California’s Needless Housing Crisis

Richard Epstein*

Richard Epstein

Richard Epstein

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Loyal Opposition

Richard Epstein*

Richard Epstein

Richard Epstein

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

J. Edgar Comey

Andrew Napolitano*

Andrew Napolitano

Andrew Napolitano

I had intended to use this final column before the presidential election to explain at length why I cannot vote for either Hillary Clinton or Donald Trump and plan to vote for Gary Johnson for president. In a nutshell, big government is our biggest problem. It thrives on more debt, more taxes, more regulations, more war, a secretive deep state and less personal freedom. Both Clinton and Trump would grow the government. Only Johnson would shrink it.

One of the most dangerous tendencies of big government is the generation of a police state -- wherein laws, rules and procedures are primarily written and can often be bent to aid law enforcement when it is encroaching on our personal freedoms. We saw a terrifying example of that last week when FBI Director James Comey behaved as if he were his most infamous predecessor, J. Edgar Hoover.

Here is the back story.

Late last week, in an effort to redeem himself from the consequences of having ignored a mountain of evidence of guilt against former Secretary of State Hillary Clinton last summer, Comey told Congress in a cryptic letter that the FBI would resume investigating her emails based upon the belief that more of them may be located in the laptop of disgraced former Rep. Anthony Weiner. Weiner is the alleged sexual predator who remains the estranged husband of Huma Abedin, one of Clinton’s closest aides. Abedin backed up all her emails onto the laptop that she and her husband shared.

At the time he sent his Friday letter, Comey had not yet seen the contents of the Weiner laptop because the search warrant authorizing FBI agents to access its contents was not signed until Sunday. If he saw something incriminating before he wrote his letter, he saw it unlawfully; yet his duty was to bring what he saw to the Department of Justice, for which he works, not to hint about it publicly to Congress.

Comey’s progress report to Congress is prohibited by the internal regulations of the DOJ and the FBI -- and by the canons of legal ethics that regulate lawyers. Comey had no obligation to send the letter at any time; moreover, sending it last week was a direct violation of DOJ and FBI rules that prohibit all public announcements about candidates for public office within 60 days of Election Day.

Comey told FBI staffers early this week that he sent the letter because he felt duty-bound to members of a congressional committee to whom he had given a promise that he would keep them informed of the status of the email investigation. That was a troublesome promise because its compliance violated other duties imposed upon Comey. Worse than making a promise and not keeping it is making a promise that should not be kept.

The genesis of all this was Comey’s unprecedented news conference on July 5, at which he announced that no charges would be filed against Clinton because no prosecutor would take the case. That was not an announcement for him to make. The FBI’s job is to gather facts and present them to the DOJ, not to make legal evaluations. He made his announcement when he did to head off the behavior of some of his agents who were seeking Clinton’s medical records, unlawfully, from the National Security Agency to ascertain the gravity of her head injury -- an injury she posited during her FBI interrogation as the reason for her professed memory loss.

I have argued that Comey’s July 5 decision was dead wrong; there is a mountain of evidence with which to indict and convict Clinton on espionage charges. Yet it should have been presented to a grand jury -- it was not -- rather than at a news conference. The July 5 announcement was bizarre in that it not only exonerated Clinton but also described the quantity and quality of the evidence against her. This insulted the agents who worked on the case and produced the lowest collective FBI morale since Watergate. If Comey sent his Friday letter to address the problems he caused by his July 5 announcement, he did the wrong thing for the wrong reasons.

But perhaps the gravest of Comey’s violations is that of the constitutional guarantee of due process. The essence of due process is notice and fairness. How exquisitely unfair of Comey to say, in effect, “We have something that warrants investigation of you, yet we don’t know its significance, so we can’t say what it is.” This is reminiscent of Franz Kafka’s “The Trial,” in which the lead character is being pursued for a year on unnamed charges, against which he cannot defend himself.

In his play “A Man for All Seasons,” Robert Bolt shows Sir Thomas More arguing with William Roper, a colleague, who suggests that government lawbreaking can be justified for the greater good, particularly if the target is the devil (which Trump has called Clinton). More demolishes that argument in a few now iconic lines: “And when the last law was down, and the Devil turned round on you -- where would you hide, Roper, the laws all being flat? This country's planted thick with laws from coast to coast -- man's laws, not God's -- and if you cut them down, and you're just the man to do it, d'you really think you could stand upright in the winds that would blow then? Yes, I'd give the Devil benefit of law, for my own safety's sake.”

To my friends who have rejoiced in James Comey’s letter, please take warning that, as More accurately predicted, the tables can be turned. If there is any moral lesson in all this, it is that the history of human freedom consists of paying careful attention to constitutional guarantees and legal protections, no matter the reputation of the accused.

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

Unaffordable Care Act

Richard Epstein*

Richard Epstein

Richard Epstein

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What Happened to the FBI?

Andrew Napolitano*

Andrew Napolitano

Andrew Napolitano

When FBI Director James Comey announced on July 5 that the Department of Justice would not seek the indictment of Hillary Clinton for failure to safeguard state secrets related to her email use while she was secretary of state, he both jumped the gun and set in motion a series of events that surely he did not intend. Was his hand forced by the behavior of FBI agents who wouldn’t take no for an answer? Did he let the FBI become a political tool?

Here is the back story.

The FBI began investigating the Clinton email scandal in the spring of 2015, when The New York Times revealed Clinton’s use of a private email address for her official governmental work and the fact that she did not preserve the emails on State Department servers, contrary to federal law. After an initial collection of evidence and a round of interviews, agents and senior managers gathered in the summer of 2015 to discuss how to proceed. It was obvious to all that a prima-facie case could be made for espionage, theft of government property and obstruction of justice charges. The consensus was to proceed with a formal criminal investigation.

Six months later, the senior FBI agent in charge of that investigation resigned from the case and retired from the FBI because he felt the case was going “sideways”; that’s law enforcement jargon for “nowhere by design.” John Giacalone had been the chief of the New York City, Philadelphia and Washington, D.C., field offices of the FBI and, at the time of his "sideways" comment, was the chief of the FBI National Security Branch.

The reason for the "sideways" comment must have been Giacalone’s realization that DOJ and FBI senior management had decided that the investigation would not work in tandem with a federal grand jury. That is nearly fatal to any government criminal case. In criminal cases, the FBI and the DOJ cannot issue subpoenas for testimony or for tangible things; only grand juries can.

Giacalone knew that without a grand jury, the FBI would be toothless, as it would have no subpoena power. He also knew that without a grand jury, the FBI would have a hard time persuading any federal judge to issue search warrants. A judge would perceive the need for search warrants to be not acute in such a case because to a judge, the absence of a grand jury can only mean a case is “sideways” and not a serious investigation.

As the investigation dragged on in secret and Donald Trump simultaneously began to rise in the Republican presidential primaries, it became more apparent to Giacalone’s successors that the goal of the FBI was to exonerate Clinton, not determine whether there was enough evidence to indict her. In late spring of this year, agents began interviewing the Clinton inner circle.

When Clinton herself was interviewed on July 2 -- for only four hours, during which the interviewers seemed to some in the bureau to lack aggression, passion and determination -- some FBI agents privately came to the same conclusion as their former boss: The case was going sideways.

A few determined agents were frustrated by Clinton’s professed lack of memory during her interview and her oblique reference to a recent head injury she had suffered as the probable cause of that. They sought to obtain her medical records to verify the gravity of her injury and to determine whether she had been truthful with them. They prepared the paperwork to obtain the records, only to have their request denied by Director Comey himself on July 4.

Then some agents did the unthinkable; they reached out to colleagues in the intelligence community and asked them to obtain Clinton’s medical records so they could show them to Comey. We know that the National Security Agency can access anything that is stored digitally, including medical records. These communications took place late on July 4.

When Comey learned of these efforts, he headed them off the next morning with his now infamous news conference, in which he announced that Clinton would not be indicted because the FBI had determined that her behavior, though extremely careless, was not reckless, which is the legal standard in espionage cases. He then proceeded to recount the evidence against her. He did this, no doubt, to head off the agents who had sought the Clinton medical records, whom he suspected would leak evidence against her.

Three months later -- and just weeks before Clinton will probably be elected president -- we have learned that President Barack Obama regularly communicated with Clinton via her personal email servers about matters that the White House considered classified. That means that he lied when he told CBS News that he learned of the Clinton servers when the rest of us did.

We also learned this week that Andrew McCabe, Giacalone’s successor as head of the FBI Washington field office and presently the No. 3 person in the FBI, is married to a woman to whom the Clinton money machine in Virginia funneled about $675,000 in lawful campaign funds for a failed 2015 run for the Virginia Senate. Comey apparently saw no conflict or appearance of impropriety in having the person in charge of the Clinton investigation in such an ethically challenged space.

Why did this case go sideways?

Did President Obama fear being a defense witness at Hillary Clinton’s criminal trial? Did he so fear being succeeded in office by Donald Trump that he ordered the FBI to exonerate Clinton, the rule of law be damned? Did the FBI lose its reputation for fidelity to law, bravery under stress and integrity at all times?

This is not your grandfather’s FBI -- or your father’s. It is the Obama FBI.

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

Yale, Beyond the Pale

Richard Epstein*

Richard Epstein

Richard Epstein

In his recent op-ed in the Wall Street Journal, Yale President Peter Salovey tried to explain how colleges can make room for both freedom of speech and a culture of inclusion and diversity. Salovey wants to have his cake and eat it, too. The supposed tension between free speech and inclusion is false, he argues, because it is possible to pursue both ends simultaneously. Several days later, Yale was again in the news for its sexual harassment tribunals. As Jennifer Braceras explains in her op-ed for the Wall Street Journal, “College Sex Meets the Star Chamber,” Yale’s current policy on sexual harassment has led to a massive expansion of Yale’s control over the life of its faculty, students, and staff. At first, look, Salovey’s defense of free speech and inclusion seems unrelated to Braceras’s argument about the reach of Yale’s sexual harassment directive. But they are part of the same problem.

Yale defines sexual harassment very broadly: “Sexual harassment consists of nonconsensual sexual advances, requests for sexual favors, or other verbal or physical conduct of a sexual nature on or off campus, which includes (3) such conduct [that] has the purpose or effect of unreasonably interfering with an individual’s work or academic performance or creating an intimidating or hostile academic or work environment.” To be sure, no one wishes to defend assaultive or abusive sexual misconduct. But the Yale definition is capable of a broader reading. Combine the italicized words in the basic definition with clause (3) and the threat that this definition poses to free speech becomes clear. The phrase “purpose or effect” reaches actions that some reasonable person thinks might have an adverse effect, even if no harm was intended by it. Nor is there any effort to limit what is meant by a “hostile academic or work environment,” or activities on and off campus. It is all too likely that eager Yale bureaucrats will read these provisions broadly in order to expand the scope of their own authority.

The situation is still more dangerous because of the highly dubious procedures that are used in these cases. The tribunals use the lower “preponderance” of the evidence standard for guilt, rather than the stricter “clear and convincing” standard, which means the accuser has to bring less evidence against the accused. On top of that, the accused is denied the central right of cross-examination, even though he will face dire sanctions if convicted. It is impossible to know from the articulation of these standards exactly how any particular case will play out, or whether the Yale system will guarantee some modicum of consistency across separate cases. But what is perfectly clear is that the diehards who are likely to implement this policy are the same folks who have taken the lead in implementing Yale’s policy on inclusion and free speech, in ways that necessarily sacrifice the latter to the former.

The point here is not one of idle speculation. As Braceras notes, the administrative process against the accused does not need to be launched by an actual complaint by an individual victim; instead, independent parties, including Yale’s Title IX coordinators, are entitled to initiate and prosecute these cases. Given their own strong precommitments, this mixing of functions necessarily builds in an institutional bias against any claim that given speech acts should be protected. As a general matter, a broad definition of relevance is used in cases of this sort, so that it is possible for self-appointed inquisitors to roam far and wide to build up a case against unpopular professors or administrators, especially since the Yale procedures include no statute of limitations. The combination of loose definitions and dubious procedures is poisonous to the protection of free speech. Yet the tension goes unresolved.

It is equally instructive to realize that one does not have to introduce formal procedures in order to pose a grave threat to free speech on campus. Salovey takes great pride in noting “the Yale administration did not criticize, discipline, or dismiss a single member of its faculty, staff, or student body for expressing an opinion.” That sentence may be technically true, but it does not explain why Salovey did not mention the unfortunate fate of Nicholas and Erika Christakis, both of whom resigned from Yale under massive pressure after student protestors demanded that Nicholas be removed from his position as master of Silliman College. Why? Because Erika had written an email that took issue with a letter from Yale’s Intercultural Affairs Committee that warned students against various insensitive forms of behaviors, like wearing offensive Halloween costumes. The letter noted, like Salovey’s op-ed, that Yale values “free expression as well as inclusivity.” But the massive level of abuse directed at Nicholas and Erika Christakis reveals how strongly Yale weighs one imperative over the other.

The errors here are not just unfortunate glitches, but systematic blunders. One of the most critical matters in dealing with the right to free speech is the correlative duty that all individuals have to avoid actions that harm another person. But the harm principle contains much built-in ambiguity. It can only be clarified within a complete theory of freedom of speech, which itself must rest upon a comprehensive theory of freedom of human action. At the very least, any speech that involves the threat of force or the use of fraud should be subject to sanction under this principle, given the risk to the autonomy of others. That is why both assault and defamation have long been actionable harms. But by the same token, the harm principle can never be extended to cover cases where one person takes offense at the speech or conduct of other individuals—which is why flag-burning, however distasteful to most people, nonetheless receives constitutional protection. That extension of the harm principle, if applied uniformly to all speech acts, means that anyone who takes offense gets the right to sanction, if not veto, the speech of others, at which point no one can speak at all.

To forestall this risk, the great principle of toleration requires suspending the use of formal sanctions against disagreeable speech. Failure to follow this principle introduces the most dangerous set of incentives, by allowing any person to magnify his own indignation and outrage as a means to assert greater control over the speech of others. The danger of this position is apparent. The broader definition that equates harm with offense can only work if it is selectively applied. Thus protected groups get to complain loudly about the microaggressions against them, but they, in turn, are entitled to venomously attack those with whom they disagree.  A culture of free speech and open inquiry cannot long survive using this broad and selective definition of harm.

Yale, of course, is a private university that is not bound by the First Amendment, and hence could adopt whatever warped political and intellectual environment that it wants. But what Salovey cannot do is claim that Yale respects the principle of free speech, especially after the resignation of the Christakises following the relentless personal attacks on them as a result of Erika’s thoughtful email. What Salovey should have done was spoken forcefully and publicly in their defense, and entreated them to stay. Nor should he have stopped there. It was incumbent on him to endorse explicitly and publicly the commitment to free speech that President Robert Zimmer announced for the University of Chicago not too long ago. Zimmer made it crystal clear that he expects Chicago students to develop a certain toughness of mind in academic settings that transcends today’s vogue of “trigger warnings” and “safe spaces.” In order to learn and grow, students must encounter views averse to their own.

Yet Yale does not take that evenhanded and content-neutral position to preserve free speech on campus. Instead, it acts as an institutional arbiter that offers some groups special protection and leaves others to fend for themselves. It is quite chilling to read the Yale website, which heralds the university’s new commitment to the principles of diversity and inclusion across all aspects of Yale life: recruitment, mentoring, communications, and the like. One component of that program is a commitment to spend $50 million to make diversity hires on the faculty. Other initiatives are intended to create new centers and programs to study diversity throughout the university.

The Yale website proudly proclaims: “A diverse workforce and inclusive environment increases productivity, creates new ideas, performs on a higher level, and enhances Yale’s ability to continue to excel in an increasingly complex, competitive and diverse world.” Apparently, the principles of diminishing marginal returns do not apply to diversity. At no point does Yale even hint at the opportunity costs that are incurred by this uncritical adoption of its diversity agenda. Which programs were cut to make room for these new initiatives? And why?

Another obvious problem is that Yale does not celebrate political and intellectual forms of diversity, even though the overall leftward movement of university faculties has intensified in recent years. If Yale truly cared about diversity, it would look to increase the number of conservative-minded and pro-market academics in its hires of new faculty, while backing off hiring faculty members who have strong sympathies with groups like Black Lives Matter or the anti-Israel BDS (boycott, divest and sanctions), which represents the very antithesis of inclusion. But there is no indication that right-of-center thinkers are welcome under Yale’s tent.

Yale’s new inclusion and diversity policies will have grave consequences for the future of freedom of speech on campus. They will further reduce the likelihood that the institution will either announce or enforce content-neutral policies. The direct effect will be Yale’s continued discrimination against, or exclusion of, people whose views are found to not fit within its faux-inclusive community. Yale’s diversity-focused policies of recruitment, promotion, and retention will continue to drive the university further to the left now that no one in the administration is prepared to defend the traditional values of academic excellence and freedom of speech against the demands of diversity and inclusion. As a Yale Law School alumnus, I fear Peter Salovey’s misguided agenda will cause Yale to descend into moral dogmatism and intellectual mediocrity.

*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.

What if Liberty Is Attached to Humanity?

Andrew Napolitano*

Andrew Napolitano

Andrew Napolitano

What if the Declaration of Independence states that the purpose of government is to protect our natural rights? What if natural rights are the freedoms we enjoy without neighbors or strangers or government interfering? What if those freedoms are listed in part in the Bill of Rights? What if the government is supposed to keep its hands off those freedoms because they are ours, we have not surrendered them and we have hired the government to protect them?

What if the reason some of our rights are listed in the Bill of Rights was the fear the colonists had after the American Revolution that the new government here might become as destructive of freedom as the British king and Parliament -- whose government they had just kicked out -- were before the Revolution? What if it is impossible to list completely the freedoms that all people enjoy by reason of our humanity? What if the Framers -- who wrote the Constitution and the Bill of Rights -- understood that?

What if, in order to address the impossibility of listing all rights, the Framers ratified the Ninth Amendment? What if the Ninth Amendment declares that the enumeration of certain rights in the Constitution shall not be construed to deny or disparage other rights retained by the people? What if this amendment was the Framers’ way of recognizing the inherent attachment of our personal liberties to our individual humanity?

What if the government is supposed to protect those liberties -- the ones that are enumerated in the Bill of Rights and the others that are too numerous to enumerate and are covered by the Ninth Amendment?

What if the government -- no matter which party controls the White House or Congress -- always claims that it is protecting personal freedoms? What if this is just an empty boast? What if there is a government within the government that never changes, never shrinks, answers only to itself, hates and fears personal freedoms, and is largely unrecognized by the Constitution?

What if that government, because of its secrecy, is largely unaccountable to the voters? What if it resides in the Federal Reserve, the military, federal law enforcement and intelligence establishments, and an enormous federal bureaucracy that regulates and spends in secret to a greater extent every year, no matter which party is in control?

What if the secret government commands the loyalty of the elected government by sharing secrets with it? What if the law requires those shared secrets to be kept secret? What if the elected government knows what the secret government is up to but cannot legally reveal it? What if members of Congress know why Hillary Clinton was not indicted but they learned it in secret and so cannot legally reveal it? What if members of Congress know the extent of the Donald Trump financial shell game but they learned that in secret and so cannot reveal it?

What if some personal courage has broken this mold? What if Edward Snowden revealed massive secret government spying on all Americans after the government had denied it? What if Sen. Dianne Feinstein revealed horrific torture by the federal government after the government had denied it? What if the elected government knew about the spying and the torture but was legally prevented from revealing it? What if Hillary Clinton was largely right when she said politicians have a public persona and a private persona? What if President Barack Obama has demonstrated his two sides by killing people in secret, with his undeclared wars, and denying it in public?

What if the interest rate you pay on your home mortgage or car loan is not established by the free market -- or even reached by bankers looking for your business -- but is fixed in private by the secret government? What if the secret government has decided that it prefers Clinton to succeed President Obama and so its agents in law enforcement will overlook all evidence of Clinton's lawbreaking in order to bring that about? What if the secret government has given Trump an enormous pass on his financial behavior, a pass unavailable to the average voter, and it needs to keep that secret?

What if government has no interest in personal freedom, except perhaps as a catchy phrase around which to rally support? What if government nurtures having foreign adversaries -- real and imagined -- so that it has an excuse, in repelling or resisting those enemies, to exercise unlawful powers?

What if the presidential election this year has become a beauty contest -- devoid of intellectual substance, without serious debate over the limited duties of government in a constitutional democracy, rolling in the gutter and largely motivated by hate and fear? What if both Clinton and Trump recognize the paradox that government is essentially the negation of personal liberty? What if whoever wins will largely use it for that purpose?

What if liberty really is attached to humanity? What if all rational people yearn for personal freedom? What if the government -- in order to stay in power -- has detached liberty from humanity and made it a gift of the state instead of a gift of God? What if government knows that by restricting and then expanding liberty, it can command loyalty?

What if there is a sense of hopelessness in the land? What if this hopelessness is bred by a government that kills, lies, steals, conceals and denies? What if that hopelessness is furthered by a rational fear that things will only get worse, no matter who wins the presidential election? What do we do about it?

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

An Open Letter to Trump

Richard Epstein*

Dear Mr. Trump:  

Richard Epstein

Richard Epstein

It is hard—perhaps impossible—to calculate the damage that you have done to the United States and its people, and the people of the world. The situation that the United States faces today is one of great uncertainty at home and great peril abroad. You are running at the end of Barack Obama’s failed presidency, against Hillary Clinton, one of the least trusted and most unfit candidates ever to run for high office. There is little question that any other Republican candidate, including your vice presidential nominee, Mike Pence, would be far ahead of her in the polls, because any other candidate would concentrate on her dubious ethics and weak policy proposals.

But not you. Instead of tackling substantive issues on the campaign trail, you have doubled down on your shameless efforts at self-promotion and self-justification. You have engaged in endless tweets that reveal a thin skin and an unstable psyche. You hired the lawyer Marc Kasowitz to write one of the dumbest demand letters in the history of defamation law to the New York Times, asking it to retract its story about your past sexual misconduct because, he bizarrely claimed, old stories cannot be true, even if they are. Though I’m no New York Times cheerleader, I found myself, along with millions of other Americans, cheering as the paper’s General Counsel, David McGraw, gave your lawyer the written drubbing that your bullying deserved.

As you make yourself the central campaign issue, you also reveal that you are unfit to hold office. In your praise of Vladimir Putin, you show a flagrant disregard of the constitutional limitations associated with the office of the Presidency, so much so that I joined with other Constitutional originalists to oppose your nomination because of your extravagant views of unilateral presidential power. In addition, you stoked fears that you are anti-Semitic when you ranted: “Hillary Clinton meets in secret with international banks to plot the destruction of U.S. sovereignty in order to enrich these global financial powers, her special interest friends and her donors.” These wild charges ignore the more serious case against Clinton. With each passing day, more powerful evidence emerges that key government officials, including President Obama and Attorney General Loretta Lynch, may have improperly taken part in blocking criminal prosecutions against Clinton by using kid-glove procedures. These behaviors stand in striking contrast to the FBI’s overzealousness in the failed prosecution of Virginia Governor Bob McDonnell for far less serious offenses of supposed corruption—charges that were unanimously rejected this past June by the United States Supreme Court.

I have recently asked some of my colleagues about the scope of Article II, Section 4 of the Constitution, which provides that the President “shall be removed from Office on Impeachment for, and conviction of, Treason, Bribery, or other high Crimes and Misdemeanors.” Does that provision apply to actions that were committed by Clinton prior to her anticipated election as President, when she was Secretary of State? It is a serious interpretive question that we should hope never arises. Yet unless fresh revelations cease simply because she is elected President, this question could occupy public attention long after your juvenile antics have become old news. But the impeachment threat does not hang over her alone. Just this past Saturday, David Gelernter, a professor of computer science at Yale, publicly supported your candidacy as the best protection against Hillary Clinton, noting that impeachment by hostile Democrats and Republicans alike is, in this “abnormal year,” a vital safeguard against your potential abuse of power.

Right now, it seems that you will not do anything constructive to save your rapidly declining campaign. But there is still time for you to put the nation ahead of your insatiable ego. There are a number of reasons why you should abandon your pointless and petulant vendettas.

First, even as your presidential chances fade, the balance of power in Congress is still very much in play. Right now, it appears that you are quite happy to take down the rest of the Republican Party with you. But today, a divided government in which the Republicans control either—or preferably both—houses of Congress is more critical than ever. If the Republicans lose control of the Senate, all of Clinton’s judicial nominees will sail through. Spared the need to compromise, she will pick judges from the left-wing of her own party, which means the courts will rubber stamp the untenable political positions the Democrats have urged in recent years. There will be further unnecessary racial strife, as Clinton repeats her false charge of institutional racism against state and local police, which denigrates the work of tens of thousands of public officials and police officers. There will also be increased persecution of small religious groups that do not have the wherewithal to stand up to the Office of Civil Rights in the Department of Education, or the Equal Opportunity Employment Commission.

Then there’s the economy, which will implode under her so-called tax reforms. Her proposed higher taxes on ordinary income, capital gains, and large estates will deprive the private sector of the capital needed for innovation and jobs. Every emboldened alphabet government agency will be in the hands of the Democrats, which means that more senseless regulations and government programs will be created. A perfect example is Clinton’s madcap plan to subsidize the construction of half a billion solar panels, based on her idea that Hurricane Matthew offers striking evidence that global warming poses a grave threat to the overall economy. This is not the way to make America great again.

The only safeguard against the runaway progressivism of a Clinton presidency is a Republican Congress. But you compromise the chances that responsible conservative politicians will be elected when you call out House Speaker Paul Ryan for distancing himself from you. Each time you charge that elections are rigged against you, you further delegitimize our political system in ways that will make it harder for decent people of both parties to run for public office.

You have also failed to articulate a coherent vision of limited government and strong property rights on which the success of this nation depends. The Democrats are united at this point in their progressive vision that centralized government power will somehow lead to greater income equality on the one hand and improved growth on the other. This proposition ignores the simple truth that it is far easier to level downward than upward, which is what will happen if incentives for wealth creation are suffocated by high taxes and extensive regulations, making the pie smaller and the public mood more divisive than it already is.

So you have to clarify that your policies do not replicate that result. And the first point here is to back off the delusion that the way to make America great again is to tear up all trade agreements and build a wall to keep people from coming across the border from Mexico. On the first point, it is easy to claim that jobs lost in the rust belt have landed in Mexico or China—easy but flawed. The missing step is simple enough. There is nothing that says that the lost jobs can’t stay here if they don’t go to Mexico. The state-level differences in lost jobs are quite enormous, as states like Illinois will continue to lose jobs because of their own business climate. If the jobs do not go to Mexico, they will go to Tennessee, or perhaps just disappear.

One of the key benefits of free trade is that it forces nations and states to reform their own practices so that they can become more competitive. Knock down the exit threat and the massive internal impediments to growth gain a new lease on life. Allow for the trade, and you open up markets in other countries like Mexico, which increases the economic opportunities for their citizens, making them less likely to want to sneak across the border into the United States. Your opposition to the Trans-Pacific Partnership only doubles down on your systematic ignorance of how complex economic systems work, making it all the harder for you to differentiate your positions from those of the Democrats you oppose.

On other points, you do have comparative advantages that you should stress. You favor lower taxes and decreased regulation without embracing the protectionist creed that undoes much of the benefits that domestic reform could achieve. It is important to attack the populist urge to soak the rich. It is imperative to oppose any increase in union power, and to forcibly oppose union efforts to block the expansion of charter schools, a particularly foolish move supported by the NAACP.

On foreign affairs, it is critical for you to hone in on the failures of the Obama administration in virtually all corners of the world. The growing instability in the Middle East stems from the President’s unwillingness to use force, which has given Putin, Assad, and ISIS free run over the area. The humanitarian consequences of America’s Middle East policy are also deplorable, and have bred chaos in other parts of the world. The refugee crisis has created major dislocations inside Europe, and has helped contribute to the breakdown of trust across the continent. Surely, you could say more about your proposals to increase the number of combat-ready troops and to repair the frayed relationship between the head of the military and the President of the United States.

It is not clear whether you have the good sense to rise above personal slights and indignities; but if you do not, one of two things will happen. Either you will lose the election and be condemned as one of the most destructive forces in American history for your inflammatory behaviors, or you will win the election and be an ineffective leader as your endless preoccupation with the personal and the petty will make you a divisive threat to the country that you hope to lead.

So here is my piece of not-so-friendly advice: Either shape up, or, even at this late date, step aside and let Mike Pence take your place at the head of the ticket.

Sincerely yours,

Richard A. Epstein

*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.

Can the Media Reveal Stolen Truths?

Andrew Napolitano*

Andrew Napolitano

Andrew Napolitano

It seems that at every turn during this crazy presidential election campaign -- with its deeply flawed principal candidates (whom do you hate less?) -- someone’s personal or professional computer records are being hacked. First it was Hillary Clinton’s emails that she had failed to surrender to the State Department. Then it was a portion of Donald Trump’s 1995 tax returns, showing a $916 million loss he claimed during boom times. Then it was those Clinton emails again, this time showing her unacted-upon doubts about two of our Middle Eastern allies’ involvement in 9/11 and her revelation of some secrets about the killing of Osama bin Laden.

The reason we know about these leaks is the common thread among them -- the willingness of the media to publish what was apparently stolen. Hence the question: Can the government hold the press liable -- criminally or civilly -- for the publication of known stolen materials that the public wants to know about? In a word: No.

Here is the back story.

When Daniel Ellsberg, an outside contractor working in the Pentagon, stole a secret study of U.S. military involvement in Vietnam in 1971, which revealed that President Lyndon Johnson had lied repeatedly to the public about what his military advisers had told him, the Department of Justice secured an injunction from U.S. District Judge Murray Gurfein, sitting in Manhattan, barring The New York Times from publishing what Ellsberg had turned over to Times reporters. Such an injunction, known as a “prior restraint,” is exceedingly rare in American legal history.

This is so largely because of the sweeping language of the First Amendment -- “Congress shall make no law … abridging the freedom of speech, or of the press” -- as well as the values that underlie this language. Those values are the government’s legal obligation to be accountable to the public and the benefits to freedom of open, wide, robust debate about the government -- debate that is informed by truthful knowledge of what the government has been doing.

Those underlying values spring from the Framers’ recognition of the natural right to speak freely. The freedom of speech and of the press had been assaulted by the king during the Colonial era, and the Framers wrote a clear, direct prohibition of such assaults in the initial amendment of the new Constitution.

Notwithstanding the First Amendment, Judge Gurfein accepted the government’s argument and found that palpable, grave and immediate danger would come to national security if the Times were permitted to publish what Ellsberg had delivered.

The Times appealed Judge Gurfein’s injunction, and that appeal made its way to the Supreme Court. In a case that has come to be known as the Pentagon Papers case, the high court ruled that when the media obtains truthful documents that are of material interest to the public, the media is free to publish those documents, as well as commentary about them, without fear of criminal or civil liability.

The government had argued to the Supreme Court -- seriously -- that “'no law' does not mean 'no law'” when national security is at stake. Fortunately for human freedom and for the concept that the Constitution is the supreme law of the land and means what it says, the court rejected that argument. It also rejected the government’s suggested methodology.

The government argued that because Congress and the president had agreed to void a constitutional mandate -- the First Amendment’s “no law” language -- in deference to national security, the judiciary should follow. That methodology would have rejected 180 years of constitutional jurisprudence that taught that the whole purpose of an independent judiciary is to say what the Constitution and the laws mean, notwithstanding what Congress and the president want. Were that not so, the courts would be rubber stamps.

Moreover, the high court ruled, it matters not how the documents came into the possession of the media. The thief can always be prosecuted, as Ellsberg was, but not the media to which the thief delivers what he has stolen. In Ellsberg’s case, the charges against him were eventually dismissed because of FBI misconduct in pursuit of him -- misconduct that infamously involved breaking in to his psychiatrist’s office looking for dirt on him.

Since that case, the federal courts have uniformly followed the Pentagon Papers rule. Hence, much to the chagrin of the Obama administration, the media was free to publish Edward Snowden's revelations about the ubiquitous and unconstitutional nature of government spying on Americans by the National Security Agency. The same is true for Trump’s tax returns and Clinton’s emails.

Are these matters material to the public interest?

Of course they are. In a free society -- one in which we do not need a government permission slip to exercise our natural rights -- all people enjoy a right to know if the government is spying on us in violation of the constitutionally protected and natural right to privacy. We also have a right to know about the financial shenanigans or uprightness and the honesty or dishonesty of those who seek the highest office in the land. That is particularly so in the 2016 campaign, in which Trump has argued that his business acumen makes him uniquely qualified to be president and Clinton has offered that her experiences as secretary of state would bring a unique asset to the Oval Office.

Efforts to silence the press or to punish it when it publishes inconvenient truths about the government or those who seek to lead it are not new, and the vigilance of the courts has been unabated. Thomas Jefferson -- himself the victim of painful press publications -- argued that in a free society, he’d prefer newspapers without a government to a government without newspapers. Would Clinton or Trump say that today?

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

Intellectual Myopia On Insider Trading

Richard Epstein*

Richard Epstein

Richard Epstein

This past week, the United States Supreme Court heard oral argument in Salman v. United States, an important case concerning federal securities law. At issue are the limitations placed on insiders who trade in the shares of companies on the basis of material, nonpublic information. The parties covered are not only those who obtain the information themselves, but the persons to whom they (as “tippers”) pass on that information, commonly called tippees.

The prohibition on insider trading is said to derive from Section 10(b) of the Securities Exchange Act of 1934, which makes it unlawful for any person to “employ any device, scheme, or artifice, to defraud,” as implemented under SEC Rule 10b-5.  The purpose of this prohibition on insider trading is to restore overall investor confidence in the exchange markets, by denying to certain insiders the ability to reap undue benefit because of the informational advantage from undisclosed information that they gain against their actual or potential trading partners.

The extension of Rule 10b-5 to insider trading only took place in 1962 in the critical SEC decision In Re Cady, Roberts, & Co., and it has been long surrounded by controversy. Salman concerns whether, under Rule 10b-5, the tipper of the inside information had to receive some tangible benefit from the tippee, or whether some more diffuse social benefit sufficed to trigger criminal liability. 

The simple fact that the SEC sought to expand the scope of the insider trading prohibition has generated serious uneasiness. In writing about this case in Defining Ideas, Professor Jonathan Macey, a noted securities law expert at the Yale Law School, reaches the grim conclusion that Salman could easily provide the government with an opportunity to unduly expand the reach of the securities law by allowing it to use its own ill-defined notions of “fairness” to attack just about anyone it wants. In the abstract, that point resonates with small-government groups, such as the Cato Institute, whose amicus brief for Salman stresses an argument Salman’s lawyer, Alexandra Shapiro, made in court—that what qualifies as criminal should be narrowly construed in order to avoid dangerous government overreach.

In general, I am no defender of increasing the breadth of government enforcement. But in Salman these fears are wildly overblown. In this instance, liability should be expanded to cover all individuals who make unauthorized use of insider information whether or not the tipper has received any benefit from the tippee.  To see whether this rule makes sense, let’s start with the facts of the case. Maher Kara, who worked in Citigroup’s healthcare investment banking group, passed along inside information to his older brother, Michael Kara, who knew that the information was stolen but nonetheless used it to make some advantageous trades. Michael then shared the information with his future brother-in-law, Bassam Salman, who then followed Michael’s trades.  Salman, like Michael, knew that he was trading on stolen information. At this point, it is instructive to analogize the situation to one in which Maher took some tangible property from Citigroup, which he then gave to Michael, who then transferred some portion of his booty to Salman, who then used or disposed of it for his own personal benefit. In these cases, the standard common law rule is that Citibank could recover any profits Salman got from the use or sale of the stolen property.

As I explained in a recent article in the Yale Law Journal, the applicable principle for dealing with stolen tangible property—and by extension stolen information—is that the only person with any valid claim to the property is the bona fide purchaser for value. Raising that defense bars two types of individuals from keeping the property. The first are those who bought the property with knowledge that it was stolen. The second are those who received it as a gift from the thief. When the theft is established, the law imposes a constructive trust on the donee, which in turn requires him to return the stolen property, or the proceeds of its sale, to the owner. The word “constructive” means that the recipient is treated as if he had received the property as a trustee, even though he did not.

The same basic framework carries over to the theft of information, such that Salman flunks both ways. He received the stolen information as a gift, and he knew that it was stolen. He is the lowest of the low, a bad faith donee. So why then does his pathetic case end up in the Supreme Court? Because the Justices have for years asked the wrong question, assuming that Maher and Michael had to receive in return some “personal benefit” from Salman for his use of the stolen information. More precisely, the question presented was:

Whether the personal benefit to the insider [Maher] that is necessary to establish insider trading under Dirks v. SEC requires proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit held in United States v. Newman, or whether it is enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case.

The question presents a false choice, when the right answer is that no return benefit should be required at all, once Salman knew that he was trading on stolen information. Instead, the constructive trust should be imposed to capture his knowingly illegal conduct. The only interesting question is how the Supreme Court persuaded itself that some return benefit was required in insider trading cases. At this point, we need to unpack the two cases mentioned in the question presented.

First, take Dirks. Raymond Dirks was an officer of a broker-dealer of a corporation who received from Ronald Secrist, a former officer of Equity Funding, reliable information that Equity had deliberately inflated its share values. Dirks freely shared this information with clients and investors, who sold their stock to avert future losses, when he could not persuade either the SEC or the Wall Street Journal to investigate based on his tips. The legal question was whether Dirks, who surely operated from mixed motives, was guilty of aiding and abetting insider trading—and no more, since he did not trade himself. The answer given by the ever-prudent Lewis Powell was that he was not. He was not an insider and hence he could only be held responsible “when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee [here Salman, once removed] and the tippee knows or should know that there has been a breach.” Justice Powell then introduced the personal benefit test into the equation by noting that the question of whether the insider was in breach of his fiduciary duty depends “in large part on the personal benefit that the insider receives as a result of the disclosure.”

At this junction, the dispute under the personal benefit test is whether tangible benefits are required, as suggested in Newman, or whether a set of close family interconnections, such as those found in Salman, suffices.

This entire learned debate is an irrelevant diversion. The simple point here was that Dirks knew that this was inside information, and so the key question is what should he do with that information in order to expose a scandal. The simple answer is that he should make that information public before sharing it with his various clients, but his failure to do so makes him guilty of abetting the insider trading, which is what the lower court found. And that is surely the case in the ordinary situation where the tippee receives information about inside share value that he shares with his customers when there is no whiff of scandal at all. In neither case is there any room for an actual fiduciary duty of the sort that corporate officers and directors owe to a firm. It is enough to impose the constructive trust by analogy to the physical transfer.

This view of the transaction helps explain the correct resolution of the situation presented in Newman, on wholly different facts. In that case, officers of two corporations released information to a selected group of analysts at the behest of the company in order to stimulate interest in the firm’s shares in ways that would increase their value. Unfortunately, the SEC promulgated Regulation FD. (i.e. fair disclosure) in 2000, making it unlawful to release company information selectively to some analysts unless, in the name of “full and fair” disclosure, it released the information to all. As usual, the SEC missed the mark. So long as the world is on notice that these selective disclosures are made, all traders can take that into account in making their own decisions for those firms (which need not be all firms) that engage in the practice. There is accordingly no fraud.

As it happens, Regulation FD imposes sufficient dislocation on firms that management tends to authorize,sub rosa, just these selective disclosures on the theory announced above—that inside information can be used by all recipients for their purposes, so the taint on all transferees is removed. Sadly, that line of argument was not open to the Court in Newman, so it then decided the case on two related grounds. First, the remote tippees (three and four links away) received this information as part of a deluge of information from multiple sources that made it impossible for them to know whether they had inside information or not—a problem completely absent in Salman. Second, the Second Circuit held that the diffuse set of personal benefits linking the various parties together—all of which were weaker than the close family ties in Salman—flunked the personal benefit test as announced in Dirks, setting up the conflict between the circuits when the Ninth Circuit in Salman held that the family connections sufficed.

During the oral argument before the Supreme Court, the Justices and the lawyers inconclusively bandied about endless hypotheticals as to what counts as a personal benefit. But as is so often the case, no one bothered to rethink the relevance of that issue at all. The correct resolution involves knocking out Regulation FD, and asking whether the release of the information was authorized expressly or implicitly by the firm—and if not, whether the tippee knew of its illegal release. In this scenario, the personal benefit test becomes irrelevant and Salman gets the hard punishment he deserves.

It is sometimes said, as by Professor Macey, that this view of liability opens the floodgates on insider information, but it does nothing of the sort. In United States v. O’Hagan, a 1997 Supreme Court decision fleetingly mentioned by the Court in the oral argument for Salman but extensively discussed by Macey, the defendant was the lawyer for a large firm, MetLife, who took confidential information that he received from MetLife, which he then used to buy shares on his own account, thus running up the price that MetLife had to pay to complete the operation. This situation is an open-and-shut breach of the standard agreements always imposed by law firms and investment banks on their members—never to trade against the interests of a client. Clearly, that decision retains its full force no matter which way Salman comes out because of the enormity of the self-dealing. But should the case have come out differently if James O’Hagan had given key information to a casual friend who did the same thing? The danger to the client interest is the same whether the insider uses the information alone or shares it with a friend.

If you think of the securities law as trying to reinforce the restrictions that private parties impose on their employees and independent contractors, then Salman has to be decided for the SEC to prevent wholesale breaches of insider’s fiduciary and contractual duties—but only if the Supreme Court shakes off its intellectual myopia and rethinks the question as a matter of first principle.

*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.