The Poverty Of Progressivism

Richard Epstein*

Richard Epstein

Richard Epstein

Political life is rich with contradictions. In her acceptance speech at the Democratic National Convention, presidential nominee Hillary Rodham Clinton insisted that the economic performance of the past eight years was “much stronger” than it was during the Bush years. More than fifteen million private-sector jobs were created under President Obama, she said; many more people are now on health insurance; and the automobile industry is booming. Her argument seemed to be that the Obama administration’s progressive policies led to this economic growth. But a closer look reveals a less rosy picture.         

The day after her speech, the Commerce Department reported that the slowest economic recovery since 1949 was getting slower still. Gross Domestic Product growth for the second quarter of 2016 was down to 1.2 percent. The cumulative growth rate during the years of the Obama administration was down to 2.1 percent. Consumer spending held up for the short run, but capital investment—a more reliable predictor of future economic growth—has fallen. So how can these disappointing figures be reconciled with interventionist progressive policies of the past seven and a half years?

The standard Democrat response is that the decline of the middle class is the source of our social and economic problems. But given the high levels of consumer demand, it is hard to argue that rising levels of inequality are to blame for our sluggish economy. Nonetheless, given their populist aversion to free markets, the Democrats propose to double down on existing policies: they want to move to a national $15-per-hour minimum wage, add paid family leave, increase the strength of public and private unions, and raise taxes on the rich—and then, presto, we shall reverse the steady decline in median household income, which has fallen from about $57,000 in 2008 to about $53,660 in 2016. But lest Republicans start pointing their fingers at the Democrats, the median household income reached its highest level of $58,000 in 2000 at the end of the Bill Clinton era. Household income also fell, but less precipitously, when George W. Bush was president.

Political campaigns are notable for their lack of reasoned argument, and the Clinton and Trump acceptance speeches were no exception. To understand their positions, it’s better to turn to the circle of advisors and the intellectual elites that back both parties. On this point, the sad truth is that Donald Trump’s major intellectual guide is himself, for he has been rightly deserted by the intellectual wing of the Republican party that has little or no affinity to a man who spurns pro-growth policies based on free trade and small government. The Democrats, by contrast, have no shortage of pundits to celebrate the cultural and economic contradictions of capitalism.

Representative of this trend is the largely misguided economic critique offered, in the Wall Street Journal no less, by Ruy Teixeira of the Center for American Politics, which is chock full of fatal errors of economic reasoning. His intellectual case is summarized in four propositions derived from Thomas Piketty’s well-known but highly flawed book, Capital in the Twenty-First Century. Teixeira’s exposé of the perils of unvarnished capitalism offers a causal explanation filled with missing links:

First, the basic dynamic of the system tends toward higher inequality. Second, this tendency makes economic growth less effective at raising living standards. Third, faster overall economic growth, even if unequally distributed, could potentially solve the problem. Except that, fourth, rising inequality slows down economic growth, rather than speeds it up.

There is no reason why capitalism (in contrast with crony capitalism) ought to tend toward inequality of wealth. Piketty starts with the basic assumption that the rate of capital growth is always greater than the overall growth in GDP, at which point the long-term dominance of capital becomes a mathematical necessity. One glaring weakness is his failure to note that much capital investment is in depreciable assets, so that capital accounts can move downward as easily as they can move upward. Under his view, labor should be virtually wiped out today, which ignores the simple point that huge portions of the upper one-percent derive their income from delivering high-skilled labor services—doctors, lawyers, bankers, developers—to the public at large. In addition, the huge fortunes acquired by present-day moguls—Bill Gates, Mark Zuckerberg, Jeff Bezos—may be represented in corporate shares, but much of that wealth derives from their early labor in some small garage or office.

Teixeira also fails to take into account the role of entry and exit into labor and capital markets. The first entrant with a new technology can reap billions for himself. Those gains come in part from undermining older and less efficient technologies, and thus act as a brake on any abnormally high returns garnered by current entrepreneurs and investors. Yet in the next phase of the cycle, new inventors and entrepreneurs will target those soft areas in the formerly new generation of incumbents and garner their own abnormally high rates of return. The only way to stay ahead of the curve is to keep on innovating. There is no iron law whereby initial success guarantees safety over the long term. Individuals and firms rightly exit markets when they can no longer compete. Inherited wealth tends to divide and shrink, not multiply and increase.

Nor is there any reason to believe that the innovations that generate high rates of return are less effective in raising the overall standard of living. As a theoretical matter, the typical innovator captures about 10 percent of the wealth that he or she creates, which means that the rest of that wealth is distributed through market transactions to employees, suppliers, and, most importantly, the customer base, which receives a panoply of new products and services at prices that are far below their reservation prices—i.e. the maximum amount that they are prepared to pay.

It follows that it is very difficult for any single group in a market economy to preserve its outsized returns against the competition of others. It is therefore false to insist that rising inequality operates as a barrier against further economic growth. It is always worth remembering that the period of most rapid growth in the United States—between 1870 and 1940—was achieved under a legal order that had a relatively strong commitment to laissez-faire economics and classical liberal political theory. The best evidence of the wide distribution of these gains is found in the enormous increase in life expectancy over that period, which spread to all segments of the population regardless of geography, race, or sex. There is no way, for example, that the overall increase in life expectancy from 47 to 54 in the twenty-year period between 1900 and 1920 could be concentrated in the top one-percent of the population. It had to be widely dispersed, and that could have only happened by a combination of felicitous events: The improvement of public health and infrastructure, whose benefits extended to the whole population even if its costs were largely borne by the relatively rich; the increase of superior products for consumption; and vastly safer working conditions on the job—all fueled by technological advances in every area of life.

Nor does Teixeira offer any sensible explanation for how rising inequality could ever slow down the economic growth that is achieved by voluntary market transactions. The great virtue of a market transaction is that it leaves both sides better off, even if they gain in unequal measures. The higher the rate of overall transactions, the greater the improvement in wealth, and the greater improvement in utility for all individuals, who can take advantage of the plethora of choices made available to them in an open environment. Ordinary transactions in goods and services are positive sum for the parties to them, and generate greater opportunities for third persons everywhere.

It is now possible to see how the progressive agenda thwarts the engine for growth in ways that private ingenuity finds it difficult to overcome. The initial observation is that virtually every progressive reform undermines free markets and tends to establish monopolies in labor, agriculture, and other industries. These rules frustrate the free entry into new markets. It is therefore inexcusable that the first impulse of the determined progressive is to impose restraints on voluntary exchange. These new taxes and regulations are always described benevolently as restrictions on the bad parties—on landlords, on employers, on insurers, on health care providers. But in practice they always operate as devastating constraint on both sides of the market. The labor law regime of collective bargaining that “protects” some employees also snuffs out opportunities for their nonunion competitors. Yet the Obama administration continues to place new obstacles that block access to marginal and teenage workers. It has sought to force franchisors like McDonald’s to be subject to liability for the alleged unfair labor practices of their franchisees; its Department of Labor works incessantly to subject ever larger segments of the economy, including the gig economy, to more serious regulations. These added regulations drive down employment opportunities and net wages, which keeps the next generation out of the middle class. When government raises the price of labor relative to capital, firms will be able to diversify in ways that workers cannot. Hence the greatest blows are landed on the intended beneficiaries of this misguided legislation.

The recent figures all point to a decline in business investment: capital, we are told, is on strike. And well it should be. The rise of economic populism sparks an increase in tax rates for both ordinary income and capital gains. The legal uncertainties over our vast regulatory apparatus also exert a downward force. The hyper-enforcement of the securities laws makes potential entrepreneurs and investors factor into their calculations the prospect of civil fines and criminal sanctions. The widespread hostility toward free trade warns future investors that they will face added difficulties in acquiring factors of production from abroad, which in turn makes it harder for them to sell inferior goods, with higher prices, in foreign markets. The massive subsidies for wind and solar energy impose higher taxes on more productive elements of society. Those burdens will be further compounded by the insatiable drive for revenue to fund expansion in free tuition, social security, and other transfer payments. The whole redistributive scheme bears little or no relationship to the classical liberal theory of taxation, which uses taxes chiefly to fund public goods for the benefit of all. The prospect of diminished returns thus explains diminished investment, sans any of Piketty’s intellectual diversions.

There is no one big story here. It is the accumulated distortions from multiple levels of misguided regulation and taxation, each of which is celebrated with scant regard to the negative synergistic effects of the entire package. Look through the entire Democratic National Platform, and it is clear that the party of “inclusion” holds out no welcome mat to innovation and growth. Rather, it hopes to target “the greed, recklessness, and illegal behavior on Wall Street” and stop “corporations’ outsized influence in elections.” The entire document is a collage of political posturing and economic naiveté. Donald Trump may be clueless on solutions. But his short term pessimism surely does a better job in capturing the national mood. Four more years of Democratic rule is the path to economic stagnation and social discontent.

*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.

Are Voter ID Laws Racist?

Richard Epstein*

Richard Epstein

Richard Epstein

There are few things as controversial in American political life as voting rights. The issue surged to the fore this past week in Veasey v. Abbott when the Fifth Circuit, by a 9-6 vote, delayed the enforcement of Texas Law SB 14. This law limited the forms of photo identification that could be used when registering to vote to state driver’s licenses, U.S. passports, military photo IDs, concealed weapon permits, and U.S citizenship certificates with photographs. Although the law provided for some exceptions for poor and disabled persons, it has been attacked as the most restrictive voting rights law in the United States.

A variety of plaintiffs mounted both a constitutional and a statutory challenge to the law—the former under the Equal Protection Clause of the Fourteenth Amendment, and the latter under Section 2 of the Voting Rights Act, as amended in 1982. The plaintiffs’ burdens under the two provisions are distinct. It has long been accepted under the 1976 Supreme Court decision in Washington v. Davis that an equal protection challenge to any law cannot rest simply on proof that the law has a disparate impact by race, but rather, must show that there was some intention on the part of the lawmakers to abridge those rights on the grounds of race.

In contrast, the 1982 Amendments to the 1965 Voting Rights Act gravitated toward a stricter standard by prohibiting any law “which results in a denial or abridgement of the right of any citizen of the United States to vote on account of race or color.” That standard is then further refined in ways calculated to invite litigation, taking into account the possibility that the “political process is not equally open to participation by members of a protected class”—code for minority members, who have “less opportunity to participate in the political process.”

The issue of the constitutionality of photo IDs arose in 2008 in Crawford v. Marion County Election Board, where the Supreme Court, by a 6-3 vote, upheld an Indiana ID law that required voters to show either state or federal picture ID by denying that such a requirement unduly infringed on anyone’s right to vote. The Court only looked at the constitutional challenge and did not consider the 1982 Voting Rights Amendments, presumably because none of the parties thought it could support a claim. Instead, Justice Stevens wrote that the law was neutral on its face, and had a permissible justification of preventing voter fraud that could upset the results of individual elections and undermine public confidence in the electoral process.

One way to look at Crawford is that preventing voter fraud is important enough to justify the small burden on individual citizens of showing photo ID—a burden no greater than that faced for getting on an airplane. The record makes this view attractive. In Texas, the required IDs were held by over 95% of the population, but among the registered voters, “Hispanic and Black voters were respectively 195% and 305% more likely than their Anglo peers to lack SB 14 ID.” No one claimed this differential rate of registration was attributable to any form of state discrimination. Texas did not charge for the required ID, though there was evidence in the record that some individual plaintiffs had difficulty in navigating the system. It was also agreed that the Texas law passed in 2011 only after tremendous political struggle on a straight party-line vote, which reflected the dominance of Republicans in both houses of the Texas legislature.

There is little question that the Fifth Circuit could have easily dismissed the entire case by a respectful citation to Crawford. But instead, it took out the heavy artillery to upend the Texas statute. If Veasey survives, it will be exceedingly difficult for any photo ID law to pass muster in the United States, at least in the absence of heavily documented instances of fraud, and perhaps not even then.

Veasey goes off the rails with its uneven treatment of the fraud question. The debate over the frequency of individual fraud in various elections has been much mooted and the received wisdom is that the fraud risk is overrated in most cases. But the hard question is by exactly how much. The Veasey majority took an overly dismissive view on the question when it treated the risk as minimal, given that there were “only two convictions for in-person voter impersonation fraud out of 20 million votes cast” before the law was passed. But that result is also consistent with the proposition that significant fraud—including the organized fraud-rings found elsewhere—is going undetected by the criminal system, and a simple ID law is needed precisely because the criminal system is so weak. “Landslide Lyndon” Johnson’s victory in the 1948 senatorial election was, after all, rife with fraud. If it is permissible to refer to the inexcusable racism of 1930s Texas with respect to voting, why not take a similarly long view on fraud?

Once the fraud issue was downplayed, the majority in Veasey tackled both the constitutional and the statutory claims. On the constitutional issue, the inescapable difficulty with any intent test is that professional politicians on both sides of the aisle know which party is likely to benefit from any given enactment—which explains why the Democrats stonewalled and the Republicans pushed SB 14 over multiple legislative sessions. But if the simple knowledge of a disparate impact were sufficient to establish the intent requirement in an equal protection case, the jig is over: it is always there, and it always cuts in favor of the Democrats whose own political machinations are outside the purview of judicial review because they are acting on behalf of some protected class. Hence it takes more to establish the intent requirement, and it is here that the majority badly flubs the issue.

Let’s start with the simple point that no one found any statement by any person that indicated an invidious racial motive. To the majority, however, even this clean record was suspect, because it was quite happy to insist, without any documentation, on “the sad truth that racism continues to exist in our modern American society despite years of laws designed to eradicate it.” If you start with that presumption, you look for ways to confirm it. At this point, the majority first cautions against using evidence of misdeeds long ago to prove the charges, but nonetheless refers back to admitted cases of racial injustice, none of which are more recent than 1975. It also thinks it is permissible to infer racist sentiments from official opposition to the Voting Rights Act, which only hampers the ability of politicians to criticize the existing law, one that in my view has long been overly-intrusive into the electoral process.

There was clearly not enough in this disconnected set of dribs and drabs to sink the law, so the Circuit Court then mistakenly remanded the case for further findings to see if this portion of the case could be bulked up by circumstantial evidence gleaned by scrutinizing the long political battle. The simple point here is that every reform undertaken today is reviewed in light of sins committed decades ago. It is easier to think back to the original sins of America’s racist past than to trumpet the manifest progress on race relations that has only come undone in the last several years of heightened racial animosity.

The Fifth Circuit majority engages in equally dubious tactics in finding that the laws in question work a disparate harm on minority individuals. Once again, the heavy weight of the past is said to block equal participation in the political process, without any explanation of the major changes in legislation and voting behaviors since 1965. The 1982 Senate Report on the Voting Rights Amendments places a lot of emphasis on the various electoral devices of recent memory that were used to disenfranchise minority voters: the use of slates and large districts, for example. But the only issue that resonates today is the insistence that the law take into account “the extent to which members of the minority group in the state or political subdivision bear the effects of discrimination in such areas as education, employment and health, which hinder their ability to participate effectively in the political process."

At this point, it is easy to draw up a story about how the extra burdens of the voter ID laws fall disproportionately on minority persons, given that persistent differences by race in education, employment, and health are the norm today (in part because of the misguided progressive policies that hamper charter school education, place minimum wage and union barriers against minority employment, and block the entry of low-class corporate healthcare providers in minority neighborhoods). And it is easier still to select individual instances where the burdens of compliance are higher than the norm. But the central point is that nothing in the majority opinion stated, let alone demonstrated, that minorities who suffer from educational, employment, or health disadvantages find it any more difficult than white individuals to get the appropriate IDs. The sole objection was that there were more minority individuals in this vulnerable group, so that the disparate impact claim is always made out once the standard demographic information is trotted out.  By this dubious logic, it is possible to order the removal of existing safeguards against fraud because they too have a disparate impact.

It follows that, in light of the double-barreled attack mounted in Veasey, it will be exceedingly difficult to sustain any changes in voter ID laws. This is the highly likely result of any decision that poo-poos the fraud issue, and then relies heavily on past history to taint any efforts to tighten up ID requirements for elections. The long-term consequences of this decision are likely to prove unfortunate. For one thing, much progress could be made in voting rights by simply redoubling registration drives in poor neighborhoods. But instead, the litigation works in the other direction by encouraging people not to get the appropriate IDs if weaker forms of securing the ballot are available. Indeed, the occurrence of fraud is most likely in marginal neighborhoods where white, black, and Latino individuals may well have the weakest attachment to the overall political system.

The decision in Veasey is a careless condemnation of the current system on racist grounds. It may well be that the Texas system is far from ideal, and it would be foolish for any outsider to be overconfident that the ideal set of precautions has been adopted in this case. But based on the weak evidence presented here, it is surely a mistake for a majority of the Fifth Circuit to block the law within months of a presidential election. The Supreme Court should stay Veasey and review the outcome in light of its own now denigrated decision in Crawfold. The odds are 4-4 that this will not happen.

*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 Liberty Under Siege in Mississippi

Richard Epstein*

Richard Epstein

Richard Epstein

Last month, Judge Carlton W. Reeves of the Northern District of Mississippi handed down an extraordinarily misguided decision in Barber v. Bryant by issuing a preliminary injunction against House Bill 1523, Mississippi’s newly passed religious liberty law, just minutes before it was to go into effect. The court found that House Bill 1523 likely denied the plaintiffs—a diverse group of supporters of same-sex marriage—their rights under Fourteenth Amendment’s Equal Protection Clause, and, furthermore, established preferred religious beliefs, violating the First Amendment’s Establishment Clause. Phil Bryant, the governor of Mississippi, has filed papers in the Court of Appeals to dissolve that temporary injunction. State Attorney General Jim Hood has declined to join in that defense of the Mississippi law. As someone who gave some brief advice and encouragement to Mississippi’s appellate lawyers, I think that their motion should be granted, given the major points of principle that it raises.

To put matters in context, HB 1523 was the latest effort to provide explicit protection of religious liberty and moral conscience for those individuals who are opposed to same-sex marriage. At no point does the legislation limit the right of any person to participate in a same-sex marriage, which would be an obvious nonstarter given Obergefell v. Hodges, a highly dubious Supreme Court decision, which held that the Equal Protection Clause of the Fourteenth Amendment guaranteed that right to all persons. House Bill 1523 does not seek to dislodge or compromise that decision. Indeed, it would have been dead on arrival if it had attempted any such maneuver. But as is often the case, no one quite understands the scope of a particular constitutional right until its correlative duties are accurately specified.

The correct reading of Obergefell comes in two parts. First, no private person can seek to block the performance of a same-sex marriage. Second, some public official must be prepared to solemnize those marriages, so that they have the full force and effect as traditional marriages. What the decision in Obergefell did not do, and indeed disclaimed, was the notion that people who are opposed to same-sex marriages had to participate in their validation. Even public officials can escape that duty under House Bill 1523 so long as alternative arrangements are made to ensure that “the authorization and licensing of any legally valid marriage is not impeded or delayed as a result of any recusal.” House Bill 1523 thus represents the kind of sensible accommodation that has long been the hallmark of religious liberty.

The explanation for this distinction is not hard to find. When any state bans same-sex marriage, it is using its monopoly power to block the consensual activities of private persons. They have no place else to go once that ban is in effect. The two conditions above neutralize that blocking power. But that mission is fully accomplished without conscripting other individuals to participate in these relationships, or indeed any other arrangements. The correlative duty commanded by Obergefell is noninterference; it is not support, participation, or approval. The Mississippi statute tries to cement that understanding into law by enacting three related provisions.

First, House Bill 1523 protects only those individuals with “sincerely held religious beliefs or moral conviction” that marriage is properly confined to one man and one woman, that sexual relationships should be limited to such marriages, and that the terms male and female refer to “an individual’s immutable biological sex as objectively determined by anatomy and genetics.” The protection applies to participation in religious services, but also to all employment-related and housing activities subject to the same caveat. The wording was chosen in part to make it clear that no explicit preferences were given to religious persons or groups on this score, in order to forestall the charge of favoritism. But there is little doubt that the religious element was the primary motivation for the provision.

Judge Reeves struck down the Mississippi statute because he did not grasp the fundamental distinction between forcing others to yield to your beliefs and just asking to be left alone. His confusion is evident from his opening salvo that quotes the Supreme Court in Epperson v. Arkansas (1968) as saying that the Establishment Clause of the First Amendment means that the state “may not aid, foster, or promote one religion or religious theory against another.” He then uses McCreary County v. American Civil Liberties Union (2005) to argue that it violates the Establishment Clause—“Congress shall make no law respecting an establishment of religion”—“when the government acts with the ostensible and predominant purpose of advancing religion.”

At no point, however, does Judge Reeves attempt to put either of these broad generalities into context. And context matters. The words in Epperson were directed to an Arkansas law that prohibited the teaching of evolution in public schools—a clear instance of a state-compelled law that binds all persons inside the legal system. No one could describe this as a situation in which private parties sought to run their own lives and businesses free of government interference. Similarly, McCreary County struck down two county resolutions that announced that the Ten Commandments were Kentucky’s “precedent legal code,” and authorized extensive religious exhibits on public property intended to extol its virtues. There is no similar commitment of public resources in House Bill 1523. It is practically legal malpractice to rip out of context words that were rightly intended to knock down state coercion for religion and the state subsidy of religion while invalidating a statute whose whole purpose was to insulate private parties from any form of public coercion.

One irony in this case is that Judge Reeves noted, with apparent approval, that Mississippi had passed its own Religious Freedom Restoration Act. Mississippi’s law, in line with the federal version, provides that the state may not substantially burden a person’s exercise of religion, unless it does so to further a compelling governmental issue by the narrowest form possible. This law has a broader scope than House Bill 1523, but its protection is not absolute, although it may be when these two conditions are satisfied. When the original federal statute was passed in 1993, the phrase “compelling state interest” had a reasonably clear meaning, according to which some powerful necessity had to be demonstrated to override the original constitutional right. The Mississippi statute refers to “a government interest of the highest magnitude.” Traditionally, this language meant that the state could curb religious freedom in order to prevent riots in public places. But in line with the general jurisprudence of the time, such instances were few and far between.

Not any more, one can at least argue. More concretely, the argument has been commonly made that the elimination of discrimination in all areas of American life counts as a compelling state interest, of course of the highest magnitude. Just that argument was put forward successfully in Elane’s Photography v. Willock (2014), where the New Mexico Supreme Court held that its state’s Human Rights Act prevented all private discrimination on grounds of sexual orientation. Thus when Elane’s refused to photograph a commitment ceremony for a lesbian couple, at a time when same-sex marriage was not legal in New Mexico, its appeal to the First Amendment protections of religion and speech fell on deaf judicial ears, in a case that the United States Supreme Court denied certiorari. It is therefore reasonable for the defenders of religious liberty to think that the potential evisceration of RFRA required the sterner protection of House Bill 1523.

In this case, they are right. Because there is only this narrow focus on religious and moral convictions, it is virtually impossible to think of any situation where the exercise of that right would in fact cause actionable dislocations to other people. The word “actionable” has to be inserted because otherwise any distaste for the actions of others, e.g. flag burning, becomes a harm that must be put into the scales, which means that every refusal to deal necessarily hurts the individuals who were rejected and their sympathizers.

Nonetheless, this overbroad account of harm resonated with Judge Reeves, who noted that the various plaintiffs could suffer some irreparable harm if the injunction in question were delayed. But at this point, a cold look at the relative tradeoffs explains why these alleged harms should be disregarded. On the one side, the targeted individuals may face the choice of having to go out of business to protect their religious or moral conscience. This is no better than the choice between your money and your life. But just what is the harm on the other side? There are thousands of employers and landlords, and dozens of vendors that are eager to cater to the interests of gay and lesbian couples. Indeed, it is highly unlikely that they would (as is their right) hire a photographer or caterer who was unsympathetic to their views. So how do individuals with many choices suffer from irreparable harm when persons who have no choice do not? The point should be as clear to the opponents of religious liberty as to its defenders.

Given this current impasse, it is critical to rethink the basic legal rules on private discrimination that set the stage for Barber v. Bryant. House Bill 1523 was drafted in ways in which the right to refuse service was tied to religious and moral convictions. Otherwise, a broader right would run into a collision course with one of the most venerable parts of the Civil Rights Act of 1964, the public accommodation provisions embodied in Title II. Historically, Title II had two potent justifications. The first is that it was a necessary corrective against massive abuses of state power under Jim Crow. Thankfully, that risk is gone today. The other justification was that the traditional common law view—still good today—that any common carrier or public utility, by virtue of holding a monopoly position, was duty-bound to take all customers on reasonable and nondiscriminatory terms. When ordinary people have no where else to go for power, water, or transportation, they are entitled to get these services at reasonable rates. The rule covered all cases of racial discrimination, but it was not limited to it.

The implicit drawback of this position was that there was no duty to serve anyone in a competitive industry, precisely because disappointed customers had a full range of alternatives to which they could turn. The common law rightly held that refusals to deal in competitive industries counted as basic liberties. In the progressive run-up to the New Deal, the argument was put forward that every refusal to deal in economic matters was an exercise of coercion—the kind of coercion that the state had a compelling interest to stop. That misguided view marked the end of economic liberties in all cases, and led to the passage of laws like the 1935 National Labor Relations Act, which forced collective bargaining in otherwise competitive industries.

The battle over religious liberties is a novel extension of the older war in one of the few bastions of individual liberty. Until recently, the older view on religious liberties exempted private religious beliefs from this hopelessly broad definition of coercion. But with the new progressive resurgence, that protected liberty shrinks while the domain of government power expands. It is a genuine intellectual tragedy that the people who speak on behalf of religious liberties—including the plaintiffs in Barber, many of whom represent gay, lesbian, and transgender people—can be so alert to their own claims of personal liberty, and yet so insensitive and indifferent to the claims of others.

*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.

Hasty Judgment On “Institutional Racism”

Richard Epstein*

Richard Epstein

Richard Epstein

Over the past few dizzying days, the nation has been shaken by the killings of Alton Sterling in Baton Rouge, Louisiana, Philando Castile in St. Paul, Minnesota, and the five police officers mercilessly gunned down in Dallas, Texas. These events have intensified a bitter debate about whether institutional racism is endemic in police forces across the nation. Sterling and Castile, some say, were murdered in cold blood simply because they were black. But individual cases are unique, and often are notoriously difficult to judge, even with the benefit of hindsight.

Take the case of Sterling. He was surely resisting arrest, but the video shows him being subdued by two police officers when one pulled out a gun from his holster and shot him several times in the head. It is hard to imagine any earlier events that could have justified this action. To be sure, we should hear from the officers before making a final judgment, but the public outrage in this case seems well justified.

But the situation with Castile is draped in obscurity. The video taken by Castile’s girlfriend Diamond Reynolds only picked up the action after Castile was shot four times by Officer Jeronimo Yanez. According to Reynolds, Castile had already told the police he carried a licensed concealed weapon as he was reaching for his license. By her account, he was doing everything possible to avoid engaging in confrontation with his girlfriend at his side and a four-year child sitting in the back seat. Those facts paint a picture of excessive force used by a police officer in an incident with clear racial overtones. Indeed, just that judgment was reached by Minnesota Governor Mark Drayton who, obviously shell-shocked by the event, mused out loud: "Would this have happened if those passengers, the driver and the passengers, were white? I don't think it would have. So I'm forced to confront, and I think all of us in Minnesota are forced to confront, that this kind of racism exists."

This verdict, though, may not be entirely fair. The facts are still coming in and at least one recent account insists that Castile’s automobile was not stopped for a broken tail light, but because Castile matched the picture of a suspect involved in a recent robbery in a nearby convenience store, meaning the stop was connected to a past felony. There is also some evidence that a handgun that matched the kind used in the convenience store was found near Castile’s hand, leaving the question of why, if Castile were reaching for his license, the gun was at his side. The audio also reveals the officers telling Reynolds to keep her hands up, which makes good sense if in fact the gun was in easy reach for her. Indeed, it is far from clear whether she knew that the gun was there when she made her commentary.

There will doubtless be more iterations in the evidence before the case winds down. But the lesson is clear. Everyone should be very careful about making judgments about individual homicides before the evidence is fully in.

We have been here before. Today, the narrative about Ferguson, Missouri, is that Officer Darren Wilson gunned down Michael Brown, an unarmed black man. But that indictment misses the true story. An exhaustive Department of Justice investigationexonerated Wilson of any wrongful conduct, only to be buried when DOJ simultaneously released a report that blasted Ferguson for its “racist” practices in issuing traffic tickets for revenue purposes. As a result, there is a great deal of confusion about the case, and Ferguson continues to fuel massive protests, often violent, against police brutality. A similar thing happened in the case of Trayvon Martin. At trial, his killing was found to be done in self-defense, notwithstanding the rush to judgment the other way. The moral: we need to hear both sides.

In my initial reaction to last week’s news, I ignored this key rule. Instead, I sought to explain that Drayton’s key error was his uncritical willingness to infer some level of institutional racism from the sad facts of an individual case. In other words, if, in fact, the account that Reynolds offered were correct in all its particulars, the inference that the case itself represented a form of institutional racism would still be a mistake. It is difficult to imagine that anyone, in any position of power, condones racially motivated killings. The situation, therefore, is worlds apart from the institutional racism of Jim Crow, where horrific practices were approved at the highest levels of state, county, and local governments throughout the South, and other places as well.

The more likely explanation for these tragic killings is more sophisticated, and seeks to undercut any connection between individual tragedy and institutional racism. These homicides likely stem from the fear that officers have about their own perceived risks given the so-called “Ferguson effect,” or the higher level of resistance by black citizens to police arrests, especially those conducted by white officers. There is also the background statistics that are driving individual police behaviors. The rate of criminal conduct by blacks is higher than that for whites, especially in the area of homicides. And with the rise of the Black Lives Matter movement, there is an organized resentment against police that is race-based, leading to higher levels of hostility toward white police officers, especially those making arrests of young black males.

None of this is lost on the cops who face these realities every day. The police are intuitive Bayesians, as it were, meaning they believe that the crime statistics give some indication of potential danger in their confrontations with citizens. So white police officers are more likely to regard interactions with black people as involving relatively higher risks of injury. Jumpy and scared, they think they are acting in self-defense when they confront a black man, when it turns out that they are just jumping to conclusions. Black officers are less likely to take extreme measures against black men because they may not, at least not to the same extent, regard themselves as subject to the same level of hostility that white officers are. These are rational police adjustments to perceived risks, which in some cases lead to tragic overreactions.

The key point here is that no matter what happened in the Castile case, large claims about institutional racism are hard to connect with the facts on the ground. There is no one in a high position who condones the shootings. There are countless programs in place to teach the police how they ought to behave in potentially risky settings. Training on racial sensitivity is at an all time high. There is an increasing use of police cameras to document police movements on a continuous basis. The ubiquity of private mobile devices makes it a virtual certainty that someone will record these events, in ways that eliminate much of the factual uncertainty surrounding individual incidents. Affirmative action programs are firmly in place across the land. There have been an increasing number of black and brown officers appointed to high positions in major settings, including in Dallas, where Police Chief David Brown is well known for his commendable initiatives to improve community policing. It is easy to understand Brown’s reaction to the horrific events in Dallas: “All I know is that this must stop—this divisiveness between our police and our citizens.” It is hard to know what to do next.

Sadly, Brown’s focus is misplaced. Public perceptions, largely influenced by the media’s coverage of such events, overlook the simple point that police homicides, whether or not justified in individual cases, are outlier events. It is not the general public that is the problem. Let 99.99 percent of all races and ages agree with every word Brown spoke. Yet we still have a major crisis. As Thomas Hobbes understood a long time ago, when the question turns to the use of force, what matters is the outlier, not the average citizen. A single outlaw has the capacity to disrupt and destroy many innocent lives. Preaching peace and cooperation to the multitudes that are appalled by violence does nothing to control the tiny tail, whose hatred could be perversely magnified by public expressions of love, cooperation, and peace.

Alas, there is a real risk that the harsh rhetoric denouncing racism only makes matters worse. The distribution of low frequency events is always hard to predict. Sometimes they cluster, sometimes they don’t. Here, what really matters is what happens when outraged individuals who are driven by incendiary anti-police rhetoric take the law into their own hands. Micah Johnson, the Dallas shooter, was an outlier and loner who took to heart the message of the New Black Panther Party that advocates violence against whites in general and Jews in particular. There are reports of similarly inspired violence against police in Tennessee,Missouri, and Georgia—but again these events have to be thoroughly investigated.

But the larger lesson is clear. Just one person, with military training no less, can send the entire system into turmoil by killing five police officers and wounding seven other officers and two civilians. It is impossible to regard Johnson’s actions as anything other than horrific individual racism. But unlike the police who have killed black men, he was motivated by divisive mainstream rhetoric.

The question of whether anything can be done, given the law of large numbers, is yes. If a large population becomes more resentful, the extreme tail moves as well—closer to violence. So here again the message is clear: it is necessary to tamp down on inflammatory claims.

But how? On these issues, leadership starts at the top. Many have praised President Barack Obama for what they regard as his measured remarks on the killings in Louisiana and Minnesota, just hours before Johnson’s senseless killings in Dallas. But the President’s carefully crafted message may well have prejudged the situation in Minnesota, as it did with Trayvon Martin and Michael Brown.

To be sure, he ends his speeches by saying some version of: “We have extraordinary appreciation and respect for the vast majority of police officers who put their lives on the line every day.” But the words ring hollow when they follow his indictment of police for institutional racism. The killings in Louisiana and Minnesota, he said, were not “isolated incidents,” but were “symptomatic of a broader set of racial disparities in our criminal justice system.”  But that linkage has just not been established in these two most recent cases.

No one should be foolish enough to say that the criminal justice system is beyond improvement. It has improved and should continue to improve. But the matter has to be kept in perspective. We are not living in the age of Jim Crow. The first thing that the President should do is acknowledge the enormous progress that has been made. Instead, he lists a dubious set of statistical claims: blacks are pulled over more frequently for traffic stops, and they are subject to higher arrest rates for homicides. Obama has rightly been criticized on this front by the ever-alert John Lott for ignoring the underlying rate of violations, especially in connection with arrest rates for homicide, which are twice as high for blacks even though they are six times as likely than whites to commit homicide. Underenforcement looks like the more serious charge.

It is good that the President declared the actions of Micah Johnson despicable. But he, and everyone else, should be more cautious about claims of institutional racism based on a few disconnected homicides. The rush to judgment can have, and has had, fatal 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. 

Barack Obama's Failed Presidency

Richard Epstein*

Richard Epstein

Richard Epstein

The week after the Fourth of July is a good time to take stock of the presidency of Barack Obama. It is highly unlikely that he will change course in his six remaining months in office, so he will be judged by history on his current record. That record reveals an enormous gap between his grandiose promises and his pitiful performance over the past eight years.

Ironically, one of Obama’s finest moments came before he was elected President. When he secured his nomination in June 2008, a younger Obama waxed eloquent about his future role as a world historical figure:

I am absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs to the jobless; this was the moment when the rise of the oceans began to slow and our planet began to heal; this was the moment when we ended a war and secured our nation and restored our image as the last, best hope on Earth.

Obama constantly used the word “we” in that speech, but all too often that first person plural sounded more like the first person singular, as if his nomination heralded a sharp demarcation between the past and future. He spoke as if no one had ever addressed these issues before he “began” a transformation that was “absolutely certain” to reach full flower in his future administration. Obama here is a visionary captured by the nobility of his ends. But vision and skills are not always doled out in equal measure, and his lack of the latter made him unfit to choose the proper means for meeting the challenges he set out for himself.

It is sobering to examine how and why his presidential performance stacks up so poorly against his ideals. An important question for any president is what issues fall in the domain of government action, and which should be left to the private sector. Any sensible answer starts with two presumptions that are antithetical to Obama’s progressive frame of mind. First, the government should seek to avoid interfering in economic affairs to allow the forces of competition and innovation to increase the size of the social pie from which everyone can benefit. Second, the government should focus its exercise of national power on defending the nation and its allies from aggression. Obama inverts these key relationships—a fundamental mistake. He is all too willing to use coercion in domestic economic affairs against disfavored groups, and all too reluctant to use it against sworn enemies of the United States and its allies.

A mistake of this magnitude cannot be corrected by marginal adjustments in office. The sad truth is that the United States today is weaker economically, more divided socially, and more disrespected across the globe than it was before Obama took office. With few exceptions, he made the wrong choices in all the areas in which he declared the dawn of a new era. Consider:

Just how has Obama provided care for the sick? On this, as in so many other economic and social issues, he faced this critical choice: Either he could seek to remove barriers to entry in markets, or he could impose a regime of regulation, taxation, and exclusion. The former increases growth and reduces administrative and regulatory overhang. The latter blocks potential gains from trade while increasing administrative and compliance costs.

His vaunted health-care exchanges violated every sound principle of economic theory. The benefit packages that were mandated were far more exhaustive than those supplied under any private plan. The more exacting standards for existing private plans forced many of them to close down or curtail their operations. The insistence that administrative expenses be capped at a predetermined fraction of total expenditures micromanaged businesses by outsiders who were totally ignorant of the trade-offs among various firm functions. Large numbers of insured people were forced out of sensible private plans into a restricted diet of public plans, typically heavily subsidized. The standard insurance problem of adverse selection was overlooked, as the president and his supporters acted as if young and healthy people were anxious to stay in health-care plans that forced them to provide extensive subsidies to older recipients. Instead, these healthy people simply delayed joining any plan until they had an immediate need of expensive medical services. Longer waiting periods for coverage of pre-existing conditions or required minimum periods of membership were brushed aside in a fit of ideological purity. The exchanges have had a rocky reception at best, and they have an uncertain future.

The situation is no better when we talk about “good jobs” for the “jobless.” The president’s policies have wreaked havoc on labor markets. A correct analysis starts with the simple insight that any regulation or tax on employers necessarily limits what employees can receive. In competitive labor markets, therefore, the government should enforce contracts as written, rather than rewrite them from above. Our unfortunate New Deal legacy contains many laws disrupting labor markets that no president can repeal at will. But the president can use his enormous administrative discretion to ease their burden.

Not this president. Just recently, the Department of Labor announced new overtime regulations under the 1938 Fair Labor Standards Act that now cover workers who earn less than $47,476 annually, double the previous figure of $23,660. The FLSA was an unwarranted interference at the time of passage, but the distortions it creates are greater in today’s fluid economy. At a minimum, the new regulations impose heavy compliance costs on both private and public employers, forcing them to rethink virtually every job classification. It makes the “hour” the official unit of compensation even where it is entirely inappropriate in practice. Here are three examples. First, tech start-ups provide much compensation in stock and stock options, whose accounting value for regulatory purposes the FLSA caps at 10 percent of wages, forcing cash-poor firms to redo their entire business plans. Second, university graduate students and post-docs work long hours to secure an education and job. Yet no one knows where to find the extra cash once they become hourly workers subject to overtime protection. Finally, the entire “gig” economy works on a piecemeal basis because neither Uber nor Task Rabbit can monitor workers’ hours at a distance.

Elsewhere, the Obama administration has sought to prop up union membership by ordering quickie elections, limiting employer speech, and treating franchisors like McDonald’s as though they were the employers of their franchisees. These clumsy forms of labor market intervention have led his administration to takeprotectionist positions on free trade in order to safeguard faltering labor monopolies. President Obama has given some support to the Transpacific Partnership, but often under a mercantilist  “fair trade” banner. It is all self-defeating. To be sure, unemployment rates have gone down, but so too have labor market participation and median family income.

The president’s policies also falter when it comes to the hugely complex issues of global warming and the environment. Most people think, all else being equal, that an increase in carbon dioxide will increase overall global temperatures. But how? Are the relatively flat temperature readings of the past 15 years a blip or a trend?  Even though the president puts global warming at the top of his agenda, he ignores these questions, only to preside over an Environmental Protection Agency that refuses to rework its permitting rules to allow low-carbon emission plants to displace the antiquated coal facilities still in operation. Obama also champions massive overregulation under the Clean Water Act and the Clean Air Act. And his international protocols could easily create domestic dislocation without securing any tangible environmental benefits.

Foreign affairs, for their part, have been an unmitigated disaster. Everywhere one looks—Russia, China, the Middle East—the situation is more dangerous than it was before President Obama took office. That is the inescapable consequence of a presidential reluctance to trust military affairs to generals, and to rule out of bounds, virtually categorically, the use of American ground troops to stem the violence in the Middle East. The relative stability that George W. Bush bequeathed to Obama in 2009 has been shattered in Afghanistan, Iraq, and Syria, and by the rising power of Iran. ISIS commits atrocities nearly daily, most recently in Baghdad and Bangladesh. And the turmoil has created a migration crisis in Europe and throughout the Middle East. Red lines in Syria count for nothing, and ISIS has set up multiple permanent bases throughout the Middle East, which serve as springboards for terrorist activities that have reached the United States, most recently in Orlando. The breakdown has only heightened global intrigue, transient alliances and political instability. Yet Obama’s only firm commitments are to cut down our military capability and not to use ground forces in the Middle East, leaving a huge power void that the Russians are all too eager to fill. Pax Americana is indeed dead.

Nor has Obama done better on an issue close to his heart: race relations. Instead of firm moral leadership, the president has raised tensions. He announced, for example, that “if I had a son, he’d look like Trayvon.” And even after his Department of Justice exonerated Darren Wilson in the killing of Michael Brown, it buried that story behind a searing denunciation of Ferguson, Missouri for the alleged racism of its ticketing practices. The “Ferguson effect” has made policing ever more difficult in African-American communities. No wonder crime rates are rising across the country, even in cities like Chicago that have strict, but largely ineffective, gun control laws, which the president relentlessly champions without any explanation of how they are likely to do any good.

Behind all of these social ills lies a president who lacks the skills of a leader. Sadly, his frayed political legacy has left us with a choice between two undesirable candidates, Hillary Clinton and Donald Trump, neither of whom has the capacity and temperament to correct the many ills that President Obama has created at home and abroad over the past eight years.

*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.

Trade And Immigration After Brexit

Richard Epstein*

Richard Epstein

Richard Epstein

No matter what happens next, last week’s stunning “LEAVE” vote on Brexit has permanently disrupted the status quo ante. Both the Conservative and Labour parties are facing major leadership changes; conservative Prime Minister David Cameron has resigned, and Labour’s Jeremy Corbyn has been besieged by his shadow cabinet for his tepid support of the REMAIN option. Stock markets worldwide continue to tumble and the British pound has taken a beating. The Sunday New York Times lead storytook a somewhat hysterical tone when it announced that the Brexit vote “is already threatening to unravel a democratic bloc of nations that has coexisted peacefully for decades.” And the strong supporters of REMAIN are now determined, it seems, to predict the worst, perhaps in the hope that Great Britain will take the opportunity to “reconsider” its decision in light of the global economic hit that occurred the day the Brexit vote was announced.

As I recently argued, the Brexit vote was complicated, given the pros and cons on both sides. But now that the voting has occurred, the correct response is to put the fear-mongering aside and to think hard about the two major issues, so central to the Brexit debate, which will continue to vex Britain and the EU—trade and immigration. On this score, it is important to realize that those two issues are distinct. The argument for free trade is pretty clear—but with the much murkier issue of immigration, it is virtually impossible to come up with a knockdown argument in favor of either fully open or fully closed borders.

Let’s start with free trade. Here, the basic economic principle of comparative advantage works with equal force in both domestic and international markets. The most efficient form of production comes through a division of labor in which all parties provide those goods and services at which they are, relatively speaking, better at producing than anyone else. Thus, even if nation A were better than nation B at all forms of production, it hardly follows that nation B should remain idle. Instead, it should produce in that area in which it has the smallest disadvantage relative to nation A. So long as trade between the two nations remains open, both nations should on balance be better off than they would have been if each kept tariff walls high against any imports. The mutual exchange produces higher outputs across the board, and thus fuels growth in both nations. The principle is scalable, so that the more nations that come to the table, the greater the gains from trade, in both the international and domestic arenas. The substantive goal is to make the borders among sovereign nations porous.

The strength of this free trade position was evident in the recent discussions over Brexit. It was easy for the opponents of Brexit to denigrate their supporters as “little Englanders” who want to stick their heads in the sands by disengaging from Europe. But that gross mischaracterization misses a key point: being in the EU prohibits Great Britain, and its other member nations, from negotiating trade deals unilaterally with other nations, such as between Britain and India and the United States, where the potential gains are enormous. It is odd, as Paul Gregory writes, that professional economists think that Brexit is likely to lead to a systematic catastrophe, as if its only consequence is the loss of unfettered British access to the sclerotic European markets, whose systematic slow growth stems from the foolish assumption that uniform restrictions on labor and capital markets are better than no restrictions at all.

Unfortunately, just that misconception is the view of Glenn Hubbard, the Dean of the Columbia Business School, who has treated the British vote as a narrow form of populism driven by people who have a “deep distrust of the benefits of the global economy.” But it is all too clear that he has not paid any attention to the writings of the most articulate defenders of Brexit, such as Daniel Hannan, whose entire pitch runs in exactly the opposite direction. Britain is a small maritime nation with few natural resources that has to make its way by trade to the far corners of the globe. The difficulty with the EU is that Great Britain had to take the bitter with the sweet. To gain access to the stagnant EU, it had to accept the power of the EU to block the trade deals that Britain could make with Canada, India, and the United States—at least so long as President Obama refuses to back off his foolish threat to put Great Britain at the back of the queue. Indeed, if all went well, Britain could enter into a free trade agreement with the EU.

 To be sure, the case for free trade is not without its drawbacks. The usual complication from free trade is the massive dislocation in domestic markets as workers lose out to cheap goods and services from foreign competition. These jarring social and political complications make it clear that even with trade we live in a second-best world. But again, it is critical to draw the right inferences. Free trade is a tonic that can unlock strong domestic competition by allowing local consumers and firms to cast a wider net for appropriate trading partners. The ability to both enter and exit local markets is a powerful prod toward internal improvement that loses its sting if outsiders are kept at bay. Even in domestic markets, the only way in which consumers can benefit is if incumbent firms are subject to displacement by newer and superior rivals.

The same rule applies in the international market. Job placement programs are often thought of as a political necessity, but that common conclusion should be tempered for two reasons. First, no such program will ever allow displaced union workers who enjoyed some element of monopoly rents to replicate their higher wages even after they get new jobs in the competitive economy. Second, scaling back this program lowers taxes and thus increases the prospects of overall domestic growth, giving all workers, including displaced workers, better opportunities. The best approach here is not to ratchet the current system of unemployment benefits to give greater protection to workers who lose out to foreign instead of domestic competition, even if these two could be kept in separate compartments. At all times, the primary effort is to keep up the flow of goods and services across the national and state lines.

That relatively clear prescription, however, does not hold with respect to immigration. The source of the contrast is all too obvious. The full range of adjustments to new people streaming into a country in the hundreds and thousands are far greater than those required with respect to goods. Goods do not have to be housed and fed. They are not capable of committing crimes. They do not have divided loyalties to their home country. They do not demand the right to vote or to participate in political affairs. They do not intermarry with local citizens or with immigrants from other lands. They do not have to receive driver’s licenses or social security or education for their children—the very issues that led a divided Supreme Court in United States v. Texas to deny President Obama the opportunity to unilaterally rewrite the U.S. immigration laws. Goods and services are not, in a word, people. Immigration was always easier in a small government state, because strong property and contract rights are scalable, but positive rights to housing, education, or health care, are not. All transfer payments must be recalibrated to take into account how new population flows.

The powerful anti-immigration forces play on these negatives, which become especially acute with mass migration borne of political oppression and economic desperation. There is no doubt whatsoever that fears of mass immigration played a critical role in the Brexit decision, and there is little wonder why, given the looming influx of immigrants and refugees from the Middle East.

Yet there is another side to the story. Immigrants have often proven to be positive sources of vigor and innovation for the countries to which they come. They should not be seen only as competitors for scarce British or American jobs and homes. They should also be regarded as potential sources of new businesses that create jobs and homes for current British and American citizens. These immigrants often display fierce loyalties to their new home countries precisely because they have suffered under the lash of tyranny, which makes them willing to go to any lengths to defend their new freedoms. As Fraser Nelson wrote in the Wall Street Journal, Brexit in part was fueled by a conscious uneasiness about the loss of British identity, coupled with a sense that the British could not open their doors to productive people from anywhere, but had to take in, no questions asked, anyone who had the requisite papers from some other EU nation.

So therein lies the rub. It is often difficult to know whether the benefits of immigration outweigh the costs. Immigration from unstable and war torn countries may well carry greater perils than immigration from more stable places. Yet, by the same token, it is just those people from war torn areas that may work hardest to preserve the set of local freedoms. So what strategy is to be used to separate the good from the bad effects? Should nations have strong checks to make sure bad immigrants do not come in, even if it means keeping desirable immigrants out? Or should the doors be opened wider to let more people in, knowing that they can be deported with relative ease? The choices come in infinite gradations that makes consensus hard to achieve. Differences in national and regional cultures may matter, but it is hard to say in which direction.

In light of these considerations, it is possible to defend free trade, but not free immigration, in relatively categorical terms. The Brexit debate on immigration resonates in the United States, where gridlock is the order of the day. To break that impasse, it is best to begin where the ripest fruit is easiest to pick, namely, by reforming the rules that keep the best and the brightest from around the world, often with graduate training in the United States, out of the country. But the President and Congress have shown little interest in removing the tight lid on the number of H-1B visas issued to skilled foreigners who seek employment in the United States. The list of stated entry qualifications is filled with anticompetitive restrictions. Potential applicants are told that “you must have an employer-employee relationship with the petitioning U.S. employer”; that you must meet educational requirements in your specialty set by the federal government; and, of course, that “you must be paid at least the actual or prevailing wage for your occupation, whichever is higher.”

It is all too clear that these regulations are not adopted to protect consumers or to promote their welfare. They are just another in the endless set of anticompetitive restrictions that cripple a nation in order to protect incumbent workers. There may be no general solution to the immigration question. But we should allow more skilled workers into the United States, with the explicit understanding that their time in the United States does not move them forward on the path toward citizenship. And it might be wise to grant temporary asylum to persons from war torn lands on the same terms. Perhaps, best of all, it makes sense to reduce trade barriers with poorer nations so that their citizens can improve their own position without having to leave home. The basic lesson applies with equal force to the Great Britain, the EU, and the U.S. The more free trade among nations, the less pressure there is on the immigration systems whose shortcomings are not likely to be resolved either here or anywhere else anytime soon.

*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 Cautious Yes On Brexit

Richard Epstein*

Richard Epstein

Richard Epstein

Thursday’s vote on Brexit will perhaps be the most consequential decision that Europe has faced in several generations. The most recent polls suggest that the outcome is very close, with a small but uncertain majority in favor of staying. Last week’s polls taken after the senseless assassination of Labor MP Jo Cox, a strong supporter of Great Britain retaining its place in the European Union, point to a surge in favor of exiting for reasons that are hard to unpack. The issue is one on which I have previously equivocated. Now, after much unhappy reflection, I think that on balance a vote to leave the EU is the right choice—in part because the established leadership of both the Conservative and Labour parties is urging the opposite course.

A decision to leave or remain has vast ramifications for many aspects of British life: economics, energy, the environment, immigration, a system of weights and measures, and much more. Making a vote is a black and white yes/no decision in a world filled with grays, given that there are major advantages both ways. Staying in the EU assures England access to continental markets, which is why many, but by no means all, large firms and banks support remaining. But at the same time, staying in the EU subjects England to vast amounts of regulation from the powerful Brussels bureaucracy, which extends its tentacles with each new decree into every nook and cranny of British and European life, as Diana Furchtgott-Roth notes. Today, more law in Great Britain comes from Brussels than London.

The EU’s power rests on the critical notion of harmonization. The union subjects all member nations to uniform rules and regulations in order to ease the burden on cross-border transactions. Uniformity surely has some advantages, but to classical liberals like myself, the advantages come at far too high a price. To see why, it is critical to see how a federal system should work, which is best exemplified in the American Constitution—not as it is interpreted today, but as it was understood in 1787.

Generally speaking, economic and social activities—including manufacture, agriculture, and mining—take place at discrete locations that are usually under the jurisdiction of a single state. These states are certainly capable of engaging in abusive activities toward their own citizens, but firms and individuals hold the right to exit a state that imposes stiff regulations on its members and move to one where the regulations are less punitive. Exit—and equally importantly, the threat of exit—imposes a huge discipline on local governments who know they will pay a heavy price if they impose unwanted taxes and regulations on their local citizenry. People leaving badly governed states like California, Illinois, and New York are putting real pressure on local governments to mend their ways, without having to identify the particular shortcomings that take place. Knock out the exit right and one reduces the internal pressures for economic and social reform. In practice, the United States Congress has done less than it should to preserve open markets, which is why the Supreme Court’s efforts to prevent the state balkanization of national markets under the so-called dormant commerce clause is among the court’s greatest initiatives, notwithstanding the shaky textual foundations of that doctrine.

The European Union has a very different constitutional tradition, given the historical separation, both by politics and languages, of the various nations. As in the United States, the right of internal movement of persons really matters. But, also as in the United States, the question of immigration from abroad poses genuine challenges, for no nation or federation can afford to have an open borders policy and still retain its national integrity.

At the same time, it is important not to ignore the economic forces that are driving Brexit. Open borders for trade are essential to economic development. The movement of people across national lines is a much more complex problem than the movement of goods, but this personal freedom also turns out to be pro-competitive by allowing people to move across borders in search of greater economic opportunity. Speaking more generally, the nation that uses force to contain its citizens has confessed to the deficient nature of its economic and political order, especially since the cost of leaving one’s nation is exceptionally high. Exit rights force governments to reform themselves at home by whatever means it takes to keep the local environment more attractive.

But all of these calculations have changed in light of the mass migrations out of the Middle East, which make open borders a far more difficult issue. It is thus no accident that Andrew Roberts’s impassioned plea for Brexit plays the immigration card. In his view, Angela Merkel invited many young Muslim refugees to settle in Germany, and under the current system, they can migrate to Britain once they get a European passport. There seems to be little doubt that this helps explain the current sentiment in the UK in favor of Brexit. Indeed, it threatens to unravel the rest of the EU as well.

Yet even if immigration is kept to one side, the economic issues tend to favor Brexit, given the massive overreach of the EU. The great post-war achievement was the formation of the European Economic Community (EEC), or European common market, which went into operation in January 1958 and whose initial members were Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany. The point of a common market is to allow free movement across national borders of people, goods, services, and capital. A common market with such modest aspirations leaves each nation free to organize its internal production as it sees fit, knowing that its comparative advantage lies in keeping those regulations that foster commerce and eliminating those that do not. The common market may require that nationals from other states be allowed to cross borders for purposes of trade, but it does not give them the right to become citizens or permanent residents of other nations.

So understood, a free trade zone like the EEC has two enormous advantages. First, it is capable of long-term operation among countries that have very different ways of doing business, because it is unnecessary, indeed impossible, to impose a uniform set of regulations on all nations with their very different histories and institutions. Second, a common market is capable of relatively straightforward expansion to include other nations with divergent traditions, who can also gain the benefits of free trade across national lines. There is no need to jigger other rules to take into account any set of unique circumstances. The admission of Great Britain into the EEC in 1973, done only with much uneasiness, was in fact possible only because of the then-limited nature of its European commitment. There was no need to develop a common currency, so exchange rates could vary as a rough measure of the relative efficiency of the different national economies.

On this view, the great blunder of the EU was the shift from a free trade zone to a broader social and economic union, with its all-powerful Brussels bureaucracy, and with the ratification of the Treaty of Maastricht in 1993. A robust EU was created to “harmonize” the laws of the various nations not only on trade but also on agriculture, fisheries, and regional development. The EU has continued to expand its membership so that today it includes some 28 nations. The Euro in turn became the single currency for 19 members of the European Union by 2002 while Britain retained the pound.

The combined EU polices represent a fatal overreach. The larger number of nations meant greater heterogeneity among its members. Yet, at the same time, the central government in Brussels sought to do more than had ever been done before under the dangerous banner of harmonization. There are of course two ways to harmonize—up and down. But the bureaucrats in Brussels displayed strong social democratic tendencies toward central planning, and thus harmonized up on the naive assumption that the more regulation that was done in labor and capital markets, the better. The synergy between regulation from the center and labor market rigidity in France, Italy, and Spain has taken its toll. The monetary tensions between Germany and Greece have only made matters worse. Centralized control meant that unwise interventions could not be confined to particular countries, but could take hold across the entire EU simultaneously

The rest, alas, is history. In the short run, weak exit rights have hamstrung efforts to rationalize European labor and monetary policy. Chronic high levels of unemployment and low levels of growth followed. Notwithstanding the grim economic news, the case for choosing to remain in the EU rests largely on three pillars. First, many members of the Labour party want to stay in the EU because they support aggressive control over labor and capital markets. Second, the Conservative party leadership wants to stay because it values the access to large markets for goods and services in the EU, which they fear a Brexit success will close. And third, some worry about the high costs of transition should the separation take place.

The better responses are these. First, Labour is wrong about the EU move toward regulation just as it is wrong about favoring heavy economic regulation at home. That Labour wants to stay in is a good reason to go. The same can be said about Barack Obama’s misguided anti-Brexit stance. Second, the constant movement toward greater regulation retards the development of the internal British market. It also reduces the value of trading inside the EU, and it increases the cost of trading with nations outside of the EU. In the long term, these regulatory costs are likely to grow, while the costs of transition are likely to recede. Brexit should be understood as a way to recreate a little England in a global economy—a way for the country to reconnect with the rest of the world.

Typically, Brexit is discussed solely in terms of its impact on Great Britain. But Brexit also impacts the nations that remain inside the EU. The conventional wisdom is that Brexit will hurt the EU economically. But perhaps not, if Brexit will spur the remaining members of the EU to rethink their positions. Free trade is a winner for all sides, whether Great Britain remains in the EU or leaves it—and the EU would cut off its nose to spite its face if it imposed sharp trade sanctions on the British. The EU should realize that it needs Britain as much as Britain needs it. So perhaps it will acquiesce to keeping trade barriers low. If it takes that course, then Brexit could mark the first step of many toward a return to a European common market. Of course, the cynics will say that the EU is incapable of reaching that level of rationality, in which case, the British should leave so that they don’t go down with the ship as the EU continues to flounder.

*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.

Illinois on the Fiscal Brink

Richard Epstein*

Richard Epstein

Richard Epstein

Illinois—a state that has long embraced progressive fiscal policies—has moved one step closer to the financial abyss. Last week, Moody’s Investors Service issued the jarring announcement that it was downgrading Illinois’s general obligations bonds to Baa2 from Baa1, which is just two levels above junk bond status. The next day, Standard & Poor’s followed suit by lowering its rating to BBB+, or three levels above junk bond status. In one important sense, this is really not news at all, since Illinois had thirteen bond downgrades under its previous governor, Patrick Quinn, even though it passed a temporary tax increase that collected an additional $31 billion in revenues between 2011 and 2015, 90 percent of which was funneled into pension payments for public employees.

The reason Illinois’s credit ratings have declined is that the state has been unable to live within its means. Even with its tax increases, Illinois has not had a balanced budget since 2001, though one is required under its Constitution. The latest credit downgrade stemmed from the inability of key players in the state to agree on any budget at all for the coming year. It is therefore no surprise that Moody’s observes: “The rating downgrade reflects continuing budget imbalance due to political gridlock that for more than a year has kept Illinois from addressing revenue lost due to income tax cuts that took effect in January 2015.” This remark reflects the bias of rating agencies to worry more about the condition of government balance sheets than the overall health of the state economy. Reduced expenditures are another, superior way to bring a budget into balance, which is necessary, for—as Moody’s ruefully notes—Illinois is running a structural budget gap of about 15 percent of its general fund expenditures.

The backstory is somewhat more complicated. In January 2015, when Bruce Rauner, who had amassed a tidy fortune in private equity, was elected governor, the temporary Illinois tax increase to a flat 5 percent reverted to its former rate of 3.75 percent. Many Democrats, led by the formidable Michael Madigan—Speaker of the Illinois House of Representatives for 31 of the last 33 years—wanted to reverse those tax cuts and replace the Illinois constitutionally mandated flat tax with a progressive tax in order to cut the deficit. Without any deliberation, the Illinois House passed an unbalanced budget with revenues under $33 billion and expenditures at close to $40 billion—a $7 billion deficit. Rauner did not have to exercise his veto threat because the budget was rejected by the Illinois Senate, even with its large Democratic majority. But a few days ago, Rauner did exercise his veto of a stop-gap educational measure that would appropriate $4 billion for education and human services, which he chastised as an “unfunded, empty promise.”

This clash of wills is no surprise, because Rauner’s worldview is the opposite of Madigan’s. The governor has been steadfast in his belief that raising taxes is throwing money down a sinkhole, unless and until someone introduces structural reforms to pull Illinois back from the brink, most notably in labor markets. The state is known for the extensive benefits that it lavishes on public employees, most of whom are unionized. It has generous workers’ compensation laws, high property taxes, a devastating public pension shortfall for retirees, and no right-to-work law, which all make the cost of doing business in Illinois among the highest in the nation. Madigan wants to postpone the reform discussions until the budget is passed. Rauner knows that if he allows that to happen, he will lose all leverage on his reform.

This impasse also makes the state highly vulnerable to competition from other states, including its immediate neighbors like Indiana, Michigan, and Wisconsin—not to mention states like Texas and Tennessee that have better business climates. Indeed, it is just this awareness that explains why a Democratic state like Illinois elected a Republican governor, while keeping its Democratic legislators. Voters in states like Illinois have two competing desires. On the one hand, they want to get the largest share of the state pie of goodies for their district, which means keeping in office incumbent members of the state House and Senate. Whatever people in other districts might think, Madigan’s base in the 13th ward near Midway Airport is not likely to vote him out of office any time soon. But at the same time, they would like to have a governor who is willing to rein in the excessive demands of the legislature. Hence the vote for Rauner in 2015, and giving him an uneasy mandate to reduce the size of the overall pie from which they crave the largest slice.

These conflicting forces have precipitated a pitched ideological debate. When the latest bond downgrades were announced, the blame game began, with each party denouncing the obstinate behavior of the other side for leading to the current impasse. Noted leaders like Chicago’s Mayor Rahm Emanuel, whose city bonds achieved junk status long ago, bellowed that Rauner is “auditioning to be Donald Trump’s running mate.” A low blow. The difficulties that are faced in Illinois are endemic to all governments—federal, state, and local—that operate on progressive principles in both the long and the short run.

According to the progressive playbook, politicians should disrupt the operation of competitive markets to supply hefty short-term benefits to their friends and political allies. Then, they should have the state borrow money to put off paying the tab. In Illinois, the dam broke on public employee pensions back in 1994 when the ubiquitous Madigan and then-Republican governor Jim Edgar struck a deal which back-loaded funding for state pension plans, as the Illinois Policy Institute reports. Their compromise plan called for smallish contributions in the early years for pensions that would come due only years later—that is, now. The thought was that someone else could pick up the pieces in the next period.

But it never quite works out that way. Today, the state’s unfunded pension liabilities have increased to nearly $100 billion with no relief in sight. The situation becomes only worse considering that the 1970 Illinois Constitution contains an explicit provision under which every pension obligation “shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired,” which this past March led to striking down state legislation to modify the annuity benefits for current and future workers, without their consent.

The circumstances thus impose an intolerable legal bind on top of the state’s political woes. Normally, the enforcement of public contracts is a good thing, for it is the only way to fund long-term, capital improvements, and to give ordinary people a degree of certainty in planning for the future. That principle applies with full force to contracts entered into in private competitive markets, free of any subsidies or preferences by the state. But the political economy of public employment shows the danger of extending this principle uncritically to public contracts, where the same strong political actors are on both sides of the bargaining table simultaneously. Thus it is an open secret that state legislatures are all too willing to enter into one-sided contracts that give public employees wages and benefits far higher than those that are received by workers in the private sector. The willingness of these union forces to work ceaselessly and effectively to get these benefits is only increased by their knowledge that the benefits in question are fully vested the moment the ink is dried on the page.

The defect of this system is apparent. At no point does anyone have a chance to ask the question appropriate to all cases of self-dealing, which is whether the government has received fair value for the obligations that it incurs. That can be done whenever the state obtains goods and services from a competitive market in which, like private firms, it can play one potential vendor off against another. But it cannot do this whenever it sets up monopoly unions with which it then obligates itself to deal.

At this point, it seems clear that the current impasse in Illinois represents a deeper failing that will be well-nigh impossible to reverse in the current populist political climate. One object of sound governance is to make sure that each public expenditure brings to the citizens of the state benefits greater than the costs that they are required to bear. Putting that ideal into practice, however, is far more difficult than it first appears. Traditional constitutional efforts have concentrated on limiting the way in which the government exerts its coercive efforts on citizens, chiefly through taxation and regulation. These protections have been vastly whittled down today, but at their best they sought to preserve competitive institutions from the ravages of factional influence.

Unfortunately, these same constitutions contain few if any provisions that explicitly deal with the ever-expanding importance of the distribution of public benefits in the form of services, licenses, permits and contracts. In order to deal with this onslaught of public “givings,” it becomes necessary to invoke the inverse of the takings clause, which provides “nor shall public property be given to private parties without just compensation.” That approach was incorporated into the Supreme Court’s well-known decision in Illinois Central Railroad v. Illinois (1892), in connection with transfers of state property to public use. But that doctrine cannot be so limited in its application. It must also apply to labor contracts that provide any group monopoly rents for services that could have been rendered more cheaply and effectively in competitive markets.

The clear implication of the analysis is striking. As a matter of first principles, it is imperative that no public union should ever be allowed to negotiate adversely to the state. Once public unions are recognized, financial ruin is not inevitable for all governments at all level. But even the risk is too high to tolerate, given that the union structure offers no state-wide benefits to offset the huge long-term downside. In insisting on this point, it is important to realize that public unions are far more potent than private ones for two reasons. First, public employers are more vulnerable to political pressures than private ones who have to answer to shareholders, not voters. Second, the union strike threat is more credible against public employers, for the shut down of the firm means the end of police, prison, and other services that are difficult to outsource to India or anywhere else. It was for these reasons that the original national labor relations statute exempted public employees. It is highly unlikely the decision to allow public unions will be reversed until we see the de facto bankruptcy of state and local governments, for which Illinois may well turn out to be the first of many.

*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 More Modern Constitution?

Richard Epstein*

Richard Epstein

Richard Epstein

The dreaded presidential showdown between Donald Trump and Hillary Clinton will spur many thoughtful people to rethink the structure of America’s basic political institutions. One notable proposal has been offered recently by Terry M. Moe and William G. Howell. Their recent column for Defining Ideas offers a summary of their book, Relic: How Our Constitution Undermines Effective Government—and Why We Need a More Powerful Presidency. Moe and Howell locate our current political malaise in the Founders’ decision, made some 229 years ago in a largely agrarian society, to vest a great deal of power in Congress, which explains why government is so dysfunctional today.

In their view, the fact that society has drastically changed since the time of the founders cries out for a more modern government and Constitution. Their proposal for a more efficient and effective system is to put the President at the center of today’s political ecosystem. No longer will the President only have the power to veto proposed legislation. Instead, the new regime will confer on the President the same kind of universal fast-track authority that is today reserved for international trade agreements. Once the President proposes legislation, each of the two Houses of Congress will have to respond within some pre-set time with an up-or-down simple majority vote. No amendments and no filibuster. Congress will of course retain its power to initiate legislation in the traditional fashion, subject to the usual rules on Presidential veto and overrides, but the President, Moe and Howell believe, will be able to break today’s legislative gridlock on key questions like immigration.

Moe and Howell misdiagnose the problem. They assume that the 1787 Constitution, as augmented by the Bill of Rights of 1791, is only suitable for a small agrarian country. But the philosophic foundations of our constitutional system were never so provincial; nor have the difficulties in governance that the founders identified diminished or transformed themselves over time. The framers understood that any government they put into place had to be strong enough to maintain a system of ordered liberty, but not so strong as to allow the nation to fall into tyranny. The most famous exposition of this point is Federalist 10 in which James Madison warned of the dangers of faction, which he defined as “a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community.” Ironically, Moe and Howell make the same diagnosis of the current situation by repeatedly pointing out that Congress is hopelessly dominated by special interest politics, which in turn leads to awkward compromises and convoluted legislation.

They err, however, in thinking that presidents are immune to factional pressures because, Moe and Howell write, they “think in national terms about national problems.” All too often, factional interests influence the President’s national views on issues from healthcare to labor to banking. Moe and Howell point to the crude Obamacare concoction, which in 2010 the Democrats rammed through the House and Senate without a single Republican vote. Reverse the sequence of events, and allow the President to propose the legislation, and it becomes easier for an even more partisan piece of legislation to get through, so long as the Democrats hold simple majorities in both Houses. But if they did not, the simple Republican strategy would be to vote down every piece of legislation the President proposes until we are back to the current system in which all legislation begins in Congress, subject to presidential veto. This new proposed system will thus lead to one of two equilibrium positions. Either a partisan President gets all that he wants, or a determined Congress forces us back into the legislative pathologies that are rife today.

The latter is far more likely. Moe and Howell note that their position would apply to all appointments. But right now, the Constitution already gives this power to the President, subject to an up or down vote by the Congress for senior officials and judicial nominees. This allocation of powers makes sense because it is far easier for a president to vet an appointment than to craft legislation. But impasses will still occur when the stakes are high. For example, President Obama’s nomination of Merrick Garland for the vacant Supreme Court seat continues to be held in limbo in the Senate, given that the Republican majority is not prepared to cede a shift in power that makes the Court’s liberal wing ascendant. Moe and Howell’s proposal, however, could make the nomination system even more convoluted by requiring all presidential nominations to receive majority votes in both Houses of Congress, not just the Senate (as in the status quo). The current political divisions will thus just make it that much more difficult to overcome delay and compromise. There is no silver bullet to deal with deep political discord.

Nor is there any reason to think that adding to the strength of the President is the proper cure to our current national ills. The President is not just one person; his influence spreads over the entire executive branch—which is massively powerful already. Recently, President Obama has initiated serious abuses of power on immigration, has made a highly questionable decision to extend the prohibitions on sex discrimination contained in Title IX to cover cases of gender identity, has coerced highly dubious distributions and settlements of criminal and civil cases by the Departments of Treasury and Justice, and has countenancedconsistent abuse of power in the Consumer Finance Protection Bureau. None of these difficulties will be ameliorated, let alone solved, by giving the President the added power of fast-track legislative proposals.

Nor will the fast-track proposal make any sense in foreign affairs, as the negotiations over the Iran nuclear treaty suggest. The current law on the treaty power is a mess. The basic constitutional provision reads: The President “shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur.” Unfortunately, no one quite knows which executive agreements count as treaties. This means that, today, the President can negotiate an executive accord without the consent of the Senate so long as he is prepared to take the risk that his successor might revoke that deal unilaterally, thus creating regrettable instability in foreign arrangements.

In addition, the President currently enjoys a high level of unilateral power in foreign affairs that goes beyond that given to him under the original constitutional design. The Supreme Court’s highly controversial 1936 decision in United States v. Curtis-Wright Export Corporation gave the President a well-nigh free hand in foreign affairs. That attitude was carried forward in the recent case of Zivotofsky v. Kerry, which, on a difficult point of constitutional construction, acquiesced in historical practice by allowing the Secretary of State to reject a congressional directive to list Jerusalem, Israel, as Zivotofsky’s place of birth on his passport. It is highly disputable whether increased presidential control over foreign affairs is preferable to the division of authority now written into the Constitution.

The uncertain prospects of constitutional fast-track stems, moreover, from a serious misreading of American constitutional history. Properly understood, much of the current angst over our system of divided government arises not because we continue to follow a 1787 Constitution, but for precisely the opposite reason. During the New Deal and afterwards, key features of that Constitution were junked when the Supreme Court yielded to pressures from the progressives to rewrite the Constitution to allow Progressives to advance their own political agenda. The simple truth, however, is that the Constitution (slavery to one side) that worked well in 1787 worked well for the next 150 years. As Robert Gordon showed, the greatest period of American growth was between 1870 and 1940, when (until 1937) classical liberal ideals of limited government flourishing.

Changed social circumstances have not rendered the framers’ constitutional design obsolete. If anything, the opposite is true. The old Constitution has worked better as society has become more complex. Just consider some of the features of the document that Moe and Howell don’t address in their article. Starting with matters of Congressional power, chiefly under the Commerce Clause, the original constitutional design called for all local matters to be regulated solely by state governments. These activities included manufacture, mining, agriculture, and all commerce (e.g. buses and taxis) that operated solely within one state. Yet at the same time, the federal power was available to prevent any one state from imposing barriers to free transportation and communication across state lines.

That is exactly the right division of power today, because the power to enter and exit puts states in competition with each other without allowing any state to destroy the American free trade zone. When the Supreme Court in 1937 first held that business activities inside the states could be regulated by the central government, two horrendous consequences followed. First, much more material was put on the Congressional plate, which in turn tended to overwhelm all three branches of the federal government. Second, the legislation that was passed was highly protectionist by promoting cartel behavior in labor, agriculture, transportation, and communications markets. Those moves were unsound in 1937 and they remain unsound nearly 80 years later.

The Constitution, then, protects us against some of the abuses of government power that make our system today so dysfunctional. Another example is New Deal jurisprudence, which violates the constitutional principle of separation of powers. The New Deal paved the way for the rise of independent administrative agencies that combined legislation and judicial powers in the same body, which in turn were given huge levels of deference by the courts to impose their will on the nation. Hence, the more complex legislative deals could be extended, often in strange ways, by administrative action that was not subject to any effective form of oversight. To give yet another example, the traditional protections that had previously been afforded to private property and economic liberties were substantially eroded by the same deferential attitude toward legislation, both federal and state, that placed an ever stronger stranglehold on the economy.

The combination of these three factors undid the two essential pillars of limited government: strict delineation of government powers and strong protection of rights of property, contract, religion, and association. In the modern setting, we have more to fear than gridlock. We also face the risk that our political process will spew out new measures like Obamacare and Dodd-Frank, which threaten to hamstring so much of the economy. Thus, Moe and Howell are right to be concerned with the current state of American government. But their incorrect diagnosis leads to the wrong cure. We don’t need more government—we need less. The problem with the original Constitution is not that it has become obsolete. It is that its store of institutional wisdom has been forgotten or repressed by modern thinkers who have failed to understand its philosophical underpinnings and institutional achievements.

*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.

 

Tyranny Within the Administrative State

Richard Epstein*

Richard Epstein

Richard Epstein

One of the most important cases now before the Court of Appeals for the District of Columbia is PHH Corporation v. Consumer Financial Protection Bureau (CFPB). Superficially, the case only involves interpreting obscure provisions contained in the Real Estate Settlement Procedures Act (RESPA) that regulate the operation of the affiliated reinsurance markets for home mortgages. In effect, these reinsurance provisions are a commonly accepted way of spreading risk. Thus when home mortgages are made with down payments of under 20 percent, Fannie Mae and Freddie Mac typically require the borrowers to get mortgage insurance, which they could obtain most cheaply by working through their lenders. These primary insurers then routinely “cede” a portion of their risk to their reinsurers who received a premium for their services rendered. Most of these companies are wholly owned captives of their primary insurers.

The gist of the dispute in PHH is whether one man, Richard Cordray, the Director of the CFPB, is entitled to retroactively impose fines of $109 million—up from the $6 million recommended by the Administrative Law Judge—on PHH Corporation for practices that it engaged in without complaint for close to two decades. The correct answer to this question should be no on two distinct grounds. The first is that whenever that form of excessive power is given to any individual, the inevitable consequence is that he will make a conscious hash of the relevant statutory materials. The second and larger point is that no single official should ever have the power to be both prosecutor and judge in the same case. Both of these sins are at play in PHH.

To set the stage, section 8(a) of RESPA provides that in the case of business referrals, no person should give or accept “any fee, kickback, or thing of value pursuant to any agreement or understanding” as part of a real estate settlement involving a “federally related mortgage.” That provision, however, could not be construed as a total ban on all forms of self-dealing because 8(b) provides an exception that states, “Nothing in this section shall be construed as prohibiting . . . (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” The clear import of that provision was later spelled out in a regulation issued by the Department of Housing and Urban Development, prior to the creation of CFPB, which provides, “If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided.”

The overall scheme makes perfect good sense. It clearly requires no exact correspondence between premiums received and services provided. Conscious efforts to inflate premiums are prohibited, and kickbacks are condemned. But bona fide business transactions between related parties are allowed because of the potential efficiencies that they can generate for everyone in the industry, chiefly by reducing transactions costs made possible by the creation of long term business relationships. It was under this provision that many companies in addition to PHH established captive subsidiaries with which they did business. In attacking and invalidating these arrangements, CFPB Director Cordray did not attempt to show that these deals were not bona fide or otherwise contained buried commissions. Nor did he explain how these transactions could be bad as a policy matter when in some instances, as we should expect, the amount of money paid out under the policies exceeded the premiums paid in.

Instead, Cordray’s frontal attack on the traditional understanding began with the claim that none of the prior interpretive material was binding on him as the Director of CFPB. In his view, all the payments that were made by PHH should count as kickbacks, wholly apart from the value that was received in exchange. Indeed, so long as it was possible that any fraction of the payments by a mortgage insurer could be conceived of as a kickback, the entire arrangement was essentially in bad faith, so the protections of 8(b)(2) were stripped away.

Sometimes Cordray took the view that the extraordinary results that this analysis demands were “dictated by section 8(a).” But at other times, he switched course and noted that on all matters of statutory interpretation, the administrator is entitled to so-calledChevron deference under the key 1984 Supreme Court decision that the word of the administrative agency should be accepted as gospel whenever the governing statute is “ambiguous.” The heavy weight of uniform past practice might have counselled Cordray to announce a prospective change in policy that other parties would then be in a position to contest, both in front of the CFPB and in court, before it went into effect. But his preferred method was to impose a huge fine, all of which is payable to the CFPB itself, to spend as it will.

The high-handed activities of the CFPB are of a piece with similar activities of other administrative agencies in the Obama Administration. From stripping private shareholders of their wealth in Fannie Mae and Freddie Mac and extending the prohibitions on sex discrimination contained in Title IX, to requiring elaborate rules on transgender individuals’ use of bathrooms and instituting the highly dubious distributions and settlements made by both the Departments of Treasury and Justice, in each of these cases, the government agency claims that it has to be the sole arbiter of what transpires.

It is striking to note how far this dangerous mindset deviates from the original justifications for the creation of government power applicable before the founding period. Thus John Locke’s Second Treatise of Government contains among its many memorable passages this injunction: “Freedom of men under government is having a standing rule to live by, common to everyone in the society in question, and made by the legislative power that has been set up in it; a liberty to follow one’s own will in anything that isn’t forbidden by the rule, and not to be subject to the inconstant, uncertain, unknown, arbitrary will of another man.” Locke then noted, in connection with monarchs, the risk that “one man . . . is free to be the judge in his own case.”

These words apply with special force to Cordray given that he has the sole power of final decision inside the CFPB to disregard precedent, adopt novel interpretations of well understood terms, impose retroactive fines nearly 20 times greater than those imposed by his own administrative law judge, and mount a militant defense of his near royal prerogative in federal court.

At this point, what is critically needed is a strong judicial rebuff to this assertion of power on both the statutory and structural points. The first line of attack is to reject the pernicious notion that administrative agencies are always allowed to have their way on statutory interpretation by pouncing on some manufactured ambiguity in a statute that reads out of the text nettlesome exceptions that displease the administrator. It should be noted for the record that the Chevron deference is wholly inconsistent with the text of Administrative Procedure Act, which under Section 706 explicitly states, “the reviewing court shall decide all relevant questions of law.”

None of CFPB’s irresponsible extravagance—treating every premium dollar as a kickback—could take place if Cordray had to make his case before a court. As matters now stand, there is an irreducible conflict of interest to the extent that he receives enormous deference in interpreting a statute from which his own agency derives a direct financial benefit, given that the fines are not paid directly into the general fund at Treasury. Chevron is not only a profound misconstruction of the APA, but also a clear affront to the most elementary concerns of the Due Process Clause, which at its core gives all litigants a fair shot before a neutral tribunal that applies known and established laws.

The excesses of the CFPB are not unique in the annals of administrative law. But they are carried forward to an unprecedented degree. What is so striking about the CFPB is that its worst structural features were incorporated by design into the Dodd-Frank statute. As a general matter, it is always possible to make challenges to the creation of the independent administrative agencies, as these are nowhere authorized under the structural provisions of the Constitution that call only for three branches of government: legislative, executive, and judicial. Under this vision, all administrative agencies become part of the executive branch, where their key officials may always be turned out at will by a sitting president, who in this instance is keen to keep Cordray exactly where he is. In any event, the key 1935 decision of the United States Supreme Court in Humphrey’s Executor v. United States indulged in the convenient fiction that administrative actions were “predominantly quasi-judicial and quasi-legislative” when in reality they involve, as in the present dispute, the routine executive enforcement of civil fines.

Fortunately, there is no need to fight this particular battle at this time, for the key point to stress is that even if these agencies may operate free of the direct threat of presidential removal, they should never be allowed to bundle the administrative and adjudicative functions in the hands of the same group of persons. Indeed, in this regard, Dodd-Frank is far worse than the Federal Trade Commission, the Federal Communications Commission, the Securities and Exchange Commission, and surely the National Labor Relations Board, all of which are multi-membered bodies. PHH has mounted an explicit constitutional attack on the structure of the CFPB, which has been rejected by other lower courts on the ground that it represents business as usual for federal agencies. That point is wrong insofar as a single man poses the greater risk of arbitrary power than a board of five, even if its members are carefully picked to give a one-vote majority to the President’s party. Occasionally, one person might defect on some issue to the other side, or at least induce some compromise decision. But here one strong-willed and close-minded individual seeks to insulate himself from any kind of judicial oversight whatsoever.

It is also worth noting that the CFPB is distinct from other agencies in that it has a one-time single appropriation that allows it, without annual review, to draw down moneys for enforcement from funds located deep in the bowels of the Federal Reserve. The CFPB is quick to point out in response that Congress is always free to pull that appropriation at any time. But that response ignores the situation on the ground that the one-time appropriation shifts the burden of initiating change to the detractors of the program, who will have a very hard time in overcoming entrenched interests. Giving this agency so many special breaks piles one dubious constitutional and administrative preference on top of the other, and leads to the dismal exercise of arbitrary power that is so evident in this case. The D.C. Circuit should remove the fine against PHH and launch a long overdue frontal assault on an agency whose authoritarian tendencies are an enduring affront to the American constitutional system. 

*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.