The War Against Airbnb

Richard Epstein*

RICHARD EPSTEIN

RICHARD EPSTEIN

This past week, with much pomp and circumstance, New York State Attorney General Eric Schneiderman filed a massive report indicting the major upstart Airbnb for its dubious short-term leasing practices in New York City. Schneider thinks that his report is sufficient to nail Airbnb to the mast for its pervasive illegal conduct. But on a closer inspection the report looks more like an indictment of the City’s obsolete laws for dealing with new disruptive technology. Why complain about a business that matches many an out-of-town traveler with willing hosts, for a fee that leaves both sides happy, even after Airbnb takes its cut? 

New York State is going after the enormously popular company now that its rental transactions have soared in recent years. Starting from virtually nothing in 2010, revenues have roughly doubled from year to year so that the business today generates about $282 million in total revenue and about $61 million in revenue to Airbnb. About 6 percent of the participating unit owners generate about 37 percent of the profits from the nearly 500,000 reservations to date. The price per unit is about the same for large and smaller renters, so that there is no sign of antitrust difficulties in a market marked by easy entry and exit. Not surprisingly, the most lucrative rentals are on Manhattan’s west side, and in those parts of Brooklyn close to Manhattan. According to Schneiderman’s report, about 72 percent of these rentals are said to be in violation of New York City’s Multiple Dwelling Law, which imposes minimum rental periods of 30 days. Units turn over far more rapidly under Airbnb. Now that Airbnb has come of age, it is critical to separate the wheat from chaff in the Schneiderman report. 

On the positive side, report notes that all persons who stay in short-term hotel arrangements have to pay a city occupancy tax of 0.05875 percent on their units. It then complains that the Airbnb units have successfully evaded that tax. The soundness of the occupancy tax can be debated. But in general where there are substitute forms of short-term accommodations, both should be subject to the same tax regime, so that Airbnb units don’t gain an unfair advantage over the traditional hotels that are its direct competitors. The point looks, however, to be far from insolvable, for Airbnb surely has the capability to add the tax to the transaction fee and to remit the receipts to the City in New York. Nothing more need be done on this score.

The rest of the charges against Airbnb look a lot weaker. First, the report reproduces an affidavit from Thomas Jensen, its Chief of Fire Prevention, in its case against City Oases, LLC and others. That affidavit claims that all units are firetraps because of the high level of concentration of transient tenants living in close quarters with each other, who could run around in deadly confusion in the event of the fire. As an abstract matter, the claim is surely plausible, but it is not persuasive in this context. 

Notwithstanding the explosive growth of Airbnb rental units, the affidavit does not offer a single instance of a fire that arose from an Airbnb unit. Instead it references the 1980 fire at the Las Vegas MGM to impress upon its readers the importance of fire safety. It never mentions the many college students and young professionals in New York City who pay astronomical rents to live in cramped quarters. But even if the risk of fire were an immediate concern, shutting down the units is the classic case of legal overkill if lesser measures are still available, including better fire inspections throughout the City.

A similar response is in order to the four affidavits appended to the report that complain of chronic noise and disruption from four Airbnb units. There is no indication of the total number of complaints filed, nor any mention of the renters and owners who report positive experiences. Cherry-picking four units out of hundreds of thousands is unacceptable for any serious systematic study of the impact of Airbnb on New York City. Sadly, the report also misses the two best ways in which to address the nuisance problem. First, there are many laws already on the books that prohibit this kind of disruptive and asocial behavior in any dwelling, whether or not it is let out through Airbnb. Long-term tenants should also be sanctioned for the same forms of abusive behavior. Better enforcement of a neutral law should supply a strong response to the nuisance problem, without targeting Airbnb rentals.

The report also completely overlooks the role of private landlords in policing unwise Airbnb arrangements. In New York City, the notion of freedom of contract is dismissed as quaint and irrelevant to the stormy world of landlord-tenant relations. But in this instance, it could help prune any potential excesses from the Airbnb problem. The simple solution lets the landlord set by lease the terms for Airbnb rentals in units under its control. That landlord might choose to prohibit Airbnb subleases entirely in order to avoid the potential noise and safety disruptions in the building. But, if so, it will pay the price if the rentals go down because present and future tenants are deprived of an additional income stream to pay the rent. To finesse that difficulty, the landlord could opt for an intermediate position that allows these rentals under certain rules that require, say, minimum occupancy periods of a week. Or it could prohibit Airbnb transactions entirely. Whichever way the landlord goes, it internalizes the costs of its decision.

The point here is that New York’s Attorney General does not have to get into making business judgments about matters about which he knows nothing. Different landlords have different layouts and different tenant bases, so it is unlikely that one size will fit all in the Airbnb market. A large chunk of the Airbnb flap can be easily converted from a public law problem to a contract problem if Mr. Schneider will call off his attack. Once the landlord sets its lease terms, it should be able to request that Airbnb not list units in its structures for rental in violation of those terms—and hold them responsible for inducement of breach of contract if they try to deal with tenants in the teeth of this known prohibition. Perhaps the supply of Airbnb units will be reduced. But given that market forces drive that selection, the change is all to the good. And those units that remain for short-term rent should be able to raise their rates, adjusting for scarcity in sensible market behavior.

Not only does the report miss this market approach, but it also conjures up dubious externalities by insisting that the renters in these short-term units are raising the costs for long-term renters in the City even as they enrich the new class of Airbnb landlords. But the report’s flimsy indictment leaves out two major sources of gain from the Airbnb market. 

First, it ignores the gains from luring people to the New York economy both for tourism and business. The City surely courts those business travelers and tourists who stay in traditional hotels for their positive benefits, which go far beyond the occupancy tax to include all the business revenue they generate in the City. Why think that Airbnb residents are a net drain on the local economy when their presence is not associated with criminal activity or any other form of antisocial conduct? Why throw these financial benefits away to benefit traditional hotels perhaps, but no one else?

Second, the report ignores the substantial gains to Airbnb renters who get better deals than they could find at conventional hotels. Indeed, the net revenues from short-term leases count as a good thing, because it taps space that would otherwise remain an idle form of “dead capital,” as Arthur Brooks of the American Enterprise Institute reminds us. Of course, there is a serious housing shortage in New York City, but the whole point of markets is to make the best allocations of scarce resources under rapidly changing conditions. 

The way to tackle the shortage issue is not to mandate preferences for long-term tenants, but to loosen up on the conditions of supply by a massive relaxation of the entry barriers to residential housing markets in New York City, not only in the high rent areas of Manhattan and Brooklyn but throughout the entire City. Streamlining the currently interminable multi-step permit process for new construction would be a real start. Making sensible reforms in the now byzantine affordable housing regulations would also be most welcome. Yet the Attorney General’s report does not say one word about any kind of structural reform. Instead it buys into the fashionable but mistaken view that managing the current mix of housing units in the City is the way to promote equity. But that method comes in a distant second best to a conscious policy that seeks to expand the number of units, which in turn should lower rents and increase opportunities for long- and short-term tenants alike.

Finally, Schneiderman’s killer argument, on which the City’s legal actions rest, is that about 72 percent of the rentals on Airbnb are in violation of New York City’s MDL. Let us suppose that the point is true. The question remains what should be done about it. And the answer is clear—repeal or modify the MDL so as to allow for the greater flexibility of market forces to bring supply and demand into equilibrium across all segments of the market. 

In dealing with the housing laws generally, it is unwise to impose total prohibitions where narrower ones will do. The simple fact that the Airbnb market has continued to thrive notwithstanding the pressure that Schneiderman and Mayor Bill de Blasio have brought to bear is strong evidence of its enduring value for the residents and visitors who use them, most of whom are not charter members of the infamous top 1 percent. New York City should back off from Attorney General’s report, whose regulatory overkill threatens to suck the economic lifeblood out of the City.

*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.

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The Government and Freedom

Judge Andrew P. Napolitano*

JUDGE NAPOLITANO

JUDGE NAPOLITANO

Earlier this week, FBI Director James Comey gave an interview to “60 Minutes” during which he revealed a flawed understanding of personal freedom. He rightly distinguished what FBI agents do in their investigations of federal crimes from what the NSA does in its intelligence gathering, when the two federal agencies are looking for non-public data.

The FBI requires, Comey correctly asserted, articulable suspicion to commence an investigation and probable cause to obtain a search warrant. It does this because its agents have sworn an oath to uphold the Constitution, and their failure to comply with that oath may very well render the evidence obtained by unconstitutional means useless in court.

The NSA, as we know, makes no pretense about presenting probable cause to a judge. Rather, it asks a judge on a secret court (so secret that the judges themselves are kept from the court’s files) for general warrants. A warrant based on probable cause must specifically describe the place to be searched and the person or thing to be seized. General warrants, which the Constitution prohibits, permit the bearer to search wherever he wishes and seize whatever he finds.

British government agents and soldiers used general warrants issued by a secret court in London to invade the privacy of the colonists. The British also used another tool now prohibited by the Constitution -- called writs of assistance -- which permitted certain agents and soldiers to write their own search warrants and serve them upon the colonists. This was done, it was argued, because London was too far from America and the British claimed an urgent need to search colonial homes to determine whether the owners had paid the king’s taxes. The British use of general warrants and agent-written warrants became arguably the last straws that tipped colonial minds toward revolution.

Comey knows that if his agents get caught violating the Constitution, their searches will be fruitless. Yet, he conveniently failed to reveal in his interview that under the Patriot Act, his agents can and do write their own search warrants -- just as British agents and soldiers did. The Patriot Act calls these warrants by the euphemism "national security letters."

A national security letter is a search warrant in which one federal agent authorizes another federal agent to search for and retrieve data held by third parties. The list of third parties that can be subjected to an agent-written search warrant includes virtually all entities required by law to keep records, such as telephone providers, banks, lawyers, physicians, hospitals, supermarkets, utility companies, credit card companies and computer service providers; the list is nearly endless. Five federal judges have held this section of the Patriot Act to be a violation of the Fourth Amendment (which provides that only judges may issue search warrants) and thus unconstitutional.

The Patriot Act also prohibits the recipient of an agent-written search warrant from telling anyone about it -- that includes a lawyer in confidence, a priest in confession, a spouse in the home, even a judge in open court. It is this section of the Patriot Act that is being challenged by Twitter and Google in the Ninth Circuit Court of Appeals in California.

Twitter and Google have apparently received many of these unconstitutional agent-written warrants, and they want their customers to know what the government is doing. Two federal judges already have found this section of the Patriot Act to be violative of the First Amendment (“Congress shall make no law … abridging the freedom of speech.”) and thus unconstitutional.

The Patriot Act is the most unconstitutional legislation since the Alien and Sedition Acts of 1798, which proscribed speech critical of the government; yet the FBI loves it. Its premise is that in dangerous times, if we surrender our freedoms to the government, the government will keep us safe until the danger passes. This is a flawed argument.

The Declaration of Independence recognizes the continuous possession of personal freedoms (“endowed by their Creator with certain inalienable rights”), and thus they cannot be stolen by a majority vote in Congress, but only surrendered by a personal, intentional, knowing choice. And history teaches that government does not return freedoms once stolen or surrendered. Without freedom, who will protect us from the government?

The government can’t deliver the mail, pave potholes, balance the budget, fairly collect taxes, protect us from Ebola, even tell the truth. Who would trust it with personal freedoms?

Since 2001, Comey’s agents have written more than half a million of their own search warrants, and their targets don’t even know what was done to them. He will argue that if the evidence from these agent-written warrants is not used in court, there is no harm to the unknowing victim, and hence no foul. Yet the Constitution was written to keep the government from interfering with our natural rights even when it does so in secret, because no government violation of inalienable rights is harmless.

*Andrew P. Napolitano, a former judge of the Superior Court of New Jersey, is the senior judicial analyst at Fox News Channel. Judge Napolitano has written seven books on the U.S. Constitution. 

The City of Houston’s Attack on Freedom of Speech and Religion

Nolan Oldham*

This week the city of Houston and its Mayor, Annise Parker, stepped up their assault on the rights and freedoms of the citys inhabitants. In a heavy-handed move aimed at silencing dissent from its new equal-rights ordinance, the city subpoenaed sermons given by pastors who opposed the law on religious grounds. The city suspects that these pastors have made inflammatory remarks regarding both LGBT issues and the citys openly lesbian mayor, and it is likely going to scour the sermons to find ways to publicly shame the pastors who made them.

The controversial equal-rights ordinance includes provisions that would allow people to use bathrooms that align with their gender preference. Transgender people will be able to file a discrimination complaint against any business owner who denies them access to the bathroom of their choice. The law has been a cause for concern for pastors from Southern Baptist, non-denominational, and other churches that fear their First Amendment right to speak freely about homosexuality would be threatened. Little did they know that the city would launch a direct attack on their free speech - and their right to religious freedom - by issuing subpoenas for any sermons that mention the ordinance, homosexuality, gender identity or Mayor Annise Parker.

HOUSTON MAYOR ANNISE PARKER.

HOUSTON MAYOR ANNISE PARKER.

The equal-rights ordinance, which is unpopular among many Houstonians, garnered opposition in the form of a petition signed by over 50,000 city residents in August - well over the 17,269 signature threshold needed to get a referendum on the ballot. The city, true to form, ignored the petition claiming that it contained “irregularities.” Opponents of the ordinance filed a lawsuit against the city. The city retaliated by issuing the subpoenas against the pastors, even though none of the pastors who received subpoenas are involved in the lawsuit.

The city’s subpoenas of the sermons - in addition to being unwise, disrespectful to religion, and abusive - are also unconstitutional because they are overly broad and violate the pastor’s First Amendment rights. A pastor’s proclamations from the pulpit are protected speech, and only subject to limited scrutiny if the church claims a tax exemption. To maintain federal tax exempt status as a 501(c) charity, the church must not substantially engage in “carrying on propaganda, or otherwise attempting, to influence legislation… [or participating in] any political campaign on behalf of (or in opposition to) any candidate for public office.” (set forth in 26 U.S.C. § 501). These subpoenas, however, are not being issued by the IRS or the State of Texas, the two levels of government that actually provide tax exemptions to the churches. Instead, the city of Houston, which has no authority and no legitimate grounds to request the sermons, is demanding the documents.

WILL THE HOUSTON CITY COUNCIL CONTINUE TO BULLY RELIGIOUS GROUPS?

WILL THE HOUSTON CITY COUNCIL CONTINUE TO BULLY RELIGIOUS GROUPS?

Also, the subpoenas do not request only information on political activities; they order the pastors to reveal any sermons that refer to homosexuality or gender identity. This strikes directly at the First Amendment’s protections of free speech and separation of church and state. There is no reason why information regarding the church’s stance on homosexuality would be useful to the city at a trial regarding the ballot referendum. The city is attempting to throw its weight around in order to intimidate pastors whose views do not align with the political establishment. Mayor Parker, the city council, and the LGBT community should respect the rights of Houston churches to preach the doctrine they believe is correct and to engage in the free exercise of their faith.

*Nolan Oldham is a J.D. Candidate in the class of 2016 at New York University School of Law, and a Staff Editor for the N.Y.U. Journal of Law & Liberty. Nolan is from Houston, TX.

We Need a Real Flat Tax

Richard Epstein*

RICHARD EPSTEIN

RICHARD EPSTEIN

I was heartened recently to see Edward Kleinbard’s op-ed in the New York Times, with its alluring title, “Don’t Soak the Rich.” But as I read the piece by Kleinbard, a law school professor at the University of Southern California, it became clear that his proposed solution was a classic bait-and-switch operation. Kleinbard’s so-called flat tax soaks the rich by a different route. He proposes a tax hike on everyone evenly and then suggests that the government spend most of the extra revenues on the poor, either by direct grants or public expenditures from which they derive the lion’s share of the benefit.

The flat tax deserves a better send-off. Historically, the tax was championed by such notables as Aristotle, Locke, and Hayek as a device to reduce the government’s role in the lives of its citizens. Even a limited government must do many things—provide national defense, preserve internal order, and supply the infrastructure on which a well-organized private sector markets run. Accomplishing these daunting tasks requires public revenues. The challenge for the defender of limited government is to find that set of taxes that minimizes the distortions of a market economy while generating revenue to accomplish government’s necessary and proper goals.

In general, a two-pronged approach offers the greatest hope. First, whenever possible, the government should impose user fees to defray the costs of public services. These include, for example, highway tolls, which ideally should cover the costs of running the system, by apportioning expenses so that those who place the greatest burden on the roads pay the greatest amount. But user taxes are not feasible for standard public goods, i.e. those indivisible benefits that must be supplied to everyone if they are supplied to anyone.

The flat tax proportionate to either income or consumption offers the most attractive option, because it allows the government to set the overall levels of revenue as high or as low as seems necessary, without inviting various factions to game the system for partisan advantage. The flat tax also tends to reduce the overall tax burden, because people are on average more reluctant to raise taxes on others if they have to raise them on themselves. This added stability of the tax system produces major administrative savings by eliminating the need to police fancy income-splitting devices, such as family partnerships and trusts, that work to reduce taxes by depositing income earned by the rich into the bank accounts of their low-income relatives. The long-term stability of flat taxes thus makes it easier for private investors to make rational long-term decisions.

It should be noted, however, that the flat tax is no panacea, for it places, as Kleinbard rightly notes, no limits on the expenditure side of the ledger. When tax levels are confined to the provision of the standard, or nonexclusive, public goods that pass muster under a classical liberal theory, the prospects for redistribution are sufficiently constrained that factional politics are accordingly reduced. But once the level of transfer payments to specific individuals or groups increases, the politics of redistribution (in which rich and poor can participate) are redirected to new targets, with the similar overall negative welfare effects, not only on the rich but on the median earner as well.

It is on the squishy expenditure side that Kleinbard finds the opening wedge to convert the flat tax into a tool to combat what he perceives as the “growing income disparity” between the very rich and everyone else. In his view, we have exhausted the gains from higher marginal tax rates, now that the United States has the world’s most progressive taxation system, even after taking into account regressive taxes on sales and property in widespread use at the state and local level.

His overall scheme, however, rests on the weakest of theoretical foundations. As an initial point, there is in the United States no growing trend of income inequality, whether we include or ignore various transfer payments. The generally accepted Gini coefficient, which offers a sensible measure of income inequality, has scarcely increased in the last 30 years. What matters more, and what that coefficient does not incorporate, is the overall rate of growth. As I argued in my critique of Thomas Piketty, the preoccupation with the Gini index blinds us to the simple proposition that many Pareto improvements—those that make someone better off without making anyone worse off—will increase both social welfare and income inequality simultaneously. The exuberant effort to increase efforts to redress inequality is one cause among many of the anemic growth levels in the United States.

Further increases to the overall taxation burden will have profound negative effects on growth, for increasing the amount of money in government hands can only diminish the returns to productive labor. A system of higher taxation for all and increased rebates for some will, as Kleinbard notes, increase, in disguise, the overall level of net progressivity system wide. But the effort to conceal the net transfers behind a flat tax will not fool anyone for long. And if the current system is too progressive, so too is Kleinbard’s improbable alternative.

Ideally, taxes provide goods that cannot be generated by market forces to all people. A well-constructed flat tax returns to all people benefits in excess of their individual contributions, thereby increasing the incentive to work. But it is wrong to say that a flat tax is unresponsive to all questions of redistribution. As Kleinbard well understands, any flat tax calibrated to earnings from labor and capital will necessarily redistribute income to the less well off, because an individual’s share from standard public services, such as access to public highways, does not increase proportionate to his income. Head taxes, regardless of income, are disasters because of the corrosive effect at the bottom of the income distribution. Indeed, it is also risky to introduce any regressive income tax, which could overtax the poor, and invite yet another fruitless struggle over finding its ideal rate.

Unfortunately, the sound political economy of a flat tax gets thrown off track as higher tax rates fuel greater levels of redistribution. One dangerous feature of Kleinbard’s system is that it introduces a sharp political disconnect between the collection and distribution of income. Once money makes it into public coffers, no one person is wise enough and powerful enough to steer it into the hands of the most needy recipients.

Kleinbard’s fine-tuning won’t work. And so an overtaxed nation is caught on the horns of a powerful dilemma. If the redistribution works as well or better than intended, we are left with a higher administrative and political cost than from today’s overly progressive fiscal system. Yet if that redistribution agenda fails, the poor suffer disproportionately because a large fraction of them won’t get their promised benefits. In designing any tax system, it is necessary to worry, not just about inequality, but also about our flawed political process, and the overall growth effects of any tax regime. Kleinbard ignores these last two.

In dealing with these twin issues, it is instructive to compare our current federal taxation regime, which operates free of all constitutional constraints, with our current system of interstate taxation, which is heavily subject to them. Federalism produces a mixed bag of incentives. Its exit options for business and labor tend to cut down on excessive taxation at the state level. At the same time, a state’s ability to tax goods and services from out-of-state could operate as a tax wall against interstate competition.

Fortunately, an alert Supreme Court applies a far higher standard of constitutional scrutiny to interstate taxation than it does federal income taxation. On interstate taxation, the fundamental constitutional rule tracks the flat tax. No state may impose taxes on foreign goods and services than are higher than the taxes that it imposes on its own internal goods and services. The upshot is a strong commitment to interstate competition, which drives down overall rates of taxation, while increasing the cross-border flow of goods and services.

Needless to say, factional politics within states works overtime to circumvent the basic rule. One notable example is in 1994 Supreme Court case of West Lynn Creamery v. Healy, in which Massachusetts adopted a two-part plan. First, it imposed “an assessment on all fluid milk sold by dealers to Massachusetts retailers.” Second, it rebated that entire assessment, most of which was levied on out-of-state dairy farmers, only to in-state producers.

The Massachusetts scheme is a federalism variation of the Kleinbard proposal. Fortunately, the Supreme Court saw through the transparent scheme and struck down this two-step evasion under the so-called “dormant” commerce clause. Doctrinally, the Supreme Court has long inferred that the power of Congress to regulate commerce among the states implies that, in the absence of any such regulation, the dormant commerce clause, as West Lynn Creamery observes, “prohibits economic protectionism—that is regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.” That commitment applied in West Lynn even for goods sold pursuant to federal marketing orders under the Agricultural Adjustment Acts, which are notorious for fixing rates at cartel levels.

There is a sobering contrast between the public choice nightmare with federal taxes and the disciplined tax regime required under the dormant commerce clause. The second regime works vastly better than the first. Sadly, Kleinbard’s proposal tries to adopt Massachusetts’s West Lynn two-part tax program on a national scale. One countermeasure to that impending debacle is to insist constitutionally on the flat federal income tax. It won’t solve all problems on the spending side, but it will be a good start to cleaning up our financial house.

*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.

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Parallel Reconstruction

Judge Andrew P. Napolitano*

JUDGE NAPOLITANO

JUDGE NAPOLITANO

While the political commentators in the nation’s capital are wrapped up in the debate over what to do about ISIS, and as one third of the Senate and nearly all members of the House campaign for re-election, the president’s spies continue to capture massive amounts of personal information about hundreds of millions of us and lie about it.

The president continues to dispatch his National Security Agency spies as if he were a law unto himself, and Congress -- which is also being spied upon -- has done nothing to protect the right to privacy that the Fourth Amendment was written to ensure. Congress has taken an oath to uphold the Constitution, yet it has failed miserably to do so. But the spying is now so entrenched in government that a sinister and largely unnoticed problem lurks beneath the surface.

NSA documents released by Edward Snowden show that the feds seriously deceived Congress and the courts in an effort to spy upon all of us and to use the gathered materials in criminal prosecutions, even though they told federal judges they would not. Among the more nefarious procedures the feds have engaged in is something called “parallel reconstruction.” This procedure seeks to hide the true and original source of information about a criminal defendant when it was obtained unlawfully.

For example, if the NSA, while unconstitutionally listening to the conversations of Americans hoping to hear about plots to harm other Americans (it has revealed no such plots from among the trillions of private conversations it has monitored since 2005), comes across evidence of a bank robbery, the NSA will pass that evidence on to the Department of Justice. The NSA routinely does this notwithstanding representations to the FISA court that authorizes its spying that it is not in the business of gathering evidence in criminal cases.

It makes those claims because the George W. Bush and Barack Obama DOJs have argued to the public and to the FISA court that the Fourth Amendment, which prohibits all searches and seizures without a warrant, somehow applies only to criminal investigations and not to domestic spying. No Supreme Court decision has ever stood for that proposition, and the plain language of the Fourth Amendment makes no distinction between intelligence gathering and evidence gathering.

Rather, the language of the amendment is so broad and sweeping (“The right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures shall not be violated” except by a search warrant issued by a judge upon probable cause.) that for 230 years it has been held to restrain and regulate all government efforts to gather private information -- no matter their purposes.

Nevertheless, the NSA’s agents and lawyers felt it necessary to concoct this groundless, disingenuous and fictional legal distinction in order to persuade the FISA court that it is legally acceptable to permit untethered spying so long as the fruits of that spying are not used in criminal prosecutions. Curiously and naively, judges of the FISA court bought that argument.

So, what happens when the spying uncovers ordinary criminal behavior unrelated to national security? In order to keep its hands clean, so to speak, the NSA sends that evidence to the DOJ, whose lawyers and agents in cahoots with the NSA then concoct an explanation as to how the DOJ came upon the evidence. Of course, that explanation curiously and carefully omits the mention of domestic spying. DOJ lawyers know that if the beginning of the process of obtaining evidence is found to be unconstitutional, then the evidence itself can be useless in court.

This is what lawyers and judges call the “fruit of the poisonous tree.” Were this not so -- that is, if the government could spread any net as broad and as wide as it wished and use whatever the net caught as evidence in criminal prosecutions -- then the Fourth Amendment’s search warrant requirement would be meaningless because it would not protect the right to privacy as its authors intended.

Thus, in order to maintain the façade of spying only for domestic intelligence purposes, and to appear faithful to public and secret promises (the FISA court only sits in secret) that any evidence of criminal behavior inadvertently discovered by NSA spies will not be used in criminal prosecutions, and so as to keep the mechanisms of domestic spying hidden from non-FISA federal judges who are more likely to apply normative interpretations of the Fourth Amendment than their FISA court colleagues, the NSA and the DOJ began the process of parallel reconstruction.

Parallel reconstruction consists largely of the creation of a false beginning -- an untrue one -- of the acquisition of evidence. This, of course, is criminal. Lawyers and agents for the NSA and DOJ may no more lawfully lie to federal judges and criminal defense attorneys about the true origins of evidence than may a bank robber who testifies in his own defense claiming to have been at Mass at the time of the robbery.

While parallel reconstruction is deceptive, unlawful and unconstitutional, I suspect it is but the tip of a dangerous iceberg spawned by the unbridled NSA spying that Bush and Obama have given us. When you mix a lack of fidelity to the plain meaning of the Constitution with a legal fiction, and then add in a drumbeat of fear, enforced secrecy and billions of unaccounted-for taxpayer dollars, you get a dangerous stew of unintended tyrannical consequences.

Is this the government the Framers gave us? Is this the government anyone voted for? Is this a faithful and moral commitment to the Constitution, the rule of law and personal liberty? The answers are obvious.

*Andrew P. Napolitano, a former judge of the Superior Court of New Jersey, is the senior judicial analyst at Fox News Channel. Judge Napolitano has written seven books on the U.S. Constitution. 

Quicks Thoughts on the Market and the Fed

Thomas Warns*

THE DOW JONES INDUSTRIAL AVERAGE OVER THE LAST FIVE DAYS.

THE DOW JONES INDUSTRIAL AVERAGE OVER THE LAST FIVE DAYS.

A very peculiar thing happened today. For the past few business days, U.S. stocks have been dropping, as worries about Ebola, combined with warnings about another recession in Europe and larger geopolitical fears, turned many investors bearish. Despite all these factors weighing on the minds of investors, the Dow Jones Industrial Average, NASDAQ, and S&P 500 all paradoxically increased sharply today. How could this be?

Well, in effect it was precisely because of all this negative news that the markets shot up. All of the fears of a global downturn led the Federal Reserve to announce today that it would not begin to raise benchmark interest rates yet, as that might imperil the economy. In this perverse way, bad economic news is welcomed by Wall Street, while good economic news might actually cause the markets to decline, if the Fed were to then believe it could then raise the federal funds rate. This seems to raise an important question: are the bullish markets actually reflecting a better economy, or are some backwards incentives at play here? Of course, one could answer that perhaps the decline over the last few days priced in fears that the Fed would raise rates, and now the markets are rebounding with the knowledge that they won't. But shouldn't a healthy market react to changes in global economic conditions, rather than the tinkering of a government interest rate by a few bureaucrats? Every Federal Reserve session is closely followed, and the minutes released can spark significant changes in the market. Shouldn't any government intervention in the economy aim to stabilize, not destabilize?

The solution might be to permanently keep the Fed's rates low; unfortunately, that is not really an option. For one, the low interest rates will eventually need to be raised in order to fend off inflation when it starts to grow too high. In addition, low interest rates may be encouraging too much risky lending and borrowing, which, if memory serves, does not always end well for the economy. Is the Federal Reserve essentially blowing a larger and larger bubble by keeping rates artificially low, which in turn pushes the stock market higher and higher on risky loans while underlying indicators of poor financial health are ignored? Only time will tell.

* Thomas Warns is a J.D. Candidate in the Class of 2015 at New York University, and the Editor-in-Chief for the N.Y.U. Journal of Law & Liberty.

Segregation in Texas?

Richard Epstein*

RICHARD EPSTEIN

RICHARD EPSTEIN

This past week the Supreme Court decided to hear an important case from the Fifth Circuit, Texas Department of Housing and Community v. The Inclusive Community. The case asks the simple but vital question of whether the United States Fair Housing Act allows private parties to challenge state practices under a disparate impact theory, even when a government is cleared of any charges of conscious racial discrimination. The dispute arises because the fair housing law makes it “unlawful” for any party, either public or private, “To refuse to sell or rent . . . or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin.”

In the case, the issue is whether the words “because of” required that IC be thrown out of Court when it could not show that Texas had intentionally discriminated against any minority person. The Fifth Circuit answered “no” and allowed IC to rely on key regulations of the US Department of Housing and Urban Development (HUD) that dispensed with that requirement in favor of a complex tripartite disparate impact test.

At stage one, the charging party has to show that a particular practice has a “discriminatory effect” in either creating or perpetuating segregated housing patterns because of race. At the second stage, the public body may justify its practices because they advance some “substantial, legitimate, nondiscriminatory interest.” At stage three, the charging party may override that justification by showing the legitimate ends of “the challenged practice could be served by another practice that has a less discriminatory effect.” The regulations then also provide that the plaintiff bears the burden of proof on the first and third issues. The defendant bears it on the second.

The scheme was used to challenge Texas’s administration of the federal tax subsidies made available to the states under the Low-Income Housing Tax Credit Program. The money came with tight federal strings that require Texas to give preference to projects located in low-income areas, under a “point system” that requires the state to “prioritize in descending order” eleven distinct criteria, the first three of which are “the financial feasibility of the development,” “quantifiable community participation,” and “income level of tenants of the development.” To make matters more complicated, Texas developed additional “below-the-line” criteria to supplement the stated criteria, while noting that none of these could “outweigh” any of the eleven mandated tests under the Federal statute.

Listing factors in order does not, of course, explain how each component should be weighed, but it does place some explicit constraints on discrimination in the state process. In contrast, IC’s own charter is explicitly race-based insofar as it works to find suitable housing for minority individuals in the Dallas suburbs or the non-minority areas of the city proper. IC’s challenge of the Texas allocation rested solely on a disparate impact theory because “the Department “approved tax credits for 49.7% of proposed non-elderly units in 0% to 9.9% Caucasian areas, but only approved 37.4% of proposed non-elderly units in 90% to 100% Caucasian areas.”

In dealing with a relatively modest statistical difference, the District Court found that the numbers cited established the disparate impact. It then further concluded, before the HUD regulations were in place, that even if Texas sought to achieve legitimate ends, the state had negated the possibility that the below-the-line criteria could have rectified the matter. It then imposed an onerous structural injunction on the state to comply with its mandates. In light of the regulations, the Fifth Circuit removed that structural injunction and remanded the case for review under the HUD regulations. Before that happened, the Supreme Court took the case to determine whether HUD’s tripartite standard is consistent with the command of the Fair Housing Act.

In dealing with this question, first note the enormous difference in scope between the disparate treatment and disparate impact tests. Disparate treatment cases are rarities today, as the action has shifted to disparate impact tests that got their start under the 1964 Civil Rights Act and in the seminal 1971 decision in Griggs v. Duke Power Co. Griggs struck down the use of various standardized employment tests that had a disparate impact on minority workers unless the employer could show that the test was justified by a very strict standard of “business necessity,” which is virtually never satisfied.Griggs led, by judicial action, to a massive expansion of the 1964 Civil Rights Act, by reading out of that statute an explicit provision that protected the use of these employment tests unless they were a pretext for discrimination.

Back in 1971, that fear of pretext was very widespread, especially in Southern states. But Griggs wrought an unnecessary overkill of an important employer tool, which is still widely used whenever there is no disparate impact, as in professional sports. The overkill of this approach became apparent with the 1982 decision in Connecticut v Teal, in which the Supreme Court took the absurd position that it was still incumbent to ferret out discrimination in state-run programs with an explicit and bona fide affirmative action component that manifestly negated any claim of covert government discrimination.

The same logic applies to the current HUD Fair Housing regulations, which bear zero relationship to objectives of the Texas low-income program, whose rigid guidelines require that extra attention be given to low-income areas, which tend to have a higher proportion of minority residents than do the state’s higher-income areas. HUD’s left hand has no idea what its right hand is doing, given that faithful compliance with the low-income housing credit program has to have a disparate impact in order to meet its statutory mission.

At this point, the initial burden-shifting requirement to the plaintiff under the Fair Housing Law is too easy to meet. In addition, any effort to comply with the explicit terms of the low-housing regulations should count as a legitimate government interest under the Fair Housing Law. It thus becomes almost perverse, no matter what the burden of proof, to allow the charging party to conjure up some alternative scheme that has “a less discriminatory effect,” when no one can say for sure what those effects are likely to be. Does it really make sense in these low-income areas to disrupt a program for years in an uncertain effort to reduce the reported program disparity, by what, given the categorical language of “less discriminatory effect” in the regulation, could be as well one or two percent?

This shift from disparate treatment to disparate impact is, moreover, not confined solely to this one federal housing program. It also extends cover another two dozen nationwide housing programs, dealing with everything from at-risk families to migrant workers, each with its own internal complexities. In virtually every one of these cases, the statutory aid will be received disproportionately by members of minority communities. It would be absurd to argue that this known disparate racial impact makes these programs constitutionally suspect. It is equally unwise to assume that any small variation in administration should mandate a huge overreaction under the Fair Housing Act, whose key provision should not be read to frustrate the operation of separate federal programs.

Indeed, this sleight of hand is all so unnecessary. Just read the statute for what it says. In IC, no one thinks that Texas engaged in any underhanded race-conscious effort to subvert the low-income program. Indeed, the widespread public opposition today to any intentional and invidious form of government discrimination makes it highly unlikely that any such actions could survive the mass political uproar that would erupt on its discovery. Today no intrusive disparate impact test is needed to unearth covert forms of state administration. Ironically, the only race-conscious actor in this case is Inclusive Communities itself, whose action if successful could introduce a form of discrimination the statute proscribes.

At this point, the case really boils down to one of statutory interpretation. Given that the federal low housing program involves the use of federal money, no one believes that the United States or Texas, as public actors, should be able to use that money to create or perpetuate any program of racial segregation. It is more controversial whether the money could be used to advance some affirmative action proposals. But that issue is not on the table here. Instead, the only statutory issue is the meaning of the three words “because of race.” As a matter of ordinary English, these three words suggest that any party governed by the Fair Housing Act, public or private, has to have a conscious racial motive to discriminate in order to violate the law. It will not do to say that these agencies should be hauled into the dock because they rely on factors found in other statutes that, as Congress and everyone else knows, correlate positively with race. At that point, every decision is “because of race,” and the words become largely redundant.

This practice has to stop. IC represents the third case in which the Supreme Court has granted certiorari to consider this question. In Gallagher v. Magner (2010) and Mt. Holly Gardens Citizens in Action, Inc. v. Township of Mount Holly (2011), the Court had granted certiorari to consider exactly this issue when the Eighth and Third Circuits respectively showed their willingness to maintain disparate impact claims.

Both of those cases settled before being decided by the Court. That should not happen now. The statutory issues are the same in all three cases, but the dynamics of the cases are not because bothGallagher and Mount Holly involved local government programs that were not tightly controlled by separate federal statutes. Gallagher raised questions of discrimination about a City Property Maintenance Code, and Mount Holly involved a local redevelopment program. Neither program was regulated by detailed federal standards. Indeed, both programs may have presented greater opportunity for discrimination than is possible under the high-reticulated federal scheme for low-income housing subsidies.

It is important to keep these programmatic differences in perspective. At best, they only go to the likelihood of finding any kind of purposive government discrimination, to which the proofs in each case should respond. Those differences do not justify the unwise and indefensible effort for the wholesale importation of a disparate impact standard against all forms of government action. That result is inconsistent with the words “because of race” found in the Fair Housing Act. There is no reason to deviate from that text to introduce an intrusive and unworkable test that combines high administrative cost with the risk of inviting massive abuses by both the courts and the executive branch of government in enforcing the Fair Housing Law, and by implication, other antidiscrimination laws in such key areas as employment and education. The Supreme Court should use the long overdue occasion in IC to issue a well-deserved rebuke to both HUD and to the lower circuit courts against this unwise expansion of the antidiscrimination laws.

*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.