Rethinking “Gender Discrimination” at Work

Richard Epstein*

Richard Epstein

Richard Epstein

The topic of gender discrimination in the workplace is making headlines again thanks to two recent events. The first is the release of the report “Women in the Workplace 2015” by Sheryl Sandberg’s LeanIn.Org and McKinsey & Co. Sandberg, writing in the Wall Street Journal, uses the report to conclude: “despite modest improvements since 2012, women remain underrepresented at every corporate level.”

The second, well critiqued by Sarah Ketterer, is the California Fair Pay Act, now awaiting Governor Jerry Brown’s signature. That bill would make it unlawful for employers to pay men and women different wages for “substantially similar work.” Touted as an extension of California’s current Equal Pay Statute, the bill “would revise and recast the exceptions to require the employer to affirmatively demonstrate that a wage differential is based upon one or more specified factors, including a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or a bona fide factor other than sex, as specified.”

Both the report and the bill assume that something is deeply amiss in employment markets, which is leading to gender discrimination. It is notable that there are no legal barriers to entry for women in virtually all professions. Indeed, a robust set of antidiscrimination laws are already on the books at both the federal and state level, which reflect a strong social sentiment against discrimination on the grounds of sex. At no point in the modern debate has anyone has claimed, let alone demonstrated, that any institutionalized animus against women or even disparate treatment of female employees exists.

Sandberg’s Wall Street Journal op-ed rightly notes that the gender differences persist, notwithstanding the large percentage of CEOs that put the goal of improving gender diversity at the top of their list of priorities. Whether one calls this smart business acumen, affirmative action, or reverse discrimination is beside the point. What remains clear is that observed differences in the types of jobs taken by men and women are not attributable to any scheme that is tolerated at the firm level, let alone imposed by government. We should hardly expect that any systematic discrimination against female employees would be tolerated now that women in large numbers have founded their own businesses and have risen in managerial ranks. The days of the all-white male boardroom are gone forever.

Similarly, in dealing with the wage gap between men and women, a careful analysis would show that the key drivers of that relate to factors that are not easily controlled within the workplace, and all of which are beyond the reach of the law. The first is the choice of occupation. More men take more training in fields involving mathematics, computers, engineering, and the sciences, notwithstanding the efforts at the undergraduate level to increase female participation in these areas. Math and science are critical to creating new technologies, so we should not be surprised if the number of male executives exceeds the number of female ones at start-up companies, where of course traditional hiring issues play no role.

The second key driver of gender differences in pay is the work–lifestyle trade off. Many women with children have a divided commitment to the work place, given their greater commitments at home. An efficient division of labor within a marriage will typically require some level of specialization between the spouses, which is reflected in the well-established fact that men tend to put in substantially longer hours in the workplace than do women.

And last there is the question of what counts as a comfortable workplace environment. Sandberg notes that both married and unmarried women “cite stress and pressure” as the main reason why they choose not to pursue top leadership roles at work. But it not possible to engineer these elements out of such positions in major firms. Senior executives have to travel a lot, spend weekends and nights on the job, and constantly negotiate with difficult adversaries. Part-time employment and job-sharing are out.

One possibility that Sandberg does not mention could help explain why men and women take different paths in the workplace: Each employee makes a choice about the kind of job and lifestyle he or she wants. This hypothesis puts a very different spin on the observed data dealing with both promotion and wage differentials. The LeanIn.Org/McKinsey report notes that at every level, the rate of expected advancement by women is 15 percentage points lower than it is for men. The report concludes that this fact “suggests that women face greater barriers to advancement” than men.

What the report misses is an alternative hypothesis for the observed trends. The report notes that women in entry and lower level positions are much more likely to choose jobs with support obligations rather than jobs with direct profit/loss responsibilities. Those choices are exactly what we should expect of women trying to balance corporate life with family life to a greater degree than men. The reason why there is little movement in the aggregate numbers of high-level female executives is that the market is already in a stable equilibrium, driven as much as by women’s choices as by firm policy.

At this point, the only way in which the numbers are likely to change is if CEOs put more pressure on their managers to promote women to higher positions, even at the cost of displacing men who are better suited for those positions. Firms have probably done this already to an extent, so that by now most of the low-hanging fruit has been picked. The effort to create proportionality by gender in the executive suite creates greater internal pressure and subsidies. Sandberg is right to insist that firms that ignore the female talent pool run the risk of falling behind. But by the same token, extra efforts to move the needle to favor female leaders could easily create performance and morale problems within firms, which in the end works to no one’s advantage. No one is safe in making general prescriptions for all women in all corporate firms. A decentralized set of decisions by individual firms that trade off the benefits of greater female participation against other firm benefits is the way to go.

It is just these decentralized decisions that are totally disregarded in the California Fair Pay Act. In a given market system, the correct way to determine fairness is to ask whether the various decisions on pay and employment were made voluntarily—that is, were they made in a competitive market in which neither force nor misrepresentation was used by any party? The term “fair” is twisted when it is used to argue that the outcomes of a fair process are unfair unless they meet someone’s preconceived external vision of what counts as a fair distribution of jobs and wages.

The Fair Pay Act shows a complete disregard of the fundamental principles of economics. It starts off with the usual overstatement of gender inequality when it notes that women in California earn 16 cents less on the dollar than men (which is a smaller gap than the national average of 22 cents). But it does not mention what corrections should be made for the variables mentioned above. It then notes that the gap is still greater for Latina women, who make 44 cents less per dollar than white men, again without any correction, including for English language skills. The bill then announces the astonishing fact that “women working full time in California lose approximately $33,650,294,544 each year due to the gender wage gap”—based on the absurd assumption that every last dollar of the difference is due to improper factors.

To attack this imaginary pay gap, the Fair Pay Act adopts an administrative quagmire that makes it possible for dissatisfied employees to compare wages not only within firms, but also across different firms, where the comparisons are much more elusive, because prevailing wages and market conditions vary widely across the state. Even the four exceptions to the law mentioned above—seniority system, a merit system, an output measure, and bona fide factors other than sex—all bristle with interpretive difficulties. Rather than face these head on, the bill dumps the matter into the California Division of Labor Standards Enforcement, which in a heavily Democratic state is likely to be stacked with pro-worker members.

The sad point is that this entire exercise is unnecessary. An employee’s wage is usually determined after the employer takes into account all of the factors that were listed in the statutory exceptions. If there is an imbalance in one market segment, wages will adjust up or down until the market returns to equilibrium. The implicit assumption of the bill is that these opportunities exist, but firms will seek to profit from them without a shove from California’s benighted legislative Solons.

One incidental tragedy of this warped legislative proposal is that it makes a voluntary job change more difficult to implement. Any change, especially one that reduces the wages of the female employee, will be routinely subject to administrative second-guessing. The bill makes explicit provision for a “civil action” which could be brought either by the Division or by a private attorney, seeking “the balance of the wages, including interest thereon, and an equal amount as liquidated damages, together with the costs of the suit and reasonable attorney’s fees, notwithstanding any agreement to work for a lesser wage.” Of course the bill contains no provision that allows a successful employer to recover its reasonable attorney fees from either the Division, the plaintiff, or his or her law firm. The asymmetrical outcomes are likely to distort labor markets further, and to give firms a strong incentive to expand their businesses elsewhere and even to transfer existing work out of the state.

The overall situation does not bode well for California. Worse still, a progressive Democratic presidential administration headed by either a Hillary Clinton or a Bernie Sanders is likely to treat the California legislation as a prototype of action that could be taken at the federal level, either by legislation or, more likely, by executive order.

It is a telling sign of today’s bad intellectual climate that proposals about how to fix the executive suite or to improve the lot of employees show no awareness of how labor markets actually work. Labor markets are still in the tank with overall participation levels lower than ever. These proposals will only make matters 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.

A Papacy of Novelty

Andrew P. Napolitano*

What if things are not always as they seem?

Judge Napolitano

Judge Napolitano

What if the enormously popular Pope Francis is popular precisely because he is less Catholic than his two immediate predecessors? What if his theory of his stewardship of Catholicism is to broaden the base of the Church by weakening her doctrine so as to attract more people by making it temporally easier to be Catholic?

What if the pope really believes that rather than resist modernism -- with its here today and gone tomorrow fancies -- the Church should give in to it and even become a part of it so as to appear to be relevant?

What if this is the very opposite of his responsibilities as the Vicar of Christ? What if he rejects his role as the personification of the preservation of Truth and believes he can ignore some truths?

What if the pope thinks, like the big government types in the federal government, that he can change any rule, alter any custom and embrace any heresy in order to advance his novel version of Catholicism? What if he has done so?

What if his radical revision of the process for nullifying Catholic marriages amounts to no more than granting Catholic divorces? What if his making easier reconciliation with the sacraments after participating in an abortion actually diminishes the gravity of killing babies in the womb and encourages more killing? What if he permits Catholics who have remarried outside the Church while still validly married to their original spouse to receive the sacraments?

What if the concept of liberation theology, condemned by Saint Pope John Paul II and Pope Benedict XVI, mixes Marxism and Catholicism -- which are essentially opposites -- and produces a weird result that mocks the Mass, rejects traditional teachings, distributes the Blessed Sacrament to non-believers, rejects the need for oracular confession and holds that all world history is but the continued exploitation of the poor by the rich? What if, before he publicly toured America, he privately welcomed at the Vatican the founder of this perversion of Christianity? What if he embraced and celebrated him?

What if one of the reasons his trip to America was so well received is because so many in the media embraced him? What if the media embrace him precisely because his version of Catholicism is not consistent with tradition? What if those in the media who embraced him are not Catholics? What if he seemed more concerned last week with the way we treat the Earth than with the way we treat each other?

What if his passion for the cause of the uber-environmentalists finds no place in Catholic dogma?

What if a bishop friend of mine reviewed all the pope’s public talks last week -- at masses and elsewhere -- and found that the references to care for the Earth were full-throated, dramatic and clear? What if the same bishop found that the pope’s references to abortion were muted, ambiguous and never even used the word?

What if the capitalism that informed the pope as a young man, the “business” he told Congress he favored, is really the fascism of Argentina in the 1950s and 1960s? What if that fascism -- private ownership and government control of economic activities -- is akin to the corporatism of today so favored by both American political parties?

What if that corporatism is really a two-way street? What if the corporations that are burdened by the government also benefit from it? What if the same government that grants welfare to the poor and tax breaks to the middle class also grants bailouts to select corporations? What if the pope understands this and embraces it and is attempting to further it by using the moral force of the papacy to support it?

What if, when the pope emphasized the Golden Rule when he addressed Congress, he was not talking about the moral obligation of individuals, but the duty of the government? What if the pope’s muted message that we are our brothers’ keepers was not addressed to us in the Judeo-Christian individualist sense, but to the government in an authoritarian sense?

What if the pope was arguing that the government has a moral obligation to be charitable with taxpayer dollars and dollars borrowed in the taxpayers’ names? What if charity comes from the heart, not from the government? What if it is impossible to be charitable with other people’s money? What if you can get to Heaven by giving of your wealth to the poor? What if there is no personal merit when the government takes your wealth and gives it away in your name?

What if the papacy of John Paul II, which helped liberate millions from the yoke of Communism, and the papacy of Benedict XVI, which produced personal piety and fidelity to traditional teachings amongst many now studying for the priesthood, have been rejected by Pope Francis in favor of novel experiments intended to attract those who reject traditional teachings?

What if this papacy of novelty is as unsuccessful as Vatican II and churches soon empty because the Church changes with the wind, embraces the cult of personality and is disinterested in the Truth?

What if Truth is immutable? What if novelty is the opposite of Truth?

*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.

Is the Pope a False Prophet?

Andrew P. Napolitano*

Judge Napolitano

Judge Napolitano

Congressman Thomas Massie, R-Ky., has invited me to the House of Representatives to watch Pope Francis address a joint session of Congress. This generous Methodist congressman has invited your traditionalist Roman Catholic columnist and cable TV guy to this grand event. I am going with joy because the pope is the Vicar of Christ on Earth, and his presence in Congress is historically unique. But within me is fear and trembling over what he might say.

The papacy is an office created personally by Our Lord. Its occupants are direct descendants of St. Peter. Its role and authorities have evolved over the centuries, but the core of its responsibilities has always been the preservation of traditional teachings about faith and morals and safeguarding the sacraments. While the papacy is a monarchy, the teaching authority in the Church is “the bishops under the pope.” This means that a pope intent on change ought to consult with his fellow bishops.

Before the monumental Church changes of the 1960s and 1970s that trivialized the Mass and blurred the distinctions between the clergy and the laity, Popes John XXIII and Paul VI consulted their fellow bishops at Vatican II. The consultations were fractious and belligerent, but both popes got what they wanted: a watering down of liturgical practices and an easing of rules safeguarding the sacraments, so as to make the Church more appealing and accessible to former and to non-adherents.

The result was a disaster. Fewer Catholics went to Mass, confusion about former theological norms reigned, and a general tenor pervaded the faithful that the Church never really meant what it preached. Former Catholics continued to stay away, new Catholics barely showed up, and many traditional faithful became demoralized.

Popes John Paul II and Benedict XVI attempted to roll this back. They succeeded in part by emphasizing traditional orthodoxy and personal piety to youth. Today, Catholic seminaries throughout the world are filled with young men who are more faithful to traditional practices and beliefs than many of their professors are.

Comes now Pope Francis to use moral relativism to take the Church in two dangerous directions. The first is an assault on the family, and the second is an assault on the free market -- two favorite political targets of the left.

In the past month, without consulting his fellow bishops, the pope has weakened the sacrament of matrimony by making annulments easier to obtain. The Church cannot grant divorces because Our Lord used his own words to declare valid marriages indissoluble. But it does grant annulments.

An annulment is a judicial finding that a valid marriage never existed. This generally requires a trial, at which the party seeking the annulment must prove the existence of the marital defect from the beginning.

Fair annulment trials are costly and time consuming, often taking years from the initial filing to the final appeal. Until now. Last week, Pope Francis arbitrarily ordered the entire process to be completed in 45 days or fewer. For contested matters, a fair trial in 45 days is impossible. So, to meet his deadline, more annulments will be granted administratively, not on the merits.

It gets worse.

The Church has taught for 400 years that abortion is murder. Because the victim of an abortion is always innocent, helpless and uniquely under the control of the mother, abortion removes the participants from access to the sacraments. Until now. Last week, Pope Francis, without consulting his fellow bishops, ordered that any priest may return those who have killed a baby in a womb to the communion of the faithful. He said he did this because he was moved by the anguished cries of mothers contemplating the murder of their babies.

I doubt he will defend these decisions before Congress. He will, instead, assault the free market, which he blames for poverty, pollution and the mass migrations into Europe away from worn-torn areas in the Middle East.

In his papal exhortation on capitalism, Pope Francis spectacularly failed to appreciate the benefits of capitalism to the health, wealth and safety of the poor. Instead, he has reworked the Peronism of his youth to advocate government-mandated redistribution of wealth and to condemn those who work hard, employ others and achieve wealth -- even when they give some of that wealth to the Church.

When he is in St. Patrick’s Cathedral in New York City later this week, he should take note of the recent and beautiful $200 million facelift. It was paid in full by rich Catholic capitalists who employed hardworking artisans and laborers to do the work.

The pope probably also will tell Congress that the world is an inherently unhealthy place because of human work. He will embrace the highly questionable green science of those who want the government to tell us how to live, outside our homes and inside -- more Thomas Piketty than St. Thomas Aquinas.

The pope has seriously disappointed those who believe the Roman Catholic Church preserves and teaches the Truth. The Truth is Christ risen and unity with Him. It is not a debate about the minimum wage or air conditioning.

Pope Francis is popular on the world stage, and the crowds love him. But if he fails in his basic duties as the pope, if his concern is more for secular than sacred, if he aids the political agenda of the atheistic left, he is a false prophet leading his flock to a dangerous place, where there is more central planning and less personal liberty.

*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 Cardinal Sins of Pope Francis

Richard Epstein*

Richard Epstein

Richard Epstein

During his whirlwind tour of the United States, Pope Francis used his speeches to the U.S. Congress and the United Nations to articulate his views on the family, human life, violence, the environment, social justice, and many other issues. No one doubts the sincerity of the Pope’s pursuit of goodness. And surely no one disagrees with his condemnation of aggression and hatred against the young, the vulnerable, and the poor. But too often, his political naiveté got the better of him. As a result, many of his controversial pronouncements, if rigorously implemented at the policy level, would pose a threat to overall human welfare. Specifically, his ideas about violence, the environment, and markets deserve a critical look.

The Pope responded tepidly to the epidemic of violence rocking the world today. These are not good times. The massive slaughter of Muslims, Christians, and others in Syria and across the Middle East has spawned a refugee problem of unparalleled proportions, along with the systematic destruction of cultural artifacts and religious shrines in Palmyra and elsewhere. It is all well and good for the Pope to demand that the more fortunate aid refugees in their time of need. But the reality is that the refugee crisis will never be solved unless resolute action is taken to fix the problem at its source, which could mean developing a coherent military program to meet force with force.

Here, though, the Pope goes wobbly by saying that the use of force against the Islamic State might be justified if done on a multilateral basis—a sure recipe for impasse and drift, even as thousands more are killed or sent packing until some collective response is found.

The Pope also sounded a sour note regarding violence in his remarks to Congress: “To imitate the hatred and violence of tyrants and murderers is the best way to take their place. That is something which you, as a people, reject.” But the U.S. and its Western allies do not “imitate” hatred and violence by using force to resist and destroy those who threaten innocent lives. If the Pope had encouraged the prompt use of force against evil, his credibility could have been restored. But he is simply encouraging the lack of American leadership in its categorical reluctance to commit ground troops to stop the bleeding in the Middle East.

President Obama’s lack of resolve has neutralized American military superiority, encouraged Putin to back the tyrant Assad in Syria, and let the Islamic State wreak havoc. Constant bromides about the need for “cooperating generously for the common good” is a recipe for standing passively to one side as a worldwide disaster plays out. The Pope’s musings, like Obama’s, mask a weak form of moral relativism that encourages the enemies of human liberty and human dignity and abandons its friends.

The second count against Pope Francis relates to his views on the environment and, in particular, on global warming. A preservation of the global commons is not just the concern of the Pope with his transparent left-wing politics; since a landmark 1954 article by H. Scott Gordon, it is common knowledge across the political spectrum, driven by Chicago-style economics, that overhunting and overfishing of unowned fish and game can lead to a tragedy of the commons. Each taker from the common gets the full benefit of the catch, but suffers only a portion of the depletion of the commons. The release of carbon dioxide or methane into the atmosphere could have the same effect.

But the science of global warming is a lot more complicated than that of the fishery. Awareness of the problem does not explain the best techniques for dealing with the threat. On this score consider two related problems. The first is to design a system that works well to curb excessive warming, chiefly from minimizing the amount of human-produced carbon dioxide and methane gas. The second is to assess the seriousness of the threat. On the first point, market economists have worked out a system oftransferable pollution permits that incentivizes firms to achieve the highest level of useful output for each unit of pollution. More efficient firms can afford to buy permits from less efficient firms and still make a profit. This system has worked extremely well for pollutants like sulfur dioxide, where the damage for pollution is evident.

But the second point asks the more difficult empirical question, which is just how dangerous are additional units of carbon dioxide to the environment. Even the EPA acknowledges that this is a nightmarish calculation at best. On this point, the Pope does no one any good by making strong empirical claims of the imminent peril of global warming, when there is still no clear picture as to the threat, if any, that global warming poses to the world at large.

It is clear that temperatures continue to rise, albeit slowly, but it is very difficult to establish how much of that temperature increase relates to increases in carbon dioxide. Indeed, there is some question as to whether small temperature increases will have positive or negative effects on overall human welfare. No one says that about sulfur dioxide.

It is, therefore, risky to overreact to the threat if that response diverts resources that could be better devoted to dealing with other woes of the world, including the still crushing poverty in much of China, India, and Africa. Many steps are available to advance pro-environmental and pro-energy policies that do not require us to pull out all the stops on climate control. A shift to natural gas, a tax on dirty coal, and a willingness to modernize nuclear power all make far more sense than paying continuing subsidies for wind and solar power, neither of which can be stored. Inspiring rhetoric does not advance basic understandings of technical issues of institutional design.

The third count against the Pope concerns his basic—and deeply problematic—misunderstanding of economic behavior. The simple truth is that there is no substitute for economic growth in dealing with both poverty and the declining fortunes of the middle class, two issues with which the Pope is concerned. The only engine that can drive growth is a competitive market economy to which the Pope—raised in Juan Peron’s Argentina—displays an unhealthy aversion.

His papal announcement is a massive misdiagnosis of the basic situation: “Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.”

The Pope’s observation that “everything comes under the laws of competition” is both descriptively and normatively false. Beyond that, the government’s regulation of wages, prices, and entry into the market has exacted a huge toll on the poor by reducing their opportunities for advancement. Minimum wage and rent control laws offer some short-term benefits to a few, but they create massive and permanent structural dislocations for many more, by reducing the supply of jobs and housing respectively, leaving too many people “excluded and marginalized.” The single most important insight from modern economics is that the removal of a barrier to entry will always outperform the addition of a new subsidy to existing structures. Knocking out restraints reduces administrative costs and increases production. Price controls do the opposite.

Normatively, the Pope misses the critical ingredient of “imperfect obligations” to help the poor, enforceable not by the state but by social, moral, and religious sanctions. These decentralized forms of aid do far better, dollar for dollar, than any centralized government program that is far less able to target its assistance and monitor the aid that is given. Laissez-faire capitalism always supported this project, which helps explain the huge outpouring in charitable aid for medical, religious and educational purposes in the late-nineteenth century.

Within markets, the Pope does not understand the profound difference between competition and survival of the fittest. The former refers to laissez-faire capitalism. The latter is to a form of social Darwinism. In nature, any creature may freely use force and fraud to achieve its ends. The survival of some necessarily depends on the killing and eating of others. A tenet of social Darwinism was to reject the notion of imperfect social obligations: the fortunate should not afford any aid or assistance to weaker members of the group who should be allowed to die in order to strengthen the human race.

Nor does the Pope understand how market competition works. Firms are not allowed to conscript or kill their potential customers. They must obtain their consent in order to sell them goods and services or to hire them. People with scarce resources and limited opportunities will not accept deals that in the long-term work to their systematic disadvantage. They will instead hold out for the best terms that they can obtain either in the purchase of goods and services or in the sale of their labor. A system of open competition means that no one party sits atop the market, at which point wages will be bid up and prices will be bid down so that the firm gets a normal risk adjusted rate of return, and no higher.

The situation with monopoly power, especially monopoly power controlled by the state, may call for a different response. In these cases, the monopolist knows that the potential customers or employees have nowhere else to turn, and hence the monopolist can exact a supra-competitive rate of return. It is for this reason that standard economists understand the need for some system of rate regulation to control monopoly power that often rises in transportation and communication markets. The details of these systems are enormously complicated, and it is not possible to give a categorical answer as to how this is best done, or indeed whether in light of dynamic possibilities for competition, it should be done at all.

The Pope’s broad pronouncements offer no sign that he is aware of the related question of institutional design. And they make it all too clear that he is prepared to commit the one clear transgression in economic theory, which is, especially through his uncritical support of labor unions, to support the use of government power to create monopoly institutions where competition works. That move, which has been the cause of so much human misery throughout the world, becomes a greater tragedy when it receives the moral backing of the Pope, who misuses his religious authority to speak out on secular affairs over which he has scant knowledge. The dangers of politicization are clear enough with Pope Francis. So too is the mischief that his ill-conceived progressive politics can wreak for the very people whom he most wants to help. 

*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 Donald’s Dangerous Populism

Richard Epstein*

Richard Epstein

Richard Epstein

Make no mistake about it: The dominant theme of the current presidential campaign—on both sides of the aisle—is economic populism. Bernie Sanders and Hillary Clinton have both articulated misguided populist positions meant to appeal to the middle class—as has the bellicose Donald Trump, who is currently the GOP frontrunner. In recent weeks, Trump has turned his energy and attention to attacking our financial elites. Thus last month he said on CBS’s Face the Nation: “I have hedge fund guys that are making a lot of money that aren’t paying anything. They're paying nothing and it’s ridiculous. I want to save the middle class. The hedge fund guys didn't build this country. These are guys that shift paper around and they get lucky.”

It is dangerous to take a demagogue seriously. But Trump’s remarks, given his popularity, deserve some parsing. He addresses the status of the financial services industry writ large while also tacitly attacking the so-called carried interest rule, under which those “hedge fund guys” get to receive favorable capital gains treatment for a large portion of their total compensation.

On the first point, Trump denounces hedge fund tycoons for getting huge chunks of money by doing very little, if anything, at all. To him, being lucky explains their success. As the old Gershwin song puts it: “It’s nice work if you can get it.” But it is less clear, as the song claims, that “you can get it if you try.” High compensation for hedge fund financiers is nothing new. So the obvious question is, why do people pay them the big bucks if they are doing virtually nothing? In a market economy, you are supposed to get back value for value given, but in Trump’s world, the hedge fund players have bamboozled the rest of us by commanding huge sums of money just for shifting paper around. It is as if the entire world has meekly agreed to subsidize a self-contained trading system with no extrinsic value, without ever catching on to the scam.

The reality is the opposite of what Trump claims. When these hedge fund guys trade, they are not just haphazardly shifting paper around. They are shifting paper as a means to transfer wealth and reallocate risk. Nor do they do it in a self-contained universe. They have paying clients who need accurate information and reliable execution to enter into transactions essential to their business survival.

In countless ways, the financial system—and the bankers and hedge funders that are participating in it—supports the so-called real economy. Start with the simple notion of liquidity. People need to have access to cash and cash equivalents all the time to pay bills and to make investments and gifts. It is those hedge funders who organize complex payment systems—credit, debit, electronic funds transfers, and more—that allow for literally billions of small and large financial transactions to take place every second of every day.

Perhaps these bankers did not build this country by laying down the bricks and mortar for various roads. But even an ignoramus like Trump should know that the scarce commodity in setting up these systems is the architecture and design that allows for individual transactions to go effortlessly forward. The fact that no one pays these transactions any mind is a tribute to how well that task is being done.

Many businesses also operate in international markets. When a manufacturer hedges a currency risk, for example, it eases its long-term planning ability, knowing that a fixed sum has allowed it to remove or control the serious risk of currency fluctuation. This risk could increase their production costs, reduce their output, and result in the layoff of middle class workers on the assembly lines—but it is controlled and hedged because of the modern financial system.

These risk-management systems are not self-funding. Someone has to make financial investments that stoke the engines. Millions of people have savings and pension funds and stock and bond portfolios that do not magically organize themselves free of human intelligence and coordination. Acting as isolated individuals, these small fund owners have no idea which investments to make, how long to hold them, and when to sell them. It is the “hedge fund guys” that take up this challenge.

Trump thinks he knows how the individuals who work in this highly risky, highly stressful, highly visible, and highly regulated space should be compensated. But he should think twice before second guessing how independent businesses led by trained professionals should best compensate their key employees. Humility is the first sign of wisdom in examining these far-flung markets. It is a commodity in short supply for Trump and the many other populists who want to manage other people’s money.

Turning to the second issue, the proper treatment of carried interest raises serious technical challenges, given the current structure of the income tax. The cardinal distinction of the Internal Revenue Code is between ordinary income (roughly: wages, interest, and dividends) and capital gains. These gains are measured by the difference between the amount received on the sale or other disposition of a capital asset—here largely stocks and bonds—less its adjusted basis, which equals its cost, which is then increased by any additional investment or reduced by any return of capital to shareholders.

The current law subjects capital gains to favorable tax treatment, at least for sales of assets held for over one year. The logic behind the distinction is that individuals have no choice as to when they receive ordinary income, but can easily defer the payment of any tax on capital assets by refusing to sell them. Part of the logic of favorable capital gains rates is to encourage the redeployment of assets into more productive assets. In fact, so long as the amount received from the disposition of one capital asset is reinvested in another, the appropriate tax rate is zero. With more efficient asset allocation, the government gets its revenues from higher corporate profits, dividends, and interest payments.

One serious difficulty with the current scheme is that it is hard to separate out earned income from capital gains in transactions. In virtually all hedge fund deals, the fund managers get intermixed returns from both labor and capital from the same transaction. But this is not unique to these transactions. Even if they do not have independent investments in the fund, once their interest is vested, it becomes a capital asset. That result happens in many family partnerships, where the individual owners draw both a salary and also a benefit from the lower capital gains tax on the disposition of their partnership interest. Normally their salary determinations will stand unless the taxpayers wildly understate the value of their services.

Making these calculations are hard in the hedge fund business. Typically, a portfolio manager receives some fixed management fee—say two percent of assets—independent of fund performance, which everyone concedes is taxed at ordinary income rates. But the same manager received a deferred or carried interest that can be equal to 20 percent of the fund’s gains at the end of a given tax period. This “carried interest” gain normally receives favorable capital gains treatment. But by the same token, there is relative overtaxation if this gain is treated entirely as ordinary income.

To see why, assume that the value of a fund goes up by 10 percent per year. All of the passive investors treat that increment as a capital gain, driven in part by a change in market conditions and in part by the efforts of the fund managers. In principle, the fund managers should receive capital gains treatment for value shifts that are a function of those external forces, even though it is difficult to measure, and treat only the remainder as compensation for services rendered.

The situation gets even more complicated when the fund suffers a loss, all of which is treated as a capital loss to the fund investors. For the fund managers that loss flows from both the change in market conditions as well as individual labor, which means that on the down side they should receive, at least in part, less favorable capital loss treatment when they sell their stake. If the fund goes down in one year and up in the second, it is unwise to treat the increment in the second period as ordinary income and the decrement in the first period as capital losses. Instead the two years should net out.

Getting the right allocation is beyond basic measurement capabilities, so perhaps the correct solution is a cross between the two systems. Take the deferred compensation and treat it half as ordinary income and half as capital gain, to reflect, however imperfectly, the two forces at work in the opposite direction.

If this is regarded as an unhappy and artificial solution, chalk it up to a system that keys taxation to two types of income even in cases where there is no clear separation between them. The game looks, however, very different if we switch from an income to a consumption tax, which for these purposes can be defined as the current income tax less any gains of ordinary income or capital gains that are saved and reinvested. At this point, there is no need to police the blurred line between ordinary income and capital gains. It is sufficient to put all income from whatever source into one bucket, and then to tax it according to how it is used, not acquired.

The consumption tax necessarily has a smaller base than the income tax, but on balance it should be easier to administer, chiefly by requiring individuals who want to defer spending to put the money into designated accounts, similar to current IRAs, on which they pay tax only when the money or its proceeds are withdrawn. The consumption tax could be either progressive or flat. I prefer the latter for the same reason that I prefer a flat income tax. It is easier to administer and raises fewer questions dealing with the bunching of income in given tax periods or its distribution among different members of the same close-knit family unit.

The basic point here is that it takes some close analysis—which seems utterly beyond Trump’s abilities—to address and resolve these knotty issues. It is regrettable that ignorance has driven a debate that needs some serious and informed attention.

The past decade has been a slow growth period defined by the progressive policies of taxation and regulation, the result of which has been a steady deterioration in the position of the middle class. The American growth engine cannot be revved up by populist pleas. The sooner we can stop listening to the ill-considered barbs of Donald Trump, the better we shall all be.

*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 Hillary Chronicles

Andrew P. Napolitano*

Judge Napolitano

Judge Napolitano

The bad news has continued to cascade onto the Hillary Clinton for President campaign, and none of it has anything to do with Clinton’s opinions on issues. It all is about her fitness for office.

Since Labor Day, we have learned that the folks into whose hands Clinton reposed her computer server for safe keeping do not believe it has been wiped clean of all emails, as her lawyer told a federal judge it was. That means the 33,000 emails she thought she destroyed probably still could be recovered. What will they reveal?

And we learned earlier this week that of the emails released thus far -- those Clinton did not attempt to destroy -- there is a five-month gap for which no emails were produced. For a government official who sent or received about 15,000 emails a year, five months of silence is not believable. Two of those months followed the assassination of the U.S. Ambassador to Libya in Benghazi. Where are her emails from that time period?

Why should you care about this?

It is now well established that when she was secretary of state, Clinton refused to use government computers or servers for any of her emails -- governmental and personal. She kept all of her emails from the government. That constitutes theft of government property, as it violates a federal law that mandates that the government owns the emails its employees generate in their work, and if an employee comingles her personal emails with the government’s, the government owns those, as well.

Clinton said she did this because she believed it would be easier to do all emailing from one hand-held device, even though she eventually used four devices. Instead of accepting a secure government-issued BlackBerry, she had aides buy an off-the-shelf BlackBerry. We now know that she was trying to conceal her Middle Eastern escapades -- secret wars and personal approvals of arms dealings to terrorists -- from the president, from FBI investigators, from State Department colleagues, and from history.

But her most serious crime is her failure to safeguard national secrets. The secretary of state is the nation’s chief diplomat. She deals with military, diplomatic, and national security secrets every day. One of the reasons government employees are required by law to use a government-issued hand-held device and a government-owned and secured server for their official work is to safeguard the national security secrets that pass to and from them by securing their emails with government software and encryption.

Why should you care about this?

When she became secretary of state, Mrs. Clinton told the president she wanted to hire her friend Sidney Blumenthal -- whom the press has nicknamed ‘the prince of darkness’ and ‘grassy knoll’ -- to work as her senior adviser. The president himself blocked the toxic Blumenthal from working for the State Department, whereupon Clinton had her husband’s foundation hire him. She then proceeded to engage with him as if he were a senior adviser and to share top secret emails with him. Blumenthal did not have any national security clearance, and it was a felony for Clinton to share government secrets with him.

Why should you care about this?

You should care about this because Clinton is running for president. Yet, she is uniquely unqualified for the presidency because she is the moral equivalent of a common crook.

Like a crook, she breaks the law, lies about why she broke the law, sees no wrong-doing in her ways, and expects to get away with it. Though millions of Democrats have dreamed of her in the White House, and are apparently willing to overlook her crimes, her support is beginning to erode.

How can a person with the morals of a crook be the chief law enforcement officer in the land, the commander-in-chief of the military, and the repository of more lawful power than any person on the planet? How can she be entrusted with national security secrets in the future when she has failed to safeguard them in the past?

Because Blumenthal lacked the government’s encryption on his email devices and server, he was hacked by foreign agents. Because he was hacked, Clinton was hacked. Because she was hacked, some of the nation’s military, diplomatic, and national security secrets in a dangerous world are now in dangerous hands.

A sailor faces 20 years in federal prison for taking a selfie in front of a radar screen and sending it to his girlfriend, and a courageous Marine who used his Gmail account in an emergency to warn his superiors of the near proximity of an assassin faces 20 years for failing to keep the email about the assassin in a secure venue. Then-CIA Director David Petraeus kept secrets in an unlocked desk drawer in his home, which was guarded 24/7, and he pleaded guilty to failure to safeguard secrets.

Clinton’s crimes are far worse, but is she any different legally? Can she get away with her crimes because of her last name? She seems to think so. Last week she apologized for making poor choices -- not crimes, but poor choices. And she has given no coherent legal justification for all this.

While all this is going on, Vice President Biden is dreaming about his boss’s job because he and many Democrats have come to the realization that Hillary Clinton is utterly unworthy of their trust, and power in her hands might be used for unlawful purposes.

*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 Consequences Of Obama's Weakness

Richard Epstein*

Richard Epstein

Richard Epstein

It has now been just over one year since President Barack Obama delivered a confident White House address explaining how the United States and its partners would be able to counter the Islamic State—which, in 2014, he claimed was neither Islamic nor a state. A year later, as we mark the fourteenth anniversary of September 11, ISIS is still very much Islamic and ever more entrenched as a rogue state. Obama’s 2014 speech about ISIS paved the way for the political and humanitarian crisis that we are now facing one year later. There are no surprises here: Bad consequences follow when a United States President thinks that he can counter forces of terrorism and world disorder on the cheap without the use or threat of ground forces.

His mistake was evident, even at the time. He told us “what the United States will do with our friends and allies to degrade and ultimately destroy the terrorist group known as ISIL.” The word “ultimately” said it all. There was no urgency, no timetable for success, no awareness that the individuals who are being raped, killed, and terrorized cannot afford to wait for “ultimately.” They have to survive immediate threats, and a promise to “degrade” an enemy someday is no promise of assistance at all. His speech was an unambiguous signal to these people that they are on their own.

If the ends in question were too timid, the means chosen to realize them are too weak. There is no way in which sporadic airstrikes, however well conceived, will be able to counteract terror that operates on the ground every hour of every day. Yet the President told his enemies all they needed to know when he stated that “we will not get dragged into another ground war in Iraq.” Or, he might have added, in Afghanistan, Syria, or any other place where innocent individuals are slaughtered.

Given Obama’s rhetoric, our enemies know that they have a clear field of operation. The stirring words that the President will “hunt down terrorists who threaten our country, wherever they are,” carried with it two dangerous caveats, both realized. First, he was not prepared to hunt down terrorist who threatened millions of other innocent lives. His speech was to the voters of the United States, not to the millions elsewhere who have no one else to whom to turn. Second, he also signaled unambiguously that he would not use ground forces as part of his hunt. The pathetic support measures that he addressed were doomed to failure from the outset. Without American leadership and planning on the ground, the effort to fight a proxy war is doomed. The military debacles in Syria and Iraq come as no surprise. “Too little, too late” is not a viable foreign policy.

In making this condemnation of presidential weakness, I am not insisting that his ineffective behavior is necessarily a violation of any legal duty that the United States faces. To be sure, there is always the right of any individual, or any nation, to come to the aid and assistance of those who are in need. But there is of course no legal obligation that one must do so, just as there is no legal obligation for any person to use force in self-defense: he can just be still if he wants and face the consequences.

The moral question is of course far more difficult. Should people stand aside when a small intervention can save a life, just because they are under no duty to rescue the innocent victims? The same hard choices arise in international affairs. The question of whether to intervene, at some peril, to help others outside our borders is a moral choice.

It is of course permissible to plead prudence as a reason for inaction. That is what, for example, what The New Yorker did after Obama’s 2014 speech. Even the modest steps that the President proposed in that speech, it was argued, would drag us into war on the backs of “an untested client regime in Baghdad,” which could only lead to further involvements. Prudential arguments of this sort also have to evaluate what will happen by staying out. Ultimately, the question here involves one of political judgment on what to do in the face of a looming political disaster.

Back in 2014, the President did not say how he would cope with the massive and looming refugee problem for one simple reason: He had no idea it was coming. But come it did—and if the United States will not organize protection for people where they live, they will give up their homes and businesses in a desperate search for protection, not only from the Islamic State, but also from Assad’s butchery in Syria, and the sectarian conflicts that have flared up all over Syria, Iraq, and Afghanistan.

Though few predicted the rapidity with which the situation would degenerate, it was easy to see that some disaster would soon strike. Why? Because the President does not believe in Pax Americana, the foreign policy approach that states that world peace can only be obtained if the United States is prepared to use force to crush—not just degrade—those that pose a threat to the lives of millions of people across the globe. Make the United States a bystander, and evil nations will wreak havoc on the international scene.

It does not really matter how or why the President came to think that he could secure world peace on the cheap. But the key point is that whenever he is faced with major foreign policy problems, his first move is to take a pot shot at the United States in particular and Western civilization in general. It was not just a verbal slip, but a planned speech, when the President at the National Prayer Meeting breakfast in February 2015 uttered this flip but fatal remark: “Lest we get on our high horse and think this is unique to some other place, remember that during the Crusades and the Inquisition, people committed terrible deeds in the name of Christ.”

Let us give the President the benefit of the doubt and assume that everything he said about the Crusades and Inquisition were spot on. He still forgot that there is a time and a place for presidential candor, and that was not it. The one-sentence mention of the Crusades was especially galling because it conveys the message that the Islamic State is on par with Western civilization. His short statement signaled to oppressed people everywhere that the United States will not get off its high horse to help them where they need it most: in their homes, schools, and markets. How could that disinterested attitude not embolden our enemies and demoralize our friends?

Moral relativism is a poor substitute for presidential leadership. The entire matter would have taken on a very different tone if the President had used his platform to deliver a decidedly different message about the Crusades and the Inquisition: One of the great capacities in Western civilization is to learn from its mistakes so that the errors, and there were many, are corrected. But there is no such impulse among the terrorists of ISIS, whose fierce fundamentalism snuff out the civil society, so prized in the West, that makes moral self-correction possible. Against people like this, persuasion is of no value, so force must be used. Obama’s ill-chosen words contained no ringing endorsement of the moral chasm that separates us from our opponents.

And so the inevitable happens: There is a mass exodus of refugees followed by human tragedy. Right now, the European migrant crisis has resulted in impossible strains on the simple physical capacity of various nations, hard-strapped by their own weak economic position, to provide food, shelter and elementary sanitation for the tens of thousands of refugees that have been driven from their homes. Public health officials and private charities struggle to keep up with the endless demands for services. Thousands more are surely on their way. Just recently Germany, the most generous of the European nations, has announced that it will impose border checks to staunch the anticipated migrant flow.

There is not the slightest recognition on the part of the President that his feckless policies have contributed to this disaster. His most recent 9/11 speech could have acknowledged the need to counter ISIS with real force. But no, instead of any serious engagement with the issue, we were given a two-pronged approach from the White House.

First, don’t bother to say anything of consequence about the failures of the past year. Instead call for a day of remembrance.

Second, puff up the Iran Nuclear Treaty—even though releasing billions of dollars to the Iranians will only increase their funding of terrorist activities in the Middle East and beyond. The resulting political instability will only exacerbate the human migration tragedy that is taking place today.

Right now, the President is looking like a tragically weak game theorist. He thinks that he can achieve successful outcomes in international affairs by using all carrots and no sticks. It won’t work against enemies who are prepared to use both. Unless he rethinks his self-imposed limits on the use of force, the bill for his mismanagement will come due, and everyone will pay the price—during his term and beyond. 

*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.

Religious Belief and the Rule of Law

Andrew P. Napolitano*

Judge Napolitano

Judge Napolitano

Shortly before the Labor Day weekend, a federal judge in Kentucky ordered the Rowan County clerk incarcerated for violating his orders. Five days later, he released her.

The judge found that the clerk, Kim Davis, interfered with the ability of same-sex couples in her county to marry by refusing to issue them applications for marriage licenses. Davis argued that she was following her conscience, which is grounded in a well-known Christian antipathy to same-sex marriages, which, in turn, is protected by the Free Exercise Clause of the First Amendment. Here is the backstory.

Davis is the clerk of Rowan County, Ky. Among her duties as county clerk is the issuance of applications for marriage licenses. When she assumed office, she took an oath to administer her duties consistent with the U.S. Constitution. Her job with respect to licenses is ministerial: issuing documents to those who legally qualify for them and filing the documents when they are returned to her.

Kentucky law requires that applicants for marriage licenses be unmarried, residents of Kentucky and at least 18 years of age. As a county clerk, Davis cannot add to these requirements another requirement -- namely, that the applicants be of the opposite sex. She cannot do that because the Supreme Court has ruled that marriage is a fundamental liberty, the exercise of which is protected by the Constitution, and within that liberty is the right to choose a same-sex marriage mate, uninterfered with by the state.

By adding her own requirement and using the force of law to enforce that requirement, she is frustrating the ruling of the Supreme Court, interfering with the fundamental liberties of marriage applicants, and violating her oath to uphold the Constitution, the final interpreter of which is the Supreme Court.

After Davis refused to comply with two of his orders to issue applications to those who comply with Kentucky law and not to add her own requirement, a federal trial judge found that she was in a state of civil contempt, and he incarcerated her.

Civil contempt is not a crime. Hence she was not sentenced to a jail term. The purpose of her incarceration was not punishment; rather, it was coercion. The courts have limited resources with which to coerce reluctant litigants to comply with court orders, and incarceration is one of them.

The court properly interpreted its duties under the Constitution, but was wrong to incarcerate her.

Davis is running a county clerk’s office, not a church and not a legislative body. Moreover, her imposition of her own religious requirement upon the license applicants violates the well-respected and long-held First Amendment value of separation of church and state. She is free to believe as she wishes and to practice her beliefs, is free to impose her beliefs on her children and family, and is free to attempt to persuade others of the salvific value of her beliefs. But she is not free to use the force of law to further her beliefs by denying legal rights to those unwilling to accept them.

Suppose her religion forbade interracial marriage (as some Mormon Churches do). Could she deny a marriage license application to an interracial couple? Or, suppose she was a traditionalist Roman Catholic, who believed that Catholics should only marry other Catholics. Could she deny a marriage license application to a Catholic planning to marry a non-Catholic? Or, suppose her religion condemned the private ownership and use of guns (as some Quakers do). Could she refuse to issue applications for gun permits? The answers are obvious.

If her personal religious views could trump her obligations under the law when she is in a ministerial and not a discretionary government job, and other government officials similarly situated could do the same, then we’d lack the rule of law in America, and we would live instead under the discretion of bureaucrats.

But she should not have been sent to jail. Judges must do all possible to resist the temptation to incarcerate defiant litigants, because incarceration should be the last resort. Judges should enforce their rulings using the least force necessary, not the most force available. And history teaches that for those who conscientiously defy the law -- particularly for religious-based reasons -- incarceration is often fruitless.

I would have removed her authority to issue marriage license applications and assigned it to others in the Kentucky state government, and directed them to issue the applications in accordance with the law. That would have kept Davis free and her conscience clear, and permitted those in Rowan County to get married to whom they choose.

What about the St. Thomas More argument: “I die the King’s good servant, but God’s first”? That is not relevant here. More was tried, convicted and executed for his personal refusal to accept a heretical doctrine: that the monstrous King Henry VIII was somehow the head of the Roman Catholic Church in England. Even More admitted that one must do all one can to avoid martyrdom, even leaving public office knowing that one’s successor will do what one has refused.

The Free Exercise Clause guarantees individuals the lawful ability to practice their religion free from government interference. It does not permit those in government to use their offices to deny the rights of those who reject their beliefs. That is the lesson for Kim Davis.

*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 Eleventh Annual Friedrich A. von Hayek Lecture

The Eleventh Annual Friedrich A. von Hayek Lecture


“Our Illiberal Administrative Law”

The Honorable Douglas H. Ginsburg, US Court of Appeals for the District of Columbia Circuit


Thursday, October 15, 2015, 6:00 p.m.

New York University School of Law

Greenberg Lounge, Vanderbilt Hall, 40 Washington Square South, New York, New York 10012


We are pleased to invite you to the Eleventh Annual Friedrich A. von Hayek Lecture, featuring The Honorable Douglas H. Ginsburg, US Court of Appeals for the District of Columbia Circuit.  Judge Ginsburg will deliver the evening’s keynote address titled “Our Illiberal Administrative Law.”  Trevor Morrison, Dean and Eric M. and Laurie B. Roth Professor of Law, NYU Law, and Richard Epstein, Laurence A. Tisch Professor of Law, NYU Law, will make introductory remarks. 


The event is jointly sponsored by the Classical Liberal Institute at NYU Law and the New York University Journal of Law and Liberty and will be held on Thursday, October 15, 2015 from 6:00 to 7:45 p.m. in Vanderbilt Hall, Greenberg Lounge, located at 40 Washington Square South.  A reception will immediately follow the lecture.


This event has been approved for 1.5 New York State CLE credits in the Areas of Professional Practice category.  It will be appropriate for both experienced and new attorneys (those admitted to the New York Bar for less than two years) and is presented in traditional (in person) format.


If you would like to take this opportunity to register online, please click here or copy and paste the link below:


Senior Circuit Judge Douglas Ginsburg was appointed to the United States Court of Appeals for the District of Columbia in 1986; he served as Chief Judge from 2001 to 2008.  After receiving his B.S. from Cornell University in 1970, and his J.D. from the University of Chicago Law School in 1973, he clerked for Judge Carl McGowan on the D.C. Circuit and Justice Thurgood Marshall on the United States Supreme Court.  Thereafter, Judge Ginsburg was a professor at the Harvard Law School, the Deputy Assistant and then Assistant Attorney General for the Antitrust Division of the Department of Justice, as well as the Administrator of the Office of Information and Regulatory Affairs in the Office of Management and Budget.  Concurrent with his service as a federal judge, Judge Ginsburg has taught at the University of Chicago Law School and the New York University School of Law.  Judge Ginsburg is currently a Professor of Law at the George Mason University School of Law, and a visiting professor at the University College London, Faculty of Laws.


Judge Ginsburg is the Chairman of the International Advisory Board of the Global Antitrust Institute at the Law and Economics Center of George Mason University School of Law. He also serves on the Advisory Boards of: Competition Policy International; the Harvard Journal of Law and Public Policy; the Journal of Competition Law and Economics; the Journal of Law, Economics and Policy; the Supreme Court Economic Review; the University of Chicago Law Review; The New York University Journal of Law and Liberty; and, at University College London, both the Center for Law, Economics and Society and the Jevons Institute for Competition Law and Economics. 


As is the custom with the Hayek lectures, Judge Ginsburg’s lecture will be published in the New York University Journal of Law and Liberty.  The Hayek lecture series has addressed many different topics since its inception, but it remains true to its mission: to challenge audiences to help shape a better world.


If you have any questions, please contact Jennifer Canose, Assistant Director, Classical Liberal Institute, at

Filtering the Clean Water Act

Richard Epstein*

Richard Epstein

Richard Epstein

On August 27, the Environmental Protection Agency and the Army Corps of Engineers suffered a rare judicial setback. On that date, District Judge Ralph Erickson of North Dakota issued a preliminary injunction that blocked the enforcement of the joint “Clean Water Rule: Definition of Waters of the United States,” which was supposed to go into effect the next day. This decision limits the power of the EPA under the Clean Water Act to expand its jurisdiction by fanciful readings of the statutory phrase “waters of the United States,” defined further as “navigable waters.”

Passed in 1972, the CWA sought to “restore and maintain the chemical, physical, and biological integrity of the Nation’s waters.” Once these waters are identified, they are subject to extensive regulation, most notably under Section 404 of the CWA, which requires all private parties and local governments to obtain permits before they can engage in any activity that has some impact upon these navigable waters. Obtaining these permits is never easy, both for private and public parties.

Oftentimes county and local governments, which do not have the luxury of inaction, find themselves in an awkward position where their own routine maintenance work to clean out waste and debris from ditches can be delayed by permitting requirements. The result is that they can easily find themselves in a double bind. Act, and there are serious penalties to pay. Don’t act, and there is flooding and potential liability for harms attributable to their neglect of basic duties.

Any decision by the EPA and the Corps to expand the scope of their activities will, as the American Farm Bureau points out in painful detail, impose onerous permit requirements on literally thousands of small ditches, often on a case-by-case basis. The same concerns are raised by the expanded definition of what counts as a tributary of a river, or in some instances a tributary of a tributary. None of these definitional anxieties are eased by the constant EPA refrain that its object is to “clarify and simplify implementation of the Act,” with bright line rules no less. In reality, the new rule is replete with areas in which case-by-case determinations need to be made on whether, for example, low-lying farm areas are covered by the CWA.

To see how far the current disputes have moved from the 1972 baseline, it is instructive to go back to some basics. The key statutory definition under the CWA is keyed to “navigable waters,” which in turn are defined as “the waters of the United States, including the territorial seas.” The CWA then makes it unlawful for any person to discharge any pollutant, broadly defined to include rock, sand, and dirt, into these navigable waters. The reference to navigation and the territorial seas makes it clear that the reach of the statute is limited to discharges into large bodies of water, where navigation is possible, if not just by steam ships then at least by canoes.

For many years, the definition of the waters of the United States received that traditional meaning. For major bodies, it makes sense to require a permit before discharging refuse or waste into a river, as lawsuits after the fact are a poor substitute for avoiding pollution in the first place. Permits that limit planned discharges are an effective way to organize pollution control.

For many years, the traditional definition of navigable waters held, but soon came under judicial attack that led to its total transformation. In its 1975 decision in Natural Resources Defense Council v. Callaway a federal district court issued a one page opinion that simply declared that Congress by using the phrase “‘the waters of the United States, including the territorial seas,’ asserted federal jurisdiction over the nation’s waters to the maximum extent permissible under the Commerce Clause of the Constitution. Accordingly, as used in the Water Act, the term is not limited to the traditional tests of navigability.”

At this point a court order held the CWA hostage to the vast expansion of commerce power inaugurated by the New Deal that covered much more than interstate transportation and communication. Now, all productive activity within the United States, including agriculture, mining, and manufacturing fell under federal power. But Callaway offered no explanation as to why that jurisprudence has to be crammed into a statutory definition that works its way back to the 1899 Rivers and Harbors Act, passed when federal commerce power jurisdiction was far more limited.

Nonetheless, this one judicial decision started a massive expansion of the scope of the CWA, as the Army Corps speedily went about making sure that anything that was water related was in fact subject to the permitting process of the CWA. When the stoked up version of the regulations reached the Supreme Court in its 1985 decision in United States v. Riverside Bayview Homes, the new definition of navigable waters included all wetlands, which were in turn “those areas that are inundated or saturated by surface or ground water at a frequency and duration sufficient to support, and that under normal circumstances do support, a prevalence of vegetation typically adapted for life in saturated soil conditions.”

The regulation was unanimously upheld in a strongly statist opinion by Justice White. He first concluded that there was no need to give a narrow definition to the waters of the United States to avoid a potential problem that the government action might take private property without just compensation, and he then further concluded that it was an “easy” decision to conclude that the Corps had acted well within its regulatory powers.

Spurred on by that decision, the Corps continued to expand its jurisdiction. The only modest setback along the way was in the 2001 Supreme Court decision in Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers, where the Court balked at letting the Corps impose its “migratory bird rule,” by which the Corps sought to control intrastate waters “which are or would be used as habitat” by migratory birds.

But that one victory did not slow down the rest of the Corps operations. The massive nature of this new regulation is made plain in the introductory paragraph of Justice Antonin Scalia’s 2006 plurality opinion in Rapanos v. United States:

In April 1989, petitioner John A. Rapanos backfilled wetlands on a parcel of land in Michigan that he owned and sought to develop. This parcel included 54 acres of land with sometimes-saturated soil conditions. The nearest body of navigable water was 11 to 20 miles away. Regulators had informed Mr. Rapanos that his saturated fields were “waters of the United States,” that could not be filled without a permit. Twelve years of criminal and civil litigation ensued.

Justice Scalia was right to think that the case itself represented a massive and unwarranted expansion of government power under the CWA. But his opinion only carried four votes. Four dissenters led by Justices Breyer and Stevens took the position that Congress had indeed exercised its maximal powers of the waters of the United States so that the entire matter was best left in administrative hands. Thus, as is often the case, the decisive vote was cast by Justice Kennedy who sought to split the difference by deciding the proper definition required that “to constitute ‘navigable waters’ under the Act, a water or wetland must possess a ‘significant nexus to waters that are or were navigable in fact or that could reasonably be so made.”

Justice Kennedy’s wobbly position duly became the applicable standard. But just what does it mean? Justice Kennedy himself did not know, so he punted the entire matter back to the lower courts to figure out exactly what his “significant nexus” test meant. It does not take the benefit of hindsight to realize the fatal mistake in that decision. Jurisdictional rules have to be clear, and the substantial nexus test is a pure matter of degree. That test might have had some bite if Justice Kennedy said that the Corps did not come close to meeting the standard in Rapanos. But his remand signals the exact opposite conclusion, that significant in law could be turn out to be rather puny in practice.

Note that in claiming permit power, the Corps did not make any claim that Rapanos’s activities actually had any perceptible negative effect, real or anticipated, on the navigable waters of the United States. What the permitting process therefore did was to put the burden on Rapanos to try to prove the negative in a setting in which there is at most a de minimis likelihood that filling in dirt could result in damage to navigable waters located long distances away. At this point, the systematic mistake of a CWA on steroids is that it alters for the worse the standard common law rule that in private disputes an injunction against certain activities will be issued only on a showing of actual or imminent harm, at which point the activity is stopped until the situation is corrected. There is little unnecessary wastage under this rule, but no real loss in environmental protection.

Unfortunately, after Rapanos, the permit process was quickly untethered from any actual pollution. Now permits could turn on how an agency, as Justice Scalia notes, views the “economics,” “aesthetics,” or “recreation” of a proposal, and “in general, the needs and welfare of the people.” These standards are so fluid that virtually any result is consistent with them, and Kennedy’s mysterious requirement of some significant nexus does little in practice to hem in that discretion.

The great vice of the CWA permit system is its overkill: these exhaustive requirements are imposed in countless small cases where there is no risk of any harm. The result is a huge addition to administrative costs, and a delay in various projects. Nonetheless, it is this mindset that the EPA and the Corps seek to use to expand their power, without so much as offering a word of explanation as to just how much benefit can be obtained from this massive investment of private and public funds in the permitting system.

In light of the long history of deference to administrative agencies, it was somewhat of a surprise that Judge Erickson decided to put some teeth back into the significant nexus test. But in this instance, Erickson had enough ammunition to support the conclusion that the expanded definitions could not achieve their stated purpose, and that the rule therefore should be struck down as “arbitrary and capricious,” a tough standard under current administrative law. He took especial umbrage at the proposed rules that targeted “intermittent and remote wetlands” without showing their nexus to navigable waters of the United States, and further challenged a rule under which waters that are located within a 100-year floodplain or “within 4,000 feet of the high tide line or ordinary high water mark of a traditional navigable water, interstate water, the territorial seas, impoundment, or covered tributary” will require a “case-specific determination of a significant nexus.” So much for those clear and objective EPA standards.

The great tragedy of this case is that the litigation battles would never have taken place if the basic constitutional and statutory framework had not been twisted beyond recognition by earlier decisions. But under current law, litigating regulations like the CWA definitions is an exercise in the theater of the absurd. Let us hope that a modicum of common sense remains so that the EPA and Corps are sent back to craft a rule that makes economic and environmental sense.

*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.