How Democrats Stifle Labor Markets

Richard Epstein*

Richard Epstein

Richard Epstein

The National Labor Relations Act of 1935 (NLRA) introduced a major revolution in labor law in the United States. Its reverberations are still acutely felt today, especially after the recent, ill-thought-out decision in the matter of Browning Ferris. There, the three Democratic members of the National Labor Relations Board overturned well-established law over the fierce dissent of its two Republican members. If allowed to stand, this decision could reshape the face of American labor law for the worse by the simple expedient of giving a broad definition to the statutory term “employer.”

Right now, that term covers firms that hire their own workers, and the NLRB subjects those firms to the collective bargaining obligations under the NLRA. Under its new definition of employer, the NLRB majority expands that term to cover any firm that outsources the hiring and management of employees to a second firm, over which it retains some oversight function. In its decision, the NLRB refers to such firms and those to whom they outsource the hiring as “joint employers.”

Just that happened when a Browning Ferris subsidiary contracted out some of its recycling work to an independent business, Leadpoint. Under traditional labor law, Browning Ferris would not be considered the “employer” of Leadpoint’s employees—but the Board’s decision overturns that traditional definition. No longer, its majority says, must the employer’s control be exercised “directly and immediately.” Now “control exercised indirectly—such as through an intermediary—may establish joint-employer status.”

By this one move, the Board ensures that unions will now have multiple targets for their organizing efforts. A union can sue the usual employer who hires and fires, and it may well be able to sue one or more independent firms who have outsourced some of their work to that firm. The exact standards by which this is done are not easy to determine in the abstract. Instead, the new rules depend on some case-by-base assessment of the role that the second firm has in setting the parameters for hiring workers, determining their compensation, and supervising their work.

There is a quiet irony in this ill-considered transformation. The Democratic majority protests that it is only applying “common law,” i.e. judge made definitions of employers and employees to shape out the structure of the NLRA, which explicitly repudiates every key move in the common law of labor relations.

The analysis of the term “joint employer” starts with the NLRA’s definition of an employer, which reads: “The term ‘employer’ includes any person acting as an agent of an employer, directly or indirectly,” and then tacks on a list of exclusions including the United States and various state governments. The complementary definition of an “employee” under NLRA section 2(3), which, with largely irrelevant qualifications, states none too helpfully: “The term ‘employee’ shall include any employee. . . .”

The NLRA makes no effort to define joint employers of a single employee. Nor does it contain any indication that this category should occupy a large space in the overall analysis, even though Browning Ferris opens up the possibility that a very large fraction of the labor force has multiple employers.

To reach this conclusion the Democratic majority notes that the common law definition of an employee is the benchmark for its statutory choice. Yet the common law approach to labor relations was historically the antithesis of the creaky administrative machinery mandated by the NLRA. Under the common law rules, there were no limitations as to the bargain that could be struck between the employer and the worker. All contractual provisions relating to wages and the conditions of work were left for the parties to decide, as was the case with respect to the duration of the arrangement. In general, most employment contracts wereat will, which meant that the employer could fire the employee for a good reason, a bad reason, or no reason at all, just as all employees could quit for a good reason, a bad reason, or no reason at all.

To the naïve, this system of contractual freedom often looks as though it is an open invitation for labor market instability, but in fact it has proved exactly the opposite. The flexibility over contractual duration and terms keeps both sides in line, and thus adds immeasurably to the overall productivity of human capital.

The NLRA, passed 80 years ago, has posed a serious threat to the productivity of labor markets from day one. Its basic structure imposes a duty on each employer to bargain collectively with a union that has been selected by a majority of workers within a statutorily defined bargaining unit. That bargaining system blocks the constant short-term adjustments always needed in response to changing conditions in either labor or product markets by imposing a rigid set of restrictions on any unilateral contract changes offered to workers on a take-it-or-leave-it basis. These proposed contract changes are deemed unfair labor practices and prohibited.

The NLRA’s top-heavy labor agreements impose onerous work rules on once free businesses that hurt workers as well as employers in an actively moving marketplace, and these agreements leave unionized firms at a serious competitive disadvantage with their more nimble competitors. Over the last 60 years, even with little or no change in the substantive law, thelevel of unionization in the private sector has declined rapidly, from a peak of about 35 percent in 1954, to under 7 percent today. Time has only exposed the defects of a statute flawed from its creation at the height of the New Deal.

The efforts of the NLRB majority to cover “joint employers” is clearly an effort to breathe life into a moribund labor movement, by making hash out of the common law rules on which it purports to rely. From the beginning, the labor law had to ask which individual workers were employees of the firm, subject to unionization, and which were independent contractors who were not.

In the 1944 case of NLRB v. Hearst, the Supreme Court held that individual “newsboys” who sold Hearst papers were to be treated as employees for the purposes of the labor statute, even though their contracts with Hearst had designated them as independent contractors. The majority of the current Board relies on Hearst for its willingness to apply the statutory definitions “broadly . . . by underlying economic facts.” But that majority conspicuously neglects to mention that Hearst was in fact repudiated in the Taft-Hartley Act of 1947, which excluded (most imperfectly) “any individual having the status of an independent contractor,” without giving a workable definition of who those individuals are.

Nonetheless, the Hearst case did have one critical feature that the NLRB’s majority ignored. In Hearst, the only question was whether ordinary workers should be treated as an employee or an independent contractor. There was, however, no third party involved, and hence no issue of whether two or more firms should be treated as joint employers of any individual worker. Exactly the same point holds in the 1968 decision in NLRB v. United Insurance Co. of America, relied on by the majority, where the Supreme Court held that individual “debit agents” of the defendant insurance company were in fact its employees.

It should be evident why United Insurance Co. of America might well be correct. The whole point of the NLRA is to protect the right of employees to unionize. If an employer could redescribe individual employees as independent contractors, the basic protections of the NLRA (however ill-advised in principle) could be circumvented by a simple labeling exercise, without making a difference in the day-to-day operation of the overall business.

The Democratic majority also relied heavily on Section 220 of the Restatement of Agency that deals with the classification of certain independent workers as independent contractors or employees. In dealing with this issue, the NLRB majority discusses the ten factors that the Restatement invokes to answer this question, without noting two gaps in its argument. The first is that each factor is directed toward individual workers and a single employer, without reference to any joint employee situation. How else to explain the one factor that observes “(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work; . . .?” The Restatement also asks about the distinct nature of the worker’s occupation, the duration of the relationship, and the kind of day to day supervision, none of which are relevant to the joint employer question.

Second, this lengthy inquiry arose when the at-will rule at common law let the parties cut whatever deal they saw fit. What the NLRB majority forgot to do was to look at the material that immediately preceded section 220 in Chapter 7 that begins: LIABILITY OF PRINCIPAL TO THIRD PERSONS TORTS. Section 219 is then headed; When Master Is Liable for Torts of His Servants.” At this point, the punch line should be clear. The independent contractor question did not govern their relationship, but arose to make sure that the common law employer did not escape liability for the torts committed by his servants against strangers by labeling them as independent contractors. But as between the parties, the question of categories doesn’t matter—at least in the absence of regulation.

Today of course, the argument is that the law has to look over this arrangement to see that other statutory obligations imposed on employers are not breached. It was for that reason that the California Commission in Berwick v. Uber Technologies reverted to the common law definition of an independent contractor to tackle the question in the most inappropriate way possible while determining case-by-case which Uber drivers were employees and which were independent contractors. The same issue arises when employers try to classify part-time individual workers as independent contractors to avoid various statutory obligations on family leave, sick pay, overtime, and the like.

None of those issues is relevant here, where the correct inquiry asks whether the joint employer rules will disrupt the settled historical pattern of collective bargaining. The NLRB majority made a passing effort to justify its decision by quoting some government statistic that indicated an increase in the number of “contingent” and “temporary” employees as of 2005 to about 4.1 percent of employment, or 5 million workers. But that factoid reveals nothing about the efficiency of the proposed modifications to the collective bargaining system.

On that question, the new joint employer rules will likely batter today’s already grim labor market, as they will not only disrupt the traditional workplace but will completely wreck the well established franchise model for restaurants and hotels. As the majority conceded, the so-called joint employer does not even know so much as the social security number of its ostensible employees. It has no direct control over the way in which the current employer treats its workers, and yet could be hauled into court for its alleged unfair labor practices. That second firm knows little or nothing about the conditions on the ground in the many businesses with which it has forged these alliances, which eases the operations for both. Those advantages will be lost if the joint employer rule holds up in court. At the very least, the majority’s decision would require each and every one of these contracts and business relationships to be reworked to handle the huge new burden that will come as a matter of course, leaving everyone but the union worse off than before.

It would be one thing, perhaps, if the majority saw the light at the end of the tunnel. But over and over again it disclaims any grand pronouncements, making the legal question of who counts as an employer a work in progress that will be finished no time soon. Against this background it is irresponsible to undo the current relationships by a party-line vote. That point should also be clear to the courts and to Congress. The quicker this unfortunate decision is scrubbed from the law books, the better.

*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 Truth About Campaign Finance Reform

Richard Epstein*

Richard Epstein

Richard Epstein

One regrettable feature of modern politics is that presidential campaigns now run for the better part of two years, which gives ample time for all sorts of crackpot ideas to make their way to center stage. It is a sign of the times that Bernie Sanders has made enormous headway on the Democratic side of the ledger, taking away attention from Hillary Clinton whose misguidedreform agenda has been overshadowed by the federal investigations and inquiries into her private email server when serving as Secretary of State. On the Republican side, a boorish know-nothing, Donald Trump, has surged to the lead, giving the mistaken impression that the conservative voters of this country are concerned with little more than “white identity politics.”

But more curious still is the incipient presidential campaign of Harvard Law Professor Lawrence L. Lessig, who has taken it upon himself to become the hero of the common man, by seeking to amass one million dollars by Labor Day to project himself into the election on the singular pledge that, if elected, he will leave office once his major campaign reform has been put into place, yielding the presidency to some Vice President like Bernie Sanders, Hillary Clinton, or Elizabeth Warren.

The centerpiece of the Lessig program is a radical reform in electoral politics, which is intended to make sure that the nameless rich are no longer allowed to “rig the system” in their favor. The sole item on his quixotic campaign is a motley collection of legislative reforms that he bundles into a single package called the Citizens Equality Act of 2017. His calling card reads as follows:

EQUAL RIGHT TO VOTE

We must have a system that guarantees a meaningfully equal freedom to vote. To achieve that, we must at a minimum enact the Voting Rights Advancement Act of 2015 and the Voter Empowerment Act of 2015. We should as well add automatic registration, and shift election day to a national holiday.

I shall pass by the vices of automatic registration to concentrate on two components of Lessig’s plan that are now gathering dust in Congress: the Voting Rights Advancement Act of 2015, and the Voter Empowerment Act of 2015. Not surprisingly, govtrack.us has the same prognosis for both statutes: zero percent chance of passage.

For Lessig, the merits of his legislation are self-evident. The Voter Advancement Law, for example, calls for the introduction of elaborate preclearance provisions on a wide range of “covered practices” that are said to impair the right to vote. It is clearly an effort to resuscitate in reinvigorated form the preclearance of Section 5 of the 1965 Voting Rights Act, which was struck down inShelby County v. Holder, for the simple reason that the reality of racial exclusion in the South (and for that matter, the North) have changed so markedly in the last 50 years that the turnout rate for black voters is higher than it is for whites. For someone interested in radical reform to clean up electoral politics, it seems odd to support a new and onerous set of preclearance procedures whose primary effect will be to slow down electoral politics and to allow eager Democratic officials to harass local election officials.

To get a flavor of what is afoot, it is sufficient to look at one key provision of the 2015 Advancement Act that is intended to expand the number of situations under which the preclearance procedures of the 1965 Voting Rights Act can be invoked. That bill would first expand the definition of violation to cover not only violations of the Fourteenth and Fifteenth Amendments, but also “violations of this Act, or violations of any Federal law that prohibits discrimination in voting on the basis of race, color, or membership in a language minority group.” To make matters worse, it targets for enactment any state if there were “(i) 15 or more voting rights violations occurred in the State during the previous 25 calendar years; or (ii) 10 or more voting rights violations occurred in the State during the previous 25 calendar years, at least one of which was committed by the State itself.”

This appalling provision in effect guarantees that large numbers of states will necessarily be subject to future regulation of their conduct based on actions completed long before the passage of the legislation. It takes little imagination for any expert in the field to tally those states that are already caught within the web, and then to find, under the Act itself, new violations, which will allow the noose to be kept in place for the indefinite future. There is no allowance for differences in the size of the state, for the severity of the violations, or for trends in state or local behavior. The impact of these provisions on legislative outcomes is obscure at best. Why anyone thinks that the robust enforcement of this misguided legislation will do anything other than inflame electoral politics is a mystery to me.

The situation on the ground is in fact worse than this brief analysis suggests. The first point to note is the inherent dangers in all forms of modern democratic politics. As James Madison wrote long ago in Federalist Number 10, the dangers of special interests (what he called “factions”) are everywhere. In some cases, it is an outraged majority that can take advantage of an embattled minority. Sometimes it is a clever minority that can use its influence to collect power and wealth from the disorganized majority. The Lessig narrative is that the system is rigged against the ordinary person. There is no mention that the organized majority, or more accurately, a huge panoply of activist groups, has taken its pound of flesh from businesses and from people of high income, many of whom have fueled the innovation and advances from which the public at large benefits.

There is no easy way to keep score on whose political intrigue matters most, but there is little doubt that the progressive forces in the Obama administration have made the redress of inequality a central theme of their policymaking. This has translated into slow growth brought on by higher taxation and more extensive regulation of that heterogeneous group, known as the rich, whose members are often in conflict with each other.

In my view, any effort to concentrate exclusively on general electoral issues obscures the kind of fundamental reforms that are really needed to get this country back on track. Here are two key proposals needed to reverse the long-term national decline.

First, we need to cut back on the overall scope of federal powers of regulation and taxation. The current laws, as exemplified in the ObamaCare decision, NFIB v. Sebelius, give the government virtually unlimited powers of regulation and taxation over the economy as a whole. This current understanding of the law is at sharp variance with the original, classical liberal constitutionalstructure, which recognized the serious perils of an inordinate concentration of power. The level of discretion enjoyed by government officials at all levels is a magnet to anyone with a partisan political agenda. The amount of money spent on campaigns at all levels reflects the fact that our current structures make it possible to use legislation to gain advantages from other groups, without having to go through the bother of selling goods and services that other people want to buy.

This simple truth gives rise to the second yawning defect in our current governance structures. The need for influence is not only felt part and parcel of electoral politics. It also depends on the way the various committees inside each house of Congress operate; these committees have to pass on particular bills that come before them. Thereafter, we can count on a huge amount of slippage between the passage of any piece of legislation and its administration. Under current administrative law, the courts apply the so-called Chevron doctrine to give enormous discretion to administrators who decide how to implement the oft-vague guidelines of particular statutory provisions. And once those regulations or other directives are adopted, they often be can be altered at will by the next president and his team of administrators, leading to serious discontinuities in the operation of the law.

These huge flip-flops in legal interpretation carry with them troubling political implications. Power abhors a vacuum, which means that any interest group that has not been able to carry its way in the electoral process will mobilize its resources to target particular rules in particular agencies that matter most to its operation. And contrary to the Lessig’s childish populist story, lobbying and logrolling is a game that liberal activist groups can play every bit as skillfully as their conservative rivals. Furthermore, many corporations and individuals give to both parties to cover their bases.

One vital administrative law reform needed is to break down the ability of agencies to adopt bad rules that are often at war with the statutory authority under which they act. And in this regard, the usual extensions have been done, most notably, by the Obama administration with its eagerness to push the envelope on executive authority on a wide range of issues from immigration reform to environmental, labor, securities, communications law, and much more. It is all too often the case that business interests are forced to lobby, not in an effort to gain some special favor, but to resist some law or regulation which threatens to drive successful businesses, like Uber, out of business.

In dealing with these issues, the populist agenda only aggravates the underlying problem. What it first does is confirm the vast power of government to control all essential matters of government. The greater the political power, the larger the role of money in politics. Well aware of this, the progressive agenda championed by Lessig and others works over time to rig (yes, it is proper to use their word against them) and then introduce a set of electoral reforms whose disparate impact will help them cement their own power.

Thus one of many approaches would put sharp limitations on contributions made to PACs, but do nothing to restrain the ability of people to work in electoral campaigns, which would give a huge advantage to labor unions—the most regressive political force in America—against those people with the ability (on all sides of the political spectrum) to use their dollars to obtain political influence. It is for this reason that the progressive movement is so vehement in its opposition to Citizens United v. Federal Election Commission. That decision gives small government forces the means to oppose its agenda—which is the opposite of what Lessig and his fellow progressive supporters want, but precisely what this country needs to counter the growth of government and all of the problems that come with it. 

*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 Deceptions of Hillary Clinton

Andrew P. Napolitano*

Judge Napolitano

Judge Napolitano

While the scandal surrounding the emails sent and received by Hillary Clinton during her time as U.S. secretary of state continues to grow, Clinton has resorted to laughing it off. This past weekend she told an audience of Iowa Democrats that she loves her Snapchat account because the messages automatically disappear. No one in the audience laughed.

            Clinton admits deleting 30,000 government emails from her time in office. She claims they were personal, and that because they were also on a personal server, she was free to destroy them. Yet, federal law defines emails used during the course of one’s work for the federal government as the property of the federal government.

            She could have designated which of the government’s emails were personal and then asked the government to send them to her and delete them from government servers. Instead she did the reverse. She decided which of her emails were governmental and sent them on to the State Department. Under federal law, that is not a determination she may lawfully make.

            Yet, the 55,000 emails she sent to the feds were printed emails. By doing so, she stole from the government the metadata it owns, which accompanies all digital emails but is missing on the paper copies, and she denied the government the opportunity to trace those emails.

            When asked why she chose to divert government emails through her own server, Clinton stated she believed it would enable her to carry just one mobile device for both personal and governmental emails. She later admitted she carried four such devices.

            Then the scandal got more serious, as Clinton’s lawyers revealed that after she deleted the 30,000 emails, and printed the 55,000 she surrendered to the feds, she had the server that carried and stored them professionally wiped clean.

            She had already denied routing classified materials through her server: “I did not email any classified material to anyone on my email. … [I] did not send classified material.”

            Then, the inspector general of the State Department and the inspector general of the intelligence community, each independent of the other, found four classified emails from among a random sample of 40.

            Then the State Department inspector general concluded that one of the four was in fact top secret. Since it discussed satellite imagery of a foreign country and since it revealed intercepts of communications among foreign agents, it received additional legal protections that were intended to assure that it was only discussed in a secure location and never shared with a foreign government, not even an ally.

            When Clinton was confronted with these facts, she changed her explanation from “I did not send classified material” to “I never sent or never received any email marked classified.” Not only is she continually changing her story, but she is being deceptive again. Emails are not “marked classified.” They are marked “top secret” or “secret” or “confidential.” Her explanations remind one of her husband’s word-splitting playbook.

            Last weekend the State Department located 305 of her undeleted emails that likely are in the top secret or secret or classified categories.

            What should be the consequence of her behavior with the nation’s most sensitive secrets?

            If Clinton is indicted for failure to secure classified information, she will no doubt argue that if one of the above markings was not on the email, she did not know it was top secret. If she does make that incredible argument -- how could satellite photos of a foreign country together with communications intercepts of foreign agents possibly not be top secret? -- she will be confronted with a judicial instruction to the jury trying her.

            The judge will tell the jury that the secretary of state is presumed to know what is top secret and what is not. The only way she could rebut that presumption is to take the witness stand in her own defense and attempt to persuade the jury that she was so busy, she didn’t notice the nature of the secrets with which she was dealing.

            Not only would such an argument be incredible coming from a person of her intellect and government experience, but it begs the question. That’s because by using only her own server, she knowingly diverted all classified emails sent to her away from the government’s secure venue. That’s the crime.

            Will she be indicted?

            Consider this. In the past month, the Department of Justice indicted a young sailor who took a selfie in front of a sonar screen on a nuclear submarine and emailed the selfie to his girlfriend. It also indicted a Marine who sent an urgent warning to his superiors on his Gmail account about a dangerous Afghani spy who eventually killed three fellow Marines inside an American encampment. The emailing Marine was indicted for failure to secure classified materials. Gen. David Petraeus stored top-secret materials in an unlocked desk drawer in the study of his secured and guarded Virginia home and was indicted for the same crimes. And a former CIA agent was just sentenced to three years in prison for destroying one top-secret email.

            What will happen if the FBI recommends that Clinton be indicted and the White House stonewalls? Will FBI Director Jim Comey threaten to resign as he threatened to do when President George W. Bush wanted him to deviate from accepted professional standards? Will Clinton get a pass? Will the public accept that?

*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.

When Bureaucrats Do Good

Richard Epstein*

Richard Epstein

Richard Epstein

This past week, the Federal Trade Commission by a 4 to 1 vote issued a one-page statement outlining its “Enforcement Principles” regarding “Unfair Methods of Competition” under Section 5 of the FTC Act of 1914 (the “Statement”). The Statement was announced by FTC Chairwoman, Democrat Edith Ramirez, and received the support of Republican Commissioner Joshua Wright, a distinguished pro-market defender. It was released partially in response to “growing calls” by Republicans in Congress and members of the business community for “clarity” about how broadly this statute should be read.

The touchstone of enforcement action by the FTC is “the promotion of consumer welfare” done under “a rule of reason” formula that is akin to that which is used under the antitrust laws. In general, the FTC is “less likely” to challenge actions if matters are covered by the Sherman and Clayton Acts.

To an outsider, the Statement sounds as though it is meaninglessly vague, and the dissenting Commissioner Republican Maureen K. Ohlhausen complained in her lengthy dissent that “this statement includes no examples of either lawful or unlawful conduct to provide practical guidance on how the commission will implement this open-ended enforcement policy.” Taking the Statement in isolation, it looks as though her criticism reaches home. But once the code is correctly interpreted, it appears that the FTC has taken a useful step in the right direction. To defend this cheery conclusion, it is helpful to place the Statement in historical context.

The story starts when Woodrow Wilson took office in 1913. Wilson was an enthusiastic backer of two complementary statutes that were intended to strengthen government control over various market processes. Section 7 of the Clayton Act made it unlawful to acquire either shares or assets of another corporation where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” In the same year, the FTC received authority under Section 5 of the newly passed FTC Act to “prohibit unfair practices” with Section 5 stating: “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.”

A sensible initial reaction to this massive mandate is to reject it as hopelessly vague and politically dangerous, given the formless discretion it confers on key government officials. It is no surprise that this one short sentence has spawned an enormous and erratic jurisprudence over the past 100 years. But there is less randomness than appears at first sight, because the broad language of Section 5 sets up a real conflict between two polar opposite conceptions: classical liberal and progressive views of the regulatory state. The former strengthens the market institutions that the latter disrupts.

Start with the phrase “deceptive practices.” It covers not only deliberate misrepresentation, but also various forms of concealment or nondisclosure. The harder question is what, if anything is meant by the word “unfair” that is appended to it. At common law, it was widely understood that “unfair competition” was just a useful variation on traditional deceptive practices that applied where one merchant palmed off his own inferior goods, claiming that they were made by his competitor, or by falsely disparaging the quality of a competitor’s superior goods in an effort to divert sales to himself.

In addition, unfair practices covered efforts to disrupt a rival’s business by scaring away his customers with loud noises, or, in rare cases, using force to drive them away. Thus, under one interpretation of Section 5 the FTC simply creates a system for the administrative enforcement of legal norms that are essential to the operation of a competitive economy. Adam Smith can breathe easily.

A similar ambiguity is contained in the elusive phrase “unfair methods of competition,” which at its core also neatly covers the use of force and misrepresentation in business relations. But from the outset, this term also applied to various practices short of force and fraud that allowed a person to obtain an improper marketplace advantage. The obvious candidate for these unfair methods of competition were the practices made illegal under the antitrust laws, of which the easiest targets were efforts to monopolize or cartelize a market in ways that restricted output, fixed prices, or divided markets. At this point, the question is what does the FTC Act add to the Sherman and Clayton Acts that were already on the books.

But a second meaning of “unfair” has many progressive adherents who deeply distrust all competitive processes. In their view, many market practices themselves are rightly labeled as unfair, which justifies conscious and forcible government actions that override them. One possible candidate for such “unfair competition” is a business lowering prices in an effort to expand market share. The progressive notion of “ruinous competition” made popular in the New Deal period denounces those practices for the burdens it imposes on competitors, without regard to their impact on overall consumer welfare.

Tragically, this notion of unfair gained immense traction during the 1930s and led to the introduction of hundreds of codes of competition under the National Industrial Recovery Act (NIRA) of 1933. The NIRA ushered in a disastrous social experiment to fix wages and prices, set up production quotas, and restrict new entry into industry. In 1935 NIRA was struck down in ALA Schechter v. United States, in part because its definition of unfair competition went beyond the common law notion of “palming off.” But that decision was short-lived, for out of the ashes of the NIRA came the National Labor Relations Act of 1935, with its array of “unfair labor practices” and the Agricultural Adjustment Acts, which works toward the same end by establishing “fair exchange” values for commodities based on the prices set in the boom agricultural years between 1909 and 1914.

The good news is that this Statement moves the FTC sharply away from that progressive conception of fairness. The phrase ”consumer welfare” is commonly used in economics to defend competitive practices that raise overall welfare. The phrase makes it clear that the FTC will not protect competitors from competition, as so much of the New Deal legislation does. Consistent with that view, the Statement embraces the so-called “rule of reason” methodology of the antitrust laws, which evaluates any given act or practice by asking whether it “must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.”

In most cases, this formulation will pose few obstacles to the FTC in going after horizontal arrangements (i.e. those among competitors) that tend to create monopolies and cartels. It also makes it a lot harder to prosecute various common business practices such as standard-setting organizations for complex technologies or loyalty discounts. The former are strictly necessary to allow an industry to establish uniform infrastructure, which enables competitive firms to communicate and cooperate with each other. The latter are used by all firms large and small to attract repeat business. Placing a strong thumb on the scale against prosecuting these so-called violations is a useful guideline to restrain FTC action.

There is still, of course, the question of why it is that the FTC needs its so-called “standalone” authority to pursue violations given the wide purview of the antitrust laws. In her recent speech about the Statement at George Washington Law School, FTC Chairwoman Ramirez gave two reasons to support the FTC’s residual authority. She first claimed that the range of potential improper trade practices is so vast and ever-changing that the FTC needs its equally vast authority to respond to new challenges brought on by technological and economic progress. The standalone authority was thus needed “to reflect changing times, new business practices, and improved techniques for evaluating competitive harms and benefits.” A “flexible understanding” of Section 5 can reach “antitrust problems” that aren’t caught under the Sherman and Clayton Acts.

Both points are subject to serious conceptual challenges. First, Ramirez overstates the need to reformulate antitrust principles in light of new social circumstances. Standard antitrust analysis starts with the “widget.” It does this because the basic principles of competition and cartelization that applied to the sale of one good in 1914 apply with equal force to the sale of another today. Similarly, setting up an efficient rail network 100 years ago presents many of the same challenges that the Internet does today. The disastrous set of Federal Communications regulations dealing with Net Neutrality rest on progressive economic principles as faulty today as they were when their predecessor regulations promulgated by the Federal Radio Commission took shape nearly 90 years ago. Better one page of horse sense than hundreds of pages of regulatory babble. Flexibility is an overrated crutch that excuses regulators from the task of formulating sensible principles.

Happily, Ramirez does not fall into a trap of her own making, for she is scrupulously careful in identifying the cases covered by the FTC’s standalone authority. These include cases involving “invitations to collude” or the sharing of price sensitive information with competitors. I agree that both these actions merit antitrust scrutiny. But Section 2 of the Sherman Act is equal to the challenge when it provides that “every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce” in the United States or with foreign nations is committing an illegal act. The word “attempt” covers both cases.

But even if the Sherman Act applies, there is little harm in using the standalone authority in this incremental fashion to plug supposed gaps in the statutory language. The presumption against using the standalone authority when either the Sherman or Clayton Act “is sufficient to address” some competitive harm is a useful limiting principle.

Commissioner Ohlhausen has done a valuable service in pointing out the potential ways that the FTC might go off the rails. But the bottom line is this: Anyone who looks at the mindless net neutrality regulations of the FCC, the EPA’s prolix clean coal power regulations, the SEC’s new regulations on CEO pay ratio disclosure, or the FDA’s stance on off-label use should recall the perverse nature of most government regulations. Fortunately, the intellectual exchange taking place within the FTC shows that it is still possible for public officials to grapple with serious problems in a responsible way. May other government officials follow suit.

*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.

Chris Christie vs. Rand Paul

Andrew P. Napolitano*

Judge Napolitano

Judge Napolitano

The dust-up between New Jersey Gov. Chris Christie and Kentucky Sen. Rand Paul over presidential fidelity to the Constitution -- particularly the Fourth Amendment -- was the most illuminating two minutes of the Republican debate last week.

It is a well-regarded historical truism that the Fourth Amendment was written by victims of government snooping, the 1770s version. The Framers wrote it to assure that the new federal government could never do to Americans what the king had done to the colonists.

What did the king do? He dispatched British agents and soldiers into the colonists’ homes and businesses ostensibly looking for proof of payment of the king’s taxes and armed with general warrants issued by a secret court in London.

A general warrant did not name the person or place that was the target of the warrant, nor did it require the government to show any suspicion or evidence in order to obtain it. The government merely told the secret court it needed the warrant -- the standard was “governmental need” -- and the court issued it. General warrants authorized the bearer to search wherever he wished and to seize whatever he found.

The Fourth Amendment requires the government to present to a judge evidence of wrongdoing on the part of a specific target of the warrant, and it requires that the warrant specifically describe the place to be searched or the person or thing to be seized. The whole purpose of the Fourth Amendment is to protect the right to be left alone -- privacy -- by preventing general warrants.

The evidence of wrongdoing that the government must present in order to persuade a judge to sign a warrant must constitute probable cause. Probable cause is a level of evidence sufficient to induce a neutral judge to conclude that it is more likely than not that the government will find what it is looking for in the place it wants to search, and that what it is looking for will be evidence of criminal behavior.

But the government has given itself the power to cut constitutional corners. The Foreign Intelligence Surveillance Act, the Patriot Act and the Freedom Act totally disregard the Fourth Amendment by dispensing with the probable cause requirement and substituting instead -- incredibly -- the old British governmental need standard.

Hence, under any of the above federal laws, none of which is constitutional, the NSA can read whatever emails, listen to whatever phone calls in real time, and capture whatever text messages, monthly bank statements, credit card bills, legal or medical records it wishes merely by telling a secret court in Washington, D.C., that it needs them.

And the government gets this data by area codes or zip codes, or by telecom or computer server customer lists, not by naming a person or place about whom or which it is suspicious.

These federal acts not only violate the Fourth Amendment, they not only bring back a system the Founders and the Framers hated, rejected and fought a war to be rid of, they not only are contrary to the letter and spirit of the Constitution, but they produce information overload by getting all the data they can about everyone. Stated differently, under the present search-them-all regime, the bad guys can get through because the feds have more data than they can analyze, thus diluting their ability to focus on the bad guys.

Among the current presidential candidates, only Paul has expressed an understanding of this and has advocated for fidelity to the Constitution. He wants the government to follow the Fourth Amendment it has sworn to uphold. He is not against all spying, just against spying on all of us. He wants the feds to get a warrant based on probable cause before spying on anyone, because that’s what the Constitution requires. The remaining presidential candidates -- the Republicans and Hillary Clinton -- prefer the unconstitutional governmental need standard, as does President Obama.

But Christie advocated an approach more radical than the president’s when he argued with Paul during the debate last week. He actually said that in order to acquire probable cause, the feds need to listen to everyone’s phone calls and read everyone’s emails first. He effectively argued that the feds need to break into a house first to see what evidence they can find there so as to present that evidence to a judge and get a search warrant to enter the house.

Such a circuitous argument would have made Joe Stalin happy, but it flunks American Criminal Procedure 101. It is the job of law enforcement to acquire probable cause without violating the Fourth Amendment. The whole purpose of the probable cause standard is to force the government to focus on people it suspects of wrongdoing and leave the rest of us alone. Christie wants the feds to use a fish net. Paul argues that the Constitution requires the feds to use a fish hook.

Christie rejects the plain meaning of the Constitution, as well as the arguments of the Framers, and he ignores the lessons of history. The idea that the government must break the law in order to enforce it or violate the Constitution in order to preserve it is the stuff of tyrannies, not free people.

*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 Slaughter of Babies

Andrew P. Napolitano*

Judge Napolitano

Judge Napolitano

The recent broadcast of videotapes taken of persons employed at Planned Parenthood -- the prolific and notorious abortion provider -- has brought the issue of abortion to the national consciousness again and front and center to the Republican presidential primary campaign. The tapes were made secretly by a pro-life group determined to show to the world the dark side of Planned Parenthood’s use of federal funds.

What the world saw was terrifying and damning. The tapes are difficult to watch, just as any discussion of human slaughter is difficult to watch. If you have seen these tapes, you witnessed physicians and others talking about the profits Planned Parenthood is making in the sale of baby body parts, even though such sales are criminal under federal law.

The cavalier demeanor of those who profit from this slaughter is chilling, and the moral punch in the nose to the Democratic Party is excruciating. That’s because Planned Parenthood is virtually a branch of the Democratic Party. It has a lock on the federal treasury to the tune of $500 million per year. It pays for or performs more than 325,000 abortions a year, which is about one-third of all abortions in America. It contributes heavily to the campaigns of Democratic office seekers. You can see the cycle.

Even though federal law has prohibited the use of federal funds for abortions for nearly 18 years, money is fungible. The Planned Parenthood folks may be baby killers, but they are not dumb. They know how to dedicate federal funds for maternal health and free up maternal health funds for the slaughter of babies -- and make it all look legal.

The reason these tapes are so upsetting to the Democrats, and to some Republicans as well, is that they have convinced themselves that the fetus in the womb is not a person. Yet, watching their abortionists graphically discuss the monetary value of body parts and the physical manipulation of fully formed babies so as to maximize the harvesting of their organs ironically humanizes the body parts and the babies from which the parts came, and is thus so upsetting to those who deny fetal personhood.

But this is more than upsetting -- it seriously challenges the underlying commitment of today’s Democratic Party that the fetus is not a person. This is, of course, the central holding of the Supreme Court’s 1973 decision in Roe v. Wade. Just as in Dred Scott v. Sandford, wherein the court held in 1857 that African-Americans were not persons, so did Roe v. Wade make that holding for fetuses.

And the stated reason for the holding was the absence of consensus in 1973 among philosophers, physicians, theologians and scientists about when life begins. Yet, the duty of the court is to say what the Constitution means, not to count noses. Roe is the only Supreme Court decision in history grounded on the absence of discernible consensus among the populace.

Is the fetus in the womb a person? Before answering this, consider the depravity to which we have sunk due to its legal non-personhood. The slaughter of babies, some where it is legal in their ninth month of gestation, the sale of their body parts, and the taxpayer financing of this have become so morose that even their staunchest supporters cannot confront these realities publicly for fear of losing political support.

Is the fetus in the womb a person? Before answering this, consider the danger of a Supreme Court possessing the power to declare any human offspring to be a non-person. Two months ago, we witnessed the spectacle of the court finding four plain English words -- “established by the States” -- to be ambiguous and, 21 pages later, telling us that legally those words do not mean what they say. If the court can change the meaning of ordinary words, can it change the meaning of life?

It has.

Is the fetus in the womb a person? Of course it is. It has two fully human parents and the fully actualizable human genome to achieve post-natal existence. The single-cell zygote in the mother’s womb came from her flesh and cannot be anything but a human person. For 600 years, the law has permitted the fetus in the womb to inherit property. How could that be if the fetus were not a human person? If you kill a pregnant woman and the fetus dies, you can be charged with the murder of two persons. If the reason for government in the first place is to protect rights, the government’s prime obligation is to protect the rights of persons to live.

The Democrats are not alone at fault here. In the first six years of the presidency of George W. Bush, when the Republicans controlled the White House and the Congress, numerous efforts were made to introduce a simple one-line statute: “The fetus in the womb shall be, for all constitutional and legal purposes, a person.” Republican congressional leaders kept all such proposals from being voted upon.

But seeing is believing. The tapes are the abortionists’ nightmare, because in their wanton slaughter they have let slip the utter humanity of their victims. And the souls of the Holy Innocents who have been slaughtered before drawing their first breaths are no doubt praying for the conversion of the hearts and the salvation of the souls of those who killed them.

*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.

Don't Strangle Uber!

Richard Epstein*

Richard Epstein

Richard Epstein

The tech community is rightly on edge because of a 12-page decision that Stephanie Barrett, a California hearing officer, filed inBerwick v. Uber Technologies earlier this summer. Ms. Barrett awarded Barbara Berwick $4,152, most of which was for reimbursable expenses for mileage and tolls, for the two month period that she worked for Uber in 2014. It was clear to Berwick when she had signed up with Uber that she would be responsible for paying these expenses out of the fees remitted to her under the standard Uber agreement whose provisions were at issue in this case.

The reason this case came to court stemmed from the various provisions of the California Labor Code and federal law that provided protections and benefits to paid employees, but not to independent contractors. The question at hand is on which side of the line these workers—to use a neutral term—fall.  The question does not arise only with this particular transaction, but arises in most transactions that take place in the modern sharing economy. That economy boasts many new entrants, including firms such as Lyft, Task Rabbit, and Airbnb. All of these ventures have been made possible by the creation of online markets that match potential customers with potential suppliers of services through a central hub.

There is no question that these platform systems require a contractual framework for a three-party relationship that is not found in the playbook of traditional industries, where there is a direct relationship between the party that supplies the goods and services and the party that requests them. But how best to bring these parties into a relationship with one another?

On this point there are strong differences in the approach to be taken in an open market versus a regulated one. In the former, the way firms typically work is as follows: The law develops a set of off-the-rack default terms that they can use as a template to structure their own relations. These standardized forms allow people to choose from a menu of different relationships, like partnerships, employees, and independent contractors.

It then gives them two vital, additional degrees of freedom. The first of these is to let firms set price or wage terms any way in which they see fit, so long as they can attract workers or customers. These terms can then evolve either gradually or quickly depending on what is learned by the parties during the relationships or on what is required to meet changes in external conditions that impact supply and demand. The key point here is that no external body decides or approves these shifts in prices and compensation.

Equally important is the flexibility to invent hybrid forms when the traditional forms do not work. That practice dates back to Roman law, which constantly asked whether a given transaction was a partnership or an employment contract. A hybrid agreement may provide that one party receive some cash first, as with an employment, after which the remainder is divided partnership style. So long as the parties know where they stand with each other, why worry? This proliferation of tailor-made forms taxed the off-the-rack default terms, which meant that the parties usually developed special arrangements to clarify their business deal.

The situation is wholly different once the law imposes a set of regulations that is intended, at least in principle, to protect, as it is constantly claimed, employees from exploitation by their employers. Regulations of this sort became big business with the rise of the New Deal. For example, the Fair Labor Standards Act (FLSA) requires employers to meet extensive conditions with respect to minimum wages and overtime. The minimum wage specifies the base rate per hour—itself a calculation of immense complexity—and overtime regulations set appropriate time-and-a-half or double wages for overtime work.

At this point, the parties cannot contract out of the legal rigidities governing the employment relationship, but now must seek to evade its application by insisting, often disingenuously, that a particular employee is really an independent contractor. Clearly they make some move to the middle, which only muddies the waters. Thus any administrative hearing officer, like Ms. Barrett, gets to decide whether the employer has pulled a fast one by insisting that a given worker should be classified as an employee—entitled to a huge raft of benefits—when he is “really” an independent contractor, who is entitled to far fewer benefits.

What makes the situation so difficult is that from the ex ante perspective—i.e. before the deal takes effect—neither the employernor the prospective worker wants to be placed in the straightjacket of an employment relationship. They know that if the full set of protections is given, the added transaction costs and collateral taxes, fees, and regulations will kill the deal altogether through an inexorable two-part process.

First, the high costs of doing business acts like an implicit tax that saps the potential gains from trade. Second, these mandates typically cost the employer more than they benefit the worker—otherwise they would be voluntarily accepted. By increasing costs and reducing benefits, the standard deal is no longer economic. It was for just this reason that Ms. Berwick waited until she finished working for Uber before raising her claim for expenses. If she had demanded them up-front, Uber’s answer would have been a resounding no.

Instead, Uber would have insisted on the basic structure now in place for all its drivers. The Barrett opinion sets out in detail its particular contractual provisions. The right question to ask is which of these seem to be ill-suited to the overall venture, which is to offer customers an attractive price by setting out an efficient business arrangement between the parties.

So here are some of the key terms of the standard Uber contract that were reproduced in the Berwick case. The drivers all have the unlimited right to select or reject customers. Clearly there is no way that Uber could try to oversee those judgments. The best strategy for the company is to have sufficient drivers on the road to compete for the business and cover the market. The drivers can also operate for as many or as few hours as they please. Uber is in no position to monitor whether its drivers are or are not loafing. It is not as if drivers can punch a time clock when they come in and out of work.

The usual statutory duties of employers to record worker hours make no sense in this context. Nor does it make any sense to compensate workers by the (unobservable) hours they work, especially if extra hours will require overtime pay. From every point of view, compensation by the ride is far better. It also makes good sense to adopt Uber’s no tipping rule. Uber’s automatic payment that can operate at top speed does so only if the full fare is automatically determined at the end of the ride.

The Uber contract also allows it to vet drivers and vehicles and to prevent any substitution of either. Clearly, the firm uses its brand to attract customers. It can only protect itself and its conscientious drivers by ensuring a certain minimum level of quality. Indeed, its driver rating system gives a strong signal to potential customers that aids in this process. Uber also has to maintain control in order to limit its potential tort liability, which need not rest on a theory of vicarious liability for the wrongs of employees done in the course of their employment, but can also rest on its negligent selection of independent contractors. Comprehensive insurance covers both forms of liability.

So the challenge is this: just where does this standard contract fall short? Uber clearly has thought of a system of divided control. It has made its rule standard for all “its” drivers because that is the only way to guarantee them equal treatment. It also gives them the flexibility to change rates and fares without having to redo the basic structure of the agreement.

What is so instructive about the Barrett opinion is that her only analysis asks how the Uber deal matches up against the elevendifferent factors that under California law an administrator or court should take into account when deciding whether Uber drivers are employees or independent contractors. That list asks such questions as whether the enterprise of each side is closely connected to the other, whether the worker brings his own tools, whether his managerial skills matter, whether he has the opportunity for profit from the deal, and so on. It asks about the “permanence” of the working relationship and the length of time that the services are performed. It is quite conceivable that part-time workers are independent contractors and long-term workers are not, a judgment that could create a case-by-case confusion from which no one benefits.

Yet here is the kicker. Not one of these factors tells us anything about the efficient division of benefits and risks between the parties. They always cut in both directions, so it is hard to know where to draw the line, which means that different judges and different administrators using somewhat different tests will be unable to straighten matters out. Does it really give confidence in Officer Barrett’s determination to know that deliverymen for pizzas were in 1991 classified as employees under the worker’s compensation laws?

The clear lesson to learn from this fiasco is that it is a hopeless task to apply traditional regulatory structures to modern arrangements, especially when they block the implementation of new business models. Indeed, it is necessary to go one step further: it makes no sense to apply these regulatory statutes to older businesses, too. Time after time, these statutes are drafted with some “typical” arrangement in mind, only for the drafters to discover that they must also try to apply the statutes to nonstandard transactions that do not fit within the mold. Rigidity is not just a problem today. It was a problem with the FLSA and other New Deal labor statutes even when they were first passed.

This point is unfortunately lost on a lot of modern commentators who think that their real challenge is only to update the employment laws for the sharing economy, rather than scrap them altogether. For example, James Surowiecki, writing in theNew Yorker, comes out in favor of “Gigs with Benefits,” a great title for a bad idea. He rightly notes the scads of critics who claim that Uber is disguising its employees as independent contractors are wrong, and he recognizes that calling Uber drivers employees could be the death knell for many of these gigs.

But he then turns plain wooly by praising worker-protection regulation: “when there’s a tough call like this, we should put workers’ interest above corporate ones,” without explaining where the conflict arises in the ex ante position or how these regulations actually would collectively benefit workers ex ante. So his solution is to create some “third legal category,” that would hold employers responsible for benefits like “expenses and workers’ compensation” but not for perks like “Social Security and Medicare taxes.”

The proposal may sound reasonable, but it is wrong on all counts. Surowiecki has no idea whether Uber can survive the stripped down version of benefits grafted on to the labor contract. Nor does any outsider. He also has no idea whether one such scheme will work for all shared services, or how long any such scheme will last. Nor does he explain why regulation done in the name of worker protection outperforms a competitive labor market in which low transaction costs and ease of entry and exit offer workers huge protections. His third way leads to a new set of stifling regulations that will inhibit the next generation of business practices. We don’t need cleverness. We need the emphatic recognition that misguided labor protections can strangle Uber and other firms in the sharing economy, just as they have on all too many occasions impeded or destroyed more traditional businesses.

*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.

Hillary Lies Again

Andrew P. Napolitano*

Judge Napolitano

Judge Napolitano

In a column I wrote in early July, based on research by my colleagues and my own analysis of government documents and eyewitness statements, I argued that in 2011 and 2012 then-Secretary of State Hillary Clinton waged a secret war on the governments of Libya and Syria, with the approval of President Obama and the consent of congressional leadership from both parties and in both houses of Congress.

I did err in that column with respect to an arms dealer named Marc Turi. I regret the error and apologize for it. I wrote that Turi sold arms to Qatar as part of Clinton’s scheme to get them into the hands of rebels. A further review of the documents makes it clear that he applied to do so but was denied permission, and so he did not sell arms to Qatar. Other arms dealers did.

I also erred when referring to Qatar as beholden to Washington. In fact, Qatar is in bed with the Muslim Brotherhood and is one of the biggest supporters of global jihad in the world -- and Clinton, who approved the sales of arms to Qatar expecting them to make their way to Syrian and Libyan rebels, as they did, knew that. She and her State Department caused American arms to come into the possession of known al-Qaida operatives, a few of whom assassinated U.S. Ambassador Chris Stevens.

When Sen. Rand Paul, R-Ky., asked Clinton in January 2013 at a Senate Armed Services Committee hearing whether she knew of any weapons coming from the U.S. and going to rebels in the Middle East, she denied such knowledge. She either has a memory so faulty that she should not be entrusted with any governmental powers, or she knowingly lied.

It gets worse.

It now appears that Clinton was managing her war using emails that she diverted through a computer server owned by her husband’s charitable foundation, even though some of her emails contained sensitive and classified materials. This was in direct violation of federal law, which requires all in government who possess classified or sensitive materials to secure them in a government-approved venue.

The inspector general of the intelligence community and the inspector general of the State Department each have reviewed a limited sampling of her emails that were sent or received via the Clinton Foundation server, and both have concluded that materials contained in some of them were of such gravity that they were obliged under federal law to refer their findings to the FBI for further investigation.

The FBI does not investigate for civil wrongdoing or ethical lapses. It investigates behavior that may be criminal or that may expose the nation’s security to jeopardy. It then recommends either that indictments be sought or the matter be addressed through non-prosecutorial means. Given Clinton’s unique present position -- as the president’s first secretary of state and one who seeks to succeed him, as well as being the wife of one of his predecessors -- it is inconceivable that she could be prosecuted as Gen. David Petraeus was (for the crime of failing to secure classified materials) without the personal approval of the president himself.

Let’s be realistic and blunt: If the president wants Clinton prosecuted for failing to secure classified materials, then she will be, no matter the exculpatory evidence or any political fallout. If he does not want her prosecuted, then she won’t be, no matter what the FBI finds or any political fallout.

I have not seen the emails the inspectors general sent to the FBI, but I have seen the Clinton emails, which are now in the public domain. They show Clinton sending or receiving emails to and from her confidante Sid Blumenthal and one of her State Department colleagues using her husband’s foundation’s server, and not a secure government server. These emails address the location of French jets approaching Libya, the location of no-fly zones over Libya and the location of Stevens in Libya. It is inconceivable that an American secretary of state failed to protect and secure this information.

But it is not inconceivable that she would lie about it.

Federal statutes provide for three categories of classified information. “Top secret” is data that, if revealed, could likely cause grave damage to national security. “Secret” is data that, if revealed, could likely cause serious damage to national security. “Confidential” is data that, if revealed, could likely cause some damage to national security. Her own daily calendars, which she regularly emailed about, are considered confidential.

Clinton has repeatedly denied ever sending or receiving data in any of these categories. She probably will argue that an email that fails to use the terminology of the statute cannot be deemed classified. Here the inspectors general have corrected her. It is the essence of the data in an email -- its potential for harm if revealed -- that makes its contents classified and the failure to protect it a crime -- not the use of a magic word or phrase in the subject line.

She is no doubt lying again, just as she did to the Senate Armed Services Committee. Yet the question remains: Why did she use her husband’s foundation’s computer server instead of a government server, as the law requires? She did that so she could obscure what the server recorded and thus be made to appear different according to history from how she was in reality. Why did she lie about all this? Because she thinks she can get away with it.

Will American voters let her?

*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.

Hillary Clinton’s Upside Down Tax Reforms

Richard Epstein*

Richard Epstein

Richard Epstein

In her recent speech at NYU Stern School of Business, Hillary Clinton put forward a suite of proposals for responding to what shetermed “quarterly capitalism,” which leads corporate executives to favor short-term income at the expense of sustainable long-term growth. The single most important feature of her speech is what she did not mention—removing or weakening taxes and regulations that shackle today’s overregulated economy.

In her uneasy effort to sound like a responsible version of the irrepressible Bernie Sanders, she tried to fuse together two progressive themes that are difficult to marry to each other: the promotion of economic growth and greater wage equity, especially for workers at the bottom end of the income scale.

The most novel aspect of her corporate program is to increase the capital gains tax on short-term investments in order to incentivize key corporate officers to invest in the long haul by having high-income taxpayers monitor their behavior. Right now short-term capital gains on assets held for less than one year are taxed at ordinary income tax rates, which tops out at 39.6 percent, to which is added a 3.8 percent net investment income tax, for a total of 43.4 percent.

The Clinton proposal is to double that short-term period, and then to slowly decrease the excess burden over the next four years, until in the sixth year the long-term capital gains rates (which top out at 20 percent) will kick in. This proposal only applies to the top 0.6 percent of families whose incomes are over $465,000 per year. Its purpose is to encourage corporate CEOs to work for long-term gains and to treat their workers as “assets.”

Unfortunately, Clinton’s proposal won’t work. It rests on a number of unexamined assumptions. The first is that companies currently manage exclusively to short-term numbers. To be sure, such numbers provide a useful benchmark that gives guidance to investors and workers alike. Stock prices can move sharply up or down on these reports.

But in general that responsiveness is a good and not a bad thing, because that one quarterly number reduces the cost of monitoring overall firm performance, which, in turn, allows all investors to punish bad and reward good performance. This brute fact is why no one wants to prohibit firms from disclosing that number. That one number, moreover, influences every market participant, not just the tiny sliver of people at the top.

The quarterly number is of course not the be-all and end-all measure of corporate behavior. The typical statement will also contain all sorts of footnotes that make it possible for firm analysts to determine how both accrued (not yet paid or collected)and contingent (which may or may not come to pass) revenues and liabilities influence long-term growth. In addition, the Securities and Exchange Commission requires an extensive Management Discussion & Analysis narration of the public firm’s annual report.

These detailed materials are not for everyone, but for the small group of professional analysts that follow individual companies. These professional analysts often have influence over large pools of capital and can base their investment decisions on long-term prospects. Clinton has presented no evidence that this process is out of whack, or more precisely, out of whack in ways that her taxation proposal can address.

Start with this question: Is the proper object of taxation income or consumption? Right now, we tax income, but as a matter of principle that decision is highly suspect, because of the extra taxation it places on personal savings, savings that become the capital investments Clinton wants. Any capital gains tax, either long-term or short-term, exerts a lock-in effect on investors that makes them reluctant to sell their current investments to buy new ones.

An investor who pays a 20 percent capital gains tax to the government has less money to invest in a new project relative to an old one. Thus, he may well be reluctant to make that shift even if the new investment promises a higher rate of return than the old investment. The numbers may not add up given that he is working off a smaller investment base. A decision that reduced the capital gains to a zero rate would, after transactions costs, leave the same amount of money to invest in the new project, which makes it easier for capital to move to its higher value use. In the alternative, the zero tax rate could be extended only to those capital gains that are reinvested in other similar ventures within, say, a 30-day period.

Note that the dangers of lock-in explain why the Clinton proposal is upside down. First, the Clinton proposal is likely to reducetax revenue as it lowers the rate of investment and postpones the turnover among investments. This second consequence is very serious because a sensible investment strategy depends on skilled investors cashing out of mature investments that are now lower risk in order to reinvest in new high risk ventures that can benefit from their expertise.

Revenue consequences aside, Clinton is wrong to think that the best way to monitor a weak investment is for rich investors to be prepared to go down with the ship. Most individuals, however wealthy, have only the tiniest sliver of ownership in any large corporation, and thus have little incentive to monitor its performance given their high private costs. But selling shares, which puts a downward pressure on the firm’s value, is a wonderful way to attract the attention of insiders that something is wrong. It also increases the possibility that new share buyers will have a sufficiently large block of stock such that they will be in a better position to deal with the shortcomings of the existing corporate culture.

Clinton in her speech berates many activist investors for their short-termism. But this point is exactly backwards. The ability of activists to acquire large blocks of stock can allow them to demand fundamental structural reforms in the company, or to claim for themselves seats on the corporate board where they can make fundamental changes in corporate strategy, including the sale of underperforming corporate assets or the replacement of ineffective corporate managers.

The point is especially true when we take into account the way in which many people, including rich owners, hold their stock. For a variety of reasons, it is generally unwise for individuals to hold stocks of individual companies. Those investments could lead to an under-diversification of risk, which exposes them to sharp downfalls that occur in either a particular sector or a particular firm. Such risks are avoidable by holding well-diversified portfolios.

In addition, many high-income individuals, such as executives, bankers, and other professionals, do not know their next assignment from one end of the year to the next. But they are keenly aware that they work under all sorts of business and legal restrictions against trading on inside information of the sort that Clinton wants them to acquire. One wrong transaction can put any of these professionals on the wrong end of firm sanctions or a criminal investigation. The best way to avoid this risk is to turn over all portfolio investments to an independent manager. Indeed, in some cases the pressures are so strong that it is best that the investments be held in a blind trust where the beneficiary knows nothing about individual holdings, but only about general investment strategy.

Given these strong business pressures, the better strategy for virtually all investors, whether well heeled or not, is to find some institutional intermediary to run interference by making all key investment decisions. One way to do that is to buy directly into mutual funds with other private parties. Still another way is to hire a personal financial advisor who can direct that task of asset allocation across different classes of assets—stocks, bonds, real estate, cash—usually held in mutual funds. At this point, the individual investor is two levels removed from the actual control of corporate activities.

Even for those hardy individuals who make their own investment decisions, huge fractions of their wealth are in pension plans that operate in a tax-free environment until distributions are made years later when they reach retirement age. For this large group of persons, no tax treatment can possibly make a difference in how these private owners (or their managers) view their operation. Quite simply, the Clinton proposal takes into account none of the complexities of current market structure in requiring persons to take long-term positions in firms, assuming that such positions will lead to appropriate forms of pressure.

Nor is it clear that any of the pressures she hopes to create will lead to her general goal that asks for firms to treat their workers as long-term assets. The initial question here is—why don’t employers do this right now? The short answer is that they do: managing “human resources” is right at the top of the list of key corporate functions. No firm can hope to survive if it gives short shrift to its worker base, which includes the large number of lower income workers on which its activities depend. In the large corporation, that long-term planning pays especial attention to skilled workers in high income positions.

The recent salary evidence makes it painfully clear that the wage gap continues to rise between those workers that have marketable skills and those that don’t. An oil company during an energy boom needs to hire petroleum engineers, but not janitors, on its long-term payroll. Janitorial work is better outsourced to independent firms that can deal with the formidable regulatory barriers to hiring low-wage workers in nonskilled areas.

Indeed, the workers who are cast out of the corporate network will have to find jobs in small firms, often run themselves by middle and lower income owners who have to struggle to stay in business because progressives like Clinton know exactly how those owners should run their businesses. The recent evidence suggests that the Obama administration’s proposed regulationsto expand the number of hourly workers entitled to overtime protection under the Fair Labor Standards Act will provoke prompt business efforts to cut overtime and reshape business to minimize that burden.

In the end, we get the perfect populist storm: Tax proposals that will not help reform the corporate sector are justified in order to promote labor reforms that will cripple labor markets. The one law that even Clinton cannot repeal is the law of unintended consequences.

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

Obama’s Disastrous Iran Deal

Richard Epstein*

Richard Epstein

Richard Epstein

In his famous 1897 essay, “The Path of the Law,” Oliver Wendell Holmes said that to understand the law, it would be necessary to adopt the perspective of the famous “bad man,” the one “who cares only for the material consequences” of his actions, but “does not care two straws for the axioms or deductions” of natural law. Our bad man just wants “to know what the Massachusetts or English courts are likely to do in fact.”

Today, Holmes’s quintessential bad man is Iran, as it only cares about what happens if it gets caught,—caught, in this case, developing nuclear weapons. With most contracts, people work overtime to avoid that problem by choosing the right business partners. But there is no such luxury in international affairs.

Last week, Iran and the six world powers—the United States, China, Russia, Great Britain, France, and Germany—plus the European Union signed a nuclear deal called the “Joint Comprehensive Plan of Action.” Any examination of this deal has to start with the ugly but accurate assumption that Iran will, at every opportunity, act in bad faith.

The agreement starts off on a grand note: “The goal for these negotiations is to reach a mutually-agreed long-term comprehensive solution that would ensure Iranˈs nuclear program will be exclusively peaceful. Iran reaffirms that under no circumstances will Iran ever seek or develop any nuclear weapons.” But it is straight downhill from there.

The first problem with the deal is that it gives Iran an undeserved respectability that comes simply from being allowed to sign a significant international agreement.

Worse still, China and Russia should not be understood as adverse to Iran, their present and future ally. They are better understood as a Fifth Column against the West, and Iran’s many other foes, whose role in the negotiations is akin to the role that Vladimir Putin played in the embarrassing negotiations over chemical weapons in Syria that all but destroyed Obama’s credibility in foreign policy. Putin will be happy to take any excess uranium ore off the hands of the Iranians. But at the most opportune time, he might be prepared to return it to Iran if doing so would benefit Russia. The Chinese, for their part, also sense weakness in the United States and the West, as they build up illegal islands in the South China Sea subject to our diplomatic objections that accomplish nothing.

The remaining parties are our nominal allies who must believe that this nuclear deal represents a retreat from the basic proposition of Pax Americana—the guarantee that the U.S. will provide meaningful guarantees for the security of its allies. Our allies may well become less hostile to Russia and China precisely because they cannot count on U.S. leadership in tough times. The situation is starker still for the Israelis, who fear that the deal will embolden the Iranians to create more mischief in the Middle East and elsewhere. The Saudis are probably next in line in this belief. And both are surely right.

Iran’s promises count for nothing. Iran is quite happy to fund Bashar al-Assad in Syria, to back Hamas, and to launch terrorist attacks throughout the Middle East. It is eager to confront its Sunni rivals, most notably Saudi Arabia, by supporting their enemies. It is eager to annihilate Israel. Indeed now that the agreement seems in place, the Ayatollah says flat out that deal or no deal, “we will never stop supporting our friends in the region and the people of Palestine, Yemen, Syria, Iraq, Bahrain and Lebanon.”

Why then would anyone be surprised that Iran would be willing to make high-sounding promises that it has every intention to quickly break? Does anyone really agree with the President’s rosy view that Iran will reciprocate our respect with its respect? Putting our best foot forward makes sense with ordinary business deals where reputations count. It makes no sense when dealing with a Holmesian bad man who has no need or intention of reciprocating good will with good will.

In this sort of negotiating environment, reviewing the counterparty’s track record is a must, and Iran’s is far from laudable. Hence the guts of this deal lie not in lofty preambles, but in its gritty details of enforcement and sanctions, two issues which should be non-negotiable—a word that President Obama never invokes to defend our position.

One issue concerns the sequence in which the various stipulations of the agreement go into play. The black mark against this agreement is that it virtually guarantees immediate removal of the full set of economic sanctions against Iran, which will lead to an infusion of cash, perhaps in excess of $150 billion, into the country, some fraction of which will promptly flow to affiliate groups that cause mayhem around the world. But what does the President say about this substantial negative? Nothing. He just ignores it.

In his much-ballyhooed interview with Thomas Friedman of the New York Times, he stated: “Don’t judge me on whether this deal transforms Iran, ends Iran’s aggressive behavior toward some of its Arab neighbors or leads to détente between Shiites and Sunnis. Judge me on one thing: Does this deal prevent Iran from breaking out with a nuclear weapon for the next 10 years and is that a better outcome for America, Israel and our Arab allies than any other alternative on the table?”

In fact, we should judge President Obama and his treaty harshly on each of these points. By providing Iran with billions of dollars of immediate cash, this agreement will help Iran fund wars and terrorist attacks that could take thousands of lives. To offset this possibility, the President has indicated that he will try to bolster American assistance to the various countries that will be affected by Iranian aggression, but none of our allies can have much confidence in the leadership of a President who has made at best negligible progress in dealing with ISIS. His public vow to never put American ground forces in the Middle East turns out to be the only promise that he is determined to keep—for the benefit of our sworn enemies who have greater freedom of action given his iron clad guarantee. The objection to the President here is not that he has merely failed to curb Iranian mischief. It is that his clumsy deal will massively subsidize it.

Second, there is no more “snap back” here. Once the sanctions set out explicitly in the agreement are lifted from Iran, they won’t be reinstated any time soon. Gone are the days of anytime, anywhere inspections. In stark contrast, Articles 36 and 37 of the agreement outline a tortuous review process to reinstate any sanctions. First the Joint Commission must act, then the Ministers of Foreign Affairs, and then a nonbinding opinion by a three-member Advisory Board must be issued. If the matter is not resolved to mutual satisfaction after this process runs its course, any participant “could treat the unresolved issue as grounds to cease performing its commitments under this ICPOA.”

Section 37 then contains a murky provision under which the UN Security Council might possibly reimpose sanctions in part. But the entire procedure could take months, and at the end of this process Iran is free to walk if it does not like the outcome. Iran would also know that reassembling the original set of sanctions would be extremely difficult. Putting this agreement in place will likely end collective sanctions irreversibly.

And what do we get in exchange for all of the added risks we assume? The President claims that we have secured the best path possible to slow down the ability of the Iranians to make a nuclear weapon for at least ten years. But why should anyone believe that that will be the result when we are dealing with the quintessential bad man? The only safe way to slow down Iran’s nuclear capabilities is to do what the President claimed was necessary earlier, which is to knock out Iran’s total production of enriched uranium, subject to constant supervision.

It is all too clear that what Obama has offered today is a far cry from the deal he outlined to the country before these negotiations. It was easy for the President to talk tough to Mitt Romney in the course of their 2012 debates by then claiming it was “straightforward” that Iran has to “give up” its nuclear program in its entirety. As the President once recognized, there are no peaceful ends for which Iran needs a nuclear program. It is awash in oil, and it can satisfy any desire for medical isotopes by buying off-the-shelf products from any of a dozen nations that would be thrilled to supply them for free.

The agreement dramatically changes Iran’s status as an international aggressor. Elliott Abrams gives us the grim tally. Right off the bat, Iran’s nuclear program has gone from illegal to legal. The new agreement lets Iran keep 6,000 centrifuges and it allows the country to continue to do its own weapons research. It is likely that it can do a lot more outside the agreement as well. In five years the agreement lifts an arms embargo and in eight years all restrictions on ballistic missiles will be lifted.

It is often said that negotiation involves the process of give and take, by which it is not meant that the United States and its allies give and Iran takes. Unfortunately, that pattern has been observed in this recent deal. Iran had no hesitation in stating in the eleventh hour that various limitations on its sovereignty, e.g. inspections, were “unacceptable.” Today its position is that the sanctions must be lifted immediately. But the Obama administration was extraordinary reluctant to say that any Iranian proposal was unacceptable. The drama in the negotiation was how far the Iranians would push the agreement to their side of the table—which is exactly what to expect from any negotiation that relies exclusively on carrots and disdains all sticks.

This agreement does not require detailed study to conclude that it is a dead loser. Nonetheless, the United States has put it forward in the United Nations for approval before Congress has spoken, and the President, incorrigible as ever, has announced that he will veto any Congressional legislation that seeks to block the treaty. Many members of his own party do not share the President’s unfailing instinct for self-destruction. They should join the Republicans to reject the treaty by veto-proof majorities in both houses before the President and his team can do any further harm. 

*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.