement of people, especially immigrants, across national boundaries.

At the time, alarmist commentators thought that the UK exit showed that populist and isolationist forces would lead the nation to turn inward. But May’s conciliatory message took exactly the opposite tack: It stressed the importance of keeping—indeed, expanding—free trade relations with the EU as the UK seeks, without any impediment from the EU, to expand its trading relationships with the rest of the world. She wrote about “the deep and special partnership” between the UK and the EU; and the EU, she continued, is the UK’s “closest friend and neighbor.” Finally, she proposed that “it is necessary to agree [on] the terms of our future partnership alongside those of our withdrawal from the European Union.”

Unfortunately, the EU’s Barnier, echoing Germany’s Angela Merkel, took a frostier tone. He, of course, recognized that both sides would lose from the failure to reach an agreement within the two-year period. But he then adopted a needlessly tough negotiation stance that increases the odds of a breakdown. He stressed that the EU had to show “unity” in dealing with the crisis, and then blamed the UK for introducing “uncertainty” into the ongoing relationships with the EU member states. Most critically, he then announced that it would be “very risky” for the two sides to negotiate the terms of their future relationship until they sorted out the mechanics of leaving. In so doing, he explicitly rejected May’s proposal for parallel negotiations on the two issues. His dubious assertion that the EU was not legally in a position to negotiate with a still-member state—because it is not yet an outsider—would seem to contradict the language of Article 50. In order to complete the divorce proceedings, he insisted that the parties first settle, to the last penny, the sums that the UK owes to the EU for obligations previously incurred as a member. He then set that figure at €60bn (£51bn) to cover the key items of account: budget commitments, pension liabilities, loan guarantees, and EU spending on UK projects.

It is hard to imagine a more counterproductive opening gambit. Barnier’s call for unity is a thinly disguised claim that the remaining 27 EU members remain in lockstep like any other cartel. In so doing, Barnier was likely trying to forestall a situation in which other EU members might wish to negotiate or withdraw from the EU. More modestly, he might also have been trying to prevent some backsliding into a “multispeed Europe.” That idea has gained some traction inside the EU. The multispeed position starts from the premise that compulsory harmonization might not sit well with all 27 EU members. Thereafter, it contemplates a set of arrangements in which different EU members might have more or less close arrangements with the center. The approach, which could move the EU back in the direction of a free-trade zone, has been suggested in part to reduce the likelihood that other member nations might be tempted to leave the EU.

That intriguing idea seems dead for the moment. Barnier, like Angela Merkel, insists that the UK cannot “cherry-pick” among the four freedoms of movement--of goods, services, capital, and people--“because that would have disastrous consequences for the other 27 member countries." But it was this uncompromising dogmatism that fueled Brexit in the first place. A more sensible approach would welcome the decision of other EU members to weaken Brussels’ control over their internal affairs, because, in the long run, the EU is more stable as a free-trade zone than it is as a top-down organization. The recent and prolonged economic stagnation inside the EU is a product of the same harmonization tactics that undermine competition among states in the EU.

The sequencing of negotiations is always critical to their long-term success. In this regard, nothing in Article 50 mandates Barnier’s position of sequential dealings. Indeed, the better reading of the text is that future relationships should be negotiated at the same time as withdrawal. Proceeding along dual lines should make any transition less painful. But the Frenchman Barnier’s hardline position is a classic illustration of cutting off one’s nez to spite one’s face. The virtue of the EU was economic integration by the removal of trade barriers, not heavy-handed top-down control. By deciding to postpone the negotiations until the separation is complete, Barnier has made it more difficult to reestablish economic integration from trade that will work to the benefit of both sides. EU members obviously benefit from the excellence of the UK’s financial and banking services, and the EU clearly benefits from having open access to the UK for the sale of the EU’s goods and services. The first priority should be to see how much these arrangements can be safeguarded after Brexit is concluded.

Putting divorce first complicates all these business arrangements. In particular, it is unclear whether, and to what extent, Article 50 authorizes the payment of any sums between members at the time of exit. But even if these side payments are required, it is as yet unclear whether the UK could make demands on the EU for a return of excess moneys. Regardless of whether side payments are off the table, the UK is sure to demand the right to challenge each of Barnier’s claims in a process that could take legions of skilled expert witnesses to sort out in some judicial proceeding. Those obligations, however determined, are more or less fixed as of the date of the UK’s withdrawal from the EU. A sensible procedure is to make, if warranted, some prompt preliminary down payment, after which the balance plus interest could be paid later. The delay is no big deal for money payments. But delay is an enormous matter if ordinary business arrangements are put on hold for years until the dispute over transfer payments is resolved.

Barnier thus has his priorities backwards . As a general matter, it should be relatively easy to resolve most of the economic and social issues so long as the EU, Barnier, and Chancellor Merkel back off their all-or-nothing stance. The knottiest question by far is how the refugee and immigration issues interact with the principle of free movement of persons across the EU. In part because of Merkel’s decision to take about one million refugees into Germany, the EU’s expanded membership has complicated that problem. One sensible way to deal with this matter is to partition the refugee problem from the movement of citizens across lines for the usual purposes of business, travel, and retirement. Unfortunately, that might not happen if the EU hard-liners have their way.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

The Affordable Housing Crisis

Richard Epstein*

Richard Epstein

Richard Epstein

Housing policy has become yet another flashpoint in these highly polarized times. Much of the controversy swirls around President Donald Trump’s nomination of Ben Carson, a distinguished neurosurgeon, as Secretary of Housing and Urban Development. HUD operates a wide range of subsidized federal housing programs that impassioned critics of his nomination are sure Carson will dismember. His chief vice in their eyes is his lack of direct experience working in the housing area. In a real sense this is a mixed blessing. On the one hand, these programs must be managed—and, ideally, by someone competent and somewhat knowledgeable in the field. On the other, his greatest strength is that from an outside perspective he understands that many of these programs must be cut back or shut down. There is some overstatement in the charge that HUD is a socialist program. But there is much truth to the claim that many of its programs have seriously aggravated housing difficulties around the country, especially for the most vulnerable groups.

The key challenge is to choose the correct path for housing reform. Many of Carson’s critics think the proper line is to require new developments to save a proportion of units for low-income residents, which will ensure, they claim, “that economically diverse neighborhoods and housing affordability will be preserved for generations to come.” The implicit assumption behind this position is that government agents have enough information to organize complex social institutions, when in fact they are slow to respond to changes in market conditions and are often blissfully unaware of the many different strategies that are needed in different market settings. No one wants to say that governments should not lay out street grids and organize infrastructure. But they operate at a huge comparative disadvantage when it comes to real estate development on that public grid.

Far superior is an alternative view that I have long championed. The first thing to do is to abandon the assumption that there is a systematic market failure requiring government intervention. The second is to remove all barriers to entry in the housing markets, so that supply can increase and prices can fall. These barriers are numerous, and include an endless array of fees, taxes, and permits that grant vast discretionary authority to local officials. A removal of these burdens will allow us to harness the private knowledge of developers who will seek to work in those portions of the market that hold the greatest profit opportunities.

The critics often fear that developers will look to build only mansions and high-rise towers to satisfy the endless desires of the millionaire class. But that hyperbole ignores every relevant feature of an unregulated housing market. Most critically, as costs of housing construction and maintenance go down, developers are able to offer lower-priced units to people of more limited means. Prices are kept low by new entry across the full spectrum. Some developers will move quickly into the luxury market, but others, knowing of the potential glut, will move into other market niches in different neighborhoods where they can secure the highest rate of return. And once that is done, the expanded supply will provide more opportunities to lower-income tenants.

Yet as matters stand, there is good reason why developers gravitate to the higher end of today’s highly regulated market—because they cannot absorb the high fixed costs of planning, permitting, and construction for smaller projects. As demand surges in highly desirable supply contracts, the result is always the same. Equilibrium prices march steadily upward, leading local activists to cry for a new round of subsidies, restrictions, and reforms, all of which start the cycle over again.

One highly controversial program is Measure S, which is on the ballot in Los Angeles. As the Los Angeles Times—a fierce opponent of this ballot initiative—notes, “Measure S would impose a two-year moratorium on all real estate projects that require a General Plan amendment, zone change or increase in allowable height.” One LA project that would be forced to stop would house homeless veterans and other low-income folks. Nor should that consequence come as a surprise. The reference to amendments and zoning changes cuts far more deeply than it appears, because under modern land use law, modifications of existing ordinances, often called “contract zoning,” are routinely necessary to get a deal through. The way it works is the initial zoning laws are set in a highly restrictive fashion. The developer then has to come forward with a package of benefits for the community as a way to secure a more favorable zoning classification. By blocking renegotiations, Measure S freezes everything, virtually assuring a mass developer exit from the market. The preexisting process already is a huge deterrent to development, which started its relentless decline after the 1950s with the onset of strict zoning regulations.

The bad ideas for housing regulation do not end with blanket moratoria. Indeed, the most popular approach nationwide does not directly limit the amount of new housing that can be built. Instead, it embraces “inclusive zoning” in which the developer is forced to set aside some fraction of the total number of units as designated affordable housing units. As one might expect, the worse the underlying situation, the more stringent the matching requirements. Thus, this past December, Portland, Oregon, unanimously approved its “Historic Inclusionary Housing Program” that requires all developments of twenty or more units to designate 20 percent of these units as affordable. Look for a lot of 19 unit projects. Earlier in the summer of 2016, San Francisco, whose zany housing policies have no known limitations, raised the ante when its voters approved Proposition C. Prior to its adoption, developers had three options: Set aside 12 percent of units for affordable housing; build some units off-site; or contribute to an “in lieu” fund to enable the City to take on new projects. Proposition C raises the ante by insisting that the projects have 25 percent on-site housing; 33 percent off-site housing; or that their developers pay a commensurately higher fee.

This program is reasonable insofar as it imposes less stiff requirements for the on-site units than the off-site ones. These are usually more expensive to construct. And, ironically, they are less desirable to low-income tenants who cannot afford to live in high-price areas. It is just for that reason that a recent op-ed in the New York Times by financial journalist Eric Uhlfelder called for a “new fix” for affordable housing that requires the imposition of an annual luxury tax “on new high-end condos and rentals.” As Uhlfelder notes, this proposal essentially eliminates the difficulties of in-kind contributions. But it is hard to see why it should make a dent in the underlying supply problem. Generally speaking, the elimination of two options will not improve the position of the developers. Instead, it becomes absolutely critical to know which of these new construction projects will be covered by the luxury tax and which will not. If the line is announced in advance, a City will find itself in the odd position of insisting that new construction meets its parameters, as developers seek to gain permits under the radar. If the rate, moreover, is set incorrectly, the entire scheme could fail for want of takers, sending the city’s program back to square one.

One way to avoid this difficulty, now under active consideration in Los Angeles, is for developers to pay a so-called “linkage fee” on all new commercial and residential housing, which can then be used to remedy the chronic undersupply of affordable housing. The program here, however, could—in combination with the city’s new project moratoria—put all development into paralysis. One clear improvement over both the Uhlfelder and Los Angeles proposals is to sever the link between new affordable housing programs and any special tax on new real estate development, by funding all local affordable housing programs out of general revenues. That switch in emphasis means that a specific tax is less likely to wreck a specific segment of the housing industry. It will also provide a modest political check on the willingness of local governments to dedicate funds to affordable housing programs, given popular resistance to overall tax increases. That just might switch the political balance in favor of the liberalization of the notorious zoning codes that have stifled new construction in the first place.

But even these are really stopgap measures. All taxes deter development. Market liberalization increases it. Folks like Uhlfedler are explicit that they resort to these schemes because they expect a Trump administration to cut back on federal subsidies, which I regard as a welcome counterforce to unsound HUD programs. So it is back again to Ben Carson, whose real comparative advantage is that he has no historical connection with the dysfunctional public housing world. But Carson does grasp the dangers of “mandated social-engineering schemes,” and appreciates the risks of “unintended consequences” of various social interventions. Hopefully, when he takes over HUD, he will bring with him a broom that will sweep clean much of the detritus that currently exists.

As Carson has noted, one of his first targets will be the multiple Obama programs that grant HUD funds to affordable housing that is built in wealthier neighborhoods. Apart from the endless paperwork these “fair housing” programs require, they also depart from Uhlfelder’s observation that most local housing activists would prefer to use government grants to fix up housing in areas where low and moderate-income people actually choose to live. Any decision by Carson to scrap the rule would be a vast improvement for housing markets, as lower administrative costs would lead to higher levels of local development.

The so-called housing experts all sign on to the general mission of HUD to deal with the various ills of housing shortages, but none of them have the slightest interest in the market solutions that could improve the overall situation. To make the point more clearly, market solutions do not include letting developers steamroll small property owners through eminent domain abuse, or allowing local communities to pass restrictive zoning and permitting requirements that are intended to block low-income housing. Rather, the correct answer is to stop eminent domain abuse, to peel away layers of regulation, and to cut out the extensive network of government grants that impose strings on how housing can be built. Perhaps Carson does not know much about the current programs. But if he puts the necessary reforms in place, he will have no need to master the details of endless federal, state, and local regulations that have created the affordable housing crisis in the first place.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

A Revolution in Administrative Law

Richard Epstein*

Richard Epstein

Richard Epstein

One of the most vital, but technical, items on the Republican agenda is not likely to get its fair share of public attention. On the first day of the new Congress, Republican Representative Bob Goodlatte of Virginia introduced two pieces of legislation that could fundamentally alter the structure of American administrative law for years to come.

The first bill, H.R. 26, the Regulations From the Executive In Need of Scrutiny (REINS) Act, languished in three previous successive Congresses, but it has now cleared the House by a vote of 237-187. If enacted, this bill will give Congress a final say on regulations with an estimated cost over $100 million through a mandatory up-or-down vote before they go into effect. More importantly for the day-to-day operation of administrative law is Goodlatte’s other bill, H.R. 5, the Regulatory Accountability Act, which the congressman claims will “wipe out abusive regulation—freeing Americans to innovate and prosper once more.”

This last claim is a tall order for any one piece of legislation. But there is no underestimating the effect H.R. 5 will have in shaping the agendas that Scott Pruitt will bring to the Environmental Protection Agency, Betsy DeVos to the Department of Education, Andy Puzdur to the Department of Labor, and Rick Perry to the Department of Energy—each of whom will administer a complex set of statutes that authorize their agency actions while delimiting their authority. In the Obama administration, there were profound political clashes between his progressive administrators, who constantly sought to extend the scope of their authority in all of these areas, and their opponents both on and off the bench.

The great challenge of H.R. 5 is to rethink a system of administrative law that was ushered in by the passage of the Administrative Procedure Act of 1946 in the aftermath of World War II. The APA has a quasi-constitutional status because it seeks to rationalize judicial oversight of administrative agencies that received vastly greater power after the New Deal constitutional revolution. This expansion came to fruition during the October 1936 Supreme Court term, during which the Court first increased the scope of congressional power by allowing it to regulate in virtually any area of economic or social importance, and second, weakened the individual rights afforded to private property and to economic liberties in the pre-New Deal Constitution. A decade later, Congress passed the APA to cut back on the aggressive implementation of legislation through regulation and enforcement actions instituted by the new generation of New Deal agencies. These transformative laws dealt with such core matters as labor, agriculture, communications, and securities law.

One essential provision of the APA, Section 706, regulates the interaction between the agencies and the courts. It states in part: “To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” In addition, Section 706 provides that the reviewing court shall “hold unlawful and set aside agency action, findings, and conclusions found to be—(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”

Under the APA’s sensible original design, a reviewing court stands in relation to the administrative agency much as an appellate court stands in relation to a trial court. On all questions of law, the appellate court makes its own interpretation of the relevant legal materials in deciding the meaning and scope of a particular provision. On questions of fact, an appellate court tends to defer to the trial court decision. Finally, an important class of cases deals with mixed questions of law and fact—e.g., whether the basic facts establish negligence by the defendant.

This time-tested regime reflects the application of the principle of comparative advantage by the different layers involved in judicial administration. Triers of fact often have to examine many witnesses and documents, for which they develop the appropriate expertise on such key issues as credibility and weight. Giving them latitude speeds up the process of adjudication, reduces the burden on appellate judges, and prevents the introduction of a fresh round of factual errors by appellate judges. At the other extreme, reading statutes and regulations is what appellate courts do well, and these questions can be resolved by standard techniques of interpretation that carry over from one substantive field to another. Courts typically apply an intermediate standard of judicial review to those difficult mixed questions of law and fact.    

For many years, the APA more or less kept true to its original conception, which treated administrative agencies as if they functioned like trial courts. By the 1970s, however, it became clear that the courts, most notably the liberal Circuit Court for the District of Columbia, had adopted an activist role in the overall process, particularly in their comprehensive review of the factual record. That Court was slapped down hard in 1978 by a young Justice Rehnquist in Vermont Yankee v. National Resources Defense Council, Inc. for introducing added layers of complexity, especially in dealing with the approval of new nuclear power plants, into the relatively lean structure of the APA.

But the truly great transformation of American administrative law took place in two major decisions of the 1980s, both of which changed administrative law for the worse, by inverting the relationship of review of facts and review of law. The first became subject to a hard-look doctrine, and the second to extensive judicial deference.

On the former, in the 1983 Supreme Court decision Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co., the Court, speaking through Justice Byron White, read the arbitrary and capricious standard strictly to require the National Highway Transportation Safety Administration to give a “hard look” to the NHTSA’s decision to postpone the implementation of passive restraint devices in automobiles. The Court insisted, among other things, that “an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.”

Under this standard any complex factual determination becomes fair game for an intensive review, which could be used not only to block new regulations but also to block efforts to roll back existing regulations on the ground that they were too onerous. The correct position is one that, as Section 706 suggests, shows some degree of deference to agency decisions. Otherwise no factual determination can be put into place, which is one reason why the nuclear power industry in the United States has been stopped dead in its tracks by judicial oversight.

In my view, the Goodlatte legislation goes in exactly the wrong direction when it proposes a grotesquely convoluted system of factual review under the grandiose claim that the law “restores to the people the true right to be heard by Washington’s regulators.” But “the people” also includes every special interest group that wishes to obstruct sensible reform, as in State Farm itself, as well as those, like the new cadre of Trump administrators, who have a more deregulatory frame of mind. There are many tasks of administration that need to be done and the Goodlatte labyrinth could bring the entire administrative process to a halt, killing off good projects as well as bad ones. No system of appellate review can neutralize incompetent regulators without hamstringing competent ones in the bargain. This portion of the legislation should be withdrawn and reengineered.

Nonetheless, H.R. 5 is on the mark with a far shorter and far more coherent provision that it styles the Separation of Powers Restoration Act (SOPRA), which in 2016 had been sensibly introduced as a freestanding bill. Its key provision reads that any court reviewing administrative action shall “decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by agencies.” “De novo” review means that the reviewing court gives no deference to the legal opinions of either the parties or lower court judges and administrators.

This compact and straightforward provision, which should be promptly enacted, takes aim at two of the most misguided decisions of administrative law that instructed courts to take a deferential stance toward agency actions interpreting the key statutes and regulations they administer. The first of these cases, Chevron USA Inc. v. NRDC (1984), written by Justice John Paul Stevens, insisted that in all ambiguous cases, reviewing courts should defer to an agency interpretation of its governing statute. Auer v. Robbins (1997), written by the late Justice Antonin Scalia, similarly held that for an agency’s “own regulations, [its] interpretation of it is, under our jurisprudence, controlling unless ‘plainly erroneous or inconsistent with the regulation.’”

The current regime of deference enjoys strong bipartisan support even though it is plainly inconsistent with Section 706, which provided for the de novo review called for in SOPRA. The change is long overdue. It is difficult to describe in a short space the enormous doctrinal refinements of both Chevron and Auer. No one knows quite when any given statute or regulation becomes ambiguous, and there is a futile debate as to whether the same level of deference should be afforded to memoranda and opinion letters as to regulations issued after the more extensive notice and comment procedures the APA calls for in dealing with major regulations. Scholars thus talk about Chevron step zero, step one, and step two in an effort to decide just how much deference is required in any given context.

But the implicit assumption that all agencies are neutral and dispassionate enforcers of their own statutes is falsified by the day-to-day actions of agencies. Their heads have strong political agendas to advance on key issues such as labor, education, and environment, all flash points in the Obama administration. The acceptance of high levels of deference lets agencies make hash out of statutes, which is what happened, for example, in the Department of Labor’s ruling that the statutory prohibitions against sex discrimination, passed decades before, meant to apply to modern gender identity cases that no one had even imagined at the time. Deferring to agencies invites huge flip-flops with the change of administration, given their radically different views of how these various relationships could be shaped. It also allows agencies like the Federal Communications Commission to expand their jurisdiction with dubious interpretive strategies, which often upsets the balance initially designed by Congress.

That potent combination of intellectual incoherence and institutional instability makes it hard for private businesses and organizations to plan for the future. Concerns for their plans could be effectively moderated if these legal issues were simply decided by courts as they have been for centuries.

The fruits of this confusion will become evident the day after the Trump inauguration when major agencies reverse field, an action requiring as little justification as the process that adopted these (dubious) rules in the first place. It is often said about administrative agencies that only they possess the expertise to make sense out of arcane statutory and regulatory language. Nothing could be further from the truth. Most of the really important language consists of words like discrimination and pollution that judges can understand and apply as well as anyone else. The great danger of entrusting these issues to administrative agencies lies in their inherent bias. The independent agencies are in most cases run by commissions of five members, which often divide three-to-two, with the President appointing a chairman from his own party. Bias in administration is not some rare Black Swan event, but is, as standard public choice theory predicts, a common occurrence.

This is why the Democrats in Congress are so fiercely opposed to the key Trump appointments mentioned above. Now that they are out of power, the Democrats, who once praised executive and administrative power, will sound the rule of law trumpet loudly. And they should be heard on this point. H.R. 5 is important now because it can be used to restrain the abuse of discretion of Republican administrators, just as it can be used to restrain the abuse of Democratic ones.

For the moment at least, the proposed revolution in administrative law will have its greatest impact on the regulatory misadventures of the highly partisan Obama agencies. But in the long run, we need SOPRA to make sure that Republican administrators do not return the favor by hiding behind Chevron and Auer deference in order to impose, by regulation and interpretation, their own dubious decisions. Whether one deals with constitutions, statutes, or regulations, the only safe guide is to try to use text, context, structure, and purpose to determine the correct interpretation of disputed provisions. Gimmicks like Chevron and Auer deference only muddy the waters. In all cases, de novo review of questions of law is a matter of the highest importance for constitutional and institutional safeguards of the rule of law. We need it today.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

Obama’s Dangerous Palestinian Gambit

Richard Epstein*

Richard Epstein

Richard Epstein

As we reach the end of the Obama presidency, U.S.–Israeli relations are in a state of turmoil after the administration abstained on the UN Security Council vote of December 23, 2016 regarding Resolution 2234, which, among other things, “Reaffirms that the establishment by Israel of settlements in the Palestinian territory occupied by since 1967, including East Jerusalem, has no legal validity and constitutes a flagrant violation under international law and a major obstacle to the achievement of the two-State solution and a just, lasting and comprehensive peace.”   

To say that this resolution has not been well received in the United States is something of an understatement. The House of Representatives, for instance, recently issued a nonbinding resolution that condemned the UN act as “one-sided and anti-Israel.”

At this point, it is imperative to take a close look at what the resolution says to see whether or not this and similar charges raised against it can be sustained. That inquiry in turn has to deal with two issues, one legal and one political. The first question is whether the Israeli settlements are in fact a flagrant violation of international law. The second asks whether the settlements are a serious impediment to the creation of a two-state solution. I conclude that the UN resolution overstates its condemnation of Israel, and join the chorus of those who think that the Obama administration stumbled badly when its abstention allowed the Resolution to become official UN policy.

As is often the case with poorly crafted resolutions, this one goes astray with its very first word. To say that the UN “reaffirms” the current status quo implies that, on some earlier occasion, it had voiced the same position that it does today. But the earlier positions taken by both the UN and the United States were far more nuanced than this latest one..

The most relevant document for these purposes is Resolution 242 of November 22, 1967 in the aftermath of the Israeli victory in the Six Day War that started when Egypt, Jordan, and Syria engaged in military action intended to destroy the state of Israel. The short resolution in effect adopted the land-for-peace formula that has guided American policy for close to 50 years. The Israelis agreed to withdraw from “territories occupied in the recent conflict” in exchange for a deal that resulted in the acceptance by all powers within the region of the legitimacy of the state of Israel with secure and defensible borders. At no point was it required that the Israelis return to the de facto borders that had been established under the 1949 armistice. Instead it could keep some territories to rationalize its national boundary lines in ways that allowed it to obtain defensible borders.

But this no longer applies after Resolution 2234, which “Reiterates its demand that Israel immediately and completely cease all settlement activities in the occupied Palestinian territory, including East Jerusalem, and that it fully respect all of its legal obligations in this regard. . . .” The resolution was not invoked under the UN’s so-called Chapter VII powers that address “threats to the peace, breaches of the peace, and acts of aggression.” Instead, it relies on Chapter VI, which is intended to deal with peaceful resolution of disputes. There is more than a whiff of complexity in this resolution. First, it condemns all Israeli settlements post-1967, including those in the Jewish quarter in East Jerusalem. But it is not clear how much further it goes, given that the phrase “completely cease all settlement activities” can easily be read to say that the Israelis are under an obligation not only to not expand existing settlements, but also to dismantle all settlements in the West Bank, or at the very least to stop all “natural growth” in Jewish populations within the settlements—a futile proposal that became national policy under Obama after, as Elliot Abrams reports, it had been explicitly rejected by George W. Bush’s administration.

It may therefore be an open question as to whether Israel is under a further obligation to turn over effective administration to Palestinian control, given what has been condemned as a flagrant violation of international law. No one can be sure, but texts less emphatic have been subject to broader interpretations. Indeed Hamas was quick to “emphasize the need to turn such a resolution into action, not only to halt settlements but to eradicate Israel’s occupation in all its forms,” including, of course, the occupation of all territories within the 1949 armistice lines. Clearly, the Resolution does not go that far, but on any reading it represents a major shift from the earlier views that Israeli settlements, especially those in or near Jerusalem, could continue to accept more people on the ground that they would be incorporated into Israel as part of any final settlement.

In light of its announced transformation, it is fair to ask, how solid is the legal foundation on which the new Resolution rests, especially compared to Resolution 242? Given its categorical denunciation of the Israeli position, we should expect to see unassailable evidence in support of its position. But the record is, in my view, far weaker than advertised. In dealing with this issue, Resolution 2234 points to two major sources of authority, both of which require some explanation. First, there is the Fourth Geneva Convention concerning the Protection of Civilian Persons in Time of War of August 1949, and second there is an advisory opinion rendered by the International Court of Justice in July 2004. At no point does Resolution 2234 discuss the rationales of these two key documents. This omission is troubling.

Most relevant to this discussion is the short text in Article 49 that provides simply: “The Occupying Power shall not deport or transfer parts of its own civilian population into the territory it occupies.” Yet the widespread consensus treats Israel as an occupying power. But it is not clear how this provision applies given the complex history of the region. The first point to note is that the phrase occupying power does not quite capture the Israeli-Palestinian dispute. Context matters.

The Fourth Geneva Convention was adopted in the aftermath of World War II, when there was an urgent humanitarian need to take care of refugees and other persons who had been displaced by the war. The Convention does deal extensively with occupied territories, but it offers no definition of what counts as such a territory. The clear cases of occupation are those in which one nation takes over the territory of another during armed conflict, which happened for example when the Soviet Union occupied the Baltic States in June 1940, in the aftermath of the notorious Molotov-Ribbentrop Pact that partitioned Eastern Europe into a Soviet and German spheres of influence. The occupation was then followed by the mass deportation of local citizens and the mass transfer of Russian citizens into the Baltics.

By linking the term “deport” with “transfer,” it is arguable, perhaps probable, that the abuse targeted was not the voluntary migration of individuals into occupied territories, but the Stalinesque activities of the forced transferal of a nation’s own people into occupied territories against their will, which happened in the aftermath of the occupation of the Baltics. None of this means that Palestinians do not have legal protection under the Geneva Conventions, but the ongoing security issues in these cases make it difficult in the abstract to determine just how far they run. But right now there is a serious debate, pro and con, over the condemnation with full compensation of vacant and uncultivated land on which to build Jewish settlements.

Set against this background, it is far from clear as a textual matter exactly how Article 49 applies to the Israeli occupation of the West Bank in the aftermath of the Six-Day War. The war began as an act of aggression against Israel by Jordan, and the legal status of those territories had not been resolved by the 1949 Armistice. The Israelis had their own historical claims to these territories, the status of which was disputed at the time. In their view, as developed here, these territories are “disputed territories” to which the Geneva Convention does not apply at all. To make matters more complicated, at the close of the Six-Day War, the only party that had a legal interest in the territories was Jordan, who had exercised de facto territorial sovereignty prior to the onset of hostilities. There was at that time no Palestinian nation either in the West Bank or in Gaza, which was then part of Egypt.

The Jordanians were, of course, no friends of the Palestinians. Indeed, in September 1970 there was a fierce conflict, known as Black September, in which the Palestinian Liberation Organization forces led by Yasir Arafat were defeated by the Jordanian forces led by then-King Hussein, and were forced into exile after the death of thousands. Just what would have happened to Palestinian national ambitions if the territories had been returned to Jordan so that the Fourth Convention would no longer apply? We shall never know the answer to that question because Jordan never sought to regain the territories and indeed in 1988 renounced all claim to the West Bank in part to clear the path to Palestinian claims. Note that the Jordanians did not—nor could they have—transferred their claims to Palestine which did not (and still does not) have statehood status. At this point, we have the novel situation in which the stripping away of the initial sovereign leaves Israel without a genuine competitor for sovereignty over the territories. Nothing in the Fourth Convention covers these unique circumstances. And it is a political, not a legal, issue that governs the implementation of any potential two-state solution.

Nor is the situation made any clearer by the 2004 Advisory opinion, which addressed the legality of the wall that Israel erected around the West Bank to protect itself against widespread Palestinian terrorist attacks. Clearly the wall separated the West Bank from the rest of Israel, and it was condemned for that reason as illegal by the ICJ, which heavily relied on notions of customary international law that have never been supported by a consistent practice that requires nations to remain immobile in the face of systematic terror threats. To be sure, Resolution 2234 condemns terrorist activities, but only in a disembodied sense that makes no reference to the constant activities of Hamas or the active support for terrorist activities that is fully institutionalized by the Palestinian authority, which offers financial support for individuals and the families of those who kill or maim Israelis. Generalized pronouncements make it appear that Israel and the Palestinian Authority are equal offenders in the commission of terrorist acts, when it is highly likely that the Israeli security measures would be vastly curtailed if there were credible assurances that the bombings, shootings, and stabbings would come to an end.

The one-sided treatment of these legal issues is consistent with the general UN approach that obsessively condemns Israel while mostly overlooking the atrocities that have ravaged the greater Middle East. In light of these issues, it is somewhat odd to treat the settlements as though they were the major obstacle to the two-state solution. Remove them tomorrow, especially in response to the UN resolution, and the most likely outcome is that the PA and Hamas would intensify their activities to destroy the Jewish state, just as they did in 1948, 1956, 1967, and 1973 when Israel fought wars of survival, knowing full well that the first defeat would be the last one, even if the 1949 Geneva Convention places strict limitations on how occupying powers have to behave toward conquered people.

The Israelis know this all too well. They also know that the lesson of the 2005 withdrawal from Gaza led to the rise of Hamas and to repeated military actions and missile attacks between 2006 and 2014. Any unilateral surrender of lands in the West Bank to a new Palestinian state opens up the possibility that greater hostilities could be launched against an Israel weakened by successive rounds of fatal concessions. The Israelis claim that the only path to peace is through bilateral negotiations between the parties, backed by the US and the UN. Those negotiations were apparently close to success in 2000 and 2008, but the deal was never closed because of the Palestinians.

At this point, Resolution 2234 has killed the prospects for any negotiated peace in the foreseeable future. The Palestinian Authority will treat compliance with a ruinous Resolution as a precondition for further negotiations. The Israelis cannot live in a world that requires them to surrender territories under their control before 1967. The terms of the UN Resolution thus have put an effective end to all negotiations between the two sides. The Israelis are likely to continue the dangerous game of expanding settlements in the West Bank, as the only credible way of punishing the Palestinians for their continued delay. Whether this strategy will work, or should work, is a hard call. But much of the blame for the current impasse lies at the feet of Secretary of State John Kerry who never did understand the political dynamics of the Israeli-Palestinian negotiations.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

Obsolete Climate Science On CO2

Richard Epstein*

Richard Epstein

Richard Epstein

The incoming Trump administration has promised dramatic transformations on many vital domestic issues. The best gauge of this development is the fierce level of opposition his policies have generated from Democratic stalwarts. One representative screed is a New York Times Op-Ed by Professors Michael Greenstone and Cass Sunstein, who lecture the incoming president on climate change: “Donald Trump Should Know: This is What Climate Change Costs Us.”

Greenstone and Sunstein have a large stake in the game: During their years in the first Obama administration, they convened an interagency working group (IWG) drawn from various federal agencies that determined that the social cost of carbon (SCC)—or the marginal cost of the release of a ton of carbon into the atmosphere—should be estimated at about $36 per ton (as of 2015). Choose that number and there is much justification for taking major policy steps to curb the emission of carbon dioxide. Greenstone and Sunstein hoped that the working group process would draw on the “latest research in science and economics,” and establish the claimed costs by “accounting for the destruction of property from storms and floods, declining agricultural and labor productivity, elevated mortality rates and more.”

Their effort should be dismissed as a rousing failure, and as an affront to the scientific method that they purport to adopt in their studies. The first error is one of approach. The worst way to get a full exchange of views on the complex matter of global warming is to pack the IWG entirely with members from the Obama administration, all surely preselected in part because they share the president’s exaggerated concerns with the problem of global warming. The only way to get a full and accurate picture of the situation is to listen to dissenters on global warming as well as advocates, which was never done. After all, who should listen to a “denier”?

This dismissive attitude is fatal to independent inquiry. No matter how many times the president claims the science is rock-solid, the wealth of recent evidence gives rise to a very different picture that undercuts the inordinate pessimism about climate change that was in vogue about 10 years ago. The group convened in the Obama administration never examined, let alone refuted, the accumulation of evidence on the other side. Indeed, virtually all of its reports are remarkable for the refusal to address any of the data at all. Instead, the common theme is to refer to models developed by others as the solid foundation for the group’s own work, without questioning a word of what those models say.

The second major mistake in the government studies is the way in which they frame the social costs of carbon. As all champions of cost/benefit analysis understand, it is a mistake to look at costs in isolation from benefits, or benefits apart from costs. Yet that appears to be the approach taken in these reports. In dealing with various objections to its reports, the IWG noted in its July 2015 response that “some commenters felt that the SCC estimates should include the value to society of the goods and services whose production is associated with CO2 emissions.” Their evasive response has to be quoted in full to be believed: "Rigorous evaluation of benefits and costs is a core tenet of the rulemaking process. The IWG agrees that these are important issues that may be relevant to assessing the impacts of policies that reduce CO2 emissions. However, these issues are not relevant to the SCC itself. The SCC is an estimate of the net economic damages resulting from CO2 emissions, and therefore is used to estimate the benefit of reducing those emissions."

In essence, the benefits from present or future CO2 emissions are not part of the story. Yet a truly neutral account of the problem must be prepared to come to the conclusion that increased levels of CO2 emissions could be, as the Carbon Dioxide Coalition has argued, a net benefit to society when a more comprehensive investigation is made. The entire process of expanding EPA regulations and other Obama administration actions feeds off this incorrect base assumption. The most striking admission of the folly of the entire EPA project comes from EPA Chief Gina McCarthy, who has stated that she would regard a decrease of one one-hundredth of a degree as enormously beneficial, notwithstanding its major cost, because its symbolism would “trigger global action.” No cost/benefit analysis would justify wasted expenditures solely on symbolic grounds. After all, human progress on global warming will only suffer if other nations follow our false siren on CO2 emissions, while ignoring the huge pollution that envelops major population centers like Delhi and Beijing.

Unfortunately, support for regulating CO2 emissions relies unduly on a Regulatory Impact Analysis that is worth no more than the faulty assumptions built into the model. These include the EPA’s hugely complicated Clean Power Plan, temporarily enjoined by the United States Supreme Court, that relies once again on the flawed social costs of carbon estimates.

The weakness of the EPA approach is shown by the data that Greenstone and Sunstein cite to support the contention that global warming has reached dangerous levels. They refer, for example, to a Geophysical Research Letter of 2014 that notes the retreat of ice in the West Antarctic between 1992 and 2011. But that one finding has to be set in context, as is done in the 2016 State of the Climate Report  prepared by the Committee for a Constructive Tomorrow (CFACT) and sent to the U.N. Climate Conference in Morocco. This more complete account notes that the mass gain in East Antarctica has been at 200 billion tons per year on average, compared to the 65 billion tons, which was offset by substantial gains in ice in West Antarctica, generating a net gain of roughly 82 billion tons per year in Antarctic ice between 2003 and 2008. The upshot: “The good news is that Antarctica is not currently contributing to sea level rise, but is taking 0.23 millimeters per year away.” Overall, the temperature over the Antarctic has been constant for the past 35 years.

No analysis that looks at the minuses can afford to ignore the larger pluses and maintain its credibility. Indeed, for what it is worth, the CFACT report notes that the ice mass in the Arctic is now about 22 percent greater than it was at its low point in 2012. This fact helps explain why there has been no recent change in the rise of sea levels, and certainly none that can be attributed to the relatively modest level of temperature increases in the past 100 years. Recent trends suggest the rate of increase in ocean levels has been decelerating over the last 18 years, during which time there has been a substantial increase in carbon dioxide levels. Yet the 102 different models used by the Intergovernmental Panel on Climate Change (IPCC) are all high in their estimates, by roughly four-fold. As documented in the 2016 CFACT report, there has been substantially no change in overall global temperature over the past 18 years, and the record highs reported are by tiny fractions of degrees that are smaller than the margin of measurement error. Yet the government’s methodology is to look at the models and ignore the data.

Just that was done by the now anachronistic 2009 EPA Endangerment Findings for Greenhouse Gases, which reported on the overall shrinkage of Arctic ice and claimed that the “elevated CO2 levels” were expected to result “in small beneficial effect[s] on crop yields.” The good news on this point seems to be that the increase in CO2 has led to about a 14 percent increase in green vegetation on earth over the past 30 years, as Matt Ridley reported in a 2016 lecture. It is the best of all possible CO2 worlds if the level of arable land increases with minor temperature changes and there are no appreciable changes in ocean levels. Put these numbers together and a revision of the SCC must be made, as it now appears that the net costs of carbon are negative. Further, the revised projections have only strengthened the lower estimates of global warming from elevated CO2 levels.

This basic conclusion is reinforced by other data, easily accessible, that addresses other concerns raised in the Greenstone and Sunstein article. For starters, there has been no recent increase in the level of storms and floods, or the damage that is said to result from them. To the contrary, the trend line has been unambiguously favorable, as the number of extreme events like floods and storms has declined steadily over the past 100 years. Indeed, the last major event in the United States was Hurricane Katrina in 2005, followed by eleven years of relative tranquility in the United States and around the world. This point is critical because one of the constant claims on global climate change is that the system-wide instability has increased these extreme events, even if overall temperature levels have remained constant.

The overall picture with respect to the SCC, then, is the exact opposite of that described by Greenstone and Sunstein, and that change in direction has a serious effect on the success of various legal challenges. Greenstone and Sunstein note that a legal decision in 2008 held that ignoring the SCC makes an administrative rule “arbitrary and capricious” and thus requires its reformulation by the applicable agency. They also reference another 2016 decision that upheld an administrative decision of the Department of Energy that explicitly took into account the SCC. But these judicial decisions have a surreal aura about them. The key statute for these cases was the Energy Policy and Conservation Act of 1975 (EPCA), which was passed in the aftermath of the 1973 Mideast Oil Embargo that followed in the wake of the 1973 Yom Kippur War. The EPCA’s chief finding was that “the fundamental reality is that this nation has entered a new era in which energy resources previously abundant will remain in short supply, retarding our economic growth and necessitating an alteration in our life’s habits and expectations.”

It was on the strength of this 41-year-old statute that the Court in 2008 required the National Highway Traffic Safety Administration to reissue its rules for the average fuel economy standards for light trucks because they failed to take into account the SCC. The ruling is wholly anachronistic today because the revolution in energy technology has obviated the entire factual premise on which the so-called CAFE (corporate average fuel economy) rules rest. Given fracking, energy is abundant. Thus, the SCC has to be reevaluated in light of evidence collected outside the EPA, and summarized above, none of which was taken into account when working within the closed universe of the current set of environmental and energy laws. At this time, it appears that virtually all the EPA rules rest on outdated science.

Greenstone and Sunstein are not alone in their refusal to deal with evidence that undermines their claims. But if the SCC looks to be negative, the Trump administration should act to eliminate the current endangerment finding for carbon dioxide, and dismantle the regulatory apparatus that rests upon its highly questionable estimation of the positive value of SCC. The sorry truth is that the EPA and the regulatory process in the Obama administration show no respect for the scientific method they claim to rely on.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

America’s Immigration Quagmire

Richard Epstein*

Richard Epstein

Richard Epstein

America’s immigration problem raises a huge set of thorny issues. At a theoretical level, it is difficult to articulate, let alone implement, the ideal immigration policy. While there are compelling arguments in favor of the basic norm of free trade, an open immigration policy could lead to massive political dislocations. Allowing the free flow of goods across borders is quite unlike allowing people to do the same. Goods do not put potential burdens on educational, health, and social service institutions; they do not participate in political activities, lobby to become citizens, or vote. By the same token, goods do not bring with them entrepreneurial skills and professional expertise like that possessed by immigrants; and, at the other end of the economic ladder, they help to fill many low-wage positions. Anyone who thinks they can come to a categorical judgment on immigration policy has not thought hard enough about the problem.

These difficulties work themselves into the fabric of our current immigration law. Right now, enforcement of immigration law is entrusted to ICE, the eerie acronym for the U.S. Immigration and Customs Enforcement. ICE is responsible for border protection and dealing with aliens already in the country. Its portfolio of duties involves the enforcement of over 400 different federal statutes. To get the barest sense of the massive size of this apparatus, just leaf through the major provisions of the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA), which addresses border control, smuggling, document fraud, employment restrictions, and, with renewed urgency given the imminent arrival of the Trump administration, the “inspection, apprehension, detention, adjudication, and removal of inadmissible and deportable aliens.”

Every cranny of such statutes is laced with hidden complexities and potential constitutional problems. Just this past week, in Jennings v. Rodriguez, the United States Supreme Court grappled with the vexing question of what kind of statutory and constitutional protections are or should be given to immigrants who are held in detention for long periods of time without a review of their status. The Ninth Circuit decided that all these detainees had to be released after six months of detention if the government did not prove by a preponderance of evidence that their detention was warranted. It is unlikely  that this aggressive bit of judicial intervention will be sustained. But no matter the outcome of the case, the underlying difficulty remains. How does ICE deal justly and efficiently with the tens of thousands of individuals in custody at any one time, even at current enforcement levels?

To add to the complications, the detainees are wildly heterogeneous. Some are stateless persons, who by definition cannot be deported to their home countries. Some are persons with strong but uncertain claims for refugee status. Others are legal permanent aliens who are threatened with deportation for the commission of minor drug offenses that would merit only modest punishment if committed by citizens. Handling these cases in the criminal justice system is made infinitely more delicate because a plea bargain that might easily be reached with a natural-born citizen could precipitate a deportation proceeding against a similarly situated alien, thereby putting enormous pressure on prosecutors and defense attorneys to avoid penalties that could trigger a deportation that neither side wants.

In light of these difficulties, the prudent practical approach is to give strong weight to the status quo ante, by implementing only those changes that will make some clear improvement to the immigration situation, without upsetting America’s fragile consensus on immigration policy. One sensible place to start is with the liberalization of the H-1B visa program, which could help expand the competitiveness of American businesses both at home and abroad. These visas represent only a small fraction of the overall immigration system. The far greater risk to the system comes from the bellicose remarks of President-Elect Donald Trump, who has vowed repeatedly to step up enforcement of the immigration laws. Thus, in his November 13 60-minutes interview with Lesley Stahl, Trump minced no words when he said:

What we are going to do is get the people that are criminal and have criminal records—gang members, drug dealers—where a lot of these people, probably two million, it could be even three million, we are getting them out of our country or we are going to incarcerate. But we’re getting them out of our country, they’re here illegally. After the border is secure and after everything gets normalized, we’re going to make a determination on the people that they’re talking about who are terrific people, they’re terrific people but we are gonna make a determination at that. But before we make that determination, it’s very important, we are going to secure our border.

These statements reveal that Trump has paid scant attention to the nature of the immigration problem, the probable impact his policies will have on aliens and citizens alike, and the huge financial, logistical, and constitutional obstacles that stand in the path of his proposed program.

Start with the nature of the underlying problem. Trump makes it appear as though there were some vast new threat from immigration, most notably from Mexico. But the facts reveal a different story. The overall rate of immigration into the United States stands at about 3.1 immigrants per 1,000 per year, trending slightly downward from 2000 onward. Set against the backdrop of a declining birth rate inside the United States, foreign immigration acts as a useful counterweight, which among other things is necessary to prop up the generous entitlements supplied to senior citizens under Social Security, Medicare, and Medicaid. More concretely, the net rate of immigration from Mexico, which was very high, totaling 600,000 in the boom years of 2006-2007, was sharply negative in the recession years of 2012-2013, at minus 600,000, and roughly neutral since that time. The same picture has applied globally since 2009, with net immigration and outflow of illegal aliens about constant, with between 300,000 and 400,000 in each group per year. I use the term “illegal” instead of the more fashionable “undocumented” for two reasons. First, it is the statutory language; and second, it expresses an accurate statement about the legal position, which the word “undocumented” fails to to capture. It is not possible to be a legal illegal alien. It is possible to be a legal but undocumented one.

No matter the terminology, however, Trump’s broad allegations also fail to make any sense in dealing with aliens with criminal records. As noted before, the risk of deportation creates a powerful deterrent against the commission of crimes for any illegal alien. Over the past 25 years, we have seen a rapid decline in the overall and violent crime rates of the early 1990s, both when illegal immigration was high and after it declined. A similar decline is found among all subgroups of illegal aliens. The recent upsurge in criminal activity in the post-Ferguson era has nothing to do with immigrant populations. It is more likely that, in some key urban areas, it stems from the so-called Ferguson Effect. Hillary Clinton’s well-noted campaign charges of institutional racism against the police only worsened the situation. But no matter how one views that controversial issue, gang members and drug dealers make up at most an insignificant fraction of the illegal aliens in the United States. In any event, they are already subject to deportation under current rules. It is also worth noting that the net removals of aliens increased in the Obama years, both for criminal and noncriminal aliens. That number was 392,000 in 2010, and it is hard to see how the system could double or triple that figure in the next several years without a massive commitment of resources, which in turn would produce vast dislocations in a domestic economy that depends heavily on illegal aliens to keep things moving. A recent McKinsey study offers a powerful endorsement of the massive social gains that occur globally through immigration.

In light of all of this, it is hard to fathom how any major shift in immigration enforcement policy would be a net good for this nation. At one level, mass deportations would undermine local economies, reduce tax revenues (especially all sales and excise taxes), militarize our cities, and cost a fortune. Wholly apart from the economics are the potentially catastrophic social consequences of turning upside down the lives of these illegal aliens.

The threat of the Trump program is also manifest in the outspoken statements of key Democratic mayors. These city leaders plan to run “sanctuary cities” in which they will not cooperate with ICE officials in enforcing immigration laws, even as they stand to lose millions in potential federal aid. In one sense, the effectiveness of this program is limited, because it is clear as a matter of constitutional law that the federal government has full power to enforce its immigration laws without the cooperation of local officials, who in turn are bound not to interfere with those federal efforts. As the 2012 Supreme Court decision in Arizona v. United States makes clear, the United States can preempt all local laws that are inconsistent with federal policy. Arizona was an Obama administration victory because it preempted Arizona laws that wanted to step up enforcement of the control of illegal aliens beyond the level of federal norms. Turnabout is fair play, so now states cannot, under any Trump administration reforms, interpose their authority against that of the federal government. On the other hand, Trump should know that these expanded federal efforts will surely falter as the United States is not under current law entitled to dragoon local officials into funneling individuals into the ICE system. A little cooperation could go a long way.

It is critical in this situation for the new Trump administration to back off its confrontational policy and instead seek a more incremental and balanced approach to the issue. Ironically, one hugely important step in dealing with the immigration problem is to liberalize our trade policy with Mexico and other Latin American nations from which large numbers of illegal immigrants come to the United States. Increased trade will have two key effects. First, it will improve the economic situation in other countries, which in turn will reduce immigration into the United States and also induce some illegal immigrants to return to their home countries. In addition, free trade will increase exports to foreign nations, thereby increasing job opportunities for citizens and aliens alike. Trump’s quixotic campaign will at the very least block these improvements, and worse could serve to further inflame political passions and partisan divisions that only make the task of intelligent immigration reform even more difficult.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

Obama’s Labor Market Mischief

Richard Epstein*

Richard Epstein

Richard Epstein

Under the Fair Labor Standards Act of 1938 and its subsequent amendments (FLSA), Congress has delegated to the President the power to set overtime regulations for all public and private employees throughout the United States. On March 13, 2016, President Obama directed Thomas E. Perez, head of the Department of Labor (DOL), to “modernize and streamline the existing overtime regulations for executive, administrative, and professional employees,” which, in his view, “have not kept up with our modern economy.” The Department of Labor conducted exhaustive hearings on the matter, during which it received comments from close to 300,000 individuals and organizations.

In May 2016, following these hearings, the Department issued its Overtime Final Rule that showed how little it had learned from the process. It did nothing to adjust the definitions of EAP (executive, administrative, and professional employees) workers. But it did raise the minimum salary level for exempt EAP workers from $23,660 per year, or $455 per week, to $47,892 per year, or $921 per week. The regulation also included a provision that automatically raised the minimum salary level every three years to take into account the effects of inflation.

This rule, which generated widespread consternation in government and business, was scheduled to go into effect on December 1, 2016. But on November 22, 2016, in Nevada v. U.S. Department of Labor, Judge Amos L. Mazzant of the Eastern District of Texas, an appointee of President Obama, issued a nationwide preliminary injunction that blocked its implementation at the request of 21 states (all but Louisiana with Republican governors) and a number of private businesses. Under the FLSA, the exemption only applies to workers paid on a salary (as opposed to an hourly) basis who must be paid the minimum amount set by the regulation in question. Most critically, the FLSA regulations contain a so-called “duties test” that must be met in order for employees to be treated as exempt
EAP workers.

Executives typically have management powers and the ability to hire and fire. Administrators do office and non-manual work related to firm management. Professionals have to engage in intellectual work that, with study, allows them to acquire “advanced knowledge . . . in a field of science or learning.” In the end Judge Mazzant held that the regulation failed because in raising the minimum level to $47,892, it did not take any steps to make sure that EAP workers under that level were not exempt from the overtime provision. In other words, the duties component of the test had to be satisfied independently of the hourly test.

In reaching his decision, Judge Mazzant upended the usual expectation that the government is given broad discretion in interpreting its own regulations. Thus in the course of its argument, the Department of Labor insisted that the well-known 1997 Supreme Court decision of Auer v. Robbins gave the Secretary of Labor virtually full discretion in fleshing out the details of the regulations that it promulgated under the FLSA. In that decision, Justice Scalia held that the Secretary could refuse to classify police sergeants and lieutenants as bona fide EAPs because they were subject to reductions in pay for various disciplinary infractions. The supposed standard for upholding an interpretation was that the interpretive rule was not “plainly erroneous or inconsistent with the regulation.” But it was laughable nonetheless because it was at enormous variancewith ordinary language, which everywhere describes sergeants as “field supervisors” and lieutenants as the supervisors of a “bureau, squad or unit.” Notwithstanding Auer’s indefensible intellectual acrobatics, Judge Mazzant decided to apply a “plain meaning” test that struck down the regulation on the simple ground that many workers earning below the new threshold in fact occupy bona fide EAP roles. Yet the Secretary made no effort to provide separately for any of those cases. Interestingly enough, the same objection did not succeed against the lower, previous minimum salary number given that few if any EAPs earn such low wages.

In making this decision, however, Judge Mazzant turned away another challenge to the FLSA insofar as it applies to public employees, to whom his decision devoted virtually exclusive attention. This more fundamental challenge should have been based on the sensible view that the United States has no business regulating the wages or overtime pay of state government employees. In principle, the strongest argument in favor of this position is that the United States and the states should be regarded as coequal sovereigns, each within its own defined territory. Under that conception, the states should be able to organize the internal affairs of all its own agencies as it sees fit. In National League of Cities v. Usery (1976), Justice Rehnquist did not embrace this strong originalist conception, but he did hold that the states were exempt from federal oversight insofar as they discharge “traditional governmental functions”—a phrase that the Court never fully defined. The unworkable nature of that needless distinction led the Court in 1985 to overturn National League of Cities in Garcia v. San Antonio Metropolitan Transit Authority, given its professed inability to decide whether mass transit in a metropolitan area fell within the class of traditional government functions.

Unfortunately, this whole judicial episode was misconceived, because in the post-New Deal Era, there is no principled reason at all to distinguish between traditional and novel government functions when both are regarded as equally legitimate. The correct result is that all states should be liberated from any statute, including the FLSA, that seeks to set the wages and hours of a state’s own employees. Judge Mazzant briefly noted correctly that the Court did some modest backtracking from Garcia in Printz v. United States, which held that the federal government could not require state and local enforcement officers to conduct background tests on prospective handgun purchasers. But he was surely correct to conclude that Garcia is still the law. Ideally, the model of coequal sovereignty is most faithful to our constitutional traditions. A reconstituted Supreme Court could solve a large fraction of this problem by ditching Garcia and expanding the exemption under National League of Cities so that it covered all state and local workers, regardless of their function.

Nonetheless, in the short run, the new Trump administration should not wait to find out whether Judge Mazzant’s edgy decision will be sustained on appeal. On day one in office, President Trump should scrap the DOL’s new overtime rule: Far from modernizing and streamlining business, the new rule, as is evident from the torrent of objections, throws a massive wrench into the new economy. The simplest point here is that the “hour” is no longer the gold standard of compensation for many workers. The gig economy, for example, pays its workers by the job and not by the hour. It is impossible for these employers to monitor the hours of workers who, under their contracts, have complete freedom to decide whether or not to take any given assignment. It becomes the road to economic ruin to impose rules of this sort when the penalties for noncompliance are so high.

The same can be said with respect to graduate students whose laboratory work is a mixture of study and employment, where it is again impossible to tease out the one component from the other. The objection also applies to tech start-ups, whose employees receive a huge chunk of their compensation in the form of stock options and future bonuses, which are largely ignored under the myopic FLSA hourly formula. None of these cases gave rise to much difficulty when the base wage was set low, but they cause enormous confusions to millions of workers whose responsibilities are not accurately measured by their base rate of compensation.

Nonetheless, the DOL has buried its head deeply in the sand in promulgating the regulation. Its own original assessment of the impact of its new overtime rule is a perfect self-parody of economic analysis. The stated point of the rule was to raise “salary threshold at the 40th percentile of weekly earnings for full-time salaried workers in the lowest wage Census region in the country, currently the South.” The meaning of this particular figure is never explained. Nor did DOL come to grips with the massive disruption that the new overtime rule could cause to many established forms of business. Instead, it adopted the naïve conclusion that “managerial costs” will be about $224 million, which is “based on the median compensation of a manager multiplied by the assumed average 5 minutes per week for the additional monitoring (i.e. more than one hour per quarter) multiplied by the total number of directly affected workers who work overtime either regularly or occasionally but on a regular basis.”

At no point does the DOL even ask whether to include in its calculation the key decisions that firms must make on whether to keep workers below the threshold, or to raise them above it, in order to avoid the heavy monitoring costs. Nor does it ask whether firms will choose to lay off some workers or redefine job classifications in ways that minimize the impact of the new rule. The DOL also fails to examine whether, and if so how, these firms will have to adjust other salaries to keep relative compensation in order. And, of course, the DOL ignores the possibility that some workers are opposed to the shift, given the loss of potential status from having to punch a clock, and the possibility that some departments might have to close or restructure or let go of some workers. The DOL model also assumes that it is easy to set in place the systems needed, and that the firms in question need not worry about inspections, fines, and potential civil liability for noncompliance with the rules. It is laughable to think that the fight over this rule is about the allegedly $224 million per annum in quantified managerial costs or even the $1.2 billion in pay increases that are identified by the DOL. The greatest sin of the DOL is that it assumes blithely that neither private nor government firms and agencies respond to incentives, so that it can reduce a complex economic inquiry into a simple set of mathematical calculations not worth the paper that they are written on.

Nonetheless, the DOL is largely unrepentant; in response to Judge Mazzant’s decision, it wrote: “We strongly disagree with the decision by the court, which has the effect of delaying a fair day’s pay for a long day’s work for millions of hardworking Americans." But once again this pronouncement suggests that the DOL knows what counts as a fair day’s pay for the millions of workers who are subjected to the rule. In so doing, it makes the most fundamental mistake in economic analysis. It assumes that the agreements that are in place do not reflect the revealed preferences of the workers who have signed on to these deals. It is of course the case that workers want to receive higher wages, and every employer would prefer to pay less. It is just these two pressures that drive a competitive market to set wages as they do. There is absolutely no reason to think that the optimal pay schedule for overtime is one-and-a-half of basic wages. A huge number of firms will have to change their job classifications and reorganize their work and production schedules to avoid overtime payments. Yet the DOL ignores this elephant in the room, so little does it understand the market that it regulates.

The only way in which to achieve permanent wage increases is to reduce the many impediments on the FLSA and other statutes that make it harder for employers and workers to achieve productivity gains. The fruitless overtime rule of the DOL, if implemented, will probably result in resource losses that exceed, by at least an order of magnitude, the paltry sums that it purports to transfer from employers to workers. The quicker the DOL is pushed to the sideline, the better it is for the American economy, its workers, and employers and consumers alike. Let’s hope that the change in presidential administration leads to a long overdue change in labor market regulation. 

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

California’s Needless Housing Crisis

Richard Epstein*

Richard Epstein

Richard Epstein

Everyone agrees the most attractive areas in California suffer from a housing crisis that calls for drastic action. The difficult question is deciding what should be done. Many of the challenges are embodied in the small California town of Mountain View, population 80,000, which should be basking in sunshine as the home of Google. But instead the town is mired in discord and controversy over a set of well-entrenched anti-growth policies concerning housing. The tight supply of housing has raised the price of the median home to about $1.4 million. Rents, too, have skyrocketed, resulting in the displacement of many long-term tenants—teachers, nurses, and tech employees—who have to endure long daily commutes to work or find jobs elsewhere. Mountain View is now the proud home to numerous mobile home parks, occupied by individuals who crave access to the city—and who reportedly drive Teslas and Mercedeses, no less—but who lack the means to purchase or rent ordinary housing.

The situation in Mountain View has provoked two distinct responses. The first of these was the approval on November 8 of Measure V, a rent control statute that turns Mountain View’s rental market into a regulated public utility, complete with its own five-member board. The ordinance exempts all units built after February 1, 1995. But for the covered units, it rolls back rents to their October 2015 levels, and then limits rent increases going forward to between 2 and 5 percent, with allowances for higher increases if justified by extraordinary costs. The tenant groups that support the statute seek, without explicit acknowledgement, to secure a massive wealth shift in their favor, without discouraging future development. In so doing, they ignore the costs to other potential residents who put a higher value on those units, which will lead to a misallocation of available units whose number is kept artificially low by a wide range of entry constraints. The administrative costs of running this system for their exclusive benefit will, moreover, be borne by everyone inside the city. It is also likely that the threat of a new rent control law will weigh heavily on the market for exempt units, and will retard the ability to build new units as well.

That last possibility is the subject of an intense struggle between Mountain View’s pro- and anti-growth factions. Generally, pro-growth forces have made gains in California leading to a new YIMBY (Yes, in my Back Yard) movement.  And new pro-growth members of the Mountain View City Council have spurred proposals to add about 10,000 new units—roughly 50 percent of the current total housing stock—to provide homes for Google employees. The politics around this proposal are intense, because new housing projects bring new tenants whose children will need to be educated in local schools, funded in part by local property tax dollars, some of which might come from existing tenants. Yet the construction of new office buildings and other facilities, which avoids this educational burden, will only aggravate the mismatch between jobs and homes in the area, further intensifying the housing shortage.

So the questions are: What caused this housing crisis, and what can be done to dig California communities like Mountain View out of their giant housing holes?

On the first question, it should be noted that similar issues occur from time to time outside of California, but usually with far less severity. The explanation for the situation lies in the heavy hand of government regulation on the operation of housing markets through tools like zoning and rent control laws, endless permitting requirements, and a host of other restrictions that go far beyond what is needed to control the health and safety risks associated with real estate development. Of course, real estate markets need some form of external regulation. But the particular form makes all the difference.

On this score, the traditional small-government approach could still work today. The first system of social control is the law of nuisance that prevents landowners from engaging in activities that are offensive to their neighbors, like the emission of filth, noises, and odors. These restrictions are efficient because they imitate standard restrictions always included in all forms of planned-unit developments, whether they be apartment complexes or gated communities. The initial owner of the property knows that his gain from selling or leasing is far greater if all owners are subject to these restrictions than if none are. The owner therefore “internalizes the externalities,” to use a term of art, by picking the optimal set of rules to regulate these risks. There is no conflict between his welfare and that of his buyers. The law of nuisance backstops these rules by protecting outsiders from the combined activities of the new project.

Every standard voluntary development goes far beyond the prevention of nuisances by imposing a set of covenants and restrictions that address such matters as setbacks, height restrictions, aesthetics, common areas, taxation, governance, and many other details. These tend to differ across developments based on the income, tastes, and preferences of the unit owners. But the same logic drives them to efficient outcomes. Any benefit given to one tenant is a restriction on the others. The optimal set of rules continues to maximize the difference between total benefits and total costs, and the entire arrangement “runs with” the land so as to preserve the basic governance structure as individual units are bought and sold.

What is striking about the system of public restraints in California is that they go far beyond the various covenants and conditions that developers devise for their own projects. And they do so in ways that benefit local residents by imposing crushing costs on new arrivals. At this point, the self-balancing mechanism that constrains the behavior of developers is removed, now that local homeowners and voters are given a free hand in how they regulate, because they never have to compensate current landowners or future buyers and tenants for the losses these restrictions impose. Local citizens are prepared to consume a lot of goodies at zero price, which is all that an emaciated takings law now requires of them. At this point, they only cast their ballots for particular restrictions that benefit themselves, no matter what the cost to future members of their community. “Welcome stranger” and “not in my backyard” become the order of the day, so each small community adopts rules that keeps out any new activity that sitting tenants think will lower the value of their own units. Let them build elsewhere is the modern equivalent to Marie Antoinette’s “let them eat cake.”

The correct way to deal with this problem is to impose a serious compensation requirement on the communities that implement these regulations so that the prices they impose on others are now borne by themselves. This elaborate system of takings law should not, of course, require that communities compensate landowners that engage in noxious activities. But by the same token, it requires a strong sense of discipline to make sure that feigned “nuisances” do not justify the full range of large-lot and height restrictions, setbacks, and the like that local communities routinely impose on new arrivals. All too often, the result is an endless back and forth in which developers challenge one set of restrictions, only to find that they have to go back to square one when the plan is rejected by the local planning board. Under current law, the aggrieved landowner cannot oppose these restrictions in court until internal administrative procedures are exhausted, which gives local governments the incentive to string out the process until developers die from financial exhaustion. The endless cycles of application and denial are ample warning to potential developers who become reluctant to buy land, develop plans, and go through endless hearing cycles before obtaining—often from multiple independent bodies—their precious permits. The potential residents that they represent are typically unheard in these proceedings. In similar fashion, the rent control laws generate an enormous wealth transfer to sitting tenants, which, over time, leads to a stagnation in real estate markets, as people hold on to their units knowing they cannot afford the higher prices available to them in the limited unregulated market.

This two-tier system creates massive inequities, which then inspires local governments to try to supply affordable housing to newcomers in ways that are routinely self-destructive. California is a national leader in this institutional folly, because its Supreme Court routinely upholds rules that act as strong barriers to entry. Thus in San Remo v. San Francisco (2002), it upheld a law that required a developer—who wanted to convert prime downtown property into a hotel—to supply substitute housing to sitting tenants, even after their leases had expired, or contribute to an “in lieu” fund that could be used to create new public housing. This senseless tax on conversion prevents the movement of property to higher value uses and thus shrinks the tax base. If a city wants to supply affordable housing programs, it can do so through general appropriations that make taxpayers take the hit for the generosity.

The situation got even worse in California Building Industry Association v. City of San Jose (2015), where a unanimous California Supreme Court held that all builders of new housing had to supply a fraction of affordable housing units at their own expense, even if their proposed plans displace no sitting tenants. The net effect of this convoluted price control system is to retard new development. Again, putting these costs on the taxpayers is the only way to break the logjam. We can be confident that the number of affordable units demanded will shrink because the expenditures will now be on-budget. But, at the same, time the total supply of housing should expand by increasing new entry, which will drive down overall price and rental levels.

At this point, it becomes clear why any Mountain View growth plan will be mired in controversy for years to come. The City Council has full discretion over what kinds of restrictions it can put on new units, and its combined weight will delay the housing relief, increase its costs, and reduce its benefits. What is needed is a systematic way out of the impasse. The first component of this program is to remove any and all permit restrictions on housing that are not related to public health and safety, narrowly defined as under traditional nuisance law. On this model, virtually every development will pass muster, and the key task of the planning commission is to make sure that vehicular access and off-street parking are properly supplied. Otherwise, the regulation stops.

More importantly, Mountain View and other towns have vacant areas and these should be regulated by a simple rule that lets the developer make all decisions inside that area on issues involving density, design, and governance. At this point, the older logic of land use restrictions can go into place. Supply will increase, and prices will go down. Where current citizens want to impose further restrictions, they can do so if they are prepared to pay for them.

The way out is therefore available. But how is that transition to be secured in the face of implacable local opposition? Local governments have no incentive to reform themselves. The California Supreme Court is so convinced of the wisdom of local governments that it will not impose any meaningful restrictions on their operations. The state is thus locked in by bad laws and bad institutions. Ironically, one of the only possible solutions to this blue state problem will come from a potentially remade conservative Supreme Court, which will likely enforce federal constitutional guarantees on takings and due process against California and its local governments.

That process will take time, and it will require the U.S. Supreme Court to recognize that it, too, has to mend its ways. But the populist wave that brought Donald Trump to power may yet protect California from its ingrained regulatory system. The incredible mess in the California housing markets is not a product of bad luck. It is the consequence of horrible laws whose destructive impact is all too evident in the daily hardship and senseless political battles now raging across the state.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

The Loyal Opposition

Richard Epstein*

Richard Epstein

Richard Epstein

No matter which candidate wins this Tuesday’s election, the nation is likely to continue the downward slide that started with the election of Barack Obama as president in November 2008. In the last eight years, the nation has fractured morally; it has failed to grow economically; and it has been continuously embarrassed in its foreign affairs. As a lame duck president, Obama will likely do nothing to reverse these downward trends. But now consider our alternatives to replace him.

Hillary Clinton, the likely winner, has moved to the left of Barack Obama on many domestic issues: We can expect to see higher taxes, more regulation of the labor markets, futile and misguided efforts to rehabilitate the Affordable Care Act, hostility to free trade, enforcement of repressive environmental regulations, and a stoking of racial tensions. There is not a single major domestic policy issue on which she promises material improvement from her misguided and dogmatic predecessor. She speaks and thinks like a diehard progressive with scant respect for, or sympathy with, market institutions. On foreign affairs, she was once thought to be more hawkish than Obama. But as of late, she has fallen under the spell of the Sanders wing of the Democratic Party. She has also shown little unhappiness with Obama’s ill-conceived Iran nuclear deal.  Thus, she is unlikely to do much, if anything, to reinvigorate a weak American military establishment, and I fear she will continue with a passive policy of disengagement with the Russians, Chinese, and Iranians. Her recent policy pronouncements are a continuation of Obama’s, which means they could lead to a further erosion of American influence abroad, and, ultimately, the escalation of conflict in the Middle East.  

Last, but by no means least, is that the stench of scandal will hang over her even if she is elected. The relentless exposure of her various lapses, rigorously dissected by Andrew McCarthy and Kimberly Strassel, among others, will not abate if she is elected president. She will have to fight a doomed three-front war dealing with the shenanigans of the Clinton Foundation, the palpable irregularities of her email server, and the lies and distortions that have come out even as the Department of Justice and FBI have slow-walked their criminal investigations of her conduct. Future waves of embarrassing disclosures could make it impossible for her to govern effectively.

She may well be put over the top by the recent Comey letter that stated that the FBI examination of the Abedin/Wiener server revealed no new information. But anyone who was skeptical of Comey for his suspect July 5 decision not to go further with the Clinton investigation will not be assuaged in the slightest by his most recent statement. Nor is it beyond the realm of possibility that she could be forced from office by some as-yet-unknown political time bomb.  No one can say.

But lest one be too critical of Hillary, there is Donald Trump, whose personal baggage means that his election carries the risk of bringing buffoonery, decadence, and political instability into the Oval Office, as well as possible investigations into sexual assault and fraud for his previous behaviors. On policy matters, he talks as if he is still cutting real estate deals in Atlantic City. His erratic behavior leads many to fear his control over our nuclear arsenal in his position of commander-in-chief and to doubt his respect of constitutional norms on such key matters as the rule of law and the separation of powers. His belligerent insistence on renegotiating international trade deals could lead to a major trade war that would cause incalculable damage to the United States and all of its many trading partners. Trump, it appears, has never heard of the principle of comparative advantage, and thus looks at American trade deals exclusively through the lens of the perceived “losers,” with scant appreciation of the systematic gains from trade. It is no wonder that most corporate executives have shunned his candidacy, given his apparent willingness to freeze out international markets. Likewise, his shrill immigration policy threatens to make it more difficult to run the domestic economy and stabilize his relations with Latin America and Muslim nations.

On most domestic issues, he is an empty vessel who has no political experience or intellectual skills to guide the nation forward. On social issues, he has the rare capacity to inflame racial tensions without cause, and to engage in gratuitous sexual slurs that further outrage public opinion. On foreign affairs, his oft-expressed disdain for treaties could usher in pandemonium on the most central military and economic issues.

It is not a pretty choice. What makes the current situation still more distressing is the polarizing impact that this campaign has had on the American electorate. It takes no sociological wizard to realize the deep antipathy that ardent Trump supporters have for Clinton, whom they think represents the bicoastal liberal elites and their favored minority groups. Clinton supporters return the favor by denouncing everyone who supports Trump as racists, homophobes, and kooks. Harsh talk like this has tended to abate during previous presidential elections. Traditionally, Democratic candidates tacked left while Republican candidates tacked right during the primaries to secure the nomination—only to both inch back to the middle in the general election in order to appeal to the ,median voter, on whom the outcome of elections was thought to hinge.

Unfortunately, this time around that movement to the center does not seem to be taking place. Instead, both parties have assiduously cultivated their respective bases in order to increase their turnout in the national election. To the extent that each tries to win over undecided voters, it is not with appeals to policy, but with denunciations of the character and temperament of the opposing candidate. And so the electorate has become more split, guaranteeing that the supporters of the losing candidate will bitterly resent the new president. There will be no honeymoon period, no reconciliation, only massive distrust. In one likely scenario, a Clinton presidency met by a Republican Congress will lead to renewed exercises of unilateral executive power, along with gridlock on just about every issue, including Supreme Court nominations, given that the president cannot move without the cooperation of Congress on such measures.

Faced with this unappetizing set of prospects, it is interesting to observe the different responses of the intellectual elites on the Democratic and Republican sides. Both are right to castigate the evident weaknesses of the other. But the Democrats are far too likely to whitewash Clinton’s many flaws and to claim that there are strong positive policy reasons to support her candidacy. After all, they don’t have any qualms with her aggressive brand of progressive politics. Interestingly, the response of Republican elites has been much more fragmented. There are many distinguished Republicans who so fear the erratic Trump that they are willing to support the Clinton nomination, warts and all. At the same time, many other Republicans find the prospect of a politically destructive and morally bankrupt Clinton administration too much to bear, so they are supporting Trump’s election and hope to restrain him while in office. And then there are those, like myself, who find the entire situation so unsettling, and both candidates so lacking in merit, that they will not vote for either.

I do not regard this last choice as irresponsible. I am thinking of my vote not just as a way to determine the outcome of an election, but also as an expression of the policies and public officials whom I am prepared to defend. The selection of one candidate over the other is like the purchase of a complex market-basket of goods. The only choice given to anyone in an election is to purchase all the goods in a particular basket or none. In most elections, it is commonly possible to have enough confidence in a candidate and a party platform to make this kind of choice. But in this election, my strong doubts about the character and integrity of both candidates, and my deep reservations regarding the substantive positions of both candidates, lead me to one conclusion. I cannot adopt the theory of vote for the lesser evil when both evils are so unacceptable.

I know that nothing that I could say would influence the decision of a President Clinton or her supporters on domestic issues if they were to control government. Our intellectual and ideological differences are so profound that I doubt that there is any common ground for discussion. One prevailing view is that Clinton has no abiding principles, and thus is always open to moving one way or the other depending on what’s most politically expedient at the moment. Yet my own sense is that she will resist any fundamental shifts in policy, such as reform of the ill-fated individual mandate under the Affordable Care Act. On foreign affairs, she is harder to read, although it is disappointing that she has not distanced herself from the Obama policies on Iraq, Iran, and Israel.

On the Trump side, the situation is more complex. On most policy matters, Trump is a blank slate, ill-prepared for office. Should he be elected, there are two questions to consider: first, will he listen to anyone, and, second, will he listen to the right people? On the former question, the odds are not good, given his willingness to disregard his staff and stumble down his own self-destructive paths. It’s impossible to answer the latter question, but the best thing Trump can do is to include in his inner circle the very conservatives and libertarians who, for compelling reasons, have most fiercely opposed his nomination. They will be reluctant to serve, but, in the end, many of them will overlook their seasickness in an effort to right the ship of state before it runs into the shoals.

Learning how to take advice is no easy art. All too many people assured me in 2008 that Barack Obama would be a fine president because he would get good advisors. What we got in the end was Valerie Jarrett, who drove away other potential advisors notwithstanding her utter want of substantive qualifications. Presidents always have a tendency to draw the wagons close around them when faced with these threats.

Nonetheless, regardless of whether Clinton or Trump is elected president, classical liberals like myself will be shut out of political influence. At this point, the only thing that we can do is to act as the loyal opposition. Economic growth is not necessarily doomed. It can be reinvigorated by sticking to the core principle of defending a limited government that understands its primary economic and social mission is not to purify the hearts and minds of those who disagree with its leaders, but to allow strong institutions, such as private property and the freedom of contract, to flourish, while offsetting the otherwise overweening power of the state. That mission requires strong opposition to the unilateral power of executive action and the unbounded power of administrative agencies. Abroad, it requires that the future president not withdraw from foreign affairs, or take a categorical stance against the use of force against those who attack or threaten our friends and allies in Western Europe, the Middle East, and in Asia.

These principles make sense no matter which party is in office. The job of the political and legal theorist is to keep steady on the course, and to demonstrate, time and again, the necessity for classical liberal positions on the full range of substantive issues. That third voice has to be heard, and heard often, in the impending political struggles that are likely to engulf the nation in the months and years ahead. 

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

Unaffordable Care Act

Richard Epstein*

Richard Epstein

Richard Epstein

The defenders of the Affordable Care Act are running out of excuses for the dismal performance of its health care exchanges. It is now old news that many uninsured individuals are unable, even with sizeable subsidies, to purchase health care coverage from private health care providers. As Yale Professor Jacob Hacker notes in his recent op-ed for the New York Times, the ACA has indeed faced “a rocky six months.” Average anticipated premium increases are running at 25 percent; major insurers like Aetna, UnitedHealth, and Humana have either pulled out of the program entirely or cut back their operations; and one recent tally reports that 16 of the 23 health care co-ops, with over 800,000 enrollees, have shut down, with at least six others on economic life support.

What should be done to respond to this unfortunate situation? The defenders of the ACA want to double-down on the current system by introducing a “public option” that was excluded from the original legislation. President Obama endorsed that position in a communication published recently in the Journal of the American Medical Association. After ignoring the problems with the individual health care exchanges, he suggests “Congress should revisit a public plan to compete alongside private insurers in areas of the country where competition is limited. Adding a public plan in such areas would strengthen the Marketplace approach, giving consumers more affordable options while also creating savings for the federal government.” That same line is echoed by Hacker who dismisses any notion that the public option will lead to a single-payer system, by making the tart observation that the wholesale withdrawal of private insurers from the marketplace has already resulted in a single-payer system in the five states whose exchanges will be serviced by only a single ACA provider next year, with the prospect of still more to come.

Unfortunately, President Obama and Professor Hacker, with their public option rescue plan, misunderstand the source of the current difficulties. The key problem is not monopoly power. It is runaway costs brought on by foolish regulations that no public option can cure. If the system is to survive, which is doubtful, it needs to be fundamentally redesigned.

In principle, there is no doubt that the exit of multiple players from any given market gives the survivors the opportunity to engage in monopoly pricing, which may allow them to increase profits. Yet current companies are leaving the ACA en masse because of developments on the cost side. They cannot make money when they have to play by onerous government rules in supplying health care insurance. Even in a perfectly competitive market, with free entry and exit, no one will sell any product for a price below its anticipated cost, plus an allowance for a risk-adjusted rate of return on invested capital. The firms that left concluded they could not provide a product consumers wanted at a price that would allow them to remain in the market. If there were monopoly profits to be made in this industry, new firms would enter as the old firms left. But the level of private entry into this market has been effectively zero, which is a strong signal there are no profits to be made.

Indeed, the situation is even more dire than this account suggests, because the individual health care market is not viable, even with the enormous public subsidies that are available to a large fraction of the insured population. According to figures from earlier this year, about 9.4 million enrollees (out of 11.1 million) on the ACA exchanges receive a government subsidy that averages $291 per month on policies that cost an average of $386 per month. That means that close to 85 percent of the enrollees receive an average subsidy of $4,632 per year, or close to 75 percent of the total price, for a grand total of about $43.5 billion in annual subsidies for their combined coverage. The situation looks even worse when you recall that the private plans of about six million people were canceled because they did not comply with the minimum standards set under the ACA. Those plans made money and contributed tax revenues to the government. So at a minimum, the $43.5 billion in subsidy dollars only increased the total exchange enrollment by about 3.5 million recipients. The rest of the reduction in the number of the uninsured comes not from the operation of the exchanges, but from the expansion of Medicaid by about 15 million enrollees, placing even more strain on an already overworked system.

The obvious inquiry here is why the President, or anyone else, should think the public option will be able to cure the underlying ACA cost problem and help the government save money. Private health insurers work in many complex markets, where they manage to turn a profit. Is there any reason to think that a new and untested government provider will be able to succeed where the companies have failed? That rosy and improbable scenario would only be possible if the government received a complex set of privileges and advantages denied to their private competitors. These subsidies could take the form of receiving free or below-cost services from other government agencies—or being exempted from the various regulatory reviews and requirements imposed on their private competitors. In other words, the few surviving private firms will be competing on an uneven playing field against coddled government entities. The rise of the public option would mean virtually all private insurers exit the field. Hacker is unduly optimistic when he thinks that the outcome will be a stable equilibrium with public and private carriers. A single-payer system, with its massive inefficiencies, is the more likely result.

It is therefore necessary to rethink the problem from the ground up. The only way to do that is to examine the devastating constraints the ACA places on the overall health-care marketplace. The first point to note is that parties in competitive markets are not told the dimensions on which they are allowed to compete. They can offer whatever mix of goods and services they choose for whatever price they charge. They can target the entire market or only a single portion of it. They can enter and exit at will. They receive no direct subsidies from the government for the services they supply.

As I have long argued, the ACA flouts these basic principles. The first point is that each of the ACA’s bloated four-tier plans—Bronze, Silver, Gold, and Platinum—have to offer 10 key essential services. As reported by, these include “outpatient care, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse disorder services, behavioral health treatment, prescription drugs, rehabilitative services, laboratory services, preventative care and pediatric services, including oral and vision care for children.” Some of these services are not found in any voluntary market, yet all of them must be made available at a high level that is determined by government regulation, and which is not sustainable in voluntary markets.

In addition, everyone must be accepted into every plan, regardless of whether they have a preexisting condition. Most potential insureds know about their anticipated risk profiles and thus enroll in plans when they expect to face heavy expenses that the insurers cannot take into account. Beyond that, all insurance carriers are required to ignore both age and sex, even though these are powerful predictors of future health care costs. An adverse selection problem arises because both old and young are most likely to enroll when the costs of their plan are smaller than their benefits.

Faced with these constraints, private insurers have to make choices their customers won’t like. They can restrict the choice of physicians, and they can increase the level of deductibles, both of which make the plans less attractive and speed the rate of exit. Recall that enrollments are done on an annual basis, so people who have lost coverage the first time will not enroll a second time, especially if the terms of the new plan are less attractive than those of the previous one. By the same token, various patient groups for assorted ailments will steer their members to their preferred plans because the cost of a sick person’s care is far lower on the exchange. Any public option that operates under ACA rules will be vulnerable to the identical pressures that have driven the individual exchanges to the brink.

The planners of the ACA had enough foresight to realize that its open enrollment system could lead to winners and losers. They therefore designed a “risk corridor” program, which is intended to require side payments from those insurers that have drawn a good group of insureds to those insurers that have drawn a more expensive group. The implicit assumption behind this strategy is that system-wide receipts will exceed system-wide costs. But, of course, that need not be the case. Some plans will indeed do better than others, but the overall costs of running the exchanges could nonetheless still be negative, which in practice means that as the overall losses get greater, it becomes more and more difficult to fund transfer payments solely from revenue sources within the exchanges. In order to stem the shortfall, the Obama administration sought to make payments to insurers that were not authorized by Congress, only to be slapped down in court.

If the public option will accomplish nothing, then what should be done? As I have long argued, the only solutions worth considering are those that reverse the major structural failings of the current system. In the short run, the list of required benefits has to be pruned; greater price freedom has to be restored; new enrollees must be required to stay for minimum periods to counteract the adverse selection problem; insurers have to be able to more accurately price in ways that reduce the cross-subsidies currently built into the system; and transfer payments among insurers have to be scrapped.

It is an open question whether these and similar reforms can remove the rot that has worked its way into the system. Yet by the same token, it will be difficult to push for a wholesale repeal of the ACA, given that it is no longer an option for people who have been forced out of the private market to return to the plans the ACA shut down years ago. After all, any new statutory reform could be so short-lived that new entrants might be hit hard by  unanticipated restrictions before they can recoup their investments.

There is a sober lesson to learn from this sorry situation. None of the ACA’s shortfalls should have been a surprise to people who understand how insurance markets operate. The basic proposition remains that market liberalization always beats increased regulation. The former reduces administrative costs and creates desirable incentives. The latter leads to heavy cross-subsidies, endless compliance rules, and systematic deficits. It is also hard to reverse course when the strongest proponents of the given program ignore its manifest structural deficits, which is exactly what the incorrigible President Obama and Professor Hacker have done in calling for a public option that will only make a bad situation worse.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.