March 6, 2012

Government By 'Expert'

The modern administrative state is a behemoth incompatible with the rule of law.

Over the weekend, I participated in the 31st Annual Student Symposium of the Federalist Society held at the Stanford Law School. The title of the symposium was “Bureaucracy Unbound: Can Limited Government and the Administrative State Co-Exist?”

The “co-exist” gives away the game. Historically, the term entered the political lexicon with Nikita Khrushchev’s famous 1956 speech to the 20th Congress of the Communist Party of the Soviet Union to signal his break with Stalin’s murderous policies that sought constant confrontation with the West. Coexistence meant the West could go its way so long as the Soviet bloc could go its own way too—a live-and-let-live relationship where occasional interactions would iron out any difficulties that arose. Nine months later, he announced to the West, “We will bury you.” Less than five years after that, the United States and the Soviets came to the brink during the Cuban Missile Crisis, where the Soviets sought to alter the global balance of power by using Fidel Castro’s Cuba as a base for its operations.

 Epstein  
 Illustration by Barbara Kelley

Peaceful coexistence, therefore, does not offer an ideal paradigm of how the rule of law does, or should, interact with the modern administrative state. To see why the two are ultimately incompatible, we must consider the nature of both the “rule of law” and the “administrative state,” about which I have written more extensively in my recent book Design for Liberty.

First, the “rule of law” is considered a venerable institution by both sides of the aisle. Historically, its use did not arise with democratic institutions, of which there were few. Rather, the term was employed as a rhetorical trope to offset the exercise of sovereign power by a king who ruled for life, often with an iron hand. Its enduring usefulness lies in its ubiquity. No matter what the substantive issue, the rule of law imposes a set of key procedural and substantive guarantees that all political authorities must accept. It requires that there be clear notice of the outer bounds of legal conduct so that people can confidently organize their affairs without crossing the line into forbidden territory.

In order to achieve that objective, a legal rule had to be internally consistent, prospective in application, and simple in form. Its application to a particular case, moreover, had to be before an impartial tribunal that gave the accused person notice of the charges against him, a chance to present his own case, and the right to cross-examine witnesses who testified against him. Those safeguards applied to both criminal and civil proceedings. It is easy to take these provisions for granted—until they are flouted by the government, which may have its own agenda.

In one sense, the rule of the law must be consistent with at least some form of public administration. Over the centuries, governments have had to enforce the criminal law, tear down firetraps, and issue driver’s licenses. It is often not easy to decide what disabilities prevent people from driving or what qualifications must be met to operate a heavy rig. But with conscientious officials, these focused tasks can be accomplished. Today’s “administrative state,” however, goes far beyond this modest level of public administration.

The proper role of the state is to create and enforce property rights.

Indeed, the successful operation of a classical-liberal approach to government requires the state to take an active role in the creation and enforcement of property rights. It is the state’s administrative bodies that set up the title registries that allow everyone to determine who owns what property. The registries let the government decide who is eligible to vote, where to deliver the mail, and whom to assess for property taxes. These records allow private individuals to determine who can sell, lease, or mortgage a particular piece of property. And, of course, more complex registries must deal with intellectual property, such as patents, copyrights, and trademarks.

The modern administrative state does not and cannot renounce these types of government action. But its new extensive duties put too much strain on its own ever-fragile institutions. The first example of the modern administrative state was the Interstate Commerce Commission, established in 1887 to regulate railroad rates across the United States. The commission was introduced to counteract the rate anomalies that arose precisely because the railroads were network industries whose interconnection obligations made it impossible for them to operate along purely competitive lines. The original ICC was charged with making sure that short-haul rates (that rose in the absence of competition) did not exceed rates on long-haul lines between major destinations, which were kept low by competition.

This statute was enacted at about the same time that the states were struggling to regulate public utilities, which had monopoly powers by virtue of their separate territories. The challenge to the rule of law was to find institutions that could keep rates low enough to avoid monopoly rents, but high enough to avoid confiscation of invested capital. The judicial enterprise, therefore, had to first decide how to determine the rate base and, second, on the risk-adjusted competitive return. From these novel difficulties arose a new generation of constitutional issues. But they did not pose a decisive challenge to the rule of law because of the relatively clear theoretical framework that guided the rate-making business.

There is nothing inherent in the notion of ratemaking that is tied to limiting monopoly profits. The level of impermissible discretion in the modern administrative state arises when the state is free to decide whether it will use its ratemaking power to limit a natural monopoly to competitive rates of return or to bestow its favors on certain industries and groups. Once the state gets into the business of conferring monopoly power on its favorite wards, the level of discretion it exercises becomes subject to powerful political influences.

The modern administrative state wants to pick winners and losers in the marketplace.

The 1914 Clayton Act, passed in the administration of the progressive Woodrow Wilson, modified the antitrust laws by creating special exemptions for labor unions and agricultural cooperatives, which could now organize collectively to gain monopoly rents. When those measures proved insufficient to achieve their goals, New Deal reforms—including the National Labor Relations Act of 1935 and the Fair Labor Standards Act 1938—were explicit in blocking the entry of new workers into the market in order to preserve monopoly power for union members. The Agricultural Adjustment Acts of the 1930s accomplished the same goal for farmers. At the state level, the extended use of the zoning power allowed one firm to prevail on local authorities to zone out a competitor that might wish to set up shop across the street.

This shift in focus from controlling natural monopolies to creating statutory monopolies out of competitive industries places enormous stress on the rule of law. Why should particular favors be showered on some members of one industry, while denied to their rivals? Which occupations or trades should receive this special dispensation? Favoring one group and then another requires large administrative agencies to establish criteria by which the state selects successful applicants. It turns out, however, to be exceedingly difficult to offer specific rules of guidance in the ambitious undertaking of dispensing government favors. Administrative bodies thus continue to expand to achieve their particular ends.

Faced with these obstacles, the Progressives had to develop rationales to justify these broad grants of administrative power, which were articulated in canonical form by the legal academic and government advisor James Landis in his classic 1938 volume, The Administrative Process. Landis took the then-fashionable view that market institutions were haphazard bodies that could not process the plethora of technical information needed to make rational investment or business decisions. In their place should be government experts and neutral government officials who would take on the essential task of overseeing these market institutions. These individuals would be largely appointed by democratically-elected public officials, but would by virtue of their delegated authority be insulated from day-to-day political pressures. The system of strong property rights would give way to a new system, where various interest groups would participate in hearings concerning their affairs. The procedural safeguards surrounding the deliberations before these independent administrative agencies would preserve, it was claimed, the old rule of law values in a new setting.

The rule of law cannot survive when government conduct is not limited.

The key ingredient in this new system was the broad level of delegation that gave administrators the dominant hand in allocating property rights. Nowhere is the change of direction more evident than in the rules that were used to allocate spectrum under the Telecommunications Act of 1934. After holding a series of hearings to evaluate competing license applications, the FCC chose the winner based on who best served the “public interest, convenience and necessity.” These words were consciously framed in a way to insulate these administrators from judicial review. In praising this standard in NBC v. United States, Justice Felix Frankfurter stressed that the agency had a mission commensurate with its expertise:

But the Act does not restrict the Commission merely to supervision of the traffic. It puts upon the Commission the burden of determining the composition of that traffic. The facilities of radio are not large enough to accommodate all who wish to use them. Methods must be devised for choosing from among the many who apply. And since Congress itself could not do this, it committed the task to the Commission.

Note that Justice Frankfurter does not even hint that a public auction of a well-defined system of property rights could deal with the scarcity problem as it existed at its time. Naturally, these allocation methods proved notoriously elusive and, to this day, have never been resolved in a coherent fashion. In a system, that offers no clear principles of allocation, political favoritism and interest group politics become endemic.

Over the past seventy-five years, Landis’ optimism about his government experts has been falsified time and again. The specialized tribunals set up to deal with labor, telecommunications, securities, and trade disputes are often chosen along political lines. They are subject to pressures that in some instances result in industry capture and, in other instances, in blockades by well-financed interest groups that are able to mobilize on the agencies.

The procedures themselves often become both so rigid and interminable that endless time is lost in nonstop maneuvering, which invites massive judicial appeals that could result in remands for yet another round of hearings. In other instances, the procedures themselves can be short-circuited by an administrator whose decision to initiate a hearing or bring an enforcement action can have disastrous consequences for a firm that is caught in the crossfire, long before the actual hearings take place.

The Achilles heel in this structure lies in the simple fact that there is no effective judicial remedy to deal with the endless delays that agencies, such as the Food and Drug Administration or the Environmental Protection Agency, can create long before any lawsuit is filed. Litigation only compounds the initial delay, and exposes the firm to tacit retaliation in some unrelated proceeding over which the agency also has vast discretion on how to proceed.

These problems have only become more complicated in modern times as the reach of government power has continued to expand. The tasks of the ICC and FCC have been relatively constrained since their formation. But the modern EPA’s powers go far beyond controlling traditional common law nuisances (tailpipe emissions, for example). Its powers now include designating large tracts of wetlands or uplands as protected habitat for some endangered species.

In addition, entitlement programs like Medicare and Medicaid entrust government agencies with organizing health-care and consumer markets by a dizzying array of rules that again commit the nation to the failed model of government expertise and public participation. The portions of Obamacare that survive constitutional challenge will leave both the state and federal governments with the hapless task of setting rates and rebates for thousands of health-care providers.

The rule of law can only survive where there are rules that guide and limit government conduct. Seventeen-part tests are not rules. In many cases, they are not even intelligible standards. The reason why classical-liberal rules can comply with the rule of law is that the simplicity of their basic standards does not require public officials to have the massive amounts of delegated discretion of the kind routinely conferred on modern administrative agencies.

Courts are thus left with two possible responses to the entrenched administrative state: either defer to agencies on all key decisions, or try to shut the whole operator down. The usual judicial response is the former. The correct response, I insist, is the latter. But it is no easy matter to overturn practices that are so entrenched. Knocking out key provisions of the PPACA is a good first step on the path of redemption.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


Letters to the editor

Securitization of Mortgages

Epstein defines the situation very well. However, Epstein and practically everyone seems to not understand the centrality of the securitization of mortgages to the profoundly draconian process of destroying the very legal standing of property. By destroying the legal standing of property the Constitution is rendered essentially worthless. For an old fashioned Bolshevik such as Stalin, the taking of private property at gunpoint, transferring it to 'expert' central autocratic Marxist/Leninist control was a massive 'wet' operation. Today's Bolshevik-, Progressive-, Socialist-minded centralized-power/redistributionist advocates are behind sophisticated financial maneuvers of an illegal nature.

James Strong


Letters to the editor may be sent to definingideas@stanford.edu. Editors reserve the right to reject or publish (and edit) letters.