Raisin' a Raw Deal

Richard Epstein*

Richard Epstein

Richard Epstein

Thanks to the Supreme Court’s decisions on Obamacare and same-sex marriage, public attention has been unfortunately drawn away from Horne v. Department of Agriculture, which deals with the Agricultural Marketing Agreement Act of 1937, under which the government stabilizes crop prices, like those of raisins.

Under the law, a Raisin Administrative Committee, consisting mainly of raisin growers appointed by the Secretary of Agriculture, requires each farmer to give, free of charge, a certain fraction of their crop to the United States government. Once received, the government can sell them in noncompetitive markets, give them away, or dispose of them “by any means consistent with the purpose of the program”—which means keeping prices high by limiting the supply of raisins for sale and destroying those that cannot be otherwise safely disposed. To complete the circle, net profits from the program, less government expenses, are distributed back to the raisin growers.

Stripped of New Deal newspeak, the marketing program institutes a textbook government-run cartel. Like monopolies, cartels raise prices, reduce output, and undermine social welfare, which would normally make them targets under the antitrust laws. Indeed, cartels are even more dangerous than a single-firm monopolist. The monopolist chooses efficient means of production to maximize his profits, even though, socially, the results are inferior to those generated by a competitive market. But a cartel cannot survive unless it offers some accommodation to inefficient producers that would, if left uncompensated, sell their commodities below the cartel price. Hence, like OPEC, the Department of Agriculture lets a central committee set quantity restrictions to keep all players happy. Franklin Roosevelt loved cartels for the votes they brought in, just as he opposed monopolies because they made ideal targets for his populist rhetoric.

The New Deal’s defense of cartels in agriculture exerted a transformative effect on American constitutional law. These cartels could only work on a nation-wide basis, so the Roosevelt administration persuaded the Supreme Court that the Commerce Clause of the Constitution was not limited to cross-border transactions between states, but reached first intrastate sales and, ultimately, the production and consumption of crops on individual farms as enshrined in Wickard v. Filburn.

 For the next seventy-plus years, these cartels worked with clock-like precision, until the Hornes, farmers in California, challenged their operation, first in 20022003 when they refused to turn over 47 percent of their raisin crop over to the government and then again in 20032004 when they refused to turn over 30 percent. The government fined the Hornes $480,000 for the value of the raisins, to which they tacked on an additional penalty of $200,000.

The fine and the penalty were challenged by the Hornes on the ground that the government seizure of their raisins constituted a taking under the Fifth Amendment, which states that “private property [shall not] be taken for public use, without just compensation.”

The most amazing part of this saga is not that the Hornes won, but that no one involved in the litigation used the word “cartel.” The Hornes had to avoid the term whose use would undermine their claim. A cartel arrangement is not just a naked taking. Its offset turns out to be the higher prices that the Hornes and other cartel members can fetch for their remaining stock of raisins in the open market, which should count as a form of in-kind compensation under the Takings Clause. Under traditional antitrust lingo, they are cheaters who work under the cartel umbrella. All power to them!

Nonetheless, the government did not wish to make an open admission that the Marketing Act fortifies cartels, lest they undermine the stabilization myth that helps shield these cartels from public disapproval. And the Supreme Court, which has already blessed these grotesque arrangements, could ill-afford to undermine the legitimacy of its own earlier rulings, including Wickard, which props up the modern welfare state, including Obamacare.

Right off the bat, Chief Justice Roberts’ entire takings discussion has a surreal quality because it ignores the real victims of this program, the public at large. The Court instead focuses only on the Hornes’ claim that the government seized their raisins, which is of course a paradigmatic taking that under current law is unconstitutional.

In its opening salvo, the government claimed that personal property, such as raisins, receive less constitutional protection than real estate. The Chief Justice rightly slapped that claim down, noting that the comprehensive phrase ”private property” includes all forms of wealth in private hands, even patents. The constitutional text offers no warrant for dividing the field into first and second-class forms of property. Once raisins received full protection, the government could not justify its marketing program by saying that the residual cash that came back at the end of each annual cycle removed any constitutional taint from the program. That residual cash from the program cannot possibly meet the standard of full and fair market value (that is, the measure of just compensation), and the Chief Justice rightly rejected Justice Sotomayor’s odd dissent that there is no taking at the front end because some compensation is offered at the end of the day.

From that point on, Justice Roberts entered choppy waters. He is no judicial revolutionary, and thus throughout his opinion he tries to make peace with the tattered constitutional jurisprudence that has long embraced a distinction between physical and regulatory takings. The latter restricts the ability of a property owner to use or sell his property, but leaves him undisturbed in the possession of his land. The Hornes are, of course, on the right side of that distinction given that the government tried to physically seize their raisins.

Yet Justice Roberts was unable to defend the line between physical and regulatory takings. Exhibit A was the Court’s 1980 decision PruneYard Shopping Center v. Robins, which, waving a free speech banner, held that there was no taking of a shopping center when its owner was forced to admit protestors on his property against their will. The right way to treat this case is as a partial physical taking of the property once the owner lost his right to exclude others from his property.

But Justice Roberts wrongly reimagined this deliberate entrance as a regulatory taking by equating partial use by others with a restriction on how one can use one’s own property. He then compounded the error by falsely claiming that the owner’s use of the shopping center was “largely unimpaired,” without ever explaining why PruneYard filed suit in the first place. Hence, he concluded the ersatz regulation did not go “too far.”

That last unfortunate phrase was lifted from Justice Holmes’ famous opinion in Pennsylvania Coal v. Mahon and has bedeviled the field ever since. With physical takings, the rule is that the government pays for whatever it takes, be it large or small. With regulatory takings, the Holmes distinction says that the property owner cannot claim that a taking occurred as a result of regulation so long as he retains some residual value. Yet Justice Roberts never explains why two forms of government action, both susceptible to potential massive abuse, should receive such different constitutional responses.

The point is painfully evident in agricultural markets, because the government could achieve most of its objectives by restricting through regulation the total amount of raisins each farmer could grow on his own land. The unified theory that the Chief Justice recognizes is needed for land and personal property now gives way to the indefensible intellectual distinction between physical and regulatory takings.

Once that distinction is buried, ironically, it turns out that the Hornes are the wrong plaintiffs in this case. The compensation for their physical taking consists not solely in the residual cash payout they receive. It is also the higher price that they can charge for their retained crops that makes them whole: if it did not, the cartel would collapse tomorrow. Accordingly, the proper challengers to the marketing orders are the consumers who should have a typical antitrust–type claim for collusion against the raisin market, which ironically they cannot bring under the misguided 1943 Supreme Court decision in Parker v. Brown that insulates government-sponsored cartels from the antitrust law.

Roberts’ reticence to tackle fundamental issues was equally evident in his unhappy resolution of the third question of whether the government could require a surrender of some portion of a farmer’s crops in order to sell the rest in interstate commerce. His answer—it cannot—is correct, but his analysis is not.

The doctrine of unconstitutional conditions has long made it impossible for the government to condition the granting of one right on the willingness of an individual to surrender a second, and then call the entire transaction “voluntary.” In many cases, this government “choice” given to private parties is tantamount to the choice that the robber gives to his victim: “your money or your life.” The government therefore must justify any condition it imposes by showing that it relates to the protection of a legitimate public interest. By way of example, the government can condition the sale of goods into interstate commerce so that they do not explode on public roads. But it cannot condition them on someone’s agreeing to waive their Fourth Amendment rights against search and seizure, or on payment of tribute to competitors anxious to preserve their monopoly position.

Unfortunately, a wretched 1984 Supreme Court decision, Ruckelshaus v. Monsanto, allowed the government to condition the licensing of a dangerous fungicide for sale on the willingness of its owner to share trade secrets, a constitutionally protected form of property, with his competitors. Justice Harry Blackmun blithely claimed that any firm that rejected the condition could always sell goods in foreign markets. Chief Justice Roberts, however, refused to overrule Monsanto with the glib remark that “raisins are not dangerous pesticides; they are a healthy snack,” without delving into whether Monsanto was wrong, which it was given that its transfer of trade secrets was no more warranted for dangerous products than safe ones

In the end, Horne counts as a partial victory over the government. But its long-term value is undercut by the confused tangle of legal doctrine that Roberts decision left in place. To be sure, the Chief Justice conveniently ignored the offsetting benefits from the marketing, and struck down the fines and penalties in the individual case. It now remains to be seen whether every raisin grower is free to defy the government mandate, or whether the government can switch to acreage restrictions or other devices to achieve the same end.

The public always pays a high price for muddled law. It leads to uncertain outcomes in future cases. And worse, it results in the perpetuation of indefensible constitutional doctrines. The line between physical and regulatory takings is essential to propping up the most destructive government initiatives, both state and federal. And the use of exactions and other unconstitutional conditions leads to massive abuses by government regulators. Chief Justice Roberts had the chance to go beyond incrementalism in the face of massive doctrinal disarray. We are all the poorer that he shunted off to one side the larger issues about New Deal programs that Horne should have brought front and center. 

*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 EPA's Clean Coal Dust-Up

Richard Epstein*

RICHARD EPSTEIN

RICHARD EPSTEIN

This past week in the Wall Street Journal, Kenneth Hill, the public utility regulator from Tennessee, joined Kentucky Senator Mitch McConnell in advocating that states boycott the EPA’s Clean Coal Plan (CPP) under the Clean Air Act of 1990. The plan would require the state to reduce the amount of carbon dioxide emissions so that by 2030 they are 30 percent below the 2005 levels. In making his case, Hill challenges EPA administrator Gina McCarthy’s soothing assurances that nothing in the EPA’s Clean Coal Plan will throw a monkey-wrench into coal operations, because “our rule creates a dynamic where cutting carbon pollution and investment decisions align.” That assertion is inconsistent with the report of the North American Electric Reliability Corp., which foresees major threats to transmission reliability, depending on exactly how the Clean Coal Initiative plays out on the ground. Indeed, it is far from clear whether sweeping new measures should be introduced to tackle this problem, especially since the EPA’s own figures show that emissions levels in 2013 were 9 percent below those in 2005.

Hill argues that the states should require the federal government to assume full responsibility for any Federal Implementation Plan, or FIP, that will govern those states that refuse to adopt a state implementation plan or SIP on their own. As of present, it is not clear whether this final confrontation will take place. Before that can happen, the courts will have to resolve the looming challenges to the EPA’s proposed rule, now that the EPA has pushed the envelope of its not inconsiderable statutory authority to regulate pollution.

The most notable opponent to the Clean Air Act is Harvard’s constitutional law Professor Laurence Tribe, who is a paid consultant for the Peabody Energy, whose wholesale denunciation of the EPA’s CPP for “burning the constitution” has attracted a strong dissent in forceful testimony before Congress from his own Harvard colleagues, Jody Freeman and Richard Lazarus, and from Richard Revesz, former NYU Dean and current head of the Institute for Policy Integrity.

The issues are complex and their resolution depends in large measure on understanding the ways in which the EPA’s CPP exercises its power. As is well explained by Mario Loyola in National Affairs, the devils lie in the details. His account is strongly at odds with Revesz’s claim that the EPA’s CPP program is just another chapter in the long-partisan tradition of effective pollution control.

The nub of the difficulty here is this: traditionally, the Clean Air Act pays homage to federalism by having the EPA set National Ambient Air Quality Standards (NAAQs), leaving it to the states to figure out how best to meet the national target in pollution control while knowing that the federal government can override them with its own FIP if the plan is not regarded as sufficient. Typically these SIPS were implemented under Section 112 of the CAA, which left it to the states to decide “the best system of emission reduction” (BSERs) to meet that standard. Generally, these were understood to let SIPs determine what technology to use to reduce pollution on a facility-by-facility basis.

The big difference with the CPP plan is that it takes these BSERs to the next level by announcing that SIPs should address four discrete “blocks” of issues that include modification of facilities but go beyond that to cover substitution of both natural gas and renewable energy for coal, and to taking measures to reduce the demand for energy within the state. Once the EPA proposed these additional measures, it became doubtful that it could act, as it traditionally had done, under Section 112, which deals only with emissions controls.

To avoid this problem, the EPA has asserted that it can regulate carbon dioxide emissions under Section 110, without regard to these limitations. Unfortunately, it appears as if resorting to Section 110 is only possible if regulation cannot be done under Section 112, which could be invoked now that the Supreme Court in its 2007 decision in Massachusetts v. EPA declared carbon dioxide a pollutant subject to EPA regulation. Unfortunately, the official text of the statute is of somewhat uncertain status because of the way in which it deals with two different versions of the 1990 CAA that were not fully reconciled in conference. The printed version limits the power of the EPA, while an alternative reading does not. Judicial decisions have pointed to a narrow reading of the EPA’s authority. Professor Tribe is surely correct to say that the EPA should not be accorded any administrative deference in deciding which version of the law controls. More likely than not, he is also not correct to claim that the printed version, done without an eye to the current controversy, should be accorded presumptive validity. In general, it is wise to have two different pathways to regulate the same types of pollution. Indeed, adopting this reading could abort the CCP before it gets off the ground.

Structurally, however, the CPP is subject to stronger objections that may yet play out in court. It is one thing to let the EPA specify the best technology for controlling pollution from a given source. It is quite another to allow it to venture into regulating the transmission and consumption of electrical power, especially since the first of these tasks is governed by the Federal Energy Regulatory Commission, or FERC, which normally leaves these issues to state control. This peculiar jurisdictional line up means that the FIP may not be able to incorporate any of the last three approaches that the EPA wants to be included in SIPs, at which point slashing carbon dioxide output from coal plants could require wholesale plant closings under the as-yet-stated FIP which may only be able to attack facility emissions directly.

EPA’s McCarthy praises the flexibility of her plans, by noting that the EPA “can look at stringency, timing, phasing-in, glide path,” and a lot else to make sure that grid reliability is not impaired. But therein lies part of the problem, for the question is just how much discretion should the EPA have in making decisions that could cost individual states and firms billions, especially since it appears that its direct regulatory authority to implement on its own only direct regulation of emissions from designated facilities. It looks therefore that the threat of very heavy direct cuts in output could be used to lever states to make alterations in local policy that the EPA is powerless to impose under its own authority. At this point, the crafty game of extending powers through threats does give rise to a serious constitutional challenge, as the EPA seeks to implement indirectly measures that it could not impose directly.

These difficulties are further compounded by the way in which the EPA sets its targets for different states, which, as Hill notes, could vary from as little as 11 percent in North Dakota to 72 percent in Washington. The huge differences are based on various local factors that relate to the ability to control carbon emissions. But the whole approach has to be taken with a grain of salt, given that the harm from carbon dioxide (which is itself the subject of serious scientific dispute, well summarized by Professor Judith Curry) in no way depends on the place from which it enters into the atmosphere, so that there is no issue of singling out dirty targets to clean up traditional forms of pollution in, say, high-sulfur areas.

Indeed, one great tragedy of this entire unfortunate episode is that it pushes further down the road any coherent way to deal with all forms of pollution. As I have previously argued, the best way to attack this problem is to direct attention to pollution outputs and not to elusive BSER standards under which it is not possible to ask the simple question of whether any particular reduction in pollution output is cost-effective. There could be a far more rapid shift to efficient coal plants if the EPA did not erect consistent barriers to getting new coal plants into service.

The huge level of discretion on these matters has given rise to the question of whether the coal companies can challenge the regulations on the grounds that they constitute a taking of private property without just compensation. On this point, Tribe’s claim that they can under current law is wholly unconvincing. The control of pollution lies at the heart of the government’s power to regulate under even the narrowest view of the takings clause. The effort to claim that somehow the EPA’s CPP “singles out” the coal industry for special treatment triggers one of the touchstones for a taking under modern law. But that principle usually applies to single parcels of land, not entire industry groups, so that it is highly unlikely that the coal companies could make out regulatory taking, under of all cases, Penn Central Transportation Co. v. New York City, which I noted in a recent column represents an indefensible expansion of state regulatory power to the confiscation of air rights when no threat of nuisance exists at all.

Tribe’s opponents, such as Revesz, Freeman and Lazarus, are therefore right to ridicule this constitutional argument. But their criticisms do not answer a more serious charge that can be levied against the CPP. Even if the end of pollution control is manifestly legitimate, the choice of means should be subject to higher levels of review than are often applied today. More concretely, the ability to set wildly different targets for different states opens up the real possibility that the EPA could help its political friends and hurt its political enemies. Right now, the courts are far too weak in the way in which they scrutinize this means-end connection in pollution. They should ratchet up their scrutiny of individual EPA determinations on carbon dioxide to see if they bear any relationship to sensible pollution control strategies, which on balance they do not.

At this point, the legal survival of the EPA’s CPP is anyone’s guess. Much will depend on the EPA’s own guidance documents about FIPs, which should come down this summer. But it is dangerous business to let the EPA take the coal industry hostage by this set of aggressive maneuvers. The Supreme Court’s initial wrong was Massachusetts v. EPA, which wrongly held that carbon dioxide counted as a pollutant under the Clean Air Act.

The simple point is that carbon dioxide raises unique issues that cannot be sensibly addressed within the basic Clean Air Act framework, which is why Congress should now legislate to take this confused matter out of the EPA’s hands. One central part of this technology is to ask the extent to which private incentives are likely to reduce overall carbon dioxide output, in light of improved technological efficiencies. A second key element is to develop a constructive national scheme that first updates the EPA’s 2009 endangerment finding on carbon dioxide, and then looks for a more even-handed regulatory scheme that does not hold an enormous dagger over the entire coal industry.

*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.